Growth is needed to encourage stability, writes Marc Coleman, Economics Editor
Last week's announcement by the IRA of an end to paramilitary activity has started the political normalisation of the North. But few are addressing an equally important challenge; economic normalisation.
Politics always follows economics. Unionism was borne of a desire by Ulster Protestants to remain within a large and laissez-faire empire, where trade flourished and Ulster was a prosperous industrial workshop.
The decline in the North's economic fortunes has been just as influential on political life there. That decline interacted with a sequence of social and political factors and events during the late 1960s to produce the subsequent Troubles.
When the paramilitaries started work, their deepest reservoirs of support were among youngsters with no economic future. More prosperous voters tended to vote Alliance, SDLP or Official Unionist, while Sinn Féin and DUP attracted those who had little to lose economically.
Remarkably, the economic dimension to the peace process is almost non-existent. The EU Fund for Peace and Reconciliation was established in the wake of the 1994 ceasefires, and targeted underprivileged groups in the North to break the link between paramilitary recruitment and economic disadvantage.
Growth in Northern Ireland's public sector was critical in providing what employment opportunities do exist.
Herein lies the challenge. The North's public sector accounts for over 60 per cent of its economy. The comparative figure for the South is 35 per cent and, while the Republic has benefited from EU transfers, they are a dwindling feature of our economy.
Northern Ireland will continue to rely on annual subvention from the UK treasury, of the order of €9 billion.
That subvention explains one of the few similarities between the two economies. Both North and South boast unemployment rates of around 4½ per cent. But 32 per cent of employees in Northern Ireland work in public sector jobs. This compares with around 21 per cent in the Republic.
And state subventions maintain low unemployment in Northern Ireland at its low levels. Although unemployment has fallen by 70,000 since 1994, the number of so-called "incapacity claimants" has risen over the same period by around 50,000 persons.
In spite of strong state inflows, Northern Ireland remains one of the UK's poorest regions. And, while growth in the Republic is becoming more influenced by personal debt, it remains more balanced than in the North.
The North is not alone in that it has a more modest rate of economic growth than the Republic and its growth rate is somewhat higher than in the UK mainland.
Its manufacturing sector is also outperforming that in the UK in terms of output and employment trends.
Like IDA Ireland in the Republic, Northern Ireland has its own agency with responsibility for attracting inward investment. Although not unsuccessful, many major international players are discouraged from locating in Northern Ireland.
Aside from residual concerns about the Troubles, a significant negative factor is the risk of currency fluctuation. From the point of view of multinationals, Northern Ireland is outside the euro zone.
According to a recent study by PricewaterhouseCoopers, a significant portion of the foreign direct investment to the region has been in the form of service sector jobs that may not stand the tests of globalisation.
The Republic's economic success to date provides a contrast with Northern Ireland in several respects.
The southern economy is far from perfect, but it is more self-sustaining, less reliant on state involvement and more tuned into dynamic, growing and high-technology sectors of the world economy.
But the North retains several advantages as an economic base.
For a start, the average house price in the North - around €165,000 - is almost €100,000 lower than in the Republic. The unionist boast about petrol being cheaper in the North may no longer ring true (due to steep increases in UK motor fuel taxation), but the overall cost of living remains far lower north of the Border.
This translates into lower labour costs in a region whose students consistently outperform those in other areas of the UK.
Business representatives in Northern Ireland refer to its cost advantage with a tinge of irony, however. Look, they say, at the Republic's low rate of corporation tax. And look also at the flexibility that the Republic has in negotiating directly with EU and US governments, not to mention with those heavy-hitting multinational companies that bring jobs and investment.
We come back to the link between economics and politics. Just as economics have strongly contributed to the North's political situation, so its political situation affects economic policy. Northern Ireland's policy environment, including its tax rates and regulatory regime, are set in Westminster.
Several commentators - including several unionists - cite direct rule as an impediment to the unique policies that are needed to face the challenges of a weak private sector and a low income, state dependant economy.
Devolution, when it comes, will provide an opportunity for redress, but only a limited one. That the North cannot match the Republic's lower corporate tax regime while remaining within the union has been made very clear by the UK government. As well as being unconstitutional, such an approach would most likely prompt a "me-too" reaction from Scottish and Welsh nationalists.
And with rights will come responsibilities. Gordon Brown has initiated a review of public spending - the so-called Gershon review - that will put strong downward pressure on state expenditure in Northern Ireland.
A more intriguing - and controversial - question facing Northern Ireland is the extent of its co-operation with the South. Collaboration is already under way in the fields of investment in transport infrastructure and electricity. Could it go further?
The SDLP has supported the idea of bringing Northern Ireland into the euro zone. Although not requiring re-unification, this idea would meet with suspicion in many unionist circles. But if combined with a continued political link to Britain, it holds out the prospect of fusing together a single island economy of six million people.
It would also help the North's relative cost advantage vis-à-vis the South to be exploited by multinational investors.
Nationalism was founded on the idea of independence from Britain, unionism on a wish to defend free trade and industry from state intervention. As both traditions negotiate the future political reality of the North, they might ponder that Northern Ireland's economic reality remains very far from the virtues of either tradition.
