Economic Freedom of the World

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238 • Economic Freedom of the World: 2016 Annual Report Figure 5.1: GDP per Capita in Selected Countries and the OECD, 1970–2014, US$ 60,000 50,000 United States Ireland Germany United Kingdom OECD GDP per capita 40,000 30,000 20,000 10,000 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2014 Source: Organisation for Economic Co-operation and Development (OECD), 2016. separately. It was only in 2014 that GDP rose above its 2007 value, with large negative growth in 2008 and 2009. Data for 2015 shows Ireland has returned to posting the largest growth rates in the European Union (EU). There is a variety of explanations for the Irish growth performance offered in the literature. This chapter will examine the growth performance of Ireland using the index published in Economic Freedom of the World (EFW Index) by the Fraser Institute. It will follow the approach taken by Powell (2003) and McMahon (2000), and to a lesser extent Dorgan (2006). The final section of this chapter will locate this explanation within the literature on Irish economic development for the period. While this chapter will not examine Ireland within a cross-section of countries, it is worth noting the positive relationship between the change in economic freedom and real GDP growth per capita in OECD countries for the period from 1980 to 2014. The correlation between the two variables is 0.46 (the correlation between economic freedom and GDP per capita in 2013 is 0.57). Figure 5.2 presents both variables for selected countries in descending order of GDP growth per capita. The next section will examine the major changes to the components of EFW Index for Ireland. This will be followed by a section outlining the major policy changes and other factors that influenced these changes. The final section will examine the relationship between economic freedom and other variables on Irish economic development. Historical background on political and economic institutions For all of the nineteenth century and the first two decades of the twentieth century, two islands on the north-west periphery of Europe existed as the political entity called the United Kingdom of Great Britain and Ireland. The Anglo-Irish Treaty of 1921 gave independence to the larger part of the smaller island, which was designated the Irish Free State. The north east of the island remained part of the United Kingdom of Great Britain and Northern Ireland (UK). Fraser Institute ©2016 • www.fraserinstitute.org • www.freetheworld.com
Percentage change in GDP per capita 15 12 9 6 3 0 Chapter 5: Economic Freedom and Growth in Ireland, 1980 to 2014 • 239 Figure 5.2: Average Annual Percentage Change in Real GDP per Capita and the Overall Percentage Change in Economic Freedom, Selected Countries, 1980–2014 China Korea, South Ireland Luxembourg Turkey Norway Portugal Spain Germany Netherlands United Kingdom Austria Denmark Finland Australia New Zealand Japan United States Belgium Sweden France Mexico Switzerland Canada Italy Iceland Greece Sources: Organisation for Economic Co-operation and Development (OECD), 2016; Gwartney, Lawson, and Hall, 2015. The Irish Free State remained within the British Commonwealth and it effectively operated a sterling-backed currency for the next 50 years. Maintaining the one-for-one link with sterling was the main purpose of Irish exchange-rate policy and it underpinned Irish monetary policy. A fiscal relationship was tied to these political and monetary linkages. As a member of the Commonwealth, Irish ministers attended the Ottawa Imperial Conference of 1932 where it was decided to give preferential trade terms to members. The protectionist tone of the conference chimed with both the post-1929 economic environment and the philosophy of the newly elected Fianna Fail government. In addition, the sea journey to Canada brought the Fianna Fail delegation into contact with their British counterparts (McMahon, 1984). However, any potential for greater cooperation on economic policies was soon destroyed by the outbreak of an economic war between the two countries. The economic war lasted until the late 1930s when Britain’s attention turned to the potential for war in Europe. While the economic war was settled on financial terms that were favorable to Ireland, the economic dislocation caused by the war raised issues about economic nationalism (Bielenberg and Ryan, 2012). A movement towards self-sufficiency may have been a policy choice during the 1930s but there was little choice in the matter during World War II (or “the Emergency” as it was known in Ireland). During these years, a fledgling air link with the United States was forged via boat-planes from Foynes and regular aircraft from Shannon. After World War II, Shannon witnessed the first significant use of tax reductions to promote regional economic development in Ireland when the Customs-Free Airport Act 1947 was passed. Within a decade, Ireland would embark on a competitive corporate-tax policy designed to promote national economic development. World War II only served to highlight the strange relationship between Dublin and London. Ireland remained neutral in the conflict but there was relatively free movement of labor between the two political entities. The political links between the separate entities, which were weakened with the 1937 Constitution of Ireland, 45 40 35 30 25 20 15 10 5 0 -5 Percentage change in economic freedom www.freetheworld.com • www.fraserinstitute.org • Fraser Institute ©2016
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Economic Freedom of the World

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