An Open Economy
By PATRICK LYNCH
Patrick Lynch abandoned a promising career in the Irish civil service so become Lecturer in Economics at University College, Dublin; then, while still.in his thirties, he was appointed Chairman of Aer Lingus. He is also a member of the Radio Eireann Broadcasting Council.
BALANCE of payments trouble, again prevalent in the sterling area, has claimed Ireland among its latest victims. An unwieldy, external deficit is being cut by import levies and hire-purchase restrictions, and next month's Budget is expected to secure substantial further retrenchment. But curtailment of imports, although imperative as a temporary remedy, will not necessarily correct the basic disorder, which is the conspicuous failure of economic growth to keep pace with the rate of consumption.
The 1955 deficit caused real anxiety because it was part of a developing trend. When the British Chancellor curbed home demand he expected the expansion of export industries to absorb most of the labour which his credit restrictions dis- placed from other industries. But a restriction of Irish domestic demand is not likely to divert resources directly to exports. The task of the Minister for Finance is to cut imports sharply to abridge the payments gap; his measures were not designed to stimulate exports. Indeed, Ireland's deeper economic ills are only partially, if at all, amenable to fiscal treatment. Recurring external deficits are a regular feature. But a normally chronic condition has temporarily become acute, due to inter- nal causes accentuated by external inflationary pressure.
Ireland is a text-book example of the 'open economy,' and not always an edifying one. Dependent on a high level of foreign trade for its well-being, it reflects, magnifies and, some- times, distorts trends prevailing abroad. As there is an extreme mobility of labour from the most remote parts of 'the country to England, the Irish labour market is really an extension of the British market. Irish wage rates tend to follow the British pattern, even when productivity lags behind. Monetary in- comes are often higher than the resources of the country would seem to warrant; and there is the alluring temptation of trying to maintain imperial standards on a republican income. Ireland has some highly efficient traditional industries, such as brewing and distilling, and a nationalised group, which includes electricity, sugar, peat, and public transport. As a rule, the average private industrial firm is small and under- capitalised, but considerable progress has been made in raising managerial and technical standards. The official policy of industrial protection has greatly expanded manufacturing activities during the past quarter of a century and given employment to thousands of workers who would otherwise have emigrated; but until recently, 'few Irish firms competed in foreign markets. the size and natural resources of the Republic are not sufficient to permit the creation of heavy industries. Indeed, for many purposes, an unpartitioned Ireland would still be too small to function as a self-contained economic unit. But the land frontier that presently divides the country is, whatever its political relevance, a barrier to sane economic development in the. island as a whole. To avoid, however, the more obvious forms of economic lunacy, trans-border co- operation has been adopted in public transport; if common sense further prevails other developments of that kind are inevitable in spite of the political division of the country.
Raw materials for Irish manufacturing firms are almost wholly imported. They are paid for by commodity exports and from the proceeds of invisible earnings, mainly interest on foreign investment and tourist revenue. As almost two-thirds of commodity exports are of agricultural origin, the expansion of agricultural exports is an indispensable condition of progress.
Cattle-raising is still the staple industry of Ireland, although attempts have been made to create a wider and more varied agricultural system. Irish livestock meet no competition in Britain, but the trade in processed goods has greatly declined since the return of efficiently produced goods from Denmark. New Zealand and Argentina to the British market. The Irish cattle population reached its highett level in 1955; as a result. however, of a fall in some other branches of agiliculture, the rate of increase in total output remains intractable. But the prospects of any dramatic increase in Irish exports depend primarily on the production, and sale, of more cattle. The livestock industry is, therefore, more than a source of income to the farming community; its exports are also an indispensable means of paying for the raw materials of industry. Because manufacturing industry was neglected before self-government in 1922, there has been a natural tendency to exaggerate its importance since. But in recent years there has been a new recognition of the primacy of agriculture and of its possibilities for development. Present levels of output and standards of technique are so low that Oven small improvements would achieve remarkable results for the economy as a whole. Ireland needs new capital, particularly for investment in agriculture. A closer integration between the Irish and British agricultural industries would be advantageous to both countries. Part of Britain's heavy expenditure on subsidies for home-produced food might yield more economic returns if invested in fertile, but underdeveloped, land in Ireland rather than in land much nearer the margin of profitable cultivation in Britain. A more rational allocation of expenditure on those lines might relieve the British Exchequer and give both Britain and Ireland the benefits of greater and more efficient food production in the part of the sterling area that is nearest to the United Kingdom and, more obviously, a rewarding field for sterling investment. The recent measures of the Minister of Finance, reinforced by a realistic Eudget, should restore equilibrium in the Irish balance of payments. But equilibrium. however vital, is mainly a technical consideration. What really matters is the level at which equilibrium is maintained. Economic expansion in Ireland demands as great a total of imports as the economy can afford. The limits to expansion are set by the level of agricultural exports; and that level will be determined by the availability from domestic savings or from foreign investors of the capital necessary to increase production. Increased production in agriculture would cure the basic disorder in the Irish economy and quickly eliminate balance of payments troubles as well.
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