Ireland's Economic Transformation Began With Charlie Haughey

By Steven Pearlstein
Wednesday, June 14, 2006

DUBLIN, June 13 They'll be honoring Charlie Haughey in Donnycarney on Friday in a state funeral befitting the colorful former prime minister who was the father of the Celtic economic miracle.

In recent years, Haughey's reputation has been badly tarnished by revelations that he diverted millions of dollars from party coffers to finance his lordly lifestyle, that he carried on an affair for years with a newspaper gossip columnist, that he tapped the phones of political journalists, and that he had to sell his large Georgian estate to pay more than $6 million in back taxes.

But I suspect that few of the smartly dressed twentysomethings bustling around Dublin's financial center these days know that it was Haughey who came up with the idea of offering cheap land and tax breaks to lure financial institutions to the once-blighted docks here, from which generations of Irish fled in search of a better life elsewhere.

Today, many of the world's largest banks, insurance companies and hedge funds have set up shop along the River Liffey, employing more than 16,000 people. Add to that offices for lawyers and accountants, along with a growing number of shops and apartments. There's even the European headquarters of Google. It's Ireland's answer to Canary Wharf in London.

The Docklands is the showpiece of an economic revival that transformed Ireland from one of the poorest countries in Europe to one of its most prosperous and dynamic. Output per person is the highest in the European Union, with average economic growth rates over the past five years of nearly 6 percent and virtually full employment. Seventy thousand new jobs were created last year in a workforce of only 2 million, most of those filled by immigrants who flock to Ireland's shore from the newest E.U. member states. Construction cranes are visible in all directions, and hotel rooms are hard to find, while residents and tourists throng the shops of Grafton Street and the pubs of Temple Bar. You know you're in the middle of a booming economy when the biggest worries are traffic congestion and rising real estate prices.

Not even Charlie Haughey would have predicted such a future when he took office for the third time in 1987. Inflation and unemployment were running at 15 percent, with the government's annual operating deficit at 12 percent of gross domestic product. For all intents and purposes, the country was going bankrupt.

But Haughey was nothing if not a charmer and a pitchman, who gave the Irish the confidence that they could turn things around if only they'd be willing to pull in their belts and pull up their socks.

Setting up the financial services haven was part of it. The idea was to turn Ireland into the world's back office by offering land deals, cheap and well-educated workers, and one-stop regulatory approvals. At the same time, the state's industrial development agency began an aggressive marketing campaign, offering what amounted to zero percent profit taxes for foreign manufacturers looking for a low-cost production base to serve European customers.

Perhaps equally important, however, was Haughey's effort to create a mechanism outside the normal process of government for the country's powerful labor unions, businesses and politicians to come to some agreement about wages, working conditions and public finances.

At the time, it was no doubt the dire nature of Ireland's predicament that led to consensus about the painful sacrifices that needed to be made. Cherished social welfare programs were cut and taxes were raised, while unions agreed to modest wage increases and a pledge not to strike.

Today, nearly 20 years later, and long after the crisis has passed, they're still at it. Any day now, Prime Minister Bertie Ahern, a onetime Haughey protege, will announce the latest social partnership agreement. Pay increases will be set at 10 percent over the next 27 months, enough to spread some of the newfound prosperity without dulling Ireland's competitive edge. There will also be a modest increase in the minimum wage, reform of the health system, more money for housing and day care, and tougher enforcement of tax and labor laws flagrantly ignored by building contractors and wealthy developers.

It's hard to imagine something like this taking hold in most other countries of Western Europe, where economic policy has become the battlefield of an increasingly bitter class and ideological war over globalization. And it is impossible to imagine it in the United States, where it is inconceivable that individual companies and unions, to say nothing of powerful members of Congress, would abide by such an agreement.

But later this week, they'll give a final tip of the hat to Charlie Haughey, a rogue of a politician who taught Ireland the age-old truth that it is better to focus your energies on growing the pie than fighting too long or too hard over how to divide it.

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