John FitzGerald: Open economy and education key to prosperity

Two weeks ago Ireland marked the centenary of the handover of power at Dublin Castle to a new Irish government. Irish economic historians Cormac Ó Gráda and Kevin O'Rourke have examined the economic record of our first century of independence.

Economic issues had barely featured in the bitter political debate around the Treaty, where the focus was on the nature of sovereignty, and the symbol of the Crown. These were also the big issues for the British side in the negotiations, with little attention on either side to the economic implications of the Treaty for the UK or independent Ireland.

While Northern Ireland continued to benefit from transfers via London in the 1930s, Ireland had no such external revenue. Rather, under the Treaty, we had agreed to shoulder a share of the UK national debt equivalent to 80 per cent of our national income at a time when income per head in the new Free State was a little over half the UK's.

Setting up a new administration was expensive. The Civil War brought extra budgetary problems, not only military spending, but the large resources needed to repair damaged property. Financially, the new State got off to a poor start, with slender resources to address pressing social issues like widespread slum housing.

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So the 1925 deal, where Britain cancelled our share of the UK national debt in return for suppression of the Boundary Commission report, was important financially for the State.

Finland, which became independent five years before us, was significantly poorer than Ireland. Like us, they began with a civil war. While both countries have moved from difficult starts to becoming among the best-off countries in the European Union today, the routes to get there have been very different.

And we have benefited from a much more benign relationship with our former imperial master, and near neighbour.

The UK treasury helped set up our Department of Finance and continued to provide economic advice thereafter. The Economic War of 1932-28, triggered by de Valera withholding the land annuities, was eventually settled in 1938 on terms particularly favourable to Ireland.

While the Irish agricultural sector suffered significant dislocation during that period, the economy benefitted from the injection of the revenue from the land annuities, amounting to more than 2 per cent of national income a year.

Ireland's neutrality in the second World War prompted an attempt by the UK to squeeze Irish supplies. Nevertheless, Irish farmers and UK consumers did well from our supply of food to the United Kingdom market in the war years. After the war the Ireland enjoyed favourable access to the UK market, up to joint entry into the EEC in 1973.

A last favour was the loan by the UK government to Ireland, on very favourable terms, at the height of the financial crisis.

It remains to be seen whether Brexit and the row over the Northern Ireland protocol leads to a sundering of these favourable economic relations with our neighbour over the first century of independence.

In contrast, Finland ended up going to war twice in 1939 and 1941 with its former imperial master, Russia. However, despite the much more difficult relationship with its neighbour, Finland made early policy choices that allowed its economy to move a lot earlier than Ireland on the road to prosperity.

Finland invested in education from the 1930s, while Ireland waited until the 1970s to radically develop this area. Given the strong links between educational attainment and economic performance, we got off to a slow start.

Finland chose to open its economy immediately after the second World War, while Ireland delayed opening till the 1960s. Our small domestic market held us back until we opened up to free trade.

As a result Finland, having been poorer than Ireland in 1920, was already substantially better off than us by 1958.

Ireland made many economic policy mistakes in the first 50 years of independence, but some good policy choices over the subsequent half century have paid off. Having opened the economy to the wider world, joined the EU, and invested in a highly-educated population, today our standard of living is almost 10 per cent higher than the EU-15, and 15 per cent higher than the UK’s.

Finland is a similarly high performer, but by a different route. They have specialised in different sectors to us. Whereas multinationals are very important to Ireland’s success, Finland relied much more on domestic firms to drive growth.

While there is no unique path to prosperity, for both Ireland and Finland, open economies and investment in education have been key drivers.