In his history of modern Ireland, published in 1989, Joe Lee commented unfavourably on Ireland's economics profession in the 1950s and 1960s. Lee's criticisms echoed the views of TK Whitaker as secretary of the department of finance from 1956, about the then weakness of Irish economic expertise.
With few exceptions, there was little policy-relevant economic research undertaken in Irish universities at that time. It was one of the reasons that Whitaker helped establish the ESRI in 1960.
This absence of local economic capability was a factor in some of the policy failures over that period. One example was a 1955 policy blunder, identified in a paper by Patrick Honohan and Cormac Ó Gráda. When UK interest rates rose early in that year, the department of finance ensured that Irish banks did not follow suit. However, the department did not understand that, in an environment with no capital controls and a fixed exchange rate with sterling, the resulting interest rate differential would drive a major capital outflow, and precipitate a serious balance of payments crisis.
Because no one diagnosed the interest rate differential as a major cause, the wrong corrective action was taken. The government introduced a very tough budget in 1956, seriously deflating the economy, and causing a recession.
Prior to the late 1960s, officials placed extensive reliance on economic advice from UK economists and from international bodies, given the dearth of home-grown economic talent. However, from the late 1960s on, the return to Ireland of a significant number of economists who had trained abroad led to a pool of good researchers working on the Irish economy and contributing relevant evidence and advice for Irish policy.
Increasing contribution
As one would expect, the advice was not always uniform, but it made an increasing contribution to policy debate within administrations and, with the help of the media, within wider society.
As a group of young economists in the department of finance in the 1970s, we were very aware of the research being undertaken outside the department, and the resulting policy recommendations. While such advice is often not always taken, given the wider policy and political concerns of government, such independent research and advice is important in challenging policymakers and improving policy outcomes.
Access by policymakers to an extensive range of economic research has undoubtedly helped secure better outcomes
An example of a change in policy direction as a result of economic research relates to the diagnosis of the causes of the high inflation of the 1970s – it reached a peak of 22 per cent in 1975. In 1974, the government published a White Paper blaming the high rate of inflation on undue domestic cost pressures, especially wage inflation. A proposed response was an enhanced incomes policy.
However, papers by Colm McCarthy, Paddy Geary and John Bradley in 1976 showed that the fixed exchange rate with sterling meant that the State imported the UK rate of inflation. Therefore the only way to bring inflation under control was either for the Bank of England to change its monetary policy, or for the State to break the link with sterling and adopt an independent monetary policy.
Major shift
When the department of finance digested this research, it brought about a major shift from a focus on controlling wage levels to focusing on monetary policy as the answer. As a result, the department began to scope out the potential economic impact of revaluing against sterling, particularly after the UK sought assistance from the IMF that autumn.
One evening in September 1976, with no notice, I was asked to work late running revaluation options through the department’s economic model. However, I also had to look after my 18-month-old that evening, as my wife had exams the next morning. The solution was to bring our daughter into the department where she was very well entertained by my boss, while I operated the model.
Later that night there was a meeting to discuss the results while my daughter, who had not signed the Official Secrets Act, happily munched biscuits under the table.
In the end, the prospect of the new European Monetary System, which began in 1979, provided a suitable escape mechanism from the failures of monetary policy in the UK. This episode illustrates how the department of finance, when provided with good economic research, could persuade the government to make significant policy changes.
Ireland’s economy has come a long way in the last 40 years. Although economic policymaking has not been an unmitigated success over this time, access by policymakers to an extensive range of policy-relevant economic research has undoubtedly helped secure better outcomes.
