Sir George Quigley: Northern Ireland could be a Celtic Tiger too

There is far more at stake in Northern Ireland than the restoration of devolved institutions. Once formed, can they be firmly anchored by their ability to address the key issues? It is fine to say that local decisions are best taken by local people, but the politics of realism requires that there be a strong positive dimension to their agenda. That dimension cannot just be temporary fixes but has to be a successful assault on the critical problem, which is the unsustainability of an economy and a society dominated by the public sector. An incoming executive assuming responsibility without the weaponry to mount that assault would be courting failure.

Superficially, Northern Ireland's economic performance is impressive. Unemployment, at 4.9 per cent, is lower than for the UK as a whole, and well below the European Union's 8.4 per cent. Employment growth in the past 10 years, at around 20 per cent, has been double the UK rate. There are innovative companies able to compete with the best in the world.

It is, however, important to look beneath the surface and see what structural processes have been working within the economy. Given that the increase in employment has been so strong, one would have expected (other things being equal) that Northern Ireland's growth rate, expressed as the increase in gross value added (GVA) per capita, would also be well ahead and that its persistent "wealth" gap with the rest of the UK would be rapidly closing. In 1989, for example, GVA per head was 27 per cent lower than the UK average. But today it is still stuck at around 20 per cent lower, whereas Scotland, for example, is close to the average.

So clearly other things have not been equal. The principal culprit has been the negative trend in labour productivity. The Northern Ireland economy has been restructuring itself through an employment boom in too many low-productivity jobs, moving therefore in precisely the opposite direction to the creation of the high-value-added economy that is the declared aim of government policy.

The disproportionately large public sector makes it both a major player in the Northern Ireland economy and, in the absence of a strong private sector, a feature of the gap with the rest of the UK. It is responsible for as much as 71 per cent of economic output (there is a range of estimates) and for 35 per cent of all employment, but it contributes only 27 per cent of Northern Ireland's Gross Value Added. The economy is obviously vulnerable to any deceleration in the rate of UK public spending growth, and the Government has announced that this is set to drop, first to 3 per cent and then to 1.9 per cent per annum from the unprecedentedly high level of 4.9 per cent in recent years.

The message to be derived from this analysis is compelling. To achieve catch-up with the rest of the UK and, even more challenging, to match performance in the southern half of the island, it is necessary to re-balance the economy and find means of engineering a step-change in the productivity level as the main driver for accelerating growth.

Another feature of the region is the small size of its export base and therefore of those activities which bring income into the region. Sales outside Northern Ireland amount to £10.5bn, of which only 30 per cent is accounted for by sales outside the British Isles. The region is therefore far from being deeply enough integrated into the global economy.

Northern Ireland is not paying its way, although it is not alone in this respect. The fiscal deficit (funded by the Treasury) is around £6bn per annum. Reducing the trade deficit (estimated at £5.5bn) is the obvious way of reducing the scale of the Treasury subvention. But the case for addressing the adverse trade balance goes much wider. It is generally accepted that when a region wishes to increase its growth rates, the means lie in inducing a variation in the size of its export base. The relative dynamism of the export base is therefore critical for Northern Ireland.

Those of us who form part of the Northern Ireland business base cannot shirk our responsibility for growth, but the plain fact is that the existing small private sector base on its own, however much its performance may be enhanced, cannot transform Northern Ireland's economic prospects, any more than the Irish Republic's private sector base could have done.

The Industrial Task Force comprising representatives of business and academia, which I have been chairing, therefore concluded that Northern Ireland (like the Republic, which has done so with such brilliant success) needs to attract a much stronger flow of inward investment of the right kind to help reinforce and transform its economic base. As well as embarking on the long, slow task of growing your own timber, you have to buy in the capabilities - the innovation, the skills, the marketing outreach - of high value added, technologically driven, profitable companies world-wide.

There is a general consensus that the prime factor in the making of the Celtic Tiger has been its ability to become the premier European host to foreign direct investment, punching well above its weight. The OECD Economic Survey Report on the Republic in 1999 said that "the massive inflow of direct investment has been the major formative shock influencing the economy in the 1990s". Ninety per cent of the Republic's manufactured exports and 70 per cent of its service sector exports are now by foreign-owned companies.

The Republic's low rate of corporation tax (with 10 per cent for manufacturing industry, later replaced by the present 12.5 per cent rate for all trading companies) has been a critical factor in its success. It has been described as the cornerstone of industrial development policy.

A country offering itself as a low-tax host location is talking the language of its global interlocutors. That gives it a real head start in negotiations. The Republic shows what happens when you set out to globalise your economy. Northern Ireland must do likewise. Given its location on the island of Ireland, that means a rate of corporation tax not greater than the 12.5 per cent which applies in the Republic. Local political parties are fully seized of the need for a competitive tax rate.

The Secretary of State said recently that the present economic situation is not sustainable and that Northern Ireland should seek the benefits which would flow from the creation of a vibrant all-island economy. What happens will be limited by the extent to which one part of the island is fixed in the position of minor economic partner with an inherently weaker economic structure. But take the tax differential out of the investment equation and Northern Ireland would derive immense advantage from sharing the island with a state which is already so globalised.

This is not a zero sum game. An economic cluster growing from the soil of the whole island and deriving strength from the capacity available in both parts enhances the ability of both to participate to the full in the global trade and investment flows.

The benefits to the UK national interest of a stable, prosperous Northern Ireland are self-evident. In no other part of the UK are the consequences of political failure so serious. The prize is great: a more open, self-confident, cosmopolitan, vibrant North, with different perspectives and different goals, equipped to stand more on its own feet, able to offer new opportunities and new horizons to a new generation - with all this implies for political development and stability.

This is an edited version of a presentation made by the chairman of Bombardier Aerospace Northern Ireland at a recent meeting of the International Advisory Board of the INM Group