Economist: The extent to which the European Union benefitted Northern Ireland has been exaggerated

At the stroke of the midnight hour, when the world sleeps, India will awake to life and freedom’

Thursday, 27th February 2020, 5:02 pm
Westminster has primacy again, now that the UK has left the EU. "The policies and institutions used by a country are more important than EU membership"

So said Jawaharlal Nehru at the time of Indian independence in August 1947.

Most business and economic commentators take a rather more down beat view of the UK’s Brexit ‘independence day,’ which happened at 11pm on the last day of January.

Part of that pessimism is based on an assessment that the UK economy benefitted a great deal from nearly 50 years of membership.

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The evidence for Northern Ireland (NI) is rather mixed.

Yes, the NI economy has grown and changed a lot during 47 years of EU membership. Total employment increased by about 280,000: in 1973 the number of employees was about 495,000 but in 2019 it was about 780,000.

During the last half century personal incomes and consumption have jumped up. Back in 1973 only about one-in-three households owed a TV and about one-quarter a telephone. Today almost every household have at least one TV and more than three-quarters of individuals have a smartphone.

During the same period Northern Ireland’s population grew from about 1.5m to almost 1.9m. But, how far can all that be attributed to EU membership?

Just as important are all the other things which were impacting on the economy — growth of public spending, the Troubles and then the ceasefires, the state of the world economy.

Some of the changes during 1973-2020 were less obviously benign. The share of manufacturing in the total number of employees has shrunk from 33% to about 11%.

The public sector increased its share of employees: from about one-quarter to about one-third. Back in 1973 the crucially important tradeable economic activities (those which could conceivably sell outside of the region/UK, ie manufacturing plus business services) represented 35% of all employees but by 2017 that share had declined to only 15%.

The NI economy’s “net dependence” on the UK Exchequer, ie the extent to which public spending within the region exceeded the tax revenues collected here, increased during 1973-2019: the subvention or net fiscal transfer from HM Treasury increased from about 15% of NI’s GDP to about 20% currently (incidently, whilst NI was a “net beneficiary” in terms of EU funding coming in during 1973-2020 the amounts of peace, structural and farming monies were always dwarfed by the funding coming from the UK exchequer).

If the good things which happened to the economy are partly related to EU membership then some of the unfavourable things which happened may also have been related to that membership.

Or at least any membership benefits were not large enough to prevent those structural weaknesses becoming more pronounced.

During the last three years it has often been claimed that the UK in general and NI in particular will take a big economic hit to the extent that Brexit means being shut out of the EU large single market.

In fact membership of the single market had much less positive dynamic effects than has often been claimed, or, at least, other factors had a much more important role in determining NI’s performance.

Throughout the period of EU membership NI’s comparative productivity remained stubbornly low and that issue will remain the greatest economic challenge post-Brexit.

My evidence base for making such assertions is the summary measure of economic performance — the level of output (GDP) in NI per head of the population compared to other countries/regions.

How did performance measure on that score during the period of EU membership? It is a mixed picture but not a very flattering one.

The EU now has 27 members.

If one compares NI to 24 of these (that is, excluding the three micro states — Luxembourg, Malta and Cyprus) then it is notable that in 1973 ten of those members had levels of GDP per head which were higher than NI but by 2020 15 had moved above NI.

NI’s position in 2020 is worse than it was in 1973 when compared to the Republic of Ireland, Austria, Netherlands, Finland, Czech Republic, Spain, Slovenia, Lithuania, Slovakia, Portugal, Poland, Hungary, Romania and Croatia.

NI roughly held its position compared to Denmark, Germany, Belgium, Estonia, Greece and Bulgaria (in the first three cases that meant a large shortfall remained when NI was compared to the other EU country but at least that gap did not widen by much).

The only EU economies NI clearly converged towards during 1973-2020 were: Sweden, France, Italy, and Latvia although in terms of the first three of these four countries NI was still lagging far behind at the end of the 1973-2020 period.

One particular question is why some other EU members — notably the Republic of Ireland and some of the former Eastern bloc countries — appear to have performed much better. Part of the explanation lies with how those countries invested in human capital or the way their training systems operated.

The Republic of Ireland has invested very heavily in expanding the number of graduates in the work-force. The Czech Republic, Slovakia and Hungary even during the Communist period retained enough of a ‘German style’ apprenticeship system to stand them in good stead post 1989.

In fact, many of the former Eastern bloc economies have either over-taken NI or are rapidly catching up.

Here, again, the critical lesson is this: more important than EU membership are the policies and institutions used by a country.

This is one reason why I am relatively more optimistic about the impact of Brexit on the UK than some other economic commentators though for NI in particular a lot will depend on the precise details of the trade arrangements (and any frictions) which will come to place east-west (with GB) and north-south (with the Republic of Ireland).

Yes, after half a century we got very used to being EU members and some parts of our economy adapted to that.

That said, the NI economy was far from being a success story during that period. A number of other countries — the Czech Republic, Slovenia, Estonia, Lithuania and the Republic of Ireland- came from behind and caught up with and over took the NI economy.

This was less because of EU membership which, after all, was a characteristic they shared with NI. It was much more about choosing the correct policies and institutions.

Provided we now select the appropriate policies and institutions I would be confident we can prosper outside of the EU.

• Esmond Birnie is a senior economist at University of Ulster