THE IRISH ECONOMIC EXPERIENCE

I am honoured to have been invited to speak at this important Congress.

When I was preparing my remarks for you this morning I was reflecting on how I could best outline to you what has become to be known as the Celtic Tiger experience that has transformed Ireland over the past ten years from an ailing, virtually bankrupt economy to the fastest growing, dynamic economy in the developed world. And when I reflected on the economic fundamentals of New Zealand and their transformation over the same period of time I wondered why people in this part of the world might want to hear about the Irish experience. Clearly I felt that I was going to visit a country that could genuinely be called the Pacific Tiger and had no further lessons to learn.

We all however have lessons to learn from one another especially in a world that is now so interdependent; a world where financial transactions can be effected virtually instantaneously between Wellington and Dublin; a world where economic and monetary weaknesses can be exploited from the laptop computers of travelling bankers.

Some of you may be aware that the European Commission has examined the competitiveness of Ireland and New Zealand compared with the European Union. I believe that both of our countries can be proud of what that study demonstrated. The study charts the performance of both countries from the depths of depression in the mid-1980s to the present day recovery. Fundamental economic reforms implemented are examined in such areas as fiscal restraint, tax reform, income moderation, labour market flexibility and investment in education and infrastructure.

The results are contrasted with those achieved by the rest of the EU. It is notable that in almost every case, both Ireland and New Zealand had superior economic performance.

Some of the highlights of the exercise are:

Average annual growth GDP 1993-1996	Irl best performance
Average annual employment growth 1993-1996	NZ 1st, Irl 2nd, ahead of rest of EU
Change in structural unemployment 1990-1996	Irl best performance
Growth of investment 1993-1996	NZ 1st, Irl 2nd, ahead of rest of EU
Tax burden as % of GDP 1986-1996	Irl 2nd best after best EU
Average annual unit labour cost growth 1993-96	Irl best performance

Another notable feature of both economies is the very low inflation despite strong growth.

Perhaps it would be useful at this juncture to look at Ireland's performance in this decade. By any standards Ireland has enjoyed remarkable economic and employment growth over the past decade.

Ireland's Gross Domestic Product (GDP) grew at an annual average rate of just under 7% between 1990 and 1997, compared with annual growth of less than 2% in the EU overall. Of the other countries in the Union, only Luxembourg had a growth rate of more than 2.4% over this period. Our growth rate last year is estimated at some 11% by the European Commission. Inflation was somewhat higher at 2.5% last year than previously due to the strength of sterling in the run up to the implementation of the euro.

For a country with Ireland's history of unemployment and emigration, a particularly heartening feature of this period is that economic growth has been translated into rapid expansion in employment. Numbers employed have grown by just under 3% per annum in the 1990s overall, and by more than 4% per annum over the last three years.

Unemployment, which peaked at almost 16% in 1993, has fallen sharply and is now at 7% and still falling.

Ireland's performance in the 1990s has been exceptional on a number of fronts, compared with less that spectacular performance in Europe generally.

However, taking a longer, comparative view, employment in the EU grew by 8.5 million in the 25 year period 1970 to 1995, while in the USA, with a smaller population employment grew by 46 million over the same period.

Clearly, Ireland's performance in the 1990s has been counter cyclical when compared to the broader European experience. There is a considerable consensus among economists that Ireland has been in "catch up" mode, in that recent policy changes have released a hitherto suppressed potential in the economy.

That "catch up" relative to historical performance can be seen on both the output and the employment front. In the fifteen years from 1975 to 1990, for example, we barely matched the EU overall in economic growth, and our employment performance lagged behind that of most other Member States. Indeed, Irish employment levels were actually falling for much of the 1980s, and unemployment and emigration had reached critical levels by 1987-88.

What then turned Ireland around?

Beginning in 1987, decisive steps were taken to correct major imbalances in the government finances; stability-oriented fiscal and monetary policies have been followed with conviction since then. Our success in meeting the criteria for Monetary Union is tangible evidence of the outcome of this process.

Again beginning in 1987, previously excessive costs in the domestic economy were brought under control. Wage developments, in particular, have been moderate since the late 1980s. This moderation owes much to a series of multi-annual agreements concluded between government and the social partners, and to policies which have tended to reduce previously high taxation levels on labour.

The extreme openness of the Irish economy is well known. A long period of high tariffs and general economic isolation which lasted from the foundation of the State to the 1960s was followed by increasing openness in the lead up and subsequent to our accession to the EEC in 1973. In recent years, we have capitalised on the openness of our economy through our foreign direct investment (FDI) and trade policies. We have positioned ourselves as "hub", if you will, between Europe and the global marketplace and this is reflected in the fact that we trade 153 percent of our GNP.

We have also introduced strong competition legislation which is designed to open up previously sheltered activities to competition in the interests of consumers. Ireland has also embarked on the privatisation of State-owned companies and, while we have had a slow start, this programme will accelerate in the coming years.

Central to the success of the Irish economy has also been our recognition of the incentive power of taxation.

Cutting tax rates stimulates economic activity and makes things happen. For years it was argued that there was a choice between cutting taxes and improving social services. I would like to think that we in Ireland have shown that this is a false choice.

Consider the Irish experience over the last ten years. We have cut the standard rate of corporation tax by 18%. We have cut the standard rate of capital gains tax by 20%. We have cut the basic rate of income tax by 8%. We have cut the top rate of income tax by 12%. Yet we have confounded our critics and instead of falling tax revenues have doubled in ten years.

We are now in a situation whereby only half of income tax receipts are needed to service the national debt, whereas ten years ago all of income tax levied was consumed by debt servicing.

We have consistently pursued a policy of low corporate taxation on manufacturing industry. We are now strengthening and deepening that policy with the planned introduction of a 12.5 percent rate applicable to all sectors from 2003. It is quite evident that low corporate taxation is a significant boost to FDI. In Ireland the tax take from corporations is 12 percent of the total tax take, compared with 5 percent in Europe where corporate tax levels are three times higher on average.

All of these developments have greatly enhanced the business environment. Profitability has improved - both for existing firms and for potential inward investors. Equally important, the consistency of macro-policy, and the predictability of future cost developments provided by the multi-annual partnership agreements, has greatly reduced the level of uncertainty surrounding investment decisions.

The net result has been a significant growth in sales driven by both exports and domestic demand. This has resulted in Ireland's manufacturing sector achieving significant employment growth at a time when the phenomenon of jobless growth appeared to be the norm. In addition, Ireland's services sector employment growth has been exceptionally strong as domestic consumer's net incomes have grown.

As the standard factors of production become lighter and, therefore, more mobile, labour supply becomes absolutely critical among factor inputs. We have been fortunate that Ireland's labour supply has been remarkably flexible in response to rapid growth in demand. Historically, Ireland has had very high potential labour force growth. The tragic factor was that the sustained absence of the various positive features which I have just described saw that potential dissipated through emigration, through women's absence from the labour force and through a general lack of opportunity.

When growth provided the opportunities in the 1990s, that potential was unleashed - young people who would have emigrated stayed in Ireland; former emigrants returned; women's participation in the labour force began to rise rapidly. As a result, the labour force has grown by 2œ% per annum since 1990.

The quality of labour supply has also risen rapidly. While many other aspects of our economy were, quite frankly, dysfunctional during the preceding two decades, major investments in up-grading education and training did continue through that period and are now paying dividends.

Ireland has clearly made tremendous strides during this decade. However, in terms of accumulated wealth and depth of infrastructure we still lag significantly behind the most developed member states of the EU. The Structural Funds have played a very important role in accelerating Irish growth. And in that regard, we believe that Ireland's prudent and productive use of the funds is a vindication of the EU's regional development strategy.

The Structural Funds had beneficial short-run macroeconomic effects by providing a boost to demand in the economy. Moreover, the availability of these funds, particularly at the beginning of the 1990s, eased some of the pain of the fiscal corrections we were making at that time.

Looking ahead to the future, considerable challenges remain ahead of us. As I have said, our prosperity is relatively newly found and much needs to be done to consolidate the progress that has been made in recent years.

In terms of our industrial base, we need to continue the transformation which has been underway in moving away from high volume low value added industries to those which are increasingly knowledge driven;

In our infrastructure we need to press ahead, not just to replace the obsolete elements, but to provide the additional capacity which will allow the country to continue to grow;

We need to continue to open up previously sheltered areas of the economy to competition, including a more ambitious programme of privatisation;

We need to guard against the threat of inflation, and control public expenditure in the new environment of EMU;

We also need to continue to work hard to strive achieve the central goal of our employment policy: that of full employment.

We have a two pronged strategy in pursuit of this goal:

Firstly, to increase the number of sustainable jobs overall. This is being achieved through the various economic and industrial policy measures which I have outlined.

Secondly, we aim to bring back into the mainstream of the labour market those who are currently excluded. This is being achieved through:

Taxation and welfare reforms designed to make it more attractive for an employer to offer a job and for a potential recruit to accept a job.

Targeted interventions under an affirmative action programme for priority categories to bring persons back into the mainstream of the labour market.

I think it will be apparent that the problems which we have faced in Ireland and which we have worked hard to overcome, are fundamentally no different to those faced by other countries.

Looking ahead, the progressive creation of the single market together with the eurozone, has given Europe with a bulwark against the global economic turbulence which we are currently experiencing. However, in the long run, Europe can only prosper and grow through a combination of internal market dynamism and a demonstrable ability to achieve a sustainable competitive advantage in the wider global marketplace.

And if Europe is to achieve competitive advantage it must do so across a broad base. We must ensure that the costs of doing business in Europe are not excessive. We must therefore strike the right balance between wage costs, taxation and other State imposed costs, and productivity.

In the European Commission study of Ireland, New Zealand and the rest of Europe to which I referred earlier, the Commission's key conclusion was that the upswing in Ireland's economy was largely due to reforms of the macroeconomic and regulatory environments. It drew three further conclusions:

• macroeconomic stability is the foundation for sustained growth of output and employment, with the consolidation of the public finances being an essential concomitant
• microeconomic level measures by companies, public administrations etc. need to support such macro policies
• such efforts and policies require time and patience and, above all, must be sustained.

The Irish Government is determined to ensure that the fruits of our collective labours over the past decade are not frittered away, but are built upon.

One of our key challenges is how best to plan for prosperity. With the 50% growth in our economy over the past five years, bottlenecks in such areas as physical infrastructure and affordable housing have emerged. These need to be tackled speedily and imaginatively if we are to sustain our competitive advantage as we cross the threshold of the new millennium.

Governments must ensure that the conditions exist for maximum flexibility in labour markets. Ireland has one of the more lightly regulated labour markets in Europe and this allows us the flexibility to respond to changing circumstances very quickly. It is one of the reasons that has made us especially attractive as a prime location for foreign direct investment.

Flexibility and "lightness of foot" will be all the more essential as a participant in EMU. It is vital therefore that competitive markets for goods and services operate within the euro zone. Transparent pricing from the introduction of the new currency will not only help achieve price stability, but also contribute to competitive cost curtailment. This in turn will assist in the development of a dynamic internal market and boost Europe's competitive position vis a vis the rest of the world.

Before I conclude, I would like to refer briefly to two areas where New Zealand has clear competitive advantage over Ireland. These are in the fields of viticulture and rugby union.

In the case of the former, unless global warming accelerates alarmingly, I don't believe that Ireland can ever catch up. However, I can assure you that Ireland is making every effort to catch up on the rugby field, so look out for the Irish in the rugby world cup at the end of this year. What better final could be in prospect than Ireland and New Zealand?