How a Small Country Transformed Itself – the Case of Ireland and the Role FDI played in that Transformation David O’Donovan Director Investment Promotion Agency Development, Communique International, Dublin, Ireland BCCI/BELTRAIDE Business Mixer June 13, 2012 Belize

Six Broad Themes I.Brief Facts II.Irish Economic Transformation - WHAT Happened III.HOW it Happened IV.The Current Crisis V.Looking Back – Lessons Learned VI.Summary Conclusions

Brief Facts – Republic of Ireland Small island on the western edge of Europe Area: 70,275 sq km (Belize X 3) Surrounded by much larger neighbours Population: 4.5m (Belize X 14) Capital: Dublin (1.5m) 800 years of British rule Independence: 1921 EU member since 1973 GDP (2010): US$197 billion – per capita US$44,000

Brief Facts – Republic of Ireland Two major famines in 19 th century Mass emigration Population halved from 8m to 4m in 100 years Irish diaspora much larger than population - 77m worldwide, of which 44m in USA alone

Brief Facts – Republic of Ireland First 50 Years of Independence: Trade protection policies dominated Economic stagnation Continued mass emigration – up to 100,000 per year in 1950s By 1961, population reached record low of 2.8 million Little natural resources Virtually no modern industry Irish income per capita of US$3000 – one of the poorest in Europe Ireland on verge of economic collapse

Similarities with Belize Ireland’s initial conditions were similar to Belize today Peripheral location Low population density Emigration and brain drain – significant diaspora English speaking Common law traditions Little modern industry and unsophisticated export basket Lagging convergence with higher income countries in region High tourism potential

Irish Economic Transformation Major policy shift from late 1960s onward: Widespread recognition of failure of past policies Realisation that major policy changes were required Deep economic crisis meant that all politicians were under pressure Need for national consensus recognised Resulted in cross-party agreement to create the right climate for investment

Irish Economic Transformation As a result, Ireland moved: From isolated and remote government to dialogue and social partnership From short-term policies to long-term strategic policies From protection to competition & economic openness From little to massive investment in education From import substitution to export promotion From limiting FDI to attraction of FDI From high taxes to low taxes both corporate & personal

Irish Economic Transformation Result – from poor to rich in one generation: Today Ireland, despite the current economic downturn, is still one of the richest countries in the world GDP: US$197 billion Per Capita: US$44,000 well above the EU 27 average Population has risen 60% to 4.5 million – from 2.8 million in 1961

Irish Economic Transformation

Irish exports have changed dramatically: 1972 Primarily agricultural products 2012 High value added, high technology products and services

Irish Economic Transformation 2011 Exports of US$117 billion (59% of GDP) 2011 Trade Surplus US$56 billion 80% of exports coming from FDI located in Ireland Cumulative FDI Stock of US$237 billion or 120% of GDP, almost 4 times the EU average of 33% Source: Central Statistics Office, Ireland –

Irish Economic Transformation The Irish economy is one of the most open in the world: - International trade is 80% of GDP - Per capita exports of $26,000 - one of the highest in the world “Ireland has one of the world’s most pro-business environments, especially for foreign business and foreign investment” 2006 Index of Economic Freedom – Wall Street Journal and Heritage Foundation

Irish Economic Transformation “It takes only 5 procedures and 14 days to establish a foreign- owned limited liability company in Ireland” World Bank, Investing Across Borders Indicators of FDI Regulations, 2010

Irish Economic Transformation “Ireland’s share of global FDI has been about five times its share of global GDP” Kasra Ferdows, Professor of Global Manufacturing, Georgetown University, USA 2003

Irish Economic Transformation The 2011 World Competitiveness Yearbook showed Ireland to be: 1 st for corporate taxes 1 st for the availability of skilled labour 1 st for business legislation for foreign investors 3 rd for inward direct investment flows 3 rd for availability of financial skills 4 th for labour productivity 4 th for exports of commercial services 7 th for the flexibility and adaptability of people

Irish Economic Transformation The 2010 Ernst & Young Globalisation Index ranked Ireland the second most globalised location in the world*: 1 st Hong Kong 2 nd Ireland 3 rd Singapore 4 th Denmark 5 th Switzerland * Based on the 60 largest economies across 20 indicators and measures the extent to which they are connected to the rest of the world

Irish Economic Transformation HOW DID THIS PHENOMENAL ECONOMIC TRANSFORMATION HAPPEN?

EU Membership from 1973 EU membership helped but was not decisive

EU Membership from 1973 Many other poor, peripheral countries also joined the EU but did not experience such rapid catch up and structural transformation There was something special about Ireland

Irish Economic Transformation

Ireland adopted a holistic, rather than piecemeal, approach to economic development

Irish Economic Transformation Joined-up thinking at policy- making level Followed by: Joined-up action at the implementation level

Irish Economic Transformation With 7 Key Foundations: 1.NATIONAL CONSENSUS 2.SOCIAL PARTNERSHIP 3.SPECIFIC BODIES FOR SPECIFIC FUNCTIONS 4.LOW TAXES 5.INVESTMENT IN EDUCATION 6.EU MEMBERSHIP FROM AGGRESSIVE CAMPAIGN FOR FDI

1.NATIONAL CONSENSUS

National Consensus Policy failures from 1930’s led to state of national crisis by 1960’s Severity of crisis brought national consensus New direction for economic and industrial policy agreed Evidence-based approach Acid Test for any new policy was ‘show us where it has worked’?

National Consensus New Direction Adopted: Free trade and expansion of market access Private sector led growth, not government sector growth Private sector with strong state encouragement to be the engine of growth FDI attraction as the fastest and best route to gain investment, jobs, technology and expertise

2. SOCIAL PARTNERSHIP

Social Partnership Cornerstone underpinning rapid Irish economic growth Virtuous circle between Government, employers, labour, farmers and voluntary sector – all have voice in developing strategies Under the umbrella of the National Economic and Social Council (NESC) since early 1970s Chaired by Head of Prime Minister’s Department

Social Partnership Representation within NESC: –Government – Secretaries General of 7 departments (ministries) –Private Sector – 5 from business associations –Labour – 5 from trades unions –Farmers – 5 from farmer organisations –Voluntary – 5 from NGO organisations –Other – 5 independent representatives, normally technical experts or academics Term of Office is 3 years

Social Partnership NESC receives technical and administrative support from semi-autonomous secretariat of 9 people Funded by Prime Minister’s Office (US$1.5m per annum) Meets once a month for a half day Meetings held in private No transcripts kept – only final agreed reports are published Decisions taken by consensus – no need for Chairman to use casting vote

Social Partnership Real Secret of Success: A Shared UnderstandingProblem Solving ApproachConsensus

Social Partnership Recognition of: Interdependence between social partners Tradeoffs both between and within interest groups

Social Partnership Partners’ core mandate is problem solving A common definition of the problem is reached Consensus and understanding not a pre-requisite of the partnership but rather a result of it

Social Partnership Trades unions included in policy making for first time New deal with trades unions in mid 1980s – no strikes and wage moderation in return for cuts in personal taxation and prospects for share in future growth

Social Partnership Led to industrial peace, wage moderation and low inflation with strong ‘buy-in’ from Trades Unions Source: ILO (International Labor Organization)

Social Partnership Led to development of coherent, long-term strategies Helped to instil common vision in implementing agencies Facilitated social cohesion Facilitated ‘joined-up’ policy making followed by ‘joined-up’ implementation - specific State bodies for specific functions

3. SPECIFIC BODIES FOR SPECIFIC FUNCTIONS

Specific Bodies for Specific Functions Objective: Joined-up thinking at the policy-making level Followed by: Joined up action at the implementation-level

Combination of government departments, state agencies and advisory councils Each with its own specialist function All well funded by government with focused operational budgets Professional, permanent staff who do not change with changes of government Specific Bodies for Specific Functions

Issues recognized as cross-cutting, interlinked and interdependent All institutions linked by cross board memberships Institutions attempt to provide a complementary division of labour Each institution has its own specialist focus within overall national strategic framework Specific Bodies for Specific Functions

Forfas (Planning, Policy Advocacy) - US $85m, 120 staff IDA-Ireland (FDI) - US$309m, 170 staff Enterprise Ireland (Indigenous Industry & Export Development) US$336m, 900 staff Science Foundation Ireland (Innovation) - US$175m, 44 staff Specific Bodies for Specific Functions

4. LOW TAXES

Low Taxes 1956 – zero tax on profits from exports 1981 – 10% corporation tax on profits from manufacturing and internationally-traded services 1990 – 10% tax extended for 20 years to – 12.5% tax on all trading profits (companies on previous 10% rate retained this to 2010)

5. INVESTMENT IN EDUCATION

Investment in Education Adoption of universal free secondary education and low cost tertiary education in 1967 Built universities/regional technical colleges in 10 enterprise zones Adoption of free University education in late 1990s

Investment in Education Government spends 16% of budget on education – one of the highest in Europe 34% of population under 25, one of the highest in Europe Almost 25% of population in full-time education 90% complete second level to age 18; 54% go on to higher third level education At 3rd Level 60% in Technology or Business

6. EU MEMBERSHIP FROM 1973

EU Membership from 1973 Allowed duty-free access for first time to Continental markets Late 1970’s to early 1990’s net transfers from EU to Ireland represented 4% to 7% of Irish GDP - helped to fund massive investment in Irish development Brought benefits of Single Market Stability from introduction of EURO currency

7. AGGRESSIVE CAMPAIGN FOR FDI

Aggressive Campaign for FDI Strong belief that massive Government financial support for new investment would, over time, be self-funding All incentives measured for cost/benefit to the economy Benefit to cost ratio must be minimum of 4 to 1 Evaluation carried out before, during and after investment

Aggressive Campaign for FDI Empirical data showed State got its money back in 4- 7 years Long-term, highly attractive incentive package designed and implemented consistently over 40 years by all Irish governments Incentives apply equally to FDI and Indigenous Irish SMEs

Aggressive Campaign for FDI See Dedicated, professional State agency, IDA-Ireland, founded in 1970 to market Ireland around the world to targeted foreign investors Separate Statutory Body Clear Mandate

Aggressive Campaign for FDI Operational freedom but with accountability for results Well funded Staff paid market rates similar to private sector

Aggressive Campaign for FDI IDA Expenditure 2010: US$309m Of Which: Grants to Industry US$165m Property Development US$84m Administration, Promotion & Advertising US$60m Total Corporation tax paid in 2009 by companies grant assisted by IDA: US$3.3 billion Source: IDA-Ireland Annual Report, 2010

Aggressive Campaign for FDI Following initial mistakes in the early years, mainly as a result of a lack of sector selectivity, IDA policy then focused strongly on two questions: 1.Which industries offered best potential for attraction to Ireland? 2.Why those industries - what was to be the basis for Irish international competitive advantage in those sectors?

Aggressive Campaign for FDI Conclusion - concentrate on high value added sectors as: 1.Availability, quality and cost of an educated workforce is key driver of international competitive advantage in those sectors 2.High value-to-weight ratios suit Ireland’s peripheral geographic location

Aggressive Campaign for FDI Three high value added sectors chosen: 1.INFORMATION TECHNOLOGY (Hardware & Software) 2.LIFE SCIENCES (Pharmaceuticals & Medical Devices) 3.INTERNATIONALLY TRADED SERVICES (Financial and non-financial)

Aggressive Campaign for FDI STRATEGY: Market leaders targeted first If successful, others would follow Create self-reinforcing clustering effect - ‘Silicon Isle’ mirroring ‘Silicon Valley’

Aggressive Campaign for FDI STRATEGY: Sector-based staff both in HQ and overseas – 20 offices in 13 countries with 40 staff Sector targets by country, by office and by staff member ‘What gets measured, gets done’ Performance evaluation based on performance against targets Promotion, merit bonuses tied to performance against targets

Aggressive Campaign for FDI STRATEGY: IDA Project Officer acts as OSS for his/her clients No separate OSS office Project Officers have established relationships with concerned Government bodies Have all necessary forms for investor Monitor progress through procedures of concerned Government bodies Bring in senior IDA management when undue delays occur

Aggressive Campaign for FDI IMPACT: Built critical mass of firms in each sector New entrants choose Ireland, in part due to skill concentration, thus further reinforcing those advantages Strong demonstration effect of successful early investors

Aggressive Campaign for FDI IMPACT: “On a per capita basis Ireland is now ranked the number 1 global destination for jobs by inward investment” Source: 2010 IBM Global Location Trends Report

Aggressive Campaign for FDI IMPACT: 985 foreign companies employing 144,000 directly with a total impact of 250,000 jobs in the economy They spend US$23.7 billion in Ireland annually Source: IDA End of Year Statement 2011

Aggressive Campaign for FDI Of which: Irish Services US$11.8 billion Payroll US$9.3 billion Irish Raw Materials US$2.6 billion Source: IDA End of Year Statement 2011

Aggressive Campaign for FDI spurred rapid growth of Irish SMEs supplying the FDI sector in Ireland brought in modern management techniques and practices and improved competitiveness spawned a wave of first time entrepreneurial start- ups by ex senior managers of multinationals in Ireland critical mass of investors in targeted sectors resulted in strong export-oriented, clustered sectors in ICT, Pharmaceuticals, Business and Financial Services This expenditure of foreign companies in Ireland has had important beneficial spin-off benefits:

Aggressive Campaign for FDI IMPACT: Much faster economic development than would otherwise have been the case More effective integration into the international economy Rapid gains in productivity Thousands of Irish emigrants attracted home Improved competitiveness of Irish firms Widened the local tax base

Aggressive Campaign for FDI IMPACT: Full employment reached in 2007 with immigrants from Eastern Europe accounting for 10% of workforce However, current crisis has seen the return of unemployment now at 14% and the re-emergence of emigration

The Current Crisis Irish economy severely hit by international financial crisis Banks had massively overlent money to Irish property developers Property market has collapsed Government revenues in crisis – shortfall of up to $28 billion EU/IMF Rescue ‘Austerity’ Program underway Unemployment rising and emigration re- emerging

The Current Crisis Mistake was the shift from Investment/Export-led economy to construction-based economy Good news is that Ireland has managed to retain almost all of its existing foreign investment New investment continues to arrive Exports rising again, despite crisis Massive existing foreign investment sustaining economy today

Looking Back – Lessons Learned Success did not come quickly – putting the ingredients together was a long slow process but was well worth the effort Social Partnership emerged only in response to economic crises Could it have been done sooner without crises? Social Partnership facilitated policy consensus and was absolutely crucial

Looking Back – Lessons Learned Success in Investment Promotion, even for a low corporate tax country like Ireland, also required: A professional well-paid civil service Strong investment in key strategic public goods especially education

Looking Back – Lessons Learned At the start, mistakes were made in going after all sectors for investment – real value of selectivity not realised until later Showed the importance of leveraging national comparative advantage – playing to national strengths – while, at the same time, removing administrative barriers to investment and creating financial incentives for investment

Looking Back – Lessons Learned Irish economic policies and institutions change very little with changes in Government Civil servants and staff of state agencies do not change with change of Government Enabled long term, strategic and consistent policies to survive outside political/electoral timeframes Gave all investors great confidence in country

Summary Conclusions Investment Promotion is the job of the Government Its a highly competitive business worldwide and getting even more so Requires wide stakeholder consensus and support Must have adequate Government Budget

Summary Conclusions Done professionally, the money comes back to the economy in less than 7 years Deciding early who does what and with what resources is crucial Leadership with joined up policy followed by joined up action is real key to success

THANK YOU!