Bold Decisions…Wise Choices (First Part 2001)

Bold Decisions…Wise Choices

By: Yusuf Mansur

10 6 2001

The Irish industrial experience has been hailed worldwide as a success story. According to David Lovegrove from Forfas, the industrial development agency in Ireland, Jordan could follow in the steps of the Irish to become a development success.  Maybe some of their famous luck could rub off on Jordan, but bold decisions are needed on the part of the public and the private sector.

Ireland is a small country with a population of 3.7 million, a labor force of 1.75 million, and an area of 70,000 sq km. In other words, it is similar to Jordan and even smaller: Jordan has a population of 5 million, a workforce of 1.34 million and a land area of 89.3 sq km. Even if we look at Jordan versus Ireland according to the old school philosophy, which believes that development is based on endowments, then Jordan has more resources for growth than does Ireland--at least in terms of population and landmass.

The economic achievements of Ireland compared to those of Jordan can be summarized as follows: In 1997, Ireland had a US$66.4 billion GNP, a per capita GNP of US$18,280, an average (1965-97) percentage growth rate of GNP of 3.7% and an average (1965-97) per capita percentage growth of GNP of 2.8%. In 1997, Jordan’s GNP was US$7.25 billion, GNP per capita US$1,570 with an average (1965-97) percentage growth in GNP of 3.9% and an average per capita percentage growth for the same period of –0.4% (a decline). Thus, in 32 years the average Irish person’s income grew at close to 3% while in Jordan it decreased at just below half a percentage point.

What happened in Ireland to prompt such steady growth? The majority of the growth has been the result of an emphasis on industry, which grew during the period 1960 to 1999 from 29% of GDP to 42%; from 29% of exports to an amazing 92%. Furthermore, exports--which had gone primarily to the UK (75% of exports) in 1960--became so diversified in 1999 that only 22% went to the UK while the rest went to the EU (43%), US (15%) and other countries (20%). Thus, the export base became diversified.

What was behind this success story? Not only luck. It has been a national victory of will and determination that has spanned three decades. Reform had to be carried out in several areas with political will at the forefront of change and grassroots support and ownership built at every step of the way. What guided Ireland was a subtle combination of right moves coordinated strategically to maximize welfare in the long run with industry at the heart of the development process. The process involved a combination of macroeconomic policies, EU membership, social partnership, industrial policy, tax reform, enhanced skills, and improved public administration.

Macroeconomic policy was aimed at reducing the public debt, decreased borrowing, lowering taxation as a percentage of GDP, lowering interest rates and reducing inflation. That is, Ireland opted to increase government revenues, not by increasing taxation but by economic expansion—the citizens of a wealthy nation pay more taxes than those of a poor nation. A prudent monetary policy that is coupled with an expansionary fiscal policy reduced the debt from 122% of GNP in the mid 1980s to 45% in 2000, taxation as a percentage of GNP was reduced from 46% to 34%, interest rates were lowered from double digits to low single digits and inflation was reduced from 18% to 4%.

As for the membership in the EU, it helped change the mindset to make the challenge more immediate, maintain macroeconomic stability, reform the public finances, diversify trade, invite FDI, foreign direct investment, and focus policy on R&D. In addition, there were significant EU transfers that were channeled into industrial development. 

Information was shared between the public and private sectors; unions, government and employers worked together, public finances were controlled, a debate was introduced and sustainable dialogue mechanisms were established. Thus, a social partnership was established for guiding and owning the policy.

Industrial policy produced like in the case of Tunisia and Portugal clear simple incentives for business upgrading, established Forfas to guide business upgrading and development provided follow-up on policy formulation and implementation, enhanced the role of science and technology through partnerships between businesses and universities and focused on the private sector as the engine for growth. Again, as in the case of Tunisia and Portugal, there was no simple picking of winning or losing sectors.

FDI, as also witnessed in Tunisia, was given national significance with emphasis on attracting FDI, keeping FDI and continuously reviewing policy to ensure that the message remains current and clear. In addition, Ireland focused on moving up the value chain, instead of only inviting FDI, and, wherever possible, technology for increasing value-added was encouraged.

Simple subcontracting for low wage jobs does not work; policy must keep in mind that this is a first step that should be followed by others to increase the control of the value-added chain of an industry, otherwise, the FDI will focus only on providing low-paying jobs which could up and leave whenever wages become lower elsewhere. In addition, globalization was neither viewed as a threat or an opportunity but as both: Some industries will survive and prosper, usually those with advanced, competitive and strategic managerial skills, while others will perish—traditionally run establishments where incentives, simply mean higher wages. Most importantly, FDI was kept by ensuring that policy was consistent: foreign business people are most averse to surprises, especially when involved in foreign countries.

Development agencies such as Forfas—its equivalent in Jordan is yet to be established—holds all powers and functions related to industrial development coordinates the work of other agencies assists in policy development for the government and monitors the competitiveness of the economy and recommends actions. Under this umbrella organization, several others are established with the aim of assisting the industrial process becomes more of a value-added environment.

As for taxes, incentives were simplified and made competitive with the rest of the world in order to invite and sustain FDI; manufacturing and international services received preferential tax rates, and other companies received progressive tax cuts that increased as the company went further into the future. The result was that the treasury makes more revenues. Isn’t that amazing? More than five hundred years ago, Ibn Khaldun recognized this fact in his magnum opus, Al Muqaddimah, when he said the government can tax itself out of tax revenues by increasing the tax rates. 

In terms of demographics, women’s participation was encouraged and increased to increase the pool of labor, skill training was demand-driven and enhanced through business links and greater awareness of business needs. Thus, FDI came to view the growth rate of the population as a positive sign, that the size of the technically competent pool was being enhanced.

The public sector was also motivated to become facilitator and catalyst, not a source of hindrance and encumbrance. Policy was made consistent with the long-term development guidelines, not haphazardly developed. Policymakers were made aware that they are part of the national effort. Their capacities were enhanced and public reform was instituted at the national level and on a continuous basis.

Ireland thus became a success story. It was not overnight; it took more than thirty years, which is what makes it a true example of development. Institutions had to be put in place and motivated through strategic frameworks. That is where the key lies for sustainable development.

Although Jordan cannot become a member of the EU, already it is a signatory to the EU-Jordan Association Agreement and a recipient of significant aid from the European Community. We can follow the Irish experience and make the right moves to close the development gap. (How we can follow Ireland’s example is the topic of next week’s column) Otherwise, thirty years from now we will still be complaining about the region and its uncertainties and their impact on the economy. It is an established fact that it simply takes a lot of work in today’s world for a business to survive; it is also a fact that the reward is commensurate with the trouble.