Fair weather for further north-south integration

Economist Douglas Hamilton examines recent progress towards economic unity in Ireland

OVER THE past decade or so one of the most significant developments taking place in Ireland, quietly and without publicity, has been the growing integration of the two economies, north and south. Interestingly, the prime mover has been the business sector, particular the business sector in the north.

I and others have argued that this has been a response to the pressures created by increasing European economic integration, and a fear of increased marginalisation within Europe.

The representative bodies, the Confederation of British Industry in the north and Irish Business and Employers's Confederation in the south, have put together a range of initiatives in an attempt to reverse the historic 'back-to-back' development of the two economies.

At a political level, these economic initiatives have been buttressed by initiatives arising from strand two of the Belfast agreement, including the establishment of cross-border bodies. The economic dynamic, however, is far from certain, and important questions remain.

Following partition, and prior the 1990s, the two economies developed along separate paths, with divergence rather than convergence as the dominant trend. On the political level, north-south initiatives were to little avail, despite some positive moves in the 1960s. However, in the 1990s things began to change quite significantly with growing potential for increasing economic interaction between the north and south. This was largely promoted by business interests with support, to a lesser extent, from the Irish trade unions.

The attempts at closer economic integration over the last decade have been, I believe, of a quite different scale, with business and representative bodies recognising the importance and value of developments in this direction.

The motivation lies in the effects of European integration, and particularly in the effect of the single European market on European integration and in a recognition that both north and south face similar economic threats.

One problem is that new economic initiatives studiously ignored the obvious political context in which they were taking place. The CBI and IBEC both argued explicitly that there was no political dimension to their attempts to create greater economic integration in the island. The business community were keen not to be seen to be allied to any particular grouping or to be seen to be pushing an ë Irish nationalistí agenda.

The person who articulated the notion of a single Ireland economy most effectively was George Quigley, a former senior civil servant, and a leading business figure in the north. With huge foresight and with substantial risk, Quigley argued that the island, north and south, should be seen as one integrated island economy and that there existed untapped potential, especially with regard to joint ventures, marketing, research, education and training, infrastructure and communications and public-sector purchasing. He also argued that Ireland should be treated as one area in relation to European funding matters.

Many of these business-led economic initiatives were encouraged and consolidated by the IRA's 1994 ceasefire, which promoted a considerable discussion about the so-called 'peace dividend' and economic opportunities which might arise in a period of sustained peace.

The first aim of these new cross-border initiates was to stimulate trade within Ireland. However, while levels rose steadily in the first half of the 1990s, by 1995 the level of intra-Ireland trade still only accounted for five per cent of overall trade, compared with 12 per cent in 1926.

On a political level, the largely northern business-led initiatives began to create important, though quite subtle fissures within unionism. Given that the majority of business people in the north are from a Protestant and unionist background, their new southern-orientated business outlook raised many an eyebrow in unionist political circles. Another important factor was the extraordinary performance of the southern economy during the so-called 'Celtic tiger' years of the 1990s, during which record rates of growth were achieved.

This led to a complete reappraisal of the southern economy by northern business people. Whatever the deficiencies of the 'Celtic tiger', the southern economy could no longer be viewed as a backward, largely agricultural-based economy.

With the fastest economic growth of the EU over broad periods throughout the 1990s the south was soon seen by northern business as an economy with huge potential, especially given its close geographical proximity.

However, these positive economic developments hadn't been experienced in the north, where the 1990s were years of deep economic failure marked by poor economic growth, failure to restructure the industrial base and refusal to change the failed policy of generous grant-giving.

The north's economy continued to be kept artificially afloat by the huge annual subvention from the taxpayer.

The recent 'strand two' period of the 1993 the Downing Street declaration, dealing with the north-south dimension, made it clear that it was going to be an crucial aspect of any settlement.

However, it was in 1995 with the 'Framework' document that we found the most detailed and explicit indication of how north-south institutions might function. As a point of principle it stated that "new institutions should be created to cater adequately for present and future political, social and economic inter-connections on the island of Ireland".

While there were many similarities with the Sunningdale Council of Ireland, in terms of policy and how it might be administered, additional areas including education and social welfare were also included this time around.

By April 1998 we had the Belfast agreement with 12 specific areas mentioned for north-south co-operation. One key area missing from the Belfast agreement, which had been included in the Sunningdale and the Framework documents, was economic and industrial development. Surprisingly, energy was also omitted as were the arts and culture, despite existing close co-operation.

The Belfast agreement was followed up in December 1998 by a specific list of areas to be administered on a north-south basis: inland waterways, food safety, trade and business development, the EU, the Irish language and matters relating to the Foyle, Carlingford and Irish Lights.

In addition, co-operation through existing bodies was to take place on transport, education, health, the environment and tourism.

For the first time in the 20th century economic and political factors were working in the same mutually supportive manner. This allowed the concept of closer economic and political integration to be discussed in a more positive context without the same degree of knee-jerk reaction of past attempts.

The huge changes brought about by the Belfast agreement and subsequent negotiations are the result of one key factor: the economic context.

Economic conditions have changed considerably over the last 20 or so years. Increased European integration, rapidly-changing economic conditions and forms, both north and south, the changing nature of business interests in Ireland and economic opportunities raised by the absence in the north of violent conflict, all point to the need to put in place a political framework that will assist the development of increased economic activity in Ireland.

However, the north and south of Ireland are remarkably dissimilar in economic structures and performance. The north has yet to restructure its generally low-productivity industries, while the south has developed a dynamic high-technology industrial base as a result of substantial overseas investment, especially from America.

Although potential gains from greater north-south trade may be modest, there are important gains to be made, not only in increasing north-south trade flows but, more importantly, in strengthening indigenous industries.

If the level of north-south trade is to reach its full potential this will require the restructuring and modernisation of northern industry. More generally, its industrial policy, especially that focused on indigenous industry, will have the biggest impact on developing north-south trade.

Perhaps the most important initiative to have come out of the Belfast agreement on areas of north-south co-operation in December 1998 has been establishment of the body to deal with trade and development -- subsequently named InterTrade Ireland. Although initially its role appeared to be restricted, in a very short time its remit has become much broader, taking in venture capital, regional development, policy and planning, science and technology innovation, e-commerce, public tendering and procurement, trade promotion and a remit to advance economic competitiveness.

Traditionally, unionists have argued that Irish economic, let alone political, unity is a financial impossibility due to the size of the British Treasury's subvention to the north, the removal of which would have a dramatic impact on local taxes to support the public services.

While breaking the financial link with Britain would involve severe costs, it is worth making some revised estimates of what the consequences might be in the 21st century. The south has been running a substantial fiscal surplus throughout the 1990s and it can be argued that Britain's subvention to the north is likely to fall.

The hypothetical fiscal position for the whole of Ireland would be a deficit. However, that public deficit is likely to be below the Maastrict criteria of three per cent of GDP, making, in the short term at least, an integrated Ireland economy no longer something to be seen as a financial impossibility. While it remains uncertain as to whether a united-Ireland economy is inevitable and the process irreversible, what is clear is that the consequences of developments throughout the 1990s fundamentally changed the face of Ireland -- economically, politically, socially, culturally and geographically.

The northern economy, with its traditional, uncompetitive and highly subsidised industrial base, has failed comprehensively and is in need of fundamental restructuring.

The southern economy, on the other hand, while highly successful in terms of significantly increasing average living standards, is highly dependent on potentially transient US capital in a very narrow range of industries. It remains unclear as to its long-term performance, as recent events have emphasised.

There are substantial benefits to be realised by closer economic integration, but the process is still too young to know with any certainty what the level of these benefits might be re Ireland as a whole. Much will depend on the development, success and competitiveness of medium and small indigenous businesses.

Politically, despite the setbacks, the north-south dimension is now a widely accepted part of the political landscape. The general trend appears to be towards increased economic integration and policy co-operation. While the Irish border has not disappeared, despite the wishful thinking of some 'post-nationalist' politicians in Ireland, and won't disappear in the absence of more fundamental constitutional changes in Ireland, it is viewed and treated quite differently at the beginning of the 21st century than it was just a few years ago.

In this respect, the process of EU integration has had a big impact. However, differing attitudes towards the EU in London and Dublin continue to highlight the significance of the border.

While politics has had a huge impact on the economics of north-south development it is also true that the reverse has occurred. Business initiatives have helped to overcome deep-seated political fears of the past amongst the unionist population of the north, freeing up much-needed north-south economic activity.

The unprecedented turn around in the economic fortunes of the south, where average living standards are now above those in the north, has changed traditional economic approaches both north and south, opening up the possibility of further constitutional change.

The above is an edited extract of Douglas Hamilton's contribution to the 2001 Desmond Greaves Summer School. Douglas Hamilton is economist, policy adviser and former senior research officer for the Northern Ireland Economic Council.