The Irish model

Off the record

Strangely enough, we always seem to need to be inspired by one economic model or another. In the 1980s, all eyes were fixated on Japan. After that, attention turned to New Zealand and its fight to reduce the deficit. And now it's Ireland's turn to be held up as a shining example of a dynamic economy. Yet we all know how these earlier successes ended. Japan has since sunk into a recession, while New Zealand, with a return to social democracy, has had some trouble staunching the wounds left by the new liberalism. As for Ireland, which recently came under fire from the European Commission, we will have to wait and see.

The Irish experience is regularly held up as an example by Quebec's traditionally interventionist government. The Emerald Isle, to paraphrase eminent Quebec economist Pierre Fortin, has experienced the most spectacular turn-- around of the decade. Indeed, it has become a genuine source of inspiration. And not only in Quebec; Industry Canada has ordered studies of Ireland as well. Closer to home, Ontario has begun to study Quebec to find out how the province has been able to more effectively diversify its industry and position itself as a world leader in aeronautics, multimedia and biopharmaceutics.

However, Ontario could run into problems if it plans to use the "Quebec model." There's no sure-fire recipe. It all depends on dialogue between the labour market, government and business, as well as a sense of urgency - two ingredients Ontario lacks.

Quebec, like Ireland, has long felt the need for a vigorous, aggressive industrial policy. For decades, Ireland has played the trump card of a 10% corporate tax. Suffering from the confusion created by the unrest in Northern Ireland, the Irish Republic did not have any other choice if it wanted to attract businesses to its shores. Quebec, too, has long been forced to offer tax incentives to companies that would be more inclined to head next door to Ontario.

Today, fortified by powerful economic levers such as the Caisse de dep6t et placement, Mouvement Desjardins and the Fonds de solidarite des travailleurs FTQ, and by an industrial policy based on tax credits and partnerships with private enterprise, Quebec has little reason to envy Ireland - apart from its record 10% growth and 4.1% unemployment rate.

To achieve these results, Ireland opted for low corporate taxes and pay restraints, as reflected in national wage and income tax agreement. It also counted on a free education system, a hospitable industrial policy, grants and free trade. And let's not forget its membership in the European Union. Its adoption of the euro alone enabled it to do away with high interest rates and benefit from the convergence to German rates, which are currently among the lowest in Europe.

But the price to pay for all of this is an inflation rate of 4.6% (the highest in the euro zone and far from the European Central Bank's 2% objective), as well as a manpower shortage, and an overuse of resources, which has led to wage pressures and problems of demand over supply.

Not only will Ireland's economy have to absorb wage increases of close to 26% over a three-year period, but the government has also promised to introduce a minimum wage. Unable to depend any longer on the powerful lever of a monetary policy, Ireland now finds itself at a crossroads, armed only with one of the loosest fiscal policies in Europe. The Irish government doesn't have many options left, as illustrated by the fact that it had no alternative in its last budget but to reduce sales and gas taxes to curb inflation. These measures will increase the average disposable income, which should rise by 3% in 2001, and trigger an 8.5% increase in private consumption. Lastly, Ireland is under pressure from the European Commission in Brussels to adopt a tighter fiscal policy and submit to European Union discipline.

Ireland is an example that, like many others, may one day be looked upon as a passing trend or a special case because of the times or its geographic location. Yet, the current Quebec government insists on frequently citing Ireland and the European Union as models. In light of the above, is this such a good idea?

[Sidebar]

With its powerful monetary lever now gone, the Irish government has few options left

[Author Affiliation]

Gerard Berube is editor of the Economie et finance section of the newspaper Le Devoir in Montreal.