Address by the Minister for Trade and Commerce, Mr. Michael Ahern TD, at the Irish Business Club seminar on ‘The Challenge of Globalisation for Small Countries – Strategies for success in Ireland and Finland’

Helsinki, 2 October, 2006

Distinguished Guests, Ladies and Gentleman,

I am delighted to join you here today to share some thoughts with you on the Irish experience of globalisation and its relevance for other small nations.

Firstly, it is useful to reflect on Ireland’s position - how would a dispassionate observer from outer space weigh up our prospects in the world and how we might develop in relation to other nations? Applying some cold logic to the matter, one would have to be quite pessimistic about economic development in Ireland. Apart from good agricultural land, we are not well endowed in terms of resources. We have some modest mineral wealth, mainly lead and zinc ore, but no downstream development of that resource, we have a modest supply of natural gas, now running out fast and some prospects of additional, more difficult, off- shore supplies coming on stream in the near future and that is about the extent of it. If we look for many other compensating natural advantages, one would likewise be pessimistic. We are the most westerly country of Europe, far from suppliers and from markets. For many centuries we have lived in the shadow of a world power on our doorstep, Great Britain, making it even more difficult to carve out a separate identity. As those of you who have been to Ireland, or perhaps even watched the Ryder Cup golf competition recently, will be aware, our geographical position has not bestowed a favourable climate on our territory either. All of this adds up to a scenario where our visiting alien would conclude that if the world were to develop in a way where there was to be easy movement of goods and services, lack of protection and tariffs for native producers, cheap transport to and from opposite ends of the earth and generally a free market system, then prospects for development and prosperity for Ireland would seem bleak.

Prospects were indeed bleak for many years but not in these circumstances, rather the opposite. When we gained independence from Britain in 1922 and set about running the country ourselves, the politicians of the time adopted a very firm course of protectionism and isolation for several decades. Strenuous attempts were made to build up and support what limited native industry we had, by means of high tariffs on imported goods and measures to ensure that Irish - made products got preference in home markets. Inevitably of course, this hampered exports, as other countries reciprocated with tariffs on Irish produce. Less efficient producers at home were able to survive in an artificial environment with little incentive to innovate and with consumers forced to purchase more expensive goods than would otherwise be the case. The inevitable result of all this was a stagnant industrial base, high levels of unemployment and emigration, low exports and inadequate tax revenue for Governments to undertake necessary expenditure. The population continued to fall throughout this period reaching an all time low of 2.9 million in 1961. Most European countries, which had the burden of catastrophic disruption and loss during the Second World War, were able to pick themselves up very quickly, with steady economic growth throughout the fifties, whereas Ireland, which had avoided participation in the war, seemed to sink lower and lower as that decade passed. We had the double disadvantage of not having had very much traditional industry to protect and then missed out on the development of new sectors which were growing elsewhere.

By the end of the 1950s, with the gradual departure of some of the politicians who had been in power since the foundation of the state, the baton passed to a younger generation and a change of direction in economic and industrial policy was initiated. The new Prime Minister was a man by the name of Sean Lemass and he commenced the process of dismantling trade barriers, initially with Britain and then further afield. Steps were also taken to attract foreign investment to Ireland and a range of incentives were developed to encourage this process. The concept of a tax free zone was initiated – one of the first in the world, at Shannon Airport in the west of Ireland. At one stage, Lemass, while concentrating on wider framework conditions, was being criticised for not taking some supporting measure for a specific sector. He made the reply that ‘A rising tide lifts all boats’. This was a phrase that was often repeated in later years and lodged in the Irish psyche in the 1960s. It is indeed a very good description for the perceived benefits of globalisation, a word which, of course, was not in use at that time, but the phrase nicely embraces the benefits of a set of principles which was to sweep the world economies with such vigour, in more recent decades. The seeds which had been sown at this time eventually led to our joining the EU, or European Economic Community as it was then, in 1973 and from then onwards, our direction was very firmly set toward opening up our markets and taking the accompanying risks and challenges which followed, some of them painful at the time. By providing open access to the richest market in the world, and to a wide range of EU and State supports that facilitated modernisation of the Irish economy in all sectors, membership of the EU has been pivotal.

The promotion of industrial development since that turning point at the end of the 1950s, has played a central role in fostering economic development in this increasingly free-trade environment. Ireland’s economic development strategy has focused on employment creation and has been characterised by actively promoting several specific policies:

• the development of a modern export-led manufacturing sector, both indigenous and foreign owned, through financial and fiscal supports;
• the attraction of green-field investment by overwhelmingly export orientated foreign companies in the manufacturing and internationally-traded services sectors;
• the establishment of up-stream linkages between foreign and indigenous companies;
• the deliberate creation of industrial clusters by foreign and indigenous companies in certain subsectors of manufacturing and internationally traded services;
• using industrial development as a tool for a policy of regional growth balance; and
• investment in the development of a highly skilled and educated workforce.

The most spectacular phase in the development of Irish trade was in the 1990s, with a number of external factors proving important. Firstly, one of the sectors which Ireland has promoted since the 1970s, the high technology sector, surged. Helena Acheson, from Forfas, which is Ireland's national policy and advisory board for enterprise, trade, science, technology and innovation, - will speak to you later in more detail on the building of a knowledge economy in Ireland. Secondly, improvements in both telecommunications and transport technology facilitated greater international trade flows. Thirdly, the exceptional boom in the US economy boosted output. Fourthly, the innovative system of social partnership developed in the late 1980s helped to provide a stable business environment on the basis of a consensus-based approach to wage levels, taxation and other issues. Finally, the provision of substantial EU funds to support regional investments and incentives, as well as the development of human resources, was crucial.

One of the objectives of Irish economic policy for the last number of decades has been to diversify exports from the United Kingdom. In 1960, 75% of merchandise exports went to the UK – now that figure is around 18%. The destination of exports has been dramatically transformed, with the European Union (EU) now accounting for over 60% of the total and the USA accounting for almost 20%. As a consequence, there is now a greater balance in our trading pattern than previously. We have not rested in our efforts to explore new markets. Just a couple of weeks ago, I myself led a Trade Mission to Australia and our Minister for Enterprise, Trade and Employment, Micheál Martin, led a Trade Mission to South Africa, both initiatives seeking new opportunities for Irish companies in distant markets.

The key to success in diversifying export markets has been the additional productivity arising from specialisation in the production of a small number of product lines. This is a consequence of the successful policy of attracting multi-national enterprises to Ireland, in particular those within the four sub-sectors – organic chemicals, medical & pharmaceutical products, office machines and electronics. Together they account for 65% of our aggregate export trade. The most significant distinction between the new strategies compared to the old is that, given the sectoral specialisation that Ireland has achieved, it is now possible to enjoy economies of scale to such an extent that encroachment into market share is difficult. Furthermore, the products we now produce are much higher in value-added terms per employee than was the case when low technology processes predominated.

Apart from the direct benefits associated with the export of goods and services in relation to export earnings, as a foreign trade multiplier, as a creator of direct and indirect employment and as a facilitator of technology acquisition and skill formation, the development model helped bring about a significant socio-cultural transformation. That made Ireland a more open and outward looking country that is capable of leveraging trade globalisation for its own purposes. Associated with this has been the emergence of some dynamic indigenous companies, principally in the high tech sectors. They are also competing in global markets. A key objective of current enterprise policy is to encourage the establishment and growth of new companies in high-tech sectors such as biotechnology, nanotechnology, photonics, digital media and functional foods.

These policies have resulted in Ireland now being one of the most open economies in the OECD.

A really significant change has been the introduction of the Euro a few years ago. That followed a policy focus on tracking European currencies since 1979, when the long standing Irish currency parity linkage with the UK currency, Sterling, was broken. The Euro has brought with it greater stability and transparency for exporters to continental Europe, as well as reinforcing an important psychological connection between Ireland and Eurozone countries. In addition, the significant support provided from the Structural Funds of the European Union allowed for essential and large-scale investments in a range of infrastructural projects, in education and training programmes, in enterprise development programmes and in research and technology applications. This was particularly important at a time when credit constraints, caused by burgeoning national debt, restricted the facility of the State to fund such vital investments.

It isn’t possible to speak about Globalisation without considering our involvement with and attitude to, the World Trade Organisation. The WTO provides assurances to its member countries and to individual companies throughout the world, that allow them to conduct business in accordance with clear and predictable trade regulations. The Government has long been convinced that this model is beneficial to all countries and, in particular, to smaller and open economies such as our own. As a consequence, we support the strengthening and widening of the multilateral trading system that the WTO embodies. We are also committed to further strengthening the WTO as being the most effective approach to addressing the challenges of globalisation and to assisting developing countries to integrate successfully into the global economy.

The benefits that have flowed to Ireland from globalisation are, of course, fundamentally tied to maintaining Ireland’s Competitive Advantage. At all costs, we must retain this competitive advantage in key areas. To retain and enhance the living standard we have achieved, there are many challenges, including the exponential change in the scale of globalization - for example India and China have a combined population of over 2 billion. In addition, the Irish cost base has increased substantially and our low corporation tax rate is being copied by some competitors. Also, the EU is changing its rules on State Aids, which will place restrictions on our assistance to enterprises.

The nature of trade is changing, with a shift towards services. Ireland was the ninth largest importer of services globally in 2004, consuming 2.8% of global imports while earning a 2.2% market share of world service exports in the same year – a far higher market share than our economic size would suggest. In 2005 services exports from Ireland are estimated at about € 40bn.

We need to develop a position of competitive strength, differentiation and critical mass. Examples of these include existing services areas, such as software development, tourism, education and intellectual property management. In manufacturing, there are opportunities in biopharmaceuticals, medical diagnostic products and even prepared consumer foods, which is likely to be a significant area.

Businesses must develop expertise in international markets to promote sales growth, and build technological and applied research and development capability. Despite the fact that foreign owned companies are a key driver in our development, it must be recognized that in general, they produce goods that were designed elsewhere, to satisfy market requirements that were specified elsewhere and sold by other people to customers which whom the Irish operation has little contact. Strenuous efforts are being made to get these enterprises more embedded in the Irish economy with as many functions as is practicable, being carried out here. This process also has the advantage of reducing the risk of a relocation, if conditions get difficult.

We have identified five sources of competitive advantage, which, taken together, can enable enterprises in Ireland to achieve this vision. These are - our educational and training system, our stable tax regime and a pro business government, regardless of occasional changes in the composition of the administration. We also need a focus on expertise in sales and marketing and finally on the application of Research and Development and technology to the creation of new products and services. There must be close interaction between industry, academia and the State with an objective to achieve a critical mass of leading edge expertise in particular niches.

In addition to these sources of competitive advantage we also need to get framework conditions for business right. These are Cost Competitiveness, investing in national infrastructure, encouraging Innovation and entrepreneurship generally and developing management capability in business.

We need to recognize the necessity of both upskilling the general workforce and achieving distinction in the quality of graduates from higher education. We now have a 12.5% corporation tax rate on all trading income. We have fought hard to oppose some attempts within the EU system to impose a standard rate of corporate tax within the EU which would mean we would loose this key advantage for Ireland.

The position we have reached is impressive by any standard; seven of the world’s top ten ICT companies have a substantial base in Ireland. Thirteen of the top fifteen pharmaceutical companies in the world have substantial operations here and eight of the top ten software suppliers in the world have operations in Ireland. We could be tempted to say that is all we need - could anything possible go wrong, our companies exported $88bn worth of goods last year and a very considerable value of services too. According to the World Competitiveness Scoreboard published recently, Ireland is the 11^th most competitive economy in the world and 4^th in the EU after Denmark, Luxembourg and your own Finland. But of course, we should never stand still in such a fast moving environment.

Since May 2004, as you know, in common with Sweden and the UK, we opened our borders to the workers of the 10 new Member States. The success of this policy has been remarkable. The Irish Government welcomes the participation of the thousands of citizens from Poland, Lithuania and Latvia and other countries who are helping with the expansion of the Irish economy in the same way as Irish citizens helped in the expansion of the other economies in the past. Almost 10% of our labour force are foreign workers.

Although there is no simple formula for economic success and trade liberalisation alone is no panacea, it is clear that over recent years those countries with the highest level of integration into the world economy have achieved the fastest growth in economic development.

It has to be stressed, of course, that trade liberalisation does not automatically mean higher growth. It has little benefit if the domestic policy environment is wrong. As mentioned earlier, economies need to build local institutional and infrastructure framework in order to reap the benefits of trade opportunities.

It should of course be remembered that many people are not convinced as we are of the benefits of Globalisation. Many of the citizens of Europe are sceptical and the benefits are not apparent to many. The key aspect to be borne in mind is that globalisation, with its increasing trade openness, results in cheaper imports, creating greater consumer purchasing power and boosting demand for goods and services. Europe’s prosperity is thereby intrinsically linked to that of other countries, especially the emerging economies of Asia. In addition, the erection of economic barriers would merely serve to keep low-productivity jobs in Europe, maintaining downward pressure on European wages. Economic growth and greater prosperity across Asian economies, increases their purchasing power for the goods and services that Europe produces.

Globalisation for Europe should not imply a race to the bottom across the Union – rather it should accelerate a race to the top of in terms of innovation, education, research capacity and in terms of expanding higher skilled employment. An essential part of this process is ensuring that Small and Medium Enterprises are well prepared to take full advantage of globalisation and remain competitive and adaptive. SMEs employ 60% of Europe’s workforce and export 70% of Europe’s total exports. SMEs can take full advantage of globalisation by being attractive business partners for others in Europe and Asia. It is essential that the benefits of globalisation are distributed so that new found wealth is used to create both societies and economies that can prosper, by means of improved infrastructure and education, for further prosperity and competitiveness.

Insofar as the Developing Countries are concerned, the aim must be that trade liberalisation, on balance, will help to alleviate poverty. I believe that the developing world has much to gain from trade liberalisation. Market openness can have significant positive effects on productivity, new technology and investment. Trade stimulates growth and provides the resources necessary for reducing poverty.

We will continue to take account of the specific needs of the developing world. We have a duty to ensure that the global trading environment is regulated in such a way that allows all countries at all levels of development to benefit. Our membership of the European Union gives us a better opportunity to realise that objective and to contribute to the shaping of the global trading environment, than we could ever hope to do alone.

The Irish Government recognises that trade policy has an important role to play in providing economic development opportunities to emerging and poorer countries. We appreciate that inadequate trade policy formulation can have significantly negative impacts on them. This is reflected in our determined approach to advancing and agreeing the development dimension of the Doha Development Agenda. That involves a recognition that advancing the economic and social needs of such developing countries can require differentiation in the pace at which trade is to be liberalised. It also requires recognition of the need to implement specific measures to assist in assessing the implications of trade liberalization policies for them, and to demonstrate the economic importance of progressively introducing necessary reforms to permit them to more fully realise the benefits of global trade liberalisation.

We must, above all, not turn our backs on the inevitable trend towards greater globalisation. It has served both Ireland and Finland well so far.

Thank you all very much

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