Economics: The price of peace in Northern Ireland

IN NORTHERN IRELAND, as in South Africa, the prospect of peace poses an economic challenge. The best way to secure public support for traumatic political change is to demonstrate that it can improve living standards. But will the province's long- underperforming economy be in good enough shape to deliver?

The long-term outlook is more favourable than it might seem, given the province's past performance. But peace will demand an uncomfortable period of transformation. The Confederation of British Industry in Northern Ireland fears for the 20,000 people whose jobs are security-related and the pounds 300m they contribute to the local economy. The Ministry of Defence spent nearly pounds 500m last year on troops, while the Northern Ireland Office devoted double that to security. The loss of this spending will not go unnoticed, even though the 'peace dividend' will eventually more than compensate.

Security costs help to explain why Northern Ireland is so much more dependent on public spending than any other part of the British Isles. The province absorbed pounds 7.3bn of taxpayers' money in 1992-3. At pounds 4,594 per person, this was a third higher than the pounds 3,411 spent on average in the UK.

About two-thirds of spending on goods and services in Northern Ireland is financed by the public sector, compared to well under half in the rest of Britain. This has helped to foster a culture of dependency among firms and employees. Innovation has been stifled, leaving the province with the lowest output per head, the highest unemployment and more people cut off from the labour market than any other British region.

The Troubles aside, Northern Ireland's economic plight has long been blamed on its location. It is stuck on the north-western fringe of an increasingly integrated and competitive European market whose centre of gravity is drifting eastwards. Almost a quarter of the support for Northern Ireland from the EU Structural Funds for depressed regions over the past five years has been devoted expressly to offsetting this disadvantage, particularly by providing support for transport infrastructure.

But the problem of being on Europe's periphery can be overstated. Northern Ireland is at least as accessible to most other markets in the European Union as much of eastern England, the Republic of Ireland, Scotland, Wales, Denmark, eastern Germany and large parts of southern Europe. A 'peripheral' location has done Singapore little harm while the 'core' locations of Saarland in Germany and Hainaut in Belgium are both relatively depressed.

Lowe Refrigeration, a Northern Irish company which rents fridges for exhibitions in Europe, is living proof that geography is not everything. It has to move bulky equipment long distances, but low wages and property prices outweigh high transport costs. Gerry Lowe, managing director, argues that 'peripherality is a very significant state of mind and an insignificant geographical fact'.

A study of 'peripherality' published last week by the Northern Ireland Economic Council came to a similar conclusion, (The Implications of Peripherality for Northern Ireland, I Begg & D Mayes, NIEC 1994.). But the study did identify a number of other serious problems: patchy professional services, a limited supply of sub-contractors, a lack of innovation, too few opportunities for highly skilled workers and a lack of intermediate-level skills.

A lasting peace will almost certainly result in both Northern Ireland and the Republic receiving more financial support from both the European Union and the United States. The European Commission is already discussing long- term aid and New York City is planning to increase the 10 per cent share of its dollars 51bn ( pounds 33bn) public employees' pension fund which it invests in the province.

Much of this extra money is likely to be devoted to infrastructure spending, but the NIEC study suggests it would be better spent ensuring that existing infrastructure is better used. It is important to remember that the lack of high- speed rail links in mainland Britain is the greatest impediment to Northern Irish companies wishing to serve European markets.

The study also argues that many companies in Northern Ireland are more inward-looking than they need to be. Business dynamism is crippled by the economy's reliance on agriculture, outdated industries and the baleful influence of the public sector. Research and development spending in the North is less than 40 per cent of the level in the rest of Britain, relative to the size of the economy.

Innovation by Northern Irish firms is dominated by attempts to make things more cheaply rather than the creation of entirely new products. A lack of rivalry for customers means products are often out of date and of low quality. This has knock-on effects down the chain of production - firms have problems finding reliable suppliers of high-quality components.

It remains to be seen whether and how quickly the IRA ceasefire will lead to greater integration between the economies north and south of the border. Complete integration is a non-starter, not least because the Republic - with an economy a twentieth the size of Britain's - could never match the pounds 4bn subsidy that Whitehall ploughs into the North each year. But the potential from stronger economic links is still great.

Unionists have long been worried by the idea of their economy being shackled to that of their poorer neighbour. But the Republic has been gaining ground on the North. It has outstripped the North's growth rate and narrowed the income gap between the two parts of the island to less than 7 per cent. The Republic has been running a trade surplus with the North for more than a decade.

The Republic has been much more successful than the North in attracting multinationals to set up plants there. But this has not always been done cost-effectively and the impact on living standards has been muted anyway as profits have been repatriated. The South also boasts a relatively thriving small and medium-sized business sector, with January's Budget providing them with pounds 2bn of long- term credit on favourable terms.

The benefits of greater integration should be clear, with a larger 'home' market creating a more stimulating environment for business creation and development. Peace and integration should also help to stem the migration of highly qualified people, which is squandering the best post- 16 education system in Britain.

The Unionists should look hard at the economic gains from co-operation with the South. If the prospect of peace is fumbled again, the taxpayers of mainland Britain may soon tire of pouring money into the bottomless pit.

Political co-operation with the South is the best way to boost the material well-being of citizens in the North if and when this happens. The economy will not regenerate spontaneously if subsidy is withdrawn. Hardline Unionists would no doubt argue that material well-being is not everything - but not even the most single-minded politician can ignore it for long.