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In
recent years Virginians, particularly those in rural
areas, have looked to the Republic
of
Ireland
as a model for economic development. As recently as
the 1980s, the small, largely rural nation suffered
from bloated government, rising deficits, a stagnant
economy and emigration of its brightest citizens.
Prompted by economic crisis around 1990, the
government found broad-based support for radical
reform.
Speaking
at the Virginia 2020 conference last week, in
Richmond, Breifne O’Reilly, economic development
counselor for
the Republic
of Ireland attached to the embassy
in Washington, D.C., cited five major initiatives
responsible for
turning the economy around:
-
Drastic
cuts in central government spending, including
the shut-down of entire agencies
-
Cuts
in the income tax rate, which topped off at 60
percent
-
Renewed
commitment to education.
Ireland
spends the highest percentage of its gross
national product on education of any nation in
the European Union
-
Free-trade
policies that positioned
Ireland
as an English-speaking platform for exporting to
continental
Europe
-
Targeted
recruitment of information technology
manufacturers and software companies
These
macro-economic policies proved to be a huge success,
triggering one of the most dramatic economic
transformations on the globe. Today,
Ireland’s
per capita income surpasses that of Great Britain.
Furthermore, it can boast of the fastest-
growing
economy in Europe.
To
sustain its momentum, O'Reilly noted, Ireland
recently established a $750 million program, to be
spent over the next seven-eight years, to promote
research and development. For a nation of 3.5
million people, that's an impressive sum.
O’Reilly
did not speculate as to whether the Irish experiment
could be replicated in rural Virginia. However, I would offer a few observations:
First,
Virginia
cannot replicate Ireland’s
tax-cutting initiative. Ireland’s
income tax reached 60 percent, a punitive level that
clearly inhibited economic activity. Virginia’s
income tax, by contrast, peaks at 5.75 percent.
Given the federal structure of government in the United
States,
the commonwealth
lacks the ability to slash tax rates as aggressively
as Ireland
did.
If
there is a lesson to be learned from Ireland, it's
that Virginia should fashion tax cuts that both
provide tax relief and stimulate desirable
economic behavior. For political reasons, the
Gilmore administration targeted the car tax, a levy
despised by much of the population. Although the
cuts did return money to
taxpayers, there is no
evidence that it has influenced their economic
behavior. The car-tax initiative lacks the
supply-side punch that
Ireland’s
cut in income taxes had. In any case, the political
will no longer exists to finish the phase-out.
Second,
Ireland’s
emphasis on education is the element that has
attracted the most attention in
Virginia.
There is a near-universal consensus across the
Commonwealth that raising educational standards and
providing 21st-century workplace skills is the key
to bringing
new industry to non-metro Virginia.
I would not dispute the critical role of education. But I
would note that it is dangerous to draw comparisons
between a national
labor market like
Ireland’s
and regional labor markets like those in rural Virginia’s.
There is less labor mobility between nations than
there is within a nation like the U.S. Ireland could
invest in its young people knowing that most, if not
all, would stay put. Rural Virginia
localities have no such confidence. Indeed, local
leaders fear that spending more on education would
spur the flight of young people who find better
employment opportunities in the metro areas.
Also
worth noting: Ireland
managed to herd a high percentage of its young
people into educational disciplines that industry
demanded: engineering, computer programming,
business and the hard sciences. Virginia
students show little appetite for the challenging
scientific and technical fields other than business. Ratcheting up
education spending in
Virginia
will have little beneficial economic impact if it
just churns out more sociology and psychology
majors.
Third,
Ireland
was successful in recruiting new industry because of
its strategic geographic location as an
English-speaking nation on the edge of
Europe.
Rural Virginia
enjoys no such locational advantage. To the
contrary, the industrial-recruitment
game is getting harder and harder. To be sure, rural
localities should continue pursuing recruitment
opportunities that come their way, mainly because
they have so few other options. But they need to
recognize the limitations of this strategy and think
seriously about alternatives.
In
sum, the Irish experiment demonstrates that low
taxes are better than high taxes, that it’s good
to cut government spending, that education in
engineering, business and computer sciences prepares
the workforce for the 21st-century workforce. But Ireland
tailored its remedies to its unique situation,
which, despite superficial similarities, differed
from that in Virginia
in important ways. Non-metro regions in the
Commonwealth will have to devise solutions based on
their own configurations of strength and weaknesses.
--
September
16, 2002
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