Economic Development of the Irish Republic - Essay Example

How successful has the government of the Irish Republic been in running its economy over the last three years Describe and evaluate the main macro economic policies used by the Irish government over the last 3 years The successful trend of economic growth in Ireland is not just confined to the recent years but has been there for a few decades in terms of per capita growth and employment levels which has been well above the normal EU average figures that represent "Economic success" particularly over the last decade. (Christopher T. Whelan 2007).In 2004 alone the GDP stood at 138% (2004) which meant that it was the second highest in Europe. The monetary position of Ireland was already improving even back in 2000 as the interest rates fell at the start of the European Monetary Union.There have also been initiatives to make Ireland a fiscally competitive region within the EU by avoiding wage inflation through the incomes policy and allowing the stabilisers to work on the budget, which moved to a surplus of about 4.6% of GDP in the year 2000. (Christopher T. Whelan 2007 ).However the current position of the slump in the ICT market has caused a temporary slump in the period of 2006-2007.It has been suggested that a policy focusing on retaining a deflated real exchange rate/real wage rate would benefit Ireland in the longer term.towards a macro-economic balance. (Christopher T. Whelan 2007 )In 2001 alone the interest rate was more than 3 % for the economy and it has been brought down recently to pave the way for a better monetary policy based economic performance by marked increase in public finances strengthened markedly and a cut down in the public debt with a surplus in the Foreign trade balance. (OECD 2001-2006)There have been recent strong gains in the disposable incomes and wealth, and investment has improved but there is a marked danger of the labour supply shortage.The better part of the Irish economy is that it has managed a low inflation rate (5%) for the past one decade despite the high fuel prices in the international market and tax increases in tobacco prices and the service sector. (OECD 2001-2006) Inflationary pressures are also coming from the employment sector but have been avoided in the interests of a tight fiscal and monetary policy.However in the face of the promising productivity growth the monetary conditions in Ireland are expansionary based upon the rapid increases in house prices and private sector credit and lending. (Christopher T. Whelan 2007 ) Tax revenues have also been promising in the face of a booming economy and have enabled sizable tax cuts and increases in real spending over the past three years for the business community.There is also an over all increase in consumer spending based on the successful international and EU trade performance of Ireland with in the past few years.Coming back to the interest rates there has been a peak in overall inflation because of the above factors but the nominal interest rates have been accordingly adjusted to adjust to the hazards of inflation without disturbing an overall real increase in disposable incomes The success of the Irish Economy mainly due to the governments attempts at the effective macro-economic policy management. Currently the Irish Economy has a nominal GDP of 180.7 billion. with a real GDP growth of 6% and a Nominal GDP per capita of $44,500. (National Statistics 2006).With an export industry that relies heavily on food processing, beverages, engineering, chemicals, pharmaceutical and construction and an export industry based upon machinery, transport equipment, chemicals, and beverages the country deals mainly with the US and the Great Britain in terms of Foreign trade. (www.imf.org). Popularly labelled as the "Celtic Tiger" the country has witnessed massive GDP growth in the past three years alongwith its progressive industrial policy and massive foreign direct investment. (Honohan, P. and Walsh, B. 2002) The economy did take a slump during the post 9/11 scenario and there was no longer the le digit GDP growth (there has been an average increase since 2003 ).The reason Ireland has done better than its other EU counterparts in terms of employment and inflation control has been its immaculate macroeconomic policy which has not only facilitated the domestic employment sector but has also attracted an average of two hundred thousand foreign workers every year and these are mostly from the EU member states. (Honohan, P. and Walsh, B. 2002) .In 2004-2005 Ireland had an employment rate of 66.3% a which was lowest unemployment rate in the EU. The last three years have seen a massive boom within the construction sector and this has been largely said to dependant upon the booming Irish Sector.Currently US trade accounts for almost half of Ireland's total exports This has a lot to do with the Irish taxation policy (currently at 12.5 percent for foreign firms).The Irish labour force is also praised for its flexibility and the over all atmosphere of political stability and sound economic policies have ensured the recent economic growth of Ireland. (Honohan, P. and Walsh, B. 2002) Economists have however warned that the increasing labour and energy costs may lead to the FDI shifting to cheaper alternative locations with in Asian and Eastern European countries.The success of the Macro economic policy structure has been largely attributed to the Irish National Reform Programme which has contributed to its recent good economic performance by taking advantage of the opportunities presented by globalisation and the EU internal market. (Honohan, P. and Walsh, B. 2002) Based on the above the Government has pursued a policy of maintaining a sate macroeconomic environment; enhanced investment in the economic and social infrastructure.The Government has also focused upon a macro economic culture of improved labour supply; better regulation,a focus on improved Research and Development opportunities as well as the promotion of social inclusion and sustainable development. Concerns have been raised however pertaining to pension coverage for the labour market as Ireland is a labour intensive economy.The current governments macroeconomic target for national target for investment in R&D is 2.5% of the of GNP for 2013. There is a marked emphasis thus upon the macro economic agenda of ensuring macro-economic stability; prioritising public investment in infrastructure the management of long-run fiscal pressures in the face of an aging population which would mean that better provisions for pensions have to be made.Currently the National Development plan of England. focuses on a large extent upon a stabilised pension reform program for the period between 2007-2013 focusing on the same macroeconomic agendas of better infrastructure, human capital and R&D investment. (Honohan, P. and Walsh, B. 2002) However the success of these macroeconomic policies is based upon the effectiveness of the micro-economic priorities which include the Governmental aims of improving competitiveness, infrastructure, regulation and social inclusion; increasing R&D investment and efficiency; Encouraging greater innovation and entrepreneurship; and sustainable development. (Honohan, P. and Walsh, B. 2002) All these measures are based upon the economic performance of Ireland almost a decade ago and they are aimed at enhancing the success that has been achieved through those measures.(OECD statistics). It is worth noting that the Irish macro economic policy is aimed at ensuring that the Irish labour force is cost competitive by ensuring its quality and productivity at work, and social cohesion.The governments formula for success is based upon its focus on the labour supply issues, including curing inertia and geographical and occupational immobility aswell as the development of a skill based migration which translates into a highly skilled and adaptable workforce. The government aims to raise employment rate targets by 70 % by 2010, through the application of labour supply-side intensive policies by mobilising the inactive segments of the population and to address the remaining disincentives in the tax and welfare systems. (Honohan, P. and Walsh, B. 2002). The issue of gender remains a key concern as the Government recognises that the female worker needs to be mobilised to contribute to the economy by the development of affordable maternity and childcare services.The macro economic objectives of employement also cover the use of a policies to educate and vocationally mobilise the disabled segment of the labour force as well as a coherent skills-based migration policy based on guaranteeing the sustainability of economic growth. (Honohan, P. and Walsh, B. 2002) Last but not the least is the impact of FSAP( Financial Sector Assessment Program) of the EU which has increased its recent rapid credit growth and the banking / financial sector.Strong prudential regulation has been the saving grace of Ireland even during periods of international financial crises.This overall framework of prudential regulation and supervision contains a strict adherence to international standards and codes. The critics are however sceptical of the risks to financial sector and macroeconomic stability could arise from rapid lending growth, in particular related to the domestic property boom which if collapses can seriously injure the over all economy.The OECD and IMF working papers have also stressed upon greater competition in the economy to lead to an improved quality of services and to avoid over inflation in the non-traded sector. (Christopher T. Whelan 2007). There is also an increase criticism of the Irish Government that it is ignoring pension funds and the fact that the Public Finances are about to suffer a 516 million deficit.This maybe because of the role of the ERSI which critics allege can slow down the economy by 60% . (Christopher T. Whelan 2007).The constant average of inflation at bordering on 5% is also a macroeconomic concern for the Irish Financial Institutions .Recent statistics show that unemployment is about to go over 6% with rampant downsizing in the public sector and an overall reduction in the Tax revenue for the year 2008 causing an 8 billion deficit in this years budget .This is true to any extent because the current growth of the Irish Economy may look promising but it has been at its lowest levels since the 1980's. (Christopher T. Whelan 2007).The public sector is also suffering from a delay in its infrastructure projects delayed and critics have shown alarm at the decreasing number of exports in the past few years with the energy levels being down by 12% in the current fiscal year. (Christopher T. Whelan 2007). Indeed recent statistics released as at April 2008 by the Irish central bank seem to indicate that the way ahead for the Irish Economy may be bleak as "Ireland's Central Statistics Office released CPI data for March, which drew a worsening picture of the economy. Irish annual inflation accelerated to 5% in March from 4.8% in February .Consumer prices were up 0.9% month-on-month in March, smaller than the 1.2% in February. The harmonized index of consumer prices in the Irish economy rose 0.9% from February and was up 3.7% annually."(Europe Round Up 2008) In conclusion it can be said that Ireland has had some phenomenal success in the past three years pertaining to its economic growth. However it is suggested that if the macro economic policy is unable to adjust to the current pressures there might be challenges ahead in the future particularly in terms of GDP growth, pensions and the labour shortage. References Christopher T. Whelan(2007),Research in Social Stratification and Mobility , Economic boom and social mobility: The Irish experience,24 -93-208, Commission of the European Communities ( 2001) Second report on economic and social cohesion ( Luxembourg: OOPEC). Figures from the Central Statistics Office; Department of Finance, and IMF, International Financial Statistics. www.imf.org Gropp, R. and Kostial, K. ( 2000) ' The Disappearing Tax Base: Is Foreign Direct Investment Eroding Corporate Income Taxes'. European Central Bank Working Paper No. 31. Honohan, P. and Walsh, B. ( 2002) ' Catching Up with the Leaders: The Irish Hare'. Brookings Papers on Economic Activity, No. 1, pp. 1- 77. -Krugman, P. ( 1997) ' Good News from Ireland: A Geographical Perspective'. In Gray, A. ( ed.) International Perspectives on the Irish Economy ( Dublin: Indecon). Grda, C. and O'Rourke, K.O. ( 1996) ' Irish Economic Growth, 1945-88'. InCrafts, N. and Toniolo, G. ( eds). O'Rourke, K. ( 1995) ' Emigration and Living Standards in Ireland since the Famine'. Journal of Population Economics, Vol. 8, No. 4, pp. 407- 21. Europe Round Up - Central Banks In Spotlight,Thursday April 10, 2008 10:38:00 EDT available at http://new.quote.com/news/story.actionid=RTT804101038001556 Read More