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Mixed Blessings
Handbook: A Tale of Two Economies

"There were those who once mockingly joked that the only thing the Republic lacked in order to become a Third World country was the climate. Well, they're not laughing now. It is the Republic which has had the last laugh." -- Northern Ireland's Democratic Unionist Party Deputy Leader Peter Robinson, Belfast, June 23, 2006.

As the world watches the economic transformation in the Republic of Ireland with interest, the inevitable question arises, "What about the other Ireland?" Given a decades-long struggle over the unification of the two Irelands, this question touches a raw nerve, but also raises new hopes as sectarian slogans give way to some new mantras -- "Collaborate to Compete" and "North-South Makes Sense." Can economics do what violence and negotiation have not? Trade and economic ties between the two are growing, as both sides of the border recognize that the other has something to offer. This economic cooperation is only likely to increase as plans to upgrade all-island infrastructure are put into play. Explore various facets of the North-South economic relationship by clicking on the tabs below.

Country Mouse No More

Although it was once the impoverished southern underperformer to an industrialized Northern Ireland (NI), the Republic of Ireland (ROI) roared ahead in the '90s, becoming one of the most productive and successful economies of Europe. Many factors contributed to this astounding rebound, among them low corporate taxes, favorable demographics, and the fruits of earlier investment in higher education. Membership in the European Union also gave the Republic opportunities in the European market and qualified it for subsidies used to upgrade its infrastructure.

But while the South's prospects soared, the North's took a nosedive as political turmoil and the violence of The Troubles took their toll on the economy -- 30 years of sectarian violence between Catholics and Protestants resulted in over 3,000 deaths and succeeded in frightening away foreign investment. At the same time, the North's traditional manufacturing industries, such as textiles and shipbuilding, steadily lost ground due to globalization.

Foreign investment and the influx of high-tech companies have boosted the ROI's economy well beyond that of NI -- its gross national product (GNP) has increased by 400 percent since 1986. In contrast, political instability and industrial obsolescence made the NI economy overly dependent on United Kingdom (UK) subsidies and the public sector. Today public spending in NI still accounts for over 60 percent of the GDP, and the government employs about one in three workers, twice the number in the ROI.

Positive Signs

However, there are indications that the North is making economic inroads and perhaps experiencing a beneficial osmosis across the border. Foreign investment in NI has increased 45 percent over the past five years and tourists are slowly making their way back to beleaguered Belfast. While NI's progress is still far behind the stunning growth of the Republic, NI now has an unemployment rate of about 4.5 percent, half that of a decade ago, and less than the 5.9 percent average rate in the UK.

Some of the positive changes stem from the same factors that boosted its neighbor and others can be attributed to overflow from the South. Like the ROI, NI has a highly educated English-speaking workforce. With its low cost of living and lower wages than the Republic, NI is attracting foreign investment in the same way the ROI did at the beginning of the Celtic Tiger phenomenon.

As the ROI has shifted its focus to more high-tech companies, there is a greater need for skilled workers. The Irish and an influx of immigrants meet many of these needs, but not all, creating opportunities for NI's IT grads. Both North and South are looking at their technological infrastructure to see how they can attract the next wave of investment. Education is key, but other factors like broadband access are important, too. While the South is struggling to make this a priority, the North has completed a 100 percent access plan. The South, however, has announced a "Strategy for Science Technology and Innovation," a planned investment of € 3.8 billion ($4.8 billion) in research in Ireland from 2006 through 2013. One of the goals of the program is to double the number of Irish Ph.D. graduates.

Taxing Dilemma

Capitalizing on the cease-fire and taking crumbs from the ROI's overflowing table will not be enough to create an Ulster Tiger. In key areas, such as corporate taxation and government spending, NI has not followed the ROI example. For NI to truly thrive, its bloated government will need to be trimmed, a tough thing to do for squabbling political parties. Furthermore, NI cannot count on additional money pouring in from the UK, the way that ROI benefited from EU subsidies.

Topping the NI list of impediments to competitiveness with the South is the 30 percent corporate tax, a considerable amount compared to the 12.5 percent in the ROI that has garnered so much foreign investment. Sharing a border with a region charging so much less in tax is a huge hindrance to growth in the North and ultimately to an all-island economy, say business and political leaders in NI. Unusually, it is a point that most political parties in the North can agree upon. Unfortunately, as NI remains part of the UK and requires heavy subsidies by taxpayers, demanding a reduction in corporate taxes is tricky. This is especially true because most regions of the UK are worse off than NI.

The much-hoped-for peace dividends have created the opportunity for NI to do something new; the question now remains whether the government has the will and the independence to do it. In the meantime, small businesses and average Irish people are doing what the government may or may not ultimately accomplish: getting down to business.

Cross-Border Cooperation

There are a growing number of incentives for both North and South to cooperate economically, and the once-powerful disincentives, particularly political differences, are proving less pertinent. Over the last decade, cross-border trade has increased to € 2.5 billion ($3.2 billion) in 2004, according to InterTradeIreland. The Good Friday Agreement of 1998, which provided for power-sharing between Protestants and Catholics in NI, also established several cross-border agencies, some to promote peace or tourism and others focused on fostering economic cooperation between the two Irelands. InterTradeIreland is just one such organization. It helps companies increase all-island sales, encourages cross-border partnerships, and matches up university researchers to businesses on both sides of the border.

Companies offering a wide variety of products and services, from cleaning solvents to uniforms or engineering consultations, are benefiting from the cross-pollination of know-how and the expansion of their respective domestic markets to include the entire island. In a survey by InterTradeIreland and the Economic and Social Research Institute (ESRI), one third of businesses indicated that they had either trading links or a plan for forging them. The most significant ties are in import or export, with stronger connections reported among companies along the border. Other cross-border activities include shared purchase of raw materials, joint marketing, and combined staff training.

Obstacles to All-Island Economics

InterTradeIreland's Dominic Mullan, a project manager with Microtrade, advises small businesses on technical issues that sometimes discourage them from engaging in cross-border trade. One of the most frequently mentioned, he says, is the difference in currencies, with NI using the pound and the ROI using the euro. "People complain about fluctuations in currency, which mean they can sometimes lose out a little on deals," says Mullan. "The currencies have been reasonably stable in recent years, so this has not been a big problem. You win some and you lose some."

Though some businesses may initially be intimidated by currency, insurance, and various complications that arise from differences in labor laws, ultimately the potential money-making opportunities of an all-island market outweigh most obstacles. For example, when Glen Aine Foods, an ROI sausage maker, was looking for a contract fryer to meet a growing demand for pre-cooked products, it stumbled upon a new market for its meats. Glen Aine turned to Northern Omagh's Crosh Valley Farm for its fryers and then the two companies distributed each other's products to their respective markets. Today the northern Crosh Valley Farm fries four tons of Glen Aine sausages a week, distributing 20 percent to NI outlets. Glen Aine, in turn, distributes half a ton of Crosh Valley Farm's bacon in the ROI.

Other obstacles cited by businesses include transportation and cultural differences. "The road network in Ireland is getting much better but is still limited," says Mullan. "This can be a problem for businesses needing to make regular deliveries of goods. There are some internal flights now, which makes some forms of business much more doable. In the past, a business in Cork would never have chosen to do business in NI, but more recently, with a direct flight, this is now much more doable. We recently brought a group of Belfast businesses to Cork to meet with some other companies, and a number of them are now working together." There are several plans under way to improve the joint infrastructure, including moves to create an all-island energy market to reduce costs and, significantly, a plan to spend billions over the next 10 years on all-island transportation, power, and communications. In the ROI, Irish Foreign Minister Dermot Ahern has instructed various government agencies that the 2007-2013 National Development Plan must be made from an all-island perspective.

While small firms dip Southern sausages in Northern deep fryers, technology sharing of a similar sort is happening in academia, where researchers are sharing their technical expertise with industries that need it. In InterTradeIreland's Fusion program, researchers "from Dublin to Galway and Coleraine to Cork" are teaming up to tackle issues from food shelf life to cancer to shellfish waste. The program provides support for small businesses from NI to work with university researchers in the ROI (or vice versa). So, for example, a food science expert in the University College Cork might work with an NI food producer to see how they could maximize shelf life of products.

Collaborate to Compete

Politically, leaders on both sides of the border and in the UK are emphasizing the benefits of a closer economic union, noting, in the words of the Northern Irish Social Democratic and Labour Party (SDLP), "North-South Makes Sense." In the ROI, Taoiseach (Prime Minister) Bertie Ahern of the Fianna Fáil party has also called for increased cross-border business ties. Political parties of all shades speak of the need for mutual marketing of the island to outside investors, particularly in the face of the external challenges of globalization.

Many in the North are careful to add that this cooperation will not be had at the cost of NI's economic relationship with the UK, the world's fourth largest economy. Closer ties should not been viewed as a threat, says SDLP leader Mark Durkan. "People who are unionist, nationalist or neither should have nothing to fear from dynamic North-South co-operation," he said. "We are all losers without it." The UK, for its part, has grown weary of subsidizing a public sector-heavy NI and wants to reduce the amount paid by British taxpayers. NI Secretary of State Peter Hain has emphasized repeatedly that the key to the province's economic success is accepting that the current reliance on the public sector is untenable and must be replaced with a private sector boom, which ties with the South can only expedite.

The pressure to piggyback on the South's success has even the Democratic Unionist Party (DUP), which is strongly opposed to political unification, trumpeting increasing NI/ROI business relations, as long as it is done for economic, not political reasons. Says DUP deputy Peter Robinson, "There are many areas where working together with the Irish Republic would be enormously to our mutual advantage and we should not allow politics to be an obstacle to such an advance. Equally, it would be a real threat to North-South relations if there were politically motivated attempts to enhance links where the merits of the individual proposals are lost in the politics of it all."

Sectarian Suspicions

After three decades of conflict between Republicans fighting for a "reunited Ireland" and the Unionists or Loyalists defending ties to the queen, calls for an "all-island" anything can result in a flaring of sectarian tempers. Despite diplomatic advances and the IRA cease-fire, neighborhoods and schools remain segregated and Catholic-Protestant mistrust continues to be a powerful factor in politics, and to a lesser degree, in business relations. Equally pernicious is the recalcitrance of the Northern Irish political establishment. Though the 1998 Good Friday Agreement established power-sharing between Catholics and Protestants as a model that could restore permanent peace to the province, the Assembly was suspended in 2002 when the Unionist (Protestant, pro-union with the UK) politicians threatened to withdraw due to revelations that the IRA paramilitary groups were still operating.

The two main architects of the plan, UK Prime Minister Tony Blair and the ROI's Bertie Ahern, have set a deadline of November 2006 for the two dominant political groups to reach agreement on their issues or face being governed directly by London, with input from Dublin. The theory is that if, after eight years, the two sides have not been able to reach a compromise that permits them to govern, they never will. The Democratic Unionists have rejected the deadline, saying that they will not form a government with Sinn Féin until it meets certain conditions.

High Price of Politics

For some investors, the lack of an operating, devolved (independent) government makes NI an unpredictable business environment compared to the South. For the first time in decades, however, the price of this inability to cooperate seems too much to pay for many Northern Irish, especially when their Southern cousins are reveling in the booty of their economic boom. It remains to be seen whether the desire of the Northern Irish for a bigger piece of the pie will do what decades of violence, political negotiation, and world attention have not: help their government see its way clear to political cooperation.