Seán Ó Riain

Ireland’s economic and social model is a mixed bag. There is clearly greater overall prosperity in recent decades, reflected in doubled employment, rising employment rates, and increased incomes. But there are also significant problems, reflected in high levels of market and disposable income inequality, a range of major deficits in infrastructure and services, and a widespread uneasiness about the basis of that prosperity. This article considers some of the structural elements that underpin this combination of features of Ireland’s ‘model’ of economic and social organisation, emphasising how these two dimensions are inevitably and deeply intertwined.

We start by considering the way in which the place of foreign direct investment (FDI) in the Irish political economy makes it distinctive, particularly in comparison with the wealthier Northern European economies. In particular, Ireland’s FDI strategy meant that the link between the economic and social model was different from that in countries built around domestic export firms and their skilled workforces. Indeed, these differences have become a matter of national and international debate, as the EU court judgement on the Apple case highlights the tax arrangements underpinning the model, while at the same time multinational companies in Ireland push for more decisive public action to tackle key infrastructural deficits, particularly in housing, water, and energy. We trace some of the consequence of this distinctive Irish version of the ‘small open economy’.

However, the following section argues that an over-emphasis on FDI can mislead us regarding both the failures and successes of Irish economic development. In order to understand the ups and downs of the highly volatile Irish political economy, we need to understand a variety of other factors. These include the influence of property and finance, of domestic exporters and enterprise policy, and more generally of public investment and the state. While international factors have deeply shaped Ireland’s economic history, Irish society has typically experienced these international factors as particularly volatile and violent ups and downs in its fortunes – often linked to how these elements other than foreign investment operate in the Irish economy (e.g. the financial bubble and crash in 2008).¹

Finally, we conclude by examining the consequences of Ireland’s fragmented economic and social models. We note a number of persistent dilemmas in Ireland’s political economy and the critical role of political and public action in resolving those dilemmas. However, that public action faces significant challenges, domestically in overcoming the dynamics that we outline in the paper and internationally in a time of great turbulence in many of the countries and regions that have historically been most important to Ireland.

Foreign investment and Ireland’s small open economy

Ireland has long been compared to other ‘small open economies’ across Europe. Just before the emergence of the ‘Celtic Tiger’, unexpected by all, two interesting comparative analyses demonstrated the unusual position of Ireland. Michel Peillon argued that Ireland was unique in Europe in sharing many of the structural features of the Southern European economies on the periphery of Europe, particularly weak domestic enterprise sectors and dependence on external capital, but with income levels that were closer to Northern European levels². Lars Mjoset – in a report described by Dermot McCarthy as ‘the greatest unread report published by the NESC’ – developed the institutional implications of this situation.³ He argued that Ireland had failed to develop the productive interaction between a national innovation system (the ‘economic’) and a broad-based system of welfare and domestic mass consumption (the ‘social’) that underpinned the economic and social progress of most comparable countries in Northern Europe. Despite the huge surges in economic and employment growth in Ireland in the decades since then, some of the effects of this unusual position of the Irish political economy remain evident.

A key frame of reference for comparison of countries like Ireland has been the ‘small open economy’ model.⁴ These countries (e.g., Denmark, Austria, Netherlands, Switzerland) tend to be heavily dependent on external trade, given their small size, but are also said to be able to use their smallness to better coordinate their responses to the ebbs and flows of the international economy – a ‘paradox of vulnerability’.⁵ A critical element in the initial accounts that often disappears from more casual treatments is the central role of ‘social compensation’ in linking ‘openness’ and ‘smallness’ in an effective way. A generous welfare system and stable set of social services provided the glue for the most successful small open economies. These provided compensation for, and protection against, the volatility and vulnerability of an internationalised economy. Moreover, they also generated the social investments that underpinned both high productivity in an export economy and effective coordination based on social solidarity in ‘small’ national polities.

In the classic account, the export sector was the lynchpin of the small open economy model. This is where wage discipline and economic upgrading were negotiated, but also where better working conditions, social investments, and social protections and services were linked to the fates of the most powerful groups of workers. The social gains in the export sector tended to spread through the economy, while they underpinned an internationally competitive economy. This then also involved ‘creative destruction’ of low productivity sectors (generally in personal services), which were typically replaced by public sector provision (e.g., in childcare). While this model has undergone many changes and challenges in recent decades, the institutions formed through it remain central to northern European small open economies.

This is an area where the Irish political economy is clearly different as the export sector has been dominated by FDI rather than domestic exporters. Ireland’s history of ‘industrialisation by invitation’ reaches back to the 1940s, is most clearly dated to the Shannon Free Trade Zone in 1958, and was firmly established with the arrival of major US firms in the 1970s and 1980s. It reached international fame in the 1990s as the backbone of the ‘Celtic Tiger’ boom and gained significant international infamy in recent years with booming GDP related to the complex tax accounting of US transnational corporations.

Implications of the foreign investment strategy

It is clear that foreign investment has been critical to employment growth in Ireland, both as a direct employer and indirectly, largely in recent years through employee spending in the Irish economy.⁷ However, our concern here is the broader effects on the shape of the Irish economy, its development, and the social model associated with it. Here, foreign investment had a range of impacts that led to significant differences with the European model.

An approach to development based on attracting foreign investment committed Ireland to free trade from an early stage, which O’Hearn argued

damaged national growth.⁸ However, free trade was a central element in European small economy growth – the key difference being that the more successful European economies combined this with key investments in and institutional supports for domestic innovation, workforce development, financial system development, and social capabilities. In Ireland, the dominance of foreign investment put productivity bargains in a different position within the broader social contract. Productivity was imported directly with new corporations, rather than developed in conjunction with supporting institutions and local spillovers.

While attractive to a society struggling to develop its export economy, by shortcutting the path to productivity and locating it mainly within the largely impenetrable walls of multinationals, Ireland missed out on the productivity pathways of the European countries. This involved a number of different dimensions. There was a significant dualism between export and domestic firms and sectors, including in the development and conditions of workers. Irish policy was based on co-existence of low and high productivity sectors, not on high driving out less productive firms. The development of the business sector suffered from limited networks and diffusion of innovations between foreign and domestic firms and a passive financial sector that had little impact on development.⁹

This was linked to a second major impact associated with foreign investment – the weakness of the indigenous sector. Of course, the weakness of the indigenous sector was a significant part of why Ireland pursued external investment with such determination in the first place. Irish governments in the 1940s and 1950s, where Seán Lemass often played the key role, had hoped and attempted to boost the growth of domestic firms. The failure of these efforts left the door open for the parallel approach of attracting foreign investment. This failure of policy had its roots in a variety of factors that deserve a wider treatment – including the emergence of Irish society from the 1800s as a population dominated by tiny smallholder agricultural households, reinforcing the importance of property and making the emergence of businesses of any scale difficult; relations of post-independence unequal exchange with the UK, particularly in the form of low value agricultural exports; and the divide between the largely Protestant business class and the Catholic emerging state elites.¹⁰

The foreign investment strategy also reinforced this – partly through the gap between foreign firms and the domestic sectors but also because

of the dominance of the foreign investment strategy within the policy and institutions of the state itself. It was only when the officials responsible for promoting Irish export firms were moved into an independent agency in the 1990s that significant progress started to be made on the support and development of Irish owned firms.¹¹

Third, in an economy dominated by foreign investors the central relation between exporters and the state came to be framed around questions of minimising taxation rather than managing the relation between wage increases and productivity improvements, particularly when measured levels of productivity were largely fictional due to transfer pricing and other multinational firm accounting strategies. Pressure from multinationals was one of the factors that resulted in a low tax burden on employers, compared to similar European countries. This is one of the major gaps in the taxation system that helps to explain the historically and currently relatively small public sector in Ireland.

An emphasis on an economic development strategy based on foreign investment meant that Ireland lacked the virtuous circle of productivity and social investment improvements that were central to small open economies in Europe, that a dualist industrial structure developed with particularly weak domestic export sector, and that the lowering of tax on businesses become a central plank of Irish economic policy across a range of domains.

Growth regimes in Ireland’s volatile economic history

So FDI has shaped the Irish economy and society in significant ways, in particular giving it distinctive features in comparison to other European small open economies. It has also created social coalitions that have been self-reinforcing. Foreign dominated sectors tend to have significantly higher proportions of technical professionals, a class that tends to vote disproportionately for the major ‘establishment parties’ of Fianna Fáil and Fine Gael, who have been in every government in the history of the state.

Nonetheless, we should not be blinded by the scale and iconic global presence of the foreign firms. Key moments in recent Irish economic and social history are only partly explained by the dynamics of foreign investment, if at all.

Foreign investment was clearly important in the surprising surge of the Celtic Tiger economy in the 1990s, but this boost in foreign firm employment only turned into a broader economic growth boom through its interaction

over time with domestic household and government spending, etc.

By contrast, the major events of the 2000s had very little to do with foreign investment. Here an older model of economic organisation, that had never been displaced by the FDI strategy, took its revenge. The key place of property, particularly on a relatively small scale, in the Irish economic and social model came to the fore as, for the first time in Irish history, it was linked through the banking system to outsized amounts of international capital. The European Union’s twin projects of monetary union and financial liberalisation made vastly more credit available to Irish banks than ever before. Fuelled by – and fuelling – a property bubble, the banks competed to borrow more and increase profits, increasing the liabilities of Irish banks to levels that far outweighed the activity and capacity of the Irish economy. This drove the bubble growth of 2003 to 2007, a period when tech sectors languished in relative terms and foreign investment was much weaker. The crash of 2008 and the subsequent recession was caused by the collapse of this model, and more broadly by the pathologies of global financialisation. While transnational tech and pharma companies were certainly entangled with these processes, they were not central to them.

Perhaps more surprisingly, and less widely recognised, was that economic

recovery was driven at least as much by Irish-owned exporters as by foreign export firms (see Table 1). This shows that employment in Irish exporters increased much more quickly than in foreign firms, which only passed out the contribution of Irish exporters once the economic recovery from the crash was well underway. This reflected the relative success of an enterprise policy that operated parallel to the foreign investment strategy, with relatively few links to it. Indeed, foreign-owned firms’ purchases in Ireland as a percentage of their sales in Ireland reduced 40% from 2000 to 2020, training spend per employee reduced in foreign firms while it increased in Irish exporters, all while the gap between the average wage in foreign firms and in Irish firms increased further, creating even more intense competition for skilled labour.

Table 1: Irish and Foreign Exporters

(Employment change per annum in each period)

Note: Export-Based Employment calculated as: Employment*(Exports/Total Sales) Data: ABSEI, CSO Database.¹²

Finally, a more recent surge brought foreign investment to the fore again, with major increases in employment. However, this latest form of FDI growth brought its own widely recognised problems. Most obviously, huge surges in revenues were clearly not related to activities in Ireland, and, while they generated huge tax revenues, they have also generated significant international political and legitimacy difficulties. Even as the historical benefits of foreign investment were clear in employment growth and wage increases, so were the costs of a system driven domestically by a distorted tax structure and facing significant international tensions.

Conclusion

Ireland’s FDI model is therefore a complex beast. It has generated clear benefits in terms of employment, often with significantly higher wages than elsewhere in the economy. Nonetheless it has shaped Ireland’s ‘small open economy’ in ways that make it different in important respects from the European comparators that it often seeks to emulate.

This segmentation of Ireland’s economic and social model, partly created and reinforced by the distortions of the FDI model, has opened up a space of competition between ‘growth regimes’, ‘mutually constituted by the core practices of firms and reinforcing public policies specific to each historical era’.¹³ These growth regimes have never been properly integrated or stabilised in the Irish economy and society. We can only understand the recent history of Ireland’s volatility in terms of the uneven relations between them – the productive (but relatively short-lived) interaction of the 1990s, the triumph

and crash of real estate and finance in the 2000s, the contribution of Irish exporters (and other domestic factors) to the recovery from that crash, and the recent surge of foreign investment, albeit in ways that significantly distort growth and taxation and create a fundamental unease about the foundations and direction of the Irish economy.

It seems unlikely that foreign investment will provide the dynamic to generate this stability and generate a less volatile, less uncertain, and more egalitarian economic and social model. This will more likely need to be driven by public institutions and social coalitions. It is notable for example that IBEC, the employers’ representative organisation, has been arguing strongly for enhanced public investment in business and social infrastructure for some time now.

Public action will be required if some key dilemmas deriving from these contradictions of the Irish model are to be resolved. In the economic sphere, high levels of wage inequality and low wages combine with only moderate competitiveness, rooted in Ireland’s missing ‘productivity bargain’. A resolution will require a broadening and deepening of existing enterprise policy, which has been effective within its exiting remit. Socially, the Irish state makes a major effort to tackle inequality through cash transfers but social divides remain stubbornly persistent. Enhanced policies and new social bargains will be required to invest not only in greater active labour market participation but also in the quality and productivity of employment across the economy. Financially, Ireland combines large amounts of capital and borrowing with comparatively poor investment levels, often lead by the public sector. The transformation of the passive financial sector to support developing domestic firms remains a significant task for policy. Finally, rooted in the dualism of the Irish economy and focus on minimising business taxation, in the fiscal area Ireland has a narrow tax base with poor ability to pay for many outside the tax base, both employers and employees.

The challenge for Ireland is that the action required to address these

dilemmas is often at odds with the pressures deriving from the core economic dynamics of the country and the dominant foreign firms. Policy action faces many domestic challenges therefore, many of which derive directly or indirectly from the central role of foreign investment in the economy and in economic policy. Furthermore, these efforts will for many years face the challenge of huge international turbulence, particularly in key countries connected to Ireland, such as the US and UK.14

The direct benefits of foreign investment come with broader externalities, or effects that reach into the wider economy and society. These include the pressures on Irish firms from competition from multinationals for labour and other resources. However, they reach further, potentially reshaping the institutions that sustain and develop the economy. These can reach further into different policy and political systems, for example in re-orienting research funding to focus on the needs of multinationals, in reshaping energy use and infrastructure development to support data centre expansion and in affecting the design of state institutions themselves (e.g. through the establishment of the IDA and other enterprise policy agencies). Tackling these externalities becomes an urgent but challenging element of Ireland’s current social challenges. There is more need than ever for public action to address the vulnerabilities in the Irish growth model, but these features of the model are likely to make it challenging to produce.

Dr Seán Ó Riain is Professor of Sociology at Maynooth University and author of The Rise and Fall of the Celtic Tiger: Liberalism, Boom and Bust, (New York: Cambridge University Press, 2014).

Notes

1. For a fuller account see Seán Ó Riain, The Rise and Fall of the Celtic Tiger: Liberalism, Boom and Bust (New York/Cambridge: Cambridge University Press, 2014).
2. Michel Peillon, ‘Placing Ireland in a Comparative Perspective’, The Economic and Social Review, 25:2 (1994), 179–195.
3. Dermot McCarthy, 2024 ‘The impact of social justice advocacy: a policy maker’s reflections’, paper presented at conference on The Social Justice Movement–A Fifty Year View, Social Justice Ireland, 31 January 2024, <www.socialjustice.ie/article/social-justice-movement-fifty-year-view>; Lars Mjoset, The Irish Economy in a Comparative Institutional Perspective, NESC Report No. 93, 1992.
4. Peter J. Katzenstein, ‘Small states and small states revisited’, New Political Economy, 8:1 (2003), 9–30.
5. J. L. Campbell and J. A. Hall, The Paradox of Vulnerability: States, Nationalism, and the Financial Crisis (Princeton: Princeton University Press, 2017).
6. For a comprehensive discussion of Ireland’s corporation ‘tax games’ see Nessa Ní Chasaide, ‘Corporate Tax Games: A Case Study of Ireland in the Global Politics of Tax’, PhD thesis, National University of Ireland Maynooth, 2023, <https://mural.maynoothuniversity.ie/18333/>
7. Gerard Brady, ‘Local Multipliers: IDA Supported Companies in the Irish Regions’, The Economic and Social Review 50:2 (2019), 341–367.
8. Denis O’Hearn, ‘The Irish case of dependency: an exception to the exceptions?’, American Sociological Review, 54:4 (1989), 578–596.
9. On foreign and domestic firms see Seán Ó Riain, The Politics of High Tech Growth: Developmental Network States in the Global Economy (New York/ Cambridge: Cambridge University Press, 2004); on finance see P. Gallagher, S. Ó Riain, F. Rhatigan, M. Byrne, ‘The Politics of Banking in Ireland’, in The Oxford Handbook of Irish Politics, ed by D. Farrell and N. Hardiman (Oxford: Oxford University Press, 2021), 480–498; P. Honohan, ‘To What Extent Has Finance Been a Driver of Ireland’s Economic Success?’, ESRI Quarterly Economic Commentary, 4 (2006), 59–72.
10. On industry after independence see Frank Barry, Industry and Policy in Independent Ireland, 1922–1972 (Oxford: Oxford University Press, 2023).
11. Ó Riain, Politics of High Tech Growth.
12. For the original use of the measure see F. Barry and A. Bergin, ‘Business’ in Austerity and Recovery in Ireland: Europe’s Poster Child and the Great Recession, ed by William (Bill) Roche, Philip J. O’Connell, Andrea Prothero (Oxford: Oxford University Press, 2017), chapter 4, 62–84.
13. P. A. Hall ‘Growth Regimes’, Business History Review, 98:1 (2024), p. 259.
14. P. Gallagher, F. Rhatigan and S. Ó Riain, ‘A turbulent commitment: economic relations between Ireland and the European Union between the crash and Brexit’, in Ireland and the European Union, ed by M. Holmes and K. Simpson (Manchester University Press, 2021).