Share

Economics: institutions, borders, norms and sentiments do matter

Posted on February 03, 2017 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

There are only five ways to avoid a further hardening of the border on the island of Ireland:

  1. The United Kingdom does not leave the EU – after all.
  2. A united Ireland within the UK and outside the EU is agreed.
  3. A united Ireland outside the UK and within the EU is agreed.
  4. The EU breaks up and/or there is an Irexit in which case Ireland and the UK are free to negotiate whatever bilateral arrangements suit them.
  5. Some special status is agreed whereby Northern Ireland remains within the EU and the UK.

None of the above appears likely any time in the near future. Some options appear particularly unlikely – especially option 2. While it would not be absolutely politically impossible (what is impossible after all?) to create some form of customs union or even single market for Northern Ireland (a variation just short of option 5 above) such an arrangement would imply a considerable hardening of the border straight down the Irish sea in such manner as movement of goods, services and/or people would be subject to border controls between the island of Ireland and Great Britain.

In other words, it would entail shifting a potentially hard border from dry land to the sea.  Such a development is hard to envisage in practice and might very well be seen by many as an undesirable stepping stone towards Irish reunification outside the UK which, clearly, a majority of citizens in Northern Ireland do not want at this time.

(In the exceptional circumstances of the 1940s and early 1950s travel was free between Northern Ireland and the Republic while ID checks were in place at ports in Great Britain for persons arriving from Northern Ireland).

If Brexit does go ahead (which is a very reasonable assumption at this point unless there is an economic cataclysm followed by a popular civic revolt in the UK in the coming 24 months) then some non-trivial hardening of the border between the Republic of Ireland and Northern Ireland seems inevitable and unavoidable – unfortunately.

In a global context, who would have foreseen the extent to which Borders are back?  When the President of the USA promised to build a physical border fence from the Pacific to the Caribbean it is clear that is what he meant. In a little over a week he has initiated a number of other actions which will have far reaching implications for trade, migration and development let alone international political relations in this fragile planet of ours.  The Schengen Agreement (which does not cover Ireland or the UK) is limping along in mainland Europe.

Can we be sure that a hardening of borders can be avoided?

Here in the Islands of the North Atlantic two heads of Government have recently proclaimed that there will be no return to a hard border on the island of Ireland.  What they really meant to say was that each, in their own way on opposite sides of the Brexit negotiating table in Brussels later this year, will have a shared understanding and goal that a relatively open border between the Republic of Ireland and Northern Ireland (and presumably between the United Kingdom and the Republic of Ireland for the purposes of freedom or travel and work) will be a ‘hard’ negotiating point. After all the European Union will be negotiating on behalf of 27 Member States – all of them together as well as each of them one by one as Pierre Moscovici said during his recent visit to Dublin.  Ireland – or the Republic of Ireland – could veto a final trade deal or some interim negotiated settlement in 2019 (realistically it could take another decade – post-brexit – to nail everything down). But then Poland could as well …. and so could 25 other Member States each with their own particular concerns. While there is not a lack of sympathy for Ireland’s concerns in Brussels (or in Washington DC), business is business and there is much bigger fish to fry in the upcoming negotiations. And should the Republic of Ireland wish for/demand/insist on some particular issue the other 26 Member States including the European Commission could wish for/demand/insist on concessions from the Republic of Ireland (readers are free to guess what issue could arise here in terms of hard negotiating behind closed doors in Brussels, London or Dublin not to mention Belfast. Hint €13 billion).

One of the things that the United Kingdom and the Republic of Ireland surrendered on the 1st January 1973 was a not insignificant element of national sovereignty – albeit in the hope and promise of a share in influencing and, if necessary, blocking of fundamental changes at EU level in the future.  It was a bargain and it worked in terms of opening up markets to investors and trade as well as help boosting productivity, living standards and social investment. But, it would be misleading to think or claim that borders completely disappeared within the EU.  Irish citizens cannot travel to EU countries outside the UK without the inconvenience of queuing up to show a passport.  There may be a ‘single market’ in principle and in law but in practice try switching motor insurance from Belfast to Dublin or try opening a sterling bank account in Dublin if you are a business or charity or try buying an inhaler for asthma in Dublin at a multiple of the price in Belfast (or Paris) or try watching BBC TV online from the Republic of Ireland. The reality is that important and invisible borders persist in a thousand different ways. Moreover, borders in the hearts and minds of populations and their elected leaders persist and these matter hugely for political and economic arrangements.  Though a member of the EEC/EU for over 40 years it would be accurate to say that a very big proportion of the population of the UK never ‘felt’ part of the EU project – at least not fully.  The situation in Ireland – North and South – is very different.  There is a keen interest in, and support for, the EU project. However, two important caveats are in order:

The extent of pro-brexit sentiment in Northern Ireland as revealed in the referendum last June was extremely high reaching to 44% of those who came out to vote and probably well over 60% among the majority traditions in Northern Ireland. The situation, by contrast, in Scotland was dramatically different.

The extent of pro-EU sentiment in the Republic of Ireland is not so rock solid as is often assumed. For one thing business and political leaders take a pragmatic view when it comes to matters of national tax sovereignty (for example). What if Brexit proved to be an economic success in some sense of the term (unlikely but not impossible if we are honest to say so)?  What if the EU27 got very tough with the Republic of Ireland on matters of corporate tax (notwithstanding protestations that the EU Commission has no interest in overriding Irish national tax sovereignty)? What if a combination of New World protectionism and aggressive UK bargain basement social policies put severe pressure on the unique Irish model – characterised as it is by low corporate and personal taxes, poor social wage infrastructure, fantastical multinational revenue figures, generally poor native enterprise productivity performance, much social inequality before distribution and tolerable social equality after state cash grants instead of public services?

The future is radically unknowable.  Economists should be the first to admit this because we got it so badly wrong in the past – especially prior to 2008.

The economics of constitutional questions

One development in the last six months which has received relatively little attention has been the emergence of reference to a ‘united Ireland’ in the popular discourse and statements of a wide spectrum of politicians in the Republic. Coincidentally, research commissioned on the question of a united Ireland has raised issues about the economic impact of reunification (outside the UK). It is not the role or mandate of the NERI to promote or take sides on questions of constitutional change. However, we do need to be mindful of the economic consequences of any proposed change in the long-run as indeed applied in the case of the Scottish independence proposal and more recently Brexit. I make some brief comments below.

A US-based group called the “Knights of the Red Branch” commissioned a report by KLC consulting  entitled Modelling Irish Unification . The report, which was prepared before the Brexit referendum last year suggested that all-island GDP could be raised by over €30 billion over a number of years).  A number of significant technical working assumptions underlie the report iuncluding the following:

  • Introduction of the Euro in Northern Ireland and a depreciating Euro against Sterling which would help exporters in Ireland.
  • Assumed convergence of corporate tax rates in both parts of Ireland.
  • Savings on public spending in Northern Ireland due to slimming down of a relatively larger public sector there (presumably through voluntary redundancies)

The modelling work was based on a Computable General Equilibrium model. This is essentially the same theoretical approach and model as used by the Copenhagen Economics study extensively used by the EU Commission and the Irish Government to argue, in 2014, that the now moribund Transatlantic Trade and Investment Partnership (TTIP) would boost income, jobs, wages, trade, investment in Ireland. All models are limited by their theoretical assumptions and construction but we need to be cautious of models that involve embedded market clearance and crowding out assumptions.

Largely missing from the analysis was a consideration of the potentially economically disruptive effects of Northern Ireland’s departure from the UK into which it is well integrated. The report does acknowledge that unification would entail a fiscal transfer from the South to the North just as, technically, there is a transfer of tax money from Dublin to West of the Shannon (as is normal in any society with different levels of regional GDP per capita etc.).

Nowhere, in the document, is the absolute size of the transfer explicitly shown although different scenarios are posed with different implications for the fiscal transfer. The case of German reunification is mentioned and while significant differences prevail, not least the relative gap in productivity in Germany in 1990 which was much higher than it is today as between Northern Ireland and the Republic, it is clear that the South would have some ‘heavy lifting’ to do over a 15 year period as productivity levels in NI catch up with the South (ultimately almost everything comes down to productivity even it is notoriously difficult to measure).

The reality that many commentators are reluctant to fully admit is that both economies on the island of Ireland are overly dependent on external help (whether fiscal or mobile international capital). Just plugging in the Republic of Ireland low/tax and locally adapted neo-liberal market model (with large social cash transfers to compensate for greater market inequality) just will not do.

The causes of poor economic performance in Northern Ireland are complex and contested but partition, the collapse of manufacturing in 1960-1990 and the troubles (1968-1998) all had their part to play in the course of the last 100 years. Removing partition is no panacea especially if were to be accompanied by a ‘business-as-usual’ southern Irish model. That is quite apart from the prospects of any border poll happening in the foreseeable future yielding a result that some yearn for. 

Digital Revolutionaries