January 9, 2006
By Marc Miles, Ph.D.
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
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
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
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
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
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
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
Its regulatory policies generally promote an open and competitive
"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
These policies continue to produce dramatic growth and
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
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
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
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
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.
Marc Miles, Ph.D.
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