Sins of the Father (18 page)

The Whiddy Island terminal is probably the most extreme example of a multinational which entered and exited Ireland with all but the tiniest of imprints on the wider economy. The motifs which were used across the State to justify tax incentives and capital expenditure on foreign investment, however, were all there: low wages are better than no wages; modest jobs are better than none; guarantee the profits and the benefits will trickle down; either way, there is no alternative. Indeed, successive Irish governments embraced each and every one of these assumptions about Irish economic life. Even when they were presented with alternative strategies and achievable goals, they simply offered to believe there were none, finding comfort in the realities of their assumptions, rather than in the reality which embraced them.

‘It could be argued that our incentives are too generous.’
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In July 1980, the American consultancy firm Telesis Incorporated was commissioned by the National Economic and Social Council (NESC) to undertake a review of Ireland’s industrial strategy. The objective was ‘to ensure that the Irish government’s industrial policy is appropriate to the creation of an internationally competitive industrial base in Ireland which will support increased employment and higher living standards’.
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It was part of a four-stage review which was flagged by Taoiseach Charles Haughey at the Fianna Fáil Ard Fheis in February 1980. ‘While our economic circumstances and general economic environment have changed over the past twenty years,’ he told his party, ‘The basic elements of our industrial strategy have remained almost unchanged.’ He said that ‘present policies have served us well, but we clearly need a comprehensive review of them in the light of the circumstances today’.
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The chairman of the NESC, Dr Noel Whelan, told
The Irish Times
that the review ‘will be a fundamental, constructively critical review of existing policies’, and that the extent of foreign-owned industry would be among the major areas of examination.
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Telesis began its review in September 1980 and finished in March 1981. Over the previous thirty years, Ireland had been engaged in a huge effort to industrialise, and had chosen foreign investment as the main impetus and stimulus for growth – a policy that Telesis saw as modestly successful. GNP had almost tripled, for example, and living standards had risen. At the same time, it wrote, ‘The income gap between [Ireland] and most other industrialised countries has seriously widened over the past twenty years; the economy has become increasingly dependent on foreign corporations for its industrial jobs; the net trade balance has deteriorated [and] the cost of State aids to industry has risen rapidly’.
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The key finding of the Telesis Report was that in order for incomes to rise, there had to be an expansion of export-led industry that was indigenous to Ireland. The reason for this was that ‘successful indigenously owned industry is, in the long run, essential for a high-income country. No country has successfully achieved high incomes without a strong base of indigenously owned resource or manufacturing companies in traded businesses.’
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Ireland needed to expand its traded sectors – i.e. its exports – but in order to have sustainable economic growth those exports needed to be Irish made and Irish sourced.

Irish manufacture underwent a significant change in the 1970s. From 1973 to 1980, over 10,000 jobs were lost in the textiles, clothing and footwear sectors. These were offset by gains of around 12,000 in metals and engineering, food, cement and glass, and printing and packaging. And while these structural changes in manufacture ‘might be interpreted as showing the successful replacement of employment in the “old” protected sectors by a generation of companies in new growth sectors’ – that is, the replacement of low-wage protected industries with modern industrial engineering – the reality was somewhat different. Telesis found that in terms of indigenous manufacture, ‘most traded [or export-orientated] industries have fallen from their 1973 employment levels, with some noticeable exceptions in glassware and agricultural machinery’. It went on to say that ‘almost all non-traded [or domestic-orientated] industries … have enjoyed net employment increases, e.g. packaging, cement and metal fabrication’.
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Overall, ‘The indigenous sector (defined as companies owned in majority by Irish interests) represented two-thirds of manufacturing in 1980, down from three-quarters in 1973, [while] employment in indigenous manufacturing industry grew by only 2,000’.
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Ireland’s indigenous industrial sector in the 1970s had actually moved away from export-orientated employment and towards domestic-orientated employment, with the housing and office construction sectors the dominant components. And as Telesis noted, ‘growth generated by the development of non-traded opportunities can only provide a limited source of income due to the size limitation of domestic demand’.
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The mantra of every party in government since the 1950s had been that exports were the key to Ireland’s prosperity. However, the development of exports and export markets came a very distant second to government policy of enticing exporters to the country, with the resultant need for construction on greenfield sites a powerful boost to the domestic building industry. There were 1,262 new Irish companies formed between 1973 and 1980, with a total employment figure in 1980 of 21,850. ‘Most of this growth has been in non-traded businesses,’ reported Telesis, ‘stimulated by plant construction, agricultural investments and infrastructure expenditure.’
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The divorce of indigenous industrial growth from the export sector was underlined by Telesis when it found that ‘few of the newly created [Irish] businesses serve the sub-supply needs of the foreign firms in Ireland’. In fact, only ‘8 per cent of the components and sub-assemblies used by the largest foreign sector, engineering, were sourced in Ireland in 1976’.
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This was a serious structural problem, one that was not entirely down to the kind of multinational operations which had come to Ireland. Overseas companies which were interviewed by Telesis ‘frequently complained of difficulties in sourcing products in Ireland, either because of poor quality or lack of cost competitiveness’. Manufacturing companies were importing ‘precision iron castings and precision moulded plastic parts due to the shortage of high-quality producers in Ireland’.
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Meanwhile the government gave tax incentives and grants for housing and office construction, and gave away mineral, oil and gas rights with little or no concern for the working dynamics of the wider economy. The need to build had become a much more important part of government policy than the need to export.

The Telesis Report highlighted the problems with such an approach, and offered viable solutions to help the Irish economy grow on a solid, sustainable, level. And just like the Ibec Report of 1951, and Kenny Report of 1974, the findings and suggestions offered by Telesis were greeted with fanfare and followed with silence. The next innovation in Irish economic policy would not arrive until 1987, when the government decided to extend the country’s corporation tax benefits to the financial sector. The era of the Irish Financial Services Sector was about to begin.

There is a continuous tension between banks and businesses over the value of money. Banks make their money through credit; businesses through trade. For banks, money is a product; for businesses, money is a lubricant. It fuels transactions, enabling products to move from seller to buyer, and it is through this activity that businesses make money and, hopefully, profit. For banks, it is a different process. Money is the product. There are internal contradictions here, integral to money itself. Banks and businesses both need each other to survive, but there is a constant tension present as both use money in different ways and for different and incompatible reasons. These tensions between business and banks, between how and why they use money, have never been resolved. The fault lines lie within the system itself.

In 1927, the Irish Free State decided to hand over monetary policy to the banks, who decided, not surprisingly, that the future of Ireland lay with a strong, value-laden, currency. Yet, this strength would not be drawn from the economic dynamics of the State, but from the Irish pound’s link with sterling at parity. The government had the option to link the punt to sterling in a way that would have allowed the punt to rise or fall in value in accordance with the realities of the economy, but it did not take it. The maintenance of the parity link with sterling was kept in place regardless of the cost to the wider economy. Each time sterling devalued – such as in 1931, 1939, 1949 and 1967 – the Irish punt had to follow, with significant consequences for the State’s economy. There was no central bank until 1943, and even then it declined to use the powers associated with such an institution – namely the management of the national currency. Ireland did not have an independent currency until 1979, when the country joined the European Monetary System (EMS), some fifty-seven years after independence and while sitting on a credit bubble. The parity link played no small part in the decades of poverty and emigration which were inflicted on the majority of the population.

The effect of having an economy which lacked an industrial export base, as was the case with Ireland for much of its existence, was that it gave the banks free reign to dictate monetary policy. The normal tension between banks and industry over the value and function of money was weak – so weak, in fact, that the value of the Irish pound was set at such a disproportionately high rate that it became a significant hurdle in the development of indigenous Irish industry. The move to import foreign industry to Ireland in the 1950s was influenced in part by monetary policy. The alternative – affordable credit to boost indigenous growth but a weaker Irish pound – was strenuously opposed by both Irish banks and the Department of Finance.

By the mid-1980s job growth by way of FDI had stalled. The next idea was to extend Ireland’s corporation tax rate to financial businesses. This was given a boost in 1987 when the leader of the opposition, Charles Haughey, announced a proposal to establish a low-tax zone for the international financial services in Ireland. The plan was to create a designated area within the State where qualifying companies would be able ‘to undertake any business in the financial services area they choose and subject to new legislation specifically passed for the centre’.
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It would lead, he said, to 7,500 jobs over a five-year period. In the election of that year, Haughey was returned as Taoiseach and one of his first acts was to establish a committee to offer advice on the financial services centre. By the end of the year the Dublin docklands area the Irish Financial Services Centre, or IFSC, was born.

From the start, the IFSC courted controversy. Although it was envisaged as an aid to foreign investment and job growth, one of the first occupants was Allied Irish Banks (AIB). The resources given to the project were completely out of proportion to the jobs it created.

In terms of the development and dynamics of the Irish economy, however, the IFSC was not an exception. It arose from the way Irish business operated, from the lopsided attention given to the facilitation of foreign investment, be it via tax breaks or simply handing over the rights to the State’s oil, gas and minerals. The sectors which benefited from the park – construction, rentiers, the financial sector, accounting and legal services – were the sectors which had benefited from industrial policy since the 1950s. Similarly, the ability of the banking sector to direct economic policy according to its needs, rather than the needs of the economy, did not arise overnight. Once again, the roots run deep.

On 3 February 1926, the Minister for Finance, Ernest Blythe, announced to the Dáil the establishment of a commission to study the situation of banking in the Irish Free State. The terms of reference, as outlined by the Minister, stated that it was ‘to consider and to report to the Minister for Finance what changes, if any, in the law relative to banking and note issue are necessary or desirable, regard being had to the altered circumstances arising from the establishment of Saorstát Éireann’.
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Political independence had not led to monetary independence from Britain, and although Irish banks issued their own notes, they were treated and accepted as sterling by both businesses and the public. The value of money in the Free State was dependent on the strengths and weaknesses of what was now a foreign currency. Not only that, the majority of deposits in Irish banks were held in Britain, as they had been prior to independence. This gave rise to serious issues regarding the issuing of credit and the financial tools the State had at its disposal in order to develop the economy. The government also needed to regulate the supply of legal tender within its jurisdiction, and it was under these concerns that the commission was formed.

The commission was top-heavy with bankers and financiers – six out of a total of nine members. They were joined by two representatives of the Department of Finance and by Professor Henry Parker-Willis of Columbia University, USA, who was also the chairman.
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The leader of the opposition, Tom Johnson, queried the appointments. ‘Is it not the case that a commission dealing with the possible evils of the banking system and composed of people interested in the banking system is likely to lead to a curious development?’ he asked. Mr Blythe replied that ‘it was not thought that inexpert opinion should be appointed to the commission’ and that the appointees ‘represent different interests, and it will be for them to consider any recommendations that come before them’. The idea that the government was serious about tackling the issue of banking and credit was greeted with cynicism. On 12 February 1926, Mr Michael Richard Heffernan of the Farmers’ Party tabled a motion to the Dáil, which was ‘of the opinion that agricultural interests in the Saorstát should have been given direct representation on the Banking Commission and that the Terms of Reference should have specifically provided for an examination of the agricultural credit problems of the Saorstát’.
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The Dáil adjourned for two weeks, but on its return Mr Blythe assured the deputy that ‘The Commission will have to keep its eye open to the whole agricultural position’.
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Mr Heffernan was not so optimistic: