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Changing Direction

Frank Barry

TK Whitaker, who died in January aged one hundred, had offered the wry suggestion in recent years that “perhaps Ireland owes de Gaulle a vote of thanks for delaying enlargement”. The quip was characteristic of the man – humorous and insightful. It shows him reflecting with maturity on his earlier advocacy of what would today be termed “shock therapy”.

The remark refers to the twelve years that elapsed between Ireland’s first application for membership of the European Economic Community and eventual accession to what is now the EU. Ireland had scrambled in 1961 to prepare an application when it became clear that Britain was to do so. The French president, Charles de Gaulle, deeply sceptical of Britain’s commitment, blocked the way. This gave Ireland time to get its house in order. Industry was restructured, redundancy entitlements were overhauled and, most importantly, foreign direct investment flowed into the country. This new source of jobs, triggered by the corporation tax innovations of 1956 and beyond, would serve as a counterbalance to the job losses that would occur as protectionist-era industries went to the wall.

Much has been written of Whitaker over recent weeks. He has been appropriately lauded as a dedicated and brilliant public servant and policy adviser, and a thorough gentleman. His 1958 document Economic Development has generally been credited with triggering the dismantling of the trade barriers that Seán Lemass had erected in the 1930s in a drive to industrialise the country. By the 1950s the policy had run into the sand. “The mood of despondency was palpable,” Whitaker would recall, and there was a danger that “the achievement of national independence would prove to have been a futility”.

Policy did indeed pivot in the early 1960s, but not as rapidly as – and frequently not in the direction – Whitaker had advocated. What he would come later to recognise, as his quip about de Gaulle illustrates, is that he had underestimated the difficulties of adjusting to free trade. It was for politicians to tackle these difficulties as best they could.

Economic Development is not an easy read and the concise and clear messages that people have subsequently read into it do not leap from the page. Its publication went unremarked in most newspapers at the time and its true significance can be argued to lie at least as much in context as in content.

Whitaker’s macroeconomic views are presented much more sharply in the paper “Capital Formation, Saving and Economic Progress” which he read to the Statistical and Social Inquiry Society just days before his appointment as secretary of the Department of Finance in 1956. His thinking on trade policy is shown to best effect in the debate conducted within the civil service in 1959-1960 and published as Protection or Free Trade – The Final Battle in 2006.

This particular battle concerned whether Ireland should seek membership of the new free trade area, EFTA, that Britain had established in response to the formation of the EEC. As Whitaker explains in his introduction to the 2006 volume, the “semi-official correspondence”, which largely pitched the Department of Finance against the Department of Industry and Commerce, was intended for the eyes of Lemass, who had just become taoiseach. The memos from both sides are models of clarity and succinctness.

Whitaker argues in favour of joining EFTA, suggesting that the cold shower of competition is necessary to raise the efficiency of Irish industry. Reducing costs, he suggests, will enhance prospects for increased exports. Industry and Commerce argues that EFTA membership, which would liberalise trade in manufactures, would be calamitous. It suggests that 20 to 40 per cent of protectionist-era manufacturing jobs could be lost.

This debate is never resolved but the final decision as to the advice to be offered is determined by an intervention from the Department of Agriculture. It points out that Irish membership would see pressure come to bear on Britain to extend preferential market access to the agricultural output of other EFTA member states. Denmark, which had lost market access to Germany when the EEC was established, was the main threat to Irish agricultural interests. Any encroachment on Ireland’s preferential access to the UK market would be hugely damaging. Towards the close of the debate, Whitaker signals his agreement on this point. EFTA membership was not pursued.

Though one would not guess it from the title of the collected memos, Whitaker lost this particular battle. The episode reminds us of the dominance of agricultural interests in Irish trade policy at that time. Lemass’s 1961 submission to the EEC Council of Ministers states that “because of the close inter-relationship of the economy of Ireland and that of the UK, and the vital interest of Ireland in agricultural trade”, Ireland hoped that its application would be considered alongside that of the UK.

To accord all the credit for the turnaround in Irish trade policy to Economic Development is to ignore these underlying factors. The first steps towards trade liberalisation came with the unilateral reductions in Irish tariff levels in 1963 and 1964. The official announcement explicitly stated that this was part of Ireland’s campaign to gain entry to the EEC. Nor was Economic Development responsible for the new export-oriented foreign direct investment (FDI) strategy, which dated from 1956, two years before the Whitaker report. The Department of Industry and Commerce had been battling for some such corporation tax initiative since the late 1940s but their efforts had been consistently blocked by the Department of Finance.

The corporation tax innovation (“export profits tax relief”) which launched the new FDI strategy was announced by inter-party taoiseach John A Costello in 1956 against the wishes of Finance and without the approval of its minister. It would be 1960 before the department would fully approve of the change. By the time Economic Development was written it was a fait accompli. Economic Development merely records the tax incentives then in place.

More than half of the twenty-four chapters in Economic Development are devoted to agriculture, forestry, fishing and related matters. Indeed, the Farmers Journal noted exultantly of the Whitaker document and the government white paper to which it gave rise that “the entire work may be taken as the clearest and most satisfactory statement on agricultural policy that has so far come from official sources”. Its true significance lies in the political cover it gave the Fianna Fáil government in implementing its U-turn on trade policy. By taking the unprecedented step of publishing the document under Whitaker’s name, as Garret FitzGerald has noted, “the government made it clear that the programme was not, and was not claimed to be, a policy prepared by the government party, but was a national programme, prepared by the head of the civil service”. This allowed it to be seen as transcending party politics.

Joe Lee expresses it best. “It may be surmised,” he notes,

that Lemass had little ambition to inflict on his backbenchers, or on De Valera, the enlightenment that would be willingly proffered from the opposition benches about the manner in which Fianna Fáil had at last seen the light, and was now reneging on its earlier self. Nor would any astute politician wish to sacrifice the advantage accruing to his party from a “plan” ostensibly based on the work of a non-party civil servant. The de-politicisation of “planning” was too useful an asset to be wantonly surrendered to the capricious vagaries of Dáil debates.

Bureaucratic politics also came into play. Lemass was shortly to become taoiseach. As minister for Industry and Commerce for most of the period since 1932 he had clashed repeatedly with Finance, which had struggled to keep his costly “developmentalist” tendencies in check. “Lemass, long frustrated with Finance,” Lee notes,

might well attempt to make Industry and Commerce, or the Department of the Taoiseach ... central to the formulation of economic policy. Whitaker had not become Secretary of Finance to preside over the decline of the premier Department. It was therefore necessary in terms of administrative politics to seize the initiative for Finance with a positive approach.

Ronan Fanning, in his history of the Department of Finance, notes that Whitaker, “already in May 1957 … was urging his Assistant Secretaries that it was desirable ‘that this Department should do some independent thinking and not simply wait for Industry and Commerce or the IDA to produce ideas’”.

The evolution of Whitaker’s thinking about Finance’s role is recorded in two fascinating essays which he published in the civil service journal Administration in 1954 and 1961. The first paper synopsises the traditional Department of Finance attitude as it appeared to him from having worked his way through the departmental files. The department had seen its role, he concluded, as “not to select the most meritorious [departmental proposals] and clap them on the taxpayer’s back but, rather, to see that as few as possible emerge as new burdens on the community”.

By 1961, under his stewardship, this had changed. The Department of Finance has now, as an integral part of its organisation, a special division whose responsibility is to seek out ways and means of advancing economic growth and to develop ideas and projects to the point at which they can be placed with the appropriate department or agency. While the department is as keen as ever on securing efficiency and economy in public services and must still examine critically all proposals for new expenditure, its broader concern is with the problems involved in the management of the economy in the interests of steady and rapid national progress.

Civil servants of more recent vintage, who are said to study episodes of the 1980s British TV comedy Yes Minister with pen and notepad at the ready, could do worse than read these papers of Whitaker’s to see what further tips they might pick up.

Whitaker’s strategising was not nearly enough for Lemass however. None of the traditional Finance strictures contained in Economic Development were adhered to over his tenure as taoiseach. Economic Development had advocated that income taxes be cut significantly and that the rate of increase in Irish wages and salaries be held below those in Britain. As a later Fianna Fáil minister suggested to me a number of years ago, Lemass may have seen these recommendations as overly grounded in the traditional orthodoxy of the department. In the event, income taxes rose significantly over the period and Irish nominal wages expanded far more rapidly than in the UK. Economic Development had also proposed that capital spending on local authority housing and hospitals be reduced, though, as Garret FitzGerald has pointed out, the subsequent reversal of population decline would have changed the perception of what was required. The reductions in social capital spending that Whitaker advocated were very short-lived.

There was no meeting of minds between Lemass and Whitaker on macroeconomics. Lemass desired to construct a continental-style social partnership system but the structure of the trade union movement and wage-bargaining processes at the time made this impossible. His macroeconomic strategy failed. Though Ireland’s economic performance of the 1960s represented a substantial improvement on the 1950s, the country continued to underperform by European – and even by other low-income Western European economy – standards.

Ronan Fanning quotes Whitaker as observing of Gerard Sweetman, the economically conservative Fine Gael finance minister in the second inter-party government, that he was “singularly unfortunate … in that his government was overthrown before the ideas which he implemented could bear fruit”. More intriguingly, Whitaker told journalist Bruce Arnold in an interview in 1986 that Sweetman “had both the energy and capacity to carry a thing like Economic Development through”. It is difficult to read this as other than an implicit criticism of Lemass.

Many of the recent eulogies to Whitaker from non-economists have talked of him as introducing Keynesianism to Ireland, or, in Paddy Lynch’s lovely phrase, of “bringing Keynes to Kinnegad”. Non-economists tend to use the term “Keynesianism” as a synonym for “economic planning”. But protectionism itself was a highly state-directed strategy. Decision-making as to which sectors to protect, and by how much, and where industries were to be located, was centralised in the hands of the minister for Industry and Commerce. The establishment of the IDA in 1949, furthermore, had been interpreted by Senator George O’Brien, professor of economics at UCD, as providing “some sort of co-ordination between private enterprise and public planning”.

More formally, the French type of indicative planning, to which much lip service was paid in Ireland in the 1960s, entailed detailed and consistent quantitative targets. The First Programme for Economic Expansion, which was based on Whitaker’s document, was not a plan in this sense. Indeed, it explicitly states that “in an economy in which private enterprise predominates and which is so exposed to fluctuations in external trade, there would be little point in drawing up a detailed plan based on predetermined production targets”. Though the Second and Third Programmes – which were not the work of Whitaker – did adopt quantitative targets, in neither case were they achieved.

To an economist, “Keynesianism” is not about planning but about demand management. Demand management is much less effective in a small open economy. Because such a high proportion of spending goes on imports, much of the stimulus effect leaks out through the balance of payments. Whitaker, as is arguably appropriate in the Irish case, was no Keynesian. This is apparent from his 1956 Statistical and Social Inquiry Society paper, which includes a discussion of the Keynesian multiplier:

Much of the new incomes would be spent on imports – initially perhaps the greater part – and the process of generating incomes might cause such a serious upset in the balance of external payments – with loss of external resources or reduction of the exchange value of the currency – as to impair public confidence and negate the initial boost given by the increase in home investment.

(The Jack Lynch government of 1977 would fail to recognise this point, with calamitous consequences.)

Whitaker concentrates therefore on supply-side policy. As complementary policies to trade liberalisation he advocates the expansion of education and training, reduced taxation, tackling restrictive work practices, aligning pay with productivity, and improving power supplies and transport services.

On a personal note, I failed for many years to appreciate the significance of this early paper of Whitaker’s because it seemed to me to be a restatement of what had by my time become conventional textbook economics. It was only later in life, when I had steeped myself in the history of the 1950s, that I came to realise how far ahead of its time it was.

Garret FitzGerald would later speak of the heated debate that followed Whitaker’s public presentation of the paper. Representatives of the Industry and Commerce camp strenuously challenged his belief that existing Irish industry could survive liberalisation. The society’s journal normally publishes an account of the debate from the floor alongside the paper itself. Whitaker’s opponents failed to put their comments in writing, however, and no record of the debate survives. The nearest we have to it is the series of memos exchanged a few years later on EFTA membership.

It is clear from this later debate that Whitaker believed that most pre-existing firms and jobs would survive. Garret FitzGerald, who was Ireland’s leading journalistic commentator on economics at the time, was also of this opinion. He wrote of his expectation that “with the possible exception of vehicle assembly work, the industrial activities started in Ireland since 1932 were likely, in one form or another, to survive free trade”. This expectation would prove hugely overoptimistic.

Trade liberalisation would be of massive benefit to Ireland over the longer term of course. The benefits, however, would surface through the emergence of new firms and new industries. Most of the old ones would disappear. The transition was the difficult part. This is why the FDI inflows mentioned in the opening paragraph of this review were of such importance.

The most substantive difference between Economic Development and the government Programme for Economic Expansion was on regional policy. Economic Development adhered to the Department of Finance’s traditional antagonism towards industrial dispersal. “A realistic appraisal of development prospects,” it suggested, “indicates that, apart from exceptional cases, industries must be at or near the larger centres of population. Special subsidisation of remote areas by more extensive grants for industrial development is wasteful and retards progress in areas better situated.” This passage was not incorporated in the government programme and decentralisation of industry remains a priority of the IDA to this day.

Last year’s votes in the US and the UK alert us to the consequences of failing to ensure that the benefits of trade are geographically dispersed. Decentralisation of industry makes more sense in light of this. Ireland further avoided these perils by massively expanding educational levels, to the degree that Ireland now far exceeds the OECD average in higher educational attainment.

This was all in accordance with the strategy Whitaker had mapped out in his 1956 paper. The commissioning of the influential Investment in Education report in 1962 coincided with the embrace of globalisation (as we would now say) and led directly to Donogh O’Malley’s “free education” scheme. Whitaker chaired the body that produced the 1964 report on Manpower Policy. As skills and technical competence expand, it noted, “the range of economic activity which can be carried on efficiently in Ireland will grow and the pace of economic development will be accelerated”. New firms could be attracted only if adequate numbers of skilled personnel were available.

By 1974, a visiting US academic would report, from personal correspondence, that the directors of the CSO, the ESRI and the research and planning division of the IDA were all agreed that new industry – the bulk of it foreign – was “the primary causative force in reducing emigration between 1958 and 1971”. The twin policies of trade liberalisation, for which Whitaker had consistently argued, and attracting export-oriented foreign investment, which was largely the brainchild of others, had come together to secure this outcome.

Whitaker was careful in life to accord credit where credit was due. Economic Development was a team project. The other members of the team are listed in the early pages of the document. In Whitaker’s volume of personal reflections and reminiscences, Interests, he acknowledges the contribution of another public servant and largely unsung hero of the period, JP Beddy, the first chairman of the IDA. “When the history of Irish industrial development comes to be written,” Whitaker wrote, “the name of Dr JP Beddy will have the prominence and honour due to a pioneer.”

1/3/2017

Frank Barry is professor of International Business and Economic Development at Trinity College Dublin.

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