Ireland's Failure-And Belated Convergence

Ireland began its career as an independent state with many advantages. In particular, its standard of living in 1922 was higher than that of many other countries in Western Europe (Kennedy et al., 1988). In spite of these advantages, its ranking within Europe in terms of standard of living fell over the following 40 years. In the 15 years after the Second World War its economic performance was dismal, and some of this failure must be attributed to the inappropriate policies of successive post-war governments, continuing the protectionist stance of the pre-war years (O'Grada, 1994). With this background, the story of the Irish economy in the 20th century may be better considered as a case study in failure: the current boom is better seen as a belated catching up, consequent on the reversal of the ill-conceived policies of the immediate post-war years, rather than as an economic miracle. The strategy of economic development adopted in Ireland since 1960 has involved the belated opening up of the goods and the capital markets as part of the long-term process of EU integration. However, there was more to Ireland's belated success than merely a liberalisation of markets. There was also active intervention by the state in investing, also belatedly, in human capital and in directly encouraging foreign direct investment. This two pronged approach has been pursued with consistency by all governments over the last 30 years. There were also a series of enabling factors that have facilitated the success of the last decade, as well as some policy mistakes that have rendered the convergence path unnecessarily bumpy. The next Section discusses some of the features that make the Irish experience different from that of its neighbours, factors that help explain its rather different performance in the 1990s. Section 3 discusses the economic record of the last 40 years and Section 4 analyses the process of convergence in the context of a simple model of the labour market.