This paper considers elements of macroeconomic policy central to Ireland’s objective of being among the first countries to enter into European Economic and Monetary Union. The paper analyzes the main determinants of the Irish pound/sterling exchange rate, an issue brought to the fore by the currency turbulence of March 1995, which saw a sterling-inspired decline in the Irish pound against the deutsche mark. It also considers fiscal developments and prospects, highlighting tax reform measures undertaken to accelerate job creation, the growth of spending in recent years, and the medium-term fiscal outlook.

Abstract

This paper considers elements of macroeconomic policy central to Ireland’s objective of being among the first countries to enter into European Economic and Monetary Union. The paper analyzes the main determinants of the Irish pound/sterling exchange rate, an issue brought to the fore by the currency turbulence of March 1995, which saw a sterling-inspired decline in the Irish pound against the deutsche mark. It also considers fiscal developments and prospects, highlighting tax reform measures undertaken to accelerate job creation, the growth of spending in recent years, and the medium-term fiscal outlook.

VI. Impact of the Uruguay Round on the Irish Economy 1/

1. Introduction

This chapter reviews estimates of the impact of the GATT Uruguay Round agreement on Ireland’s economy. It draws on a report prepared for the Irish authorities just prior to the conclusion of the Round when the broad outline of the agreement had become clear (the Fitzpatrick Report); 2/ supplemented with additional information, particularly on agriculture, obtained from the authorities in April 1995. The first section below discusses the framework that was used to calculate estimates of both sectoral and macroeconomic effects of what was then a prospective GATT agreement as well as the assumptions made concerning the expected world wide impact of the, agreement. Subsequent sections examine the Sectoral impact of the agreement, with a focus on manufacturing, services, and agriculture. The final section summarizes estimates of the overall impact of the GATT agreement, which indicate substantial economic gains for Ireland.

2. Framework

The Fitzpatrick Report analyzed the likely impact of a GATT Uruguay Round agreement along the lines of the GATT Draft Final Act of December 1991, the EC-Blair House agricultural accord of November 1992 and the Tokyo trade accord of July 1993. The report was based on a minimum average tariff reduction of one third for manufactured goods, accompanied by the phased elimination of non-tariff barriers and the gradual liberalization of heavily regulated trade in textiles, services and agriculture. 3/

The likely impact of the agreement was compared against two alternative scenarios:

  • (i) a “trade hostilities” scenario, which was based on the assumption that a failure of the Uruguay Round would lead to increased global trade protectionism;

  • (ii) a “no change scenario”, which was based on the assumption that world trade would be unaffected by a failure of the Uruguay Round.

Of the two alternatives, the “trade hostilities” scenario was believed to be the more likely outcome in the case of failure of the Uruguay Round.

The Fitzpatrick Report sought to estimate the long-term net annual impact of the GATT agreement on Irish output and employment, i.e. its effect when the full impact of the agreement had worked its way through the international and Irish economies. The sectoral analyses were based on a model that allowed for four main mechanisms through which individual sectors would be affected by the Uruguay Round agreement. There would be: (i) an “import penetration” effect, arising from increased import competition on the domestic market as trade barriers were reduced; (ii) an “export market access” effect through improved access for Irish exporters to foreign markets; (iii) an “export competition” effect, reflecting intensified competition on traditional markets for Irish exports; and (iv) a “world trade growth” effect, arising from increased world trade buoyancy.

Because of data limitations a more aggregate approach—based mainly on the “world trade growth” mechanisms—was used to estimate the impact of the Uruguay Round agreement for agriculture. For agriculture, it was necessary to first factor in the effects of common agricultural policy (CAP) reform before assessing the impact of the GATT agreement covering agricultural trade.

Concerning the global impact of the Uruguay Round agreement, the Fitzpatrick Report assumed that world trade would over a six year period from the implementation of the agreement expand by an additional 6 percent compared with the “no change” scenario, and by 12 percent compared with the “trade hostilities” scenario.

3. Manufacturing

The Fitzpatrick Report broke manufacturing up into 17 individual sectors and estimated the impact of the GATT agreement—or of a failure of the Uruguay Round—on each of them. Overall, manufacturing output was estimated to be 3 percent (2.2 percent of GNP) higher under the full implementation of an agreement’ than in the “no change” scenario and employment 2.3 percent higher (4,500 jobs). The “world trade growth” effect significantly outweighed the losses associated with the “import penetration” and “export market competition” effects, whereas the “export market access” effect was estimated to be very small because Ireland already had unrestricted access to its most important markets in the EU and European Free Trade Association (EFTA). The sectors that were judged to benefit the most were those with the sharpest export orientation, namely mechanical engineering, electrical engineering, office and data processing equipment, and chemicals. The only sectors adversely affected by the agreement were clothing and footwear, the former because the removal of the high level of protection provided by the multi-fiber agreement (MFA) outweighed any positive trade expansion effects.

Relative to the “trade hostilities” scenario, the estimated impact of a GATT agreement on output and employment was at 8 percent (6.2 percent of GNP) and 6.6 percent (13,000 jobs), respectively. The hardest hit sectors under the “trade hostilities” scenario would be those most heavily committed to exports but even clothing and footwear would register a relative decline, because of the trade depressing effects of failure to conclude an agreement.

4. Services

Data limitations precluded the use of the same methodology to assess the impact of the GATT agreement on the service sector as used for manufacturing. The Fitzpatrick Report assumed that internationally traded services would be affected by changes in world trade. Service exports such as freight and transportation, tourism, financial and technical services, and software would all benefit from the increased buoyancy in world economic activity that the GATT agreement would promote. Based on the assumption that world trade would be enhanced by 6 percent by the GATT agreement, it was estimated that the output of the Irish service sector would be raised by the equivalent of 1/2 percent of GNP relative to the “no change” scenario and employment in the service sector would be boosted by the equivalent 0.6 percent of total employment (6,300 jobs). Compared with the “trade hostilities” scenario, the impact of the GATT agreement would be twice that in the “no change” scenario.

5. Agriculture

Although the agricultural chapter of the GATT agreement had not been closed when the Fitzpatrick Report was prepared, the final outcome for agriculture was not significantly different from what was assumed. The original estimates of the impact on agriculture should, therefore, still hold.

As Irish agriculture is already adjusting to the EU’s reform of the CAP, the task of the Fitzpatrick Report was to identify the additional impact the GATT agreement would have on Irish agriculture. At the outset, this additional impact was not expected to be very large as the EU sought to negotiate a GATT agricultural agreement that was consistent with the already agreed CAP reform. Irish agricultural output was estimated to decline by around 7 percent (almost 1 percent of GNP) from its 1992 level as a result of the GATT agreement—with the beef and dairy sectors bearing the brunt of the decline—compared with a 12 percent decline under the CAP reform. The agreement was also estimated to reduce agricultural employment by about 7 percent of its 1991 level (10,500 jobs).

Under the “trade hostilities” scenario, Irish agricultural output and employment were also estimated to decline based on lower world market prices for agricultural products and the expected inability of the EU to compensate for those lower prices because of budgetary constraints. However, the declines in output and employment would be somewhat smaller than under the GATT agreement.

6. Macroeconomic impact

Tables 8 and 9 below summarize what has been reported above concerning the impact of the GATT agreement on the Irish economy. Compared with the “trade hostilities” scenario, it was estimated that total output would be 7 percent of GNP higher under the GATT agreement, and employment about 2 percent higher (22,900 jobs). Manufacturing and services would benefit substantially while the relative loss for agriculture would be quite small. Compared with the “no change” scenario, total output was estimated to be about 2 percent of GNP higher under the GATT agreement whereas unemployment would be unchanged with employment gains in manufacturing and services being offset by job losses in agriculture.

Table 8.

Ireland: Annual Output Effects of GATT Agreement 1/

(Percent of 1990 GNP)

article image
Source: Fitzpatrick Associates, Report to the Department of Tourism and Trade, Impact of a GATT Agreement on Ireland, August 1993; and staff estimates.

The estimates refer to the ultimate impact of the agreement when it has been fully implemented.

The “trade hostilities” scenario is based on the assumption that a failure of the Uruguay Round would lead to an intensification of trade disputes and protectionism.

The “no change” scenario is based on the assumption that a failure of the Uruguay Round would not lead to any trade disruptions.

For agriculture, these are estimates of the extra impact of the GATT agreement on top of the effects of CAP reform.

Table 9.

Ireland: Direct Employment Effects of GATT Agreement 1/

(Percent of 1990 employment)

article image
Source: Fitzpatrick Associates, Report to the Department of Tourism and Trade, Impact of a GATT Agreement on Ireland, August 1993; and staff estimates.

The estimates refer to the ultimate impact of the agreement when it has been fully implemented.

The “trade hostilities” scenario is based on the assumption that a failure of the Uruguay Round would lead to an intensification of trade disputes and protectionism.

The “no change” scenario is based on the assumption that a failure of the Uruguay Round would not lead to any trade disruptions.

For agriculture, these are estimates of the extra impact of the GATT agreement on top of the effects of CAP reform.

In addition to these effects of the GATT agreement on output and employment, the Fitzpatrick Report estimated that consumers would benefit through somewhat lower prices because of tariff reductions. This effect was roughly put at between 1/2–1 percent of GNP.

Table A1.

Ireland: National Accounts

article image
Sources: Central Statistics Office, National Income and Expenditure; data provided by the Irish authorities; and staff projections.

Contribution to GDP growth.

Contribution to GNP growth.

Table A2.

Ireland: Distribution of National Income

article image
Sources: Central Statistics Office, National Income and Expenditure; and data provided by the Irish authorities.

Including employers’ social insurance contributions.

Deflated by personal consumption deflator.

Table A3.

Ireland: Gross Capital Formation

article image
Sources: Central Statistics Office, National Income and Expenditure; and data provided by the Irish authorities.

Preliminary.

Table A4.

Ireland: Sectoral Origin of Gross National Product

article image
Source: Central Statistics Office, National Income and Expenditure.
Table A5.

Ireland: Industrial Production 1/

(Annual volume changes in percent)

article image
Source: Central Statistics Office; Industrial Production Index.

Major industrial categories; subsectors are not reported.

Includes manufacturing, mining, quarrying, and turf production.

Includes transportable goods, electricity, gas, and water.

Table A6.

Ireland: Summary of Balance of Payments

article image
Sources: Central Statistics Office, Statistical Release; and data provided by Irish authorities.

Including adjustments for balance of payments purposes.

Computed on a transactions basis, i.e., change in total reserves less valuation changes and allocations of SDRs. Minus (-) equals net increase in reserves.

Table A7.

Ireland: Merchandise Trade 1/

article image
Sources: Central Statistics Office Statistical Bulletin; and data provided by the Irish authorities.

Data on customs basis; not adjusted for balance of payments purposes.

Table A8.

Ireland: Exports by Sector of Origin 1/

article image
Sources: Central Statistics Office, Statistical Bulletin; IMF, World Economic Outlook; and data provided by the Irish authorities.

Data on a customs basis.

Total may not add to 100 percent due to rounding.

Including the value of EC intervention stocks sent for storage abroad, which is excluded from merchandise exports for balance of payments purposes.

From 1993, includes Intrastat Survey Estimates which are not classified by main use.

Table A9.

Ireland: Foreign Trade Shares

(At current prices)

article image
Source: IMF, Direction of Trade Statistics.
Table A10.

Ireland: Imports Classified by End Use

(Percentage distribution)

article image
Source: Central Statistics Office Statistical Bulletin.

From 1993, includes Intrastat Survey Estimates which are not classified by main use.

Table A11.

Ireland: Services and Transfers

(In millions of Irish pounds)

article image
Sources: Central Statistics Office, Statistical Bulletin; and Statistical Release on Balance of International Payments; Central Bank of Ireland, Quarterly Bulletin; and data provided by the Irish authorities.

Including passenger fare receipts from nonresidents.

Excluding passenger fare receipts from nonresidents.

Including associated interest flows.

Including semi-state and bank interest flows.

Table A12.

Ireland: Consumer, Wholesale, and Tradables Price Indices 1/

(Percentage change from one year earlier)

article image
Sources: Central Statistics Office Statistical Bulletin; and data provided by the Irish authorities.

Annual data are based on period averages.

Wholesale price indices are exclusive of VAT.

Table A13.

Ireland: Wage and Productivity Indicators in Manufacturing

(Percentage change from one year earlier)

article image
Source: Central Statistics Office, Industrial Employment, Earnings, and Hours Worked.

The Central Statistics Office defines productivity as output per person employed.

Defined as the change in hourly earnings divided by the change in output per person-hour.

Unit wage costs deflated by the manufacturing output price index.

Table A14.

Ireland: Population and Employment

article image
Source: Central Statistics Office, Census of Population and Labor Force Surveys.

Unemployment data are collected in two ways: Labor Force Surveys and the Live Register. The Libor force survey involves an annual sampling of about 4.5 percent of the population and the results are presented by reference to April of that year. The Live Register consists of claimants for Unemployment Benefit, applicants for Unemployment Assistance, and other persons registered as unemployed at the local offices of the Department of Social Welfare. The Live Register is subject to rule changes which affect its composition, the latest of which were in May 1992. Accordingly, there is a discontinuity in the series from that date.

Those unemployed for a period exceeding one year. In percent of total unemployed.

Annual numbers are the annual average of the live register in relation to the labor force estimated at mid-April.

Defined as persons aged 15 years and over either at work or unemployed (including first time job-seekers) expressed as a percentage of the total population aged 15 years and over.