Dun Laoghaire Rathdown Chamber of Commerce
By Ambassador Thomas C. Foley
November 7, 2007
Good Afternoon. I'd like to thank An Cathaoirleach Denis O'Callaghan for that introduction and the Chamber's Brian Crawford and Hal Ledford for asking me to speak here.
The past two decades have been very good to Ireland. Long gone are the days when the only job opportunities for Ireland’s well-educated youth were abroad. Economic success has created opportunity here unthinkable only a generation ago. Ireland’s success has been so remarkable it is now seen as a global pacesetter and a model for countries seeking to replicate its performance.
Our Irish Government friends tell of the steady stream of visits by officials from countries around the world coming to ask a simple question: What is your secret? We at the Embassy have not been immune to this. Since I arrived we have supported visits to Ireland by state government delegations from Florida, Wisconsin, California, and other states, as well as a host of university and business groups from across the United States.
The flow of U.S. visitors reminds me that cutting-edge U.S. industries and Ireland’s economy have, in a sense, grown up together. Where would the U.S. economy be without the engines of IT, internet, financial services, and bio-pharmaceutical firms, and what would those firms be without their Irish headquarters?
The experience of Microsoft offers a glimpse of this shared history. In the book, The Making of the Celtic Tiger, the architects of IDA Ireland recount that when Microsoft indicated its interest in establishing an Irish headquarters, the question on IDA’s mind was, “Will this company, yet another American IT start-up, still exist in a year?” Twenty years later, the world knows the answer.
But past success doesn’t guarantee future success. The question now is, can Ireland keep it going? Will the model that worked in the past continue to work in the future? Let’s explore that question today to see if we can’t shed some light on Ireland’s economic prospects going forward.
Like most of you, I am a businessperson. I take a businessperson's perspective on questions like this. As businesspeople, you are quite familiar with the things businesses look at when making investment decisions. So let’s look at Ireland from the point of view of a prospective investor, because an economy’s attractiveness to an investor and its future growth rate are closely linked.
Investors look at a number of factors, but in Ireland the main attractions that built the Celtic Tiger have been a well-educated, low-cost, English-speaking work force, low taxes, low political risk, business friendly government policies, and EU membership.
Ireland’s workforce is still one of the best in the world, but wages are no longer low, particularly recently on a dollar-basis. Rising wages are a good thing for workers and an essential benefit of economic growth. So what do Ireland’s higher workforce costs mean for investors?
First, wages and salaries aren’t the only things employers look at when considering work force costs. They look at ‘all-in’ costs which are affected by productivity, turnover, and social costs. My understanding is that Ireland compares very favorably on productivity and labor stability, but somewhat less favorably on social costs when compared to Central and Eastern European countries and the Far East. On these Ireland is holding its own, but needs to assure it remains competitive on productivity, work force stability, and social costs in the future. That means continuing to drive productivity improvements and educating and training workers for higher value added jobs that can’t be performed by labor forces in countries with significantly lower wages. It is no coincidence that Ireland finds its newest investors are in the businesses of software engineering and design, financial services, and other creative, complex intellectual services rather than manufacturing and assembly operations. These are the areas were Ireland remains most competitive.
Now let’s look at taxes. The low corporate tax rate has been an important driver of growth in Ireland. Instituting it was a far-sighted policy decision, but Ireland is no longer alone when it comes to low taxes -- there is plenty of competition out there.
Some of this competition comes from other countries within the European Union. EU enlargement has seen a major drop in average corporate tax rates across EU Member States, with the eight central and eastern European countries which joined the European Union in 2004 having rates among the lowest in Europe. Average rates in the EU countries have dropped from 38% in 1993 to 25.8% in 2006, a reduction of about one-third. Low tax rates in Ireland are being matched elsewhere and are becoming less of an advantage than they used to be.
At the same time, there is a nascent campaign led by some member states to harmonize corporate and personal rates across the European Union. For Ireland, this would mean an increase in rates. We believe that Ireland has the ability to and would block such a move as would other EU countries using low rates.
Many wonder how much low corporate taxes really drive foreign investment. The answer is that it is a critical factor for some, but not for most. It is clear that Ireland is an ideal location for some investors whose income isn’t largely affected by being located in Ireland, but who can claim Ireland as a tax nexus for their EU, or in some cases, world wide income. But this doesn’t apply to the majority of foreign multinationals who have located here. For the majority, Ireland’s low taxes are one of many ‘costs of doing business’ that they look at when deciding where to invest. It is a help, but it is not critical. If the corporate tax rate were to increase significantly, those in the former group would probably go elsewhere or not come if they aren’t already here. This would result in a far greater impact, I believe, on government revenues than employment. But most of those in the latter group, who I suspect hold the long-term prospect of employing more people in Ireland, would find it less attractive here, but not less attractive enough to leave or not come here for other reasons.
Let’s consider the other costs of doing business in Ireland. Real estate costs, both purchase and rental costs, used to be very low. This is no longer the case, as some rents in Dublin now rival Manhattan. In addition, the rapid increases in real estate values and construction activity have been significant contributors to consumption and growth. The current levels of growth in both cannot be sustained indefinitely. Lower growth in the real estate sector will help with future costs, but may result in some painful economic adjustments.
Newer on the horizon are concerns over energy costs. With the run-up in the price of oil and lacking any significant indigenous primary energy resources, Ireland is particularly exposed to global energy market shocks. I know policymakers are looking for ways to mitigate this exposure by, among other things, relying more on renewable energy sources, improving energy efficiency, and seeking to connect Ireland’s electricity grid to the grids in the U.K. and Europe. Even so, don’t count on seeing many new investors coming to Ireland for whom energy is a primary cost factor.
Other cost considerations include the rising cost of moving people and products around the country. Ireland's transportation, broadband, and communications infrastructure have not kept up with the rapid pace of economic growth. Prospective investors can take some comfort in the government’s long-term plan to address these infrastructure problems, but until those plans are realized these deficiencies present real cost and convenience factors.
There is another category of factors investors consider which I will loosely call ‘soft’ factors. For example, an important part of Ireland's success is that it is located within the European Union. Many U.S. multinationals have used Ireland as an export platform to the rest of Europe and beyond. But global businesses can be fickle and there are now other attractive EU-located options, particularly in Central and Eastern Europe. None of them is English speaking and they are all another time zone away and several hours farther in a plane from the United States, but they do present competition to Ireland.
Speaking of the European Union, Ireland has benefited immensely from EU largesse. Since joining the EU in 1973, the total amount paid to Ireland from all EU sources has surpassed what Ireland paid in by some 55 billion euro. In some years this assistance approached 5% of GDP, a very significant contributor to Ireland’s growth. However, all good things must end and thanks to Ireland's success, the country will receive far less EU structural funds in the future and may soon become a net contributor to the EU budget.
Another soft factor would be that Ireland is English speaking. While hard to quantify its impact, the rise of English as the lingua franca of business has been of enormous benefit to Ireland. This has been a particular draw for U.S. businesses who want to expand to Europe.
Also falling in the hard to quantify category is the unique social partnership Ireland has forged between business, government, and labor. You all know this history and as businesspeople you understand the benefits of investing and working in a stable, predictable environment. It has certainly helped, and its mere longevity is important to potential investors assessing future costs and risks.
One thing that is often overlooked when discussing the relative merits of Ireland is the extremely low risk of doing business here. Ireland cannot compete with wages in China and India, but those countries do not come close to competing with Ireland on political risk. In the Economist magazine's most recent political risk assessment survey, Ireland far outperforms both of those countries. Ireland even outperforms the United States.
Looking at this list of factors, a couple things jump out at me. First is that Ireland has clearly lost some of the advantages it offered in years past, particularly its low wages and rents, and its EU grants and subsidies. These advantages are unlikely to be regained. On the other hand, Ireland still has many of the advantages that worked in the past – low corporate taxes, a hard-working, well-educated work force and most of the advantages in the "soft" factors – English, work force stability, business friendly government policies, low political risk, and EU membership.
Certainly the future won’t be the same as the past or as Yogi Bera said, “The good old days just aren’t what they used to be.” But I think the future still looks very good for continued foreign investment and growth in Ireland.
The marketplace seems to be confirming that. Recent announcements about U.S. companies reducing commitments in Ireland have been related to those companies’ businesses, not Ireland, while many others continue to expand their operations here. You may have seen that Microsoft announced yesterday a commitment to invest $500 million in a new Data Center in Dublin. The Data Center will only employ about 20 people, but many more jobs will be created building, serving, and supporting the center.
Economic policy should play to Ireland’s continuing strengths. This argues for a focus away from manufacturing, for example, and toward higher-value added, knowledge-intensive industries. Policy makers should also continue to work toward matching Ireland’s infrastructure and human resources with the needs of these industries. Another key to maintaining the momentum is to encourage and reward entrepreneurship so that Ireland’s new found internal capital is invested here side by side with the foreign capital that has funded Ireland’s past growth. It will be a very good sign when more entrepreneurs who started high tech companies or financial services firms join real estate and manufacturing entrepreneurs at the top of the lists of the newly wealthy in Ireland.
The road ahead in Ireland isn’t without challenges. But I think Ireland still has a very competitive offering for a broad range of investors and businesses who will keep the Celtic Tiger moving forward. Not the least of Ireland’s capabilities are its adaptability and nimbleness, characteristics that will serve Ireland well in today’s fast-paced, constantly changing global marketplace. I have faith that market actors here -- business, labor, academia, and government -- will not disappoint. Ireland has very cleverly competed in the past and there is no reason to believe this cleverness won’t continue to work well in the future. The route to an even more successful future is not the same route traveled over the last twenty years, but there is a route ahead and I am confident Ireland will navigate it well.
Thank you.
