Celtic Tiger

In Ireland, where the price of a pint is often a measure of prosperity, there is no greater gauge of the prevailing public mood than O'Donnell's pub.

Celtic Tiger

In Ireland, where the price of a pint is often a measure of prosperity, there is no greater gauge of the prevailing public mood than O'Donnell's pub. It's a modest establishment overlooking leafy Eyre Square in the heart of the city of Galway, not much more than a long shillelagh toss from the great bay of the same name on the country's rugged west coast. Last week, the taps at O'Donnell's were overflowing, dispensing foaming rivers of its famed Guinness black stout to some of the 1,250 employees of Nortel Networks Corp., who had gathered in Ireland from 18 countries to play in a Nortel soccer tournament. In the process, they were also celebrating a quarter century of collaboration between the burgeoning high-tech corporation and the Irish city, a fruitful partnership that has helped to radically transform both.

In the 27 years since Brampton, Ont.-based Nortel first established a European toehold with a plant in Galway, the company has done more than change its name from Northern Telecom Ltd. The original Galway facility reflected what Nortel then was - a manufacturer of telephones and telephone equipment. "It was pretty basic, high-volume, low-skill stuff," says Barry O'Sullivan, Nortel's vice-president of production and technology in Europe. "What we had then were a couple of dozen employees assembling rotary telephones in a shed." The shed is still there but it has been enveloped by a sprawling building in the southern suburbs of Galway. The Ireland-based workforce has grown to more than 2,500, located at three sites in the Republic and another in Northern Ireland. Half of those employees boast university-level education, including 600 engineers who work in the largest private sector telecommunications research and development program in Ireland.

Galway has changed almost as much as the company. When Nortel moved in, the city was a picturesque but sleepy backwater at the bottom of Galway Bay. Its 50,000 inhabitants depended on fish and tourism, neither of which provided much more than an existence of genteel poverty. One in five of the workforce was unemployed, and inflation stubbornly refused to budge from 10 per cent. The city, like the country at large, appeared condemned to eternal stagnation as a rural enclave in the vigorously emerging community of 15 European nations that is now called the European Union. Today, Galway is flourishing. Down by the bay, decaying warehouses have been replaced by sparkling rows of condominiums. The city's population has jumped by almost 10,000, and the surrounding areas are home to another 120,000. Decades of emigration have reversed as the young and the educated, who once left in droves, return to fill jobs in an ever expanding economy.

The trigger for this great good fortune was a drastic change in economic policy, initiated in the late 1980s by slashing taxes, buying labour peace, and throwing out the welcome mat to foreign corporations. The program has been wildly successful. Nortel, now a $33 billion-a-year global concern employing 70,000 people, has been joined in Galway by such other planet-straddling computer firms as Texas-based Compaq Computer Corp., PMC-Sierra Inc. of British Columbia, and ADC Telecommunications Inc. of Minnesota. Together, they have helped to create in Galway an Irish version of California's Silicon Valley. With other high-tech centres located in Dublin and the southern city of Cork, these clusters are leading Ireland's near-miraculous transformation from an agricultural base to one driven by information technology and accompanying services. One-third of all the PCs sold in Europe today are made in Ireland. Nineteen of the top 25 computer companies in the world have set up shop in the country, a blue-ribbon list that includes Microsoft Corp., IBM Corp., Hewlett-Packard Co. and Dell Computer Corp. In the spring, the Paris-based Organization for Economic Cooperation and Development reported that Ireland had surpassed the United States as the world's leading exporter of software, selling products worth close to $5 billion annually.

Celtic Tiger is the label most often used to describe the remarkable vigour of the Irish economy. But unlike the Asian countries that first gave rise to the tag, the Irish breed of the beast betrays few signs of losing its roar. For the last six years, growth has been phenomenal, averaging nearly 9 per cent annually, higher than any other single country in the EU - higher, in fact, than any other nation in the Western world. Last year, the Irish economy grew by close to 10 per cent. Expectations are similar for this year, although analysts are predicting a gradual slowdown in 2001, largely because of emerging supply constraints.

Chief among those limits is lack of manpower. At the moment, there are 65,000 unanswered job openings in the country, and officials anticipate that 250,000 new jobs will be created by 2005. The Irish Software Association predicts that employment in that sector alone, already providing 24,000 jobs, could swell to 40,000 by 2002. Even pubs are having trouble finding staff, notes Daniel McCoy, an economist with Dublin's Economic and Social Research Institute. In Cork last spring, not a single recruit signed up for a prestigious year-long training course for bar workers. "It's a sure sign of the changing times," says McCoy. "Those pub apprenticeship programs used to be highly competitive all over the country. Now everyone has migrated into higher paid jobs in IT."

The service industries now account for 60 per cent of Ireland's workforce. In the last 10 years, 265,000 jobs have been created in the sector, a stunning 40 per cent increase. With the jobs has come wealth. For the first time in Irish history, the country's 3.7 million people are richer, on average, than their British compatriots. According to the OECD, the Irish GDP per person is $25,200 (U.S.), compared with Britain's $22,300 and the EU-wide average of $22,000. Ireland, in fact, is not all that far behind the United States' average of $33,900.

The telltale signs of Ireland's newfound affluence are everywhere, from the well-dressed crowds that browse the upscale stores along Shop Street in Galway, to the Grafton Street pedestrian mall in Dublin, to the overflowing pubs and restaurants around St. Stephen's Green in the heart of the capital. Construction cranes tower over the shores of the river Liffey in downtown Dublin, especially in the area around the old docklands where large-scale reconstruction is under way. O'Connell Street, the capital's seedy main thoroughfare, is due for a $68 million face-lift. Car sales this year are up by 50 per cent.

There are, to be sure, dark clouds on the horizon. Inflation is the prime cause of concern: the cost of housing, for instance, has shot up 20 per cent over the last year. At 5.5 per cent, Irish inflation is the highest in the European Union and more than double the EU-wide average. By the end of the summer, it may well reach 6 per cent, raising the prospect of a wage-and-price spiral.

A key element in Ireland's unfolding boom has been a series of three-year agreements between government, business and organized labour that, since 1987, has bought labour peace in exchange for guaranteed wage increases and tax cuts. The last of these agreements, signed earlier this year, provided for wage hikes of roughly 5.5 per cent, and already some union leaders are beginning to question the terms. "You don't have to be a rocket scientist to see the negative effect of 6 per cent inflation on our members' salaries," remarks Oliver Donohoe of the Irish Congress of Trade Unions, representing 94 per cent of the 620,000 unionized workers in the country. For the moment, however, labour unrest has been restricted to occasional grumblings from teachers and nurses and the odd outbreak among the Garda Síochana - the Irish police - of "blue flu", mass absenteeism due to temporary illness.

Keeping labour happy is especially important, since the Irish government has few other tools for controlling inflation. The country's inclusion in the single currency of the 11 nation "Euro-zone" has robbed Ireland's monetary policy-makers of the ability to hike interest rates to cool an overheated economy. The Euro, with its single interest rate set by the European Central Bank in Frankfurt, rules out that time-honoured approach. And Dublin is loath to raise taxes, viewing it as politically unpalatable when the annual budgetary surplus is approaching $5 billion.

All the signs indicate that Prime Minister Bertie Ahern's government intends to hold its course. "We're thriving in the Euro," he told a recent gathering of senior Irish managers in Killarney. "Providing we maintain our discipline, we will have great pleasure in confounding the pundits in London, Brussels and Frankfurt who, blinkered by orthodoxy, still cannot quite understand how the Irish, of all people, have managed to get it right."

Those pundits are not alone. Even some officials in charge of managing the economy confess to a certain degree of puzzlement about their own success. "To be brutally frank, nobody is quite sure why all of this happened," acknowledges Michael McKenna, an assistant secretary at Ireland's Department of Enterprise, Trade and Development. "The best that can be said is that a number of factors came together at the same time to produce what has turned out to be a happy situation." The five successive three-year agreements between government, business and labour certainly played a critical role in facilitating the right kind of environment for growth. So, too, has the money pumped into Ireland by the EU to develop the country's infrastructure. Over the past six years alone, the EU has channelled more than $35 billion to build and refurbish Irish roads, bridges, airports, seaports, communications and a host of other infrastructure assets. "Those funds," says McKenna, "provided a crucial buffer, especially since they arrived at a time of fiscal retrenchment."

But even the EU funds do not explain the Irish miracle. The EU money, in fact, probably does not account for much more than a lone percentage point of the annual 9 per cent growth rates over the past three years. Probably the single most important factor has been Ireland's ability to attract direct foreign investment. This was accomplished by slashing the tax rate for companies that export their products and services, from 40 per cent to 10 per cent. (Under pressure from the EU, that favourable rate will be applied to all companies, and increased to 12.5 per cent by 2003.) The result has been a massive influx of foreign money. Most analysts believe that as much as a third of U.S. investment in the EU is now going to Ireland. Canadian companies have not been slow to recognize the lure. Ireland is fourth among all countries as a recipient of Canadian investment abroad, attracting $6.8 billion in 1999. There are about 100 Canadian companies in Ireland, 36 of them in Dublin's International Financial Services Centre.

Most of those in charge of Canadian businesses in Ireland frankly admit that it has been a combination of low corporate taxes and access to the EU's vast market that brought them to the country. "That tax rate certainly played a major role in moving me here," says Martin Kenney, president and chief executive officer of Interclaim Recovery Ltd. a Dublin-based company of fraud-busters, engaged in the perilous business of locating and recovering illegally concealed assets. Operating from an 18th century Georgian townhouse in the Irish capital, Kenney, who was raised in Oakville, Ont., heads an 18-member multinational team of investigators, forensic accountants and lawyers. They roam the world in pursuit of ill-gotten gains, returning money to victims in return for a percentage of the proceeds. It was Kenney's firm that tracked down convicted Vancouver criminal Blair Down, operator of a notorious telemarketing scam.

Ireland's low tax rate and booming economy also helped to draw CanWest Global Communications Corp. to the country. The Winnipeg-headquartered company owns 45 per cent of Ireland's TV3, the only privately owned, independent television broadcaster in the country. Since 1998, when the station first began broadcasting, it has managed to capture 20 per cent of Ireland's TV advertising market and an 11-point share of prime time. "Our revenues have grown by 80 per cent over the last year," says TV3's CEO and managing director, Rick Hetherington, born in the West Indies but raised in Toronto. "The market here has tremendous potential for growth, due in large part to the incredible buoyancy of the Irish economy."

But of all the Canadian companies in Ireland, it has been Nortel Networks that has set the pace. Not only was the company one of the first to establish an operation in the country, its growth mirrors the development of the Irish economy. "Like us," says Nortel vice president O'Sullivan, "Ireland has moved up the value chain." Where Nortel's Irish operations once assembled rotary dial telephones, the company's facilities are now almost exclusively engaged in producing software, much of it designed to exploit the boom in Internet communications. The company's Symposium Web Response Server has already revolutionized call centres by enabling the automatic transfer of e-mail inquiries from corporate Web sites. The newly released Internet Telephony Gateway carries the process a step further by providing for voice transmissions over the Web.

Ireland itself has been moving in a similar direction. Construction is under way on a $136 million project to increase international broadband capability in the country by 15 times the current capacity. Another $200 million has been earmarked for 13 separate projects designed to bring high-speed Internet-capable networks to some 120 different towns and villages scattered around Ireland. The country was the first in Europe to link every school in the land to the Internet. By 2002, every classroom will be wired to the Web. The image that summons may not have much to do with some of the old Irish stereotypes, neither the grim ones about potatoes nor the romantic versions involving wee folk among the shamrocks. But modern-day Irish eyes are clearly fixed on the future - and they are smiling at what they see.

The Green Machine

Ireland's per capita income has shot up in the past six years, pulling head of Britiain's and rivalling Canada's (U.S. dollars):

Ireland

1994: $15,934; 1999: $25,200; 58% change

Britiain

1994: 17,678; 1999: 22,300; 26% change

Canada

1994: 20,508; 1995: 25,900; 26% change

United States

1994: 25,790; 1999: 33,900; 31% change

Source: OECD

Maclean's August 21, 2000