Economic Relations between Independent Ireland and Britain

Ireland won its independence armed with the strong conviction that its poverty relative to Britain and its failure to develop were largely the fault of its colonial master. The common belief was that free trade with a powerful Britain meant that any emerging Irish-owned industry would be swiftly overwhelmed by the superior firepower of British industry, while integration in the U.K. fiscal system meant that Ireland paid a disproportionate share of tax relative to its meager resources. In any conflict of interest between Ireland and Britain, precedence would always be given to Britain. Some pushed the argument even further: a British government had no particular wish to see Ireland develop and compete with its own industry—a poor Ireland, supplying cheap food and plentiful labor to the cities of England, suited England just fine. Against this background it was not surprising that the new Irish government had support for proactive programs to assist domestic industry against U.K. competitors and also to build up a physical infrastructure (such as an electricity network) to complement it. The restraining factor was that Irish exports remained heavily dependent on the U.K. market: 83 percent went to Britain and 14 percent to Northern Ireland.

Protection and the Anglo-Irish Economic War

By closing off the possibilities of emigration to the United States and the United Kingdom, the Great Depression of the late 1920s and 1930s accentuated the pressure on the Irish government to find ways of employing people at home. Export markets were becoming increasingly difficult to access, so attention focused on the domestic market. Economic policy changed toward the espousal of full-blooded protection. High, often prohibitive, import barriers were imposed across a wide range of industrial goods, accompanied by measures to restrict foreign investment so that the new import-competing industries would be the breeding ground for a new cadre of Irish entrepreneurs. Given the importance of the Irish market to Britain, the change in policy orientation had unfavorable repercussions for many British exporters. Around this time the Irish government decided to withhold payment of the land annuities due to the British government for landholdings purchased prior to independence. This action was met with retaliation in the form of duties on Irish food exports to the United Kingdom. Ireland retaliated in turn with restrictions on coal, steel, cement, and other imports from Britain. There followed a round of tit-for-tat measures that led to a severe depression in Irish agricultural prices, a fall in British exports to Ireland, and a general severe deterioration in Anglo-Irish relations.

The "Economic War" came to an end in 1938 with the signing of a trade agreement that involved considerable generosity on the part of Britain. After that, more normal economic relations were restored insofar as one can think of anything being normal during the Second World War. Reviewing this episode in Irish economic history, scholars have come to the rather surprising conclusion that the Anglo-Irish trade war might not have been such a bad thing for the economy. To be sure, some sectors of the economy suffered severe losses, but the overall economy benefited from a gain in the terms of trade (that is, import prices fell more than Irish export prices) and from an expansion in employment.

Postwar Doldrums

Ireland's immediate postwar economic performance was extremely poor, and this was reflected in high emigration, unemployment, and depressed living standards. The British economy also experienced difficulties, especially in comparison with its continental neighbors. Given Ireland's heavy export dependence on the U.K. market, there was an inevitable negative spillover effect, and a slow-growing British industry was unable to generate much investment abroad even if it had been made welcome. Britain's determination to keep food prices down, a logical policy for a net food importer, was also bad news for a net exporter like Ireland. Thus, to some extent, Ireland's poor growth could be attributed to its more powerful neighbor's different priorities and different economic performance. It was tempting to revert to the old culture of blaming slow-growing Britain for Ireland's economic woes. But Britain was only partly to blame, as a landmark report, Economic Development by T. K. Whitaker, then secretary of the Department of Finance, demonstrated in 1958. Ireland's inward-looking approach to economic development, with its emphasis on isolating the domestic market from foreign competition, worked well at first but rapidly encountered diminishing returns. There was a limit to how much growth could be achieved through focusing on the domestic market. Also, as the Whitaker report implied and as subsequent experience would demonstrate, a small country can buck the trend set by even the largest economic neighbor. These considerations led to a root-and-branch reappraisal of Irish economic policy that culminated in a shift from inward-looking to outward-looking policies, the dismantling of protection, and the reversal of policy from restrictions to incentives to inward foreign investment.

The European Community—An Alternative Partner

Membership in the European Economic Community (EEC) pointed to an eagerly grasped resolution to Ireland's dilemma. Unlike the United Kingdom, the European Community favored agriculture with higher than world prices, and any new member could participate in the new regime. Its economy was also dynamic; German industry in particular was strong and was ready to invest in Ireland given the right conditions. The promise of guaranteed access to the European market would also, it was hoped, prove attractive to U.S. investors. Britain's simultaneous application made the decision to apply for membership all that much easier. There were some dissenting voices, fearful of job losses in protected industries, and many believed that the Irish government's willingness to join even without Britain was overly ambitious. Perhaps fortunately for Ireland, both countries were turned down in 1963 following objections from France's president, Charles de Gaulle.

In order to maintain the momentum of trade liberalization the Irish government reduced protection unilaterally in two 10-percentage-point steps in the early 1960s and then capped this with a comprehensive trade agreement with Britain that came into effect in 1966. The Anglo-Irish Free Trade Area Agreement (AIFTA) had features similar to those of numerous agreements that fill the trade-negotiation landscape today. Trade barriers were abolished on most industrial goods over a ten-year transition period. There were exceptions for sensitive industries, and liberalization of trade in agricultural produce was tentative and took the form of individual product arrangements, most often subject to quotas. In a study of the economics of the 1966 agreement McAleese and Martin (1971) concluded that the balance of advantage was fairly evenly spread. Irish industry, the study predicted, would lose some jobs, but more would be generated in export industries, and there would be gains for the farm sector. Clearly, however, the AIFTA was a staging post on the way to a renewed application for membership in the EEC, which eventually was accepted in 1973. This was the big prize, long sought and gratefully received by the Irish voters: 83 percent of the electorate voted "yes" to membership in the national referendum in 1972.

Anglo-Irish Relations at Present

At the time of independence more than 90 percent of Ireland's trade was with Britain. By the end of the 1980s it had fallen considerably, to 37 percent, and at the turn of this century the U.K. market accounted for only 22 percent of Irish exports and 32 percent of imports. Measured by trade flows, there has been a remarkable and sustained de-linking of the two economies. Equally striking is the diminished role of U.K. investors in the Irish economy. The United States is by far the dominant investor in the manufacturing sector, and there has been a substantial influx of investment from the Continent. The link with sterling was broken in 1979, much to the relief of the Irish authorities, since sterling's role as an anchor of price stability had been undermined by high U.K. inflation rates during the 1970s (the rate reached 24 percent in 1974). The break with sterling was further sealed when the Irish government adopted the Euro, notwithstanding the United Kingdom's abstention.

However, the United Kingdom remains an important influence on Ireland's economy. U.K. subsidiaries are still highly visible in the retail sector. London continues to act as a powerful magnet and a congenial host for many Irish people in search of employment, higher education, or simply new horizons. Ireland continues to import economic-policy ideas from England. Prime Minister Margaret Thatcher's regime, though not warmly admired in Ireland, nonetheless had a powerful impact on the conduct of industrial relations and on attitudes to government spending. One could go further and suggest that the adoption of these policies played a large role in creating the 1990's Celtic Tiger economy.

Although Ireland joined the Euro area without Britain, it is clear that the new currency will not deliver all its potential benefits to the Irish economy as long as a trade partner of Britain's importance stays aloof. Paradoxically, after being the sick man of Europe for much of the postwar period, Britain has now become something of an economic star relative to slow-growing economies of continental Europe. Northern Ireland may also experience a resurgence as peace becomes more firmly entrenched. The long, steady trend toward greater de-linking of the two economies may be coming to an end and some reversal might even be in store.

At the turn of the twenty-first century Ireland's living standards are equal to Britain's, something few ever imagined possible, and mass emigration to British cities has come to an end. Ireland's export markets are becoming more and more diversified, and economic dependence on the United Kingdom is a thing of the past. Together and in friendship the peoples of Britain and Ireland seek to maintain economic prosperity in the context of a vastly more globalized world, where nothing is certain to last and where both of their economies seem very small indeed.

SEE ALSO Anglo-Irish Agreement of 1985 (Hillsborough Agreement); Economic Relations between North and South since 1922; Economic Relations between Northern Ireland and Britain; Irish Pound; Economies of Ireland, North and South, since 1920; Industry since 1920; Lemass, Seán; Primary Documents: From Economic Development (1958); Speech to Ministers of the Governments of the Member States of the European Economic Community (18 January 1962)

Bibliography

Drudy, P. J. "Migration between Ireland and Britain since Independence." In Ireland and Britain since 1922, edited by P. J. Drudy. 1986.

McAleese, Dermot, and John Martin. Irish Manufactured Imports from the UK in the Sixties: The Effects of AIFTA. 1973.

McAleese, Dermot. "Political Independence and Economic Performance: Ireland Outside the U.K." In The Economics of Devolution: Proceedings of Section F of the British Association for the Advancement of Science, edited by Edward Nevin. 1977.

McAleese, Dermot. "Anglo Irish Interdependence: Effects of Post-1979 Changes in the British Economy on Ireland." Irish Banking Review (spring 1986): 3–16.

McAleese, Dermot. "Anglo Irish Interdependence: From Excessive Intimacy to a Wider Embrace." In Ireland and Britain since 1922, edited by P. J. Drudy. 1986.

McAleese, Dermot, and Michael Gallagher. "Developments in Irish Trade in the 1980s." Irish Banking Review (autumn 1991): 3–18.

Neary, J. P., and C. Ó Gráda. "Protection, Economic War, and Structural Change: The 1930s in Ireland." Irish Historical Studies 27 (May 1991): 250–266.

Dermot McAleese