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January 9, 2006

The path to Irish freedom

By

Viewed from Washington, it's hard to believe the Ireland depicted in the film The Commitments even existed 15 years ago. When the 20-somethings depicted in that movie discussed career opportunities, the inevitable question was: "When are you going?'' As in: to the US for a job. Not any more.

Instead of double-digit unemployment, Ireland imports workers today. Instead of little or no growth, Ireland's growth outstrips world averages. The 'sick man' of Europe has become the Celtic Tiger, with prospects far better than those of its neighbours on the continent.

How did this happen? Ireland went against the grain and made it easier for people to pursue their dreams. It adopted pro-market, pro-growth policies that have made it the fastest-growing economy in Europe and the third-freest economy in the world.

The economy grew at a rate of 4.9 per cent last year, far better than the world average. It grew 80 per cent through the 1990s after pro-market reforms were adopted, and, as recently as 2000, it grew 10 per cent in a single year.

On a scale of 1 to 5,with one being best, Ireland scored 1.58 in the recently released 12th annual Index of Economic Freedom, published by the Heritage Foundation, a Washington, DC-based think-tank, and the Wall Street Journal, the US' leading financial newspaper.

That marked a gain of 0.12 owing to improvements in its monetary policy and a reduction in the financial burden government places on the economy. It finished behind only Hong Kong and Singapore in the ranking of 157 countries worldwide and passed Luxembourg to become the freest economy in the index's North America-Europe region.

As in previous years, the index ratings reflect an analysis of 50 variables, grouped into ten categories: banking and finance; capital flows and foreign investment; monetary policy; fiscal burden of government; trade policy; wages and prices; government intervention in the economy; property rights; regulation; and informal market activity.

Countries are rated from 1 to 5 in each category. These ratings are then averaged to produce the overall index score.

According to these measures, Ireland is one of the easiest countries in the world in which to do business. It posted a perfect score of 1 this year on monetary policy, foreign investment, banking and finance and property rights. It scored 2s on trade policy, government intervention in the economy and regulation and 2.3 on fiscal burden.

The trade policy score results from membership of the EU, which imposes average weighted tariffs (import taxes) of just 1.3 per cent but adds complex regulatory burdens and export subsidies.

Ireland's fiscal burden of government score improved thanks to reductions in the percentage of gross domestic product (GDP) that goes to government spending and would improve still more if it reduced its top income tax rate from its current 42 per cent.

Ireland gets good marks for its low level of government intervention in the economy. According to the Department of Finance, the government consumed 14.4 per cent of GDP in 2004 and received just 1.9 per cent of its revenues from state-owned enterprises.

The inflation rate continued to decline in Ireland - the weighted average for 1995 to 2004 was 2.83 per cent, down from the 3.91 per cent recorded in the 1994-2003 time frame. This improvement led to the perfect score of one in monetary policy.

Ireland welcomes foreign investment and erects few barriers to what foreigners can own. As a result, Ireland, with 1 per cent of the EU's population, attracted 25 per cent of new American investment in Europe over the last decade. Americans invested $9.1 billion in Ireland in 2003, two-and-a-half times what they invested in China.

Similarly, it welcomes foreign banks.

About 90 banks do business in Ireland, most of them based elsewhere. As a result, licensed credit institutions have assets that total 400 per cent of Ireland's GDP, the second-best such ratio in Europe, behind only Luxembourg.

The index gives Ireland credit for a low level of government intervention in wages and prices. The government established a new minimum wage law in 2001, but price-fixing is prohibited under the 1991 Competition Act. And, other than the EU's farm subsidy programme, the market sets prices and wages.

Ireland's judiciary and civil service are regarded as fair, competent and sound, and investors can be confident that their property won't be expropriated. This single factor drags down economies all over the world, where property is not sufficiently protected.

Its regulatory policies generally promote an open and competitive business environment.

"Most tax, labour, environment, health and safety and other laws are compatible with EU regulations and do not adversely affect investment," reports the US Department of Commerce.

Also, Ireland offers employers a flexible labour market and low social security payments, and it resists EU attempts to harmonise tax rates. Ireland's economy got an added boost in the early 1990s, when the government slashed the corporate tax rate to 12.5 per cent and took other measures to unleash the nation's entrepreneurs to create wealth.

These policies continue to produce dramatic growth and prosperity.

Six years ago, Ireland's GDP stood at $75 billion and per capita gross income at $20,710. It exported $53 billion worth of goods, imported $43 billion worth and had $2 billion in direct foreign investment. Today, national output stands at $116.2 billion, per capita output at $28,762, exports at $134.8 billion, imports at $108.1 billion and direct foreign investment at $2.5 billion. It is the world's largest exporter per capita and still attracts a substantial chunk of new US investment into the EU.

And it's not just Ireland that has benefited from pro-growth policies.

Indeed, the links between countries that embrace economic freedom and prosperity are long established.

The index breaks down countries into categories of 'free' for those better than 2, 'mostly free' for those in the 2-2.99 range, 'mostly unfree' for those in the 3-3.99 range and "repressed'' for those in the four-and-above range.

Those in countries with mostly unfree or repressed economies earn 70 per cent less than those in countries with mostly free economies, according to this year's Index. And those in free economies earn twice what those in mostly free economies earn and seven times what those in mostly unfree and repressed economies earn.

Even movement in the right direction yields quick results. Countries that post the biggest gains on the index grow at three times the rate of those which post the biggest declines.

Enlightened policymakers get the message. That's why, over the last ten years, more and more countries have embraced policies that promote economic freedom.

It's why this year, the average index score falls into the mostly free (2.98; the cut-off is 3) category for the first time.

And it's why, this year, 99 countries improved their index scores, 51 got worse and six remained the same. And it goes a long way toward explaining why the North America-Europe region remains the world's most prosperous.

In the 2006 Index, 11 of the world's 15 freest economies are located there, and 14 of the 20 economies rated as free hail from the region. It also explains why 33 of the region's 43 countries improved their index scores this year.

This also marks the year that the proposition that economic freedom brings prosperity overcame its last remaining challenge.

What happens, the cynics ask, when times get tough in the energy markets on which advanced societies so thoroughly depend?

That doomsday scenario materialised in 2005 - oil hit $70 per barrel - but free economies overcame, so much so that global economic growth hit 5.1 per cent in 2004 and continues at a pace greater than 4 per cent in 2005, according to the International Monetary Fund.

How did this happen? "Free-market policies allow economies to absorb financial and other shocks more quickly and with less long-term pain,'' writes Paul Gigot, editorial page editor of the Wall Street Journal in the 12th edition's foreword.

"Thanks to its economic flexibility, the United States is about twice as energy efficient today as it was during the energy crisis of the 1970s. So while $70 oil acts like a tax, it hasn't been as damaging as it would have been in the past."

The same, of course, could be said for Ireland.

Marc Miles is director of the Center for International Trade and Economics at The Heritage Foundation (heritage.org).

First appeared in Ireland's Sunday Business Pos

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