The dynamic nature of recent political developments in Northern Ireland has caused much debate as to the economic benefits which would result from a permanent cessation of violence. This essay shall in this context be partly concerned with the peace dividends of cross border trade and will be divided into three broad sections. The first entails an analysis of some of the underlying trends relating to cross border trade. Inspection of the data reveals two important issues which must be addressed and these shall be my focus for section two. In my final section I shall look at the future opportunities and benefits which may result from a prolonged period of peace and stability in the province.
There has been a general upward trend in cross border trade over the last twenty years; however one can easily contrast the balance of payments surplus in the Republic with the large deficit in Northern Ireland. Pre 1960 the balance had been in favour of the North, but a small trade deficit emerged in the late 1960s and early 70s, just before the first oil price shock and the emergence of widespread civil unrest. Subsequently there was a spiralling deterioration which has persisted to the present day. It is estimated that the trade deficit now amounts to between £IR300 - 400 million, which is approximately between 1 and 2% of southern GNP. (Business and Finance, Dec. 1994). It is interesting to note that the North - South trade deficit can be directly compared with the global trade pattern. The Republic's current account surplus is officially estimated to be IR£2.4 billion or 8% of GNP, whereas the Northern Ireland overall deficit is roughly equivalent to the annual subvention to Northern Ireland - around £3 billion or over 20% of GNP.(NIERC,1994).
The current market orientation of Northern Ireland remains firmly rooted in the home market and Great Britain, with these two markets alone accounting for over two thirds of manufacturing output by destination. The remainder of the output is sold in export markets with the Republic accounting for around 10% of the subtotal. In the Republic the domestic market is likewise equally important for Irish industry, accounting for 38% of industrial output (B&F, Dec. 1994). Despite this comparison it is vital to note one important difference between the Republic of Ireland and Northern Ireland in respect to external sales. Industry in the Republic has a much lower reliance on the British market, corresponding to 14% compared with 38% for Northern Ireland (NIERC,1994).
The overall level of trade between the two economies in 1992 amounted to £1.25 billion, of which just over £1billion was in manufactured goods with the remainder in agricultural products. It is interesting to note that last year Northern Ireland ranked in the top ten export markets for the Republic; however this must be put in context as Japan ranks higher in terms of Irish exports than does Northern Ireland! The above analysis of Cross Border Trade highlights two fundamental questions which must be addressed. Firstly, why has Northern Ireland had such a large trade deficit with the Republic over the last two decades? Secondly, why is the overall level of trade so low between two adjoining small open economies?
In response to the first question it is impossible to ignore the effects of twenty five years of violence on the Northern economy. If one examines the size of employment in the manufacturing sectors in 1960 and 1990, one observes a dramatic decline in the North (from 184,000 in 1960 to 110,000 in 1990) which can be contrasted with a large stimulation inmanufacturing employment in the South (from 175,000 to 232,000 over the same period). (B&F, Dec. 1994). Why should this be so? Some would argue that the decline in the North was largely due to the decline in traditional industries; however there is no doubt that the Troubles acted as a catalyst in the closure of manufacturing plants in the North. For example the C.B.I. in a recent report 'Peace - A Challenging New Era' highlighted some of the key areas where the Troubles may have had a negative impact on industry e.g. increased security costs, image problems, employment problems such as sectarian harassment and finally a 'brain drain' with few talented individuals returning.
Even if one accepts the argument that the decline in manufacturing employment was in indigenous companies, one cannot possibly ignore the adverse effects the Troubles have had on foreign direct investment, with the period 1973 to 1990 witnessing a huge decline in the externally owned sector. Despite offering a wide range of incentives the Industrial Development Board (I.D.B.) has had arelatively poor record of inward investment compared to countries such as the Republic of Irelandand Scotland. For example between 1980 to 1993 just over 13,000 jobs were promoted by the I.D.B. in new inward investment projects, compared to an equivalent figure of almost 116,000 for the I.D.A. over the same period. (NIEC, 1994). In addition some economists such as Teague and Harrison have noted that the I.D.B. has had to accept more relatively risky projects because Northern Ireland is seen as an unattractive location for investment. Also some would argue that much externally owned manufacturing employment in Northern Ireland is in relatively low technology sectors such as clothing and textiles. This is in direct contrast to the South, so the quality as well as quantity of investment is called into question. Based on these figures I feel that it is impossible to ignore the negative impact which the violence has had on foreign direct investment and hence on the size of the manufacturing base in Northern Ireland. In this context, though one must also note that the relative success of the South compared to the North may in part be due to the greater policy flexibility enjoyed in the Republic compared to the UK with regard to foreign direct investment.
One last issue which must briefly be mentioned in relation to Northern Ireland is the rapid expansion of public sector employment over the last two decades. Employment in health, education and public administration accounted for 25% of total employment in 1971, though this share had risen to 36% last year. (DKM, 1994). Though a very rough calculation this means that public expenditure in Northern Ireland accounts for over 60p of every £1 earned. While public expenditure can have positive effects such as the stability of incomes and employment, it can crowd out private sector employment by raising wage levels and attracting talented individuals into unproductive employment. Also high levels of public expenditure can direct companies towards safe strategies in home markets rather than growth strategies in international markets.
Some of the listed reasons may go part way in explaining why Northern Ireland has such a large trade deficit with the Republic. Over the last two decades, the economies have diverged quite considerably, largely I feel as a result of the Troubles. The Republic's manufacturing base has expanded rapidly and the economy is today an export oriented small open economy. The North by contrast has seen a large decline in manufacturing, and what manufacturing output there is tends to be focused predominantly on the domestic market. Also the rapid expansion of the public sector means that the North is more an 'island of Keynesianism in a UK free market area' than a divergent export oriented economy. (Tomlinson, 1994).
This discussion goes only a small way in answering the question of why the overall level of trade between the two economies is so small. Numerous other factors also apply.Firstly, a limiting factor on the level of cross border trade may be the large degree of similarity between industry North and South. Approximately, one half of gross output in manufacturing in the North and South is concentrated in four sectors - namely food/drink/tobacco, timber/furniture, paper/printing and mineral products in which both countries produce similar products. If we momentarily return to the basic Heckschler Ohlin theorem we can note the result that the potential for trade is greater the larger the diversity between factor endowments (in comparing two countries). If there exists a large degree of similarity between North/South industry, then it may be possible to assume roughly equivalent capital/labour ratios and hence similar comparative costs. In this situation, we can use the Heckschler Ohlin theorem to predict that there may exist little basis for mutual North-South trade, which interestingly appears to hold whereas for example Linder's alternative hypothesis does not. In addition if one examines other sectors, which are largely externally owned, they tend to operate on global/international scales or produce goods such as aircraft/ships in the North or pharmaceuticals/computers in the South which have limited demand in the home markets.
Secondly, one must mention the effects of barriers to entry, both physical and mental, which may have inhibited cross border trade over recent years. A strong and efficient infrastructure is vital to promote strong trade flows. The Troubles have adversely affected the transport infrastructure in many ways. Selected road closures in towns and cities as a direct result of bomb threats and delays and damage to the Belfast-Dublin rail line has no doubt had a damaging effect on economic activity, increasing costs especially for the agricultural and business sectors in local communities. The politics of the Troubles may also come into question as a mental barrier to entry for cross border trade. For example, some authors have noted that cross-border trade during the Troubles appeared to thrive where the buyer/seller were dealing in speciality products, for instance one engineer talking to another. In such cases, politics does not enter as a factor in the buying decision.
Lastly, although the overall level of trade appears small in absolute terms, statistics show that the level is largely in line with other small European economies, such as Denmark and their nearest neighbour. If one looks at sales per head of population rather than absolute levels, one notes that in 1991 sales of Northern Ireland goods was £110 per head of population in the Republic, compared with £37 per head in Great Britain. (NIERC,1994). Nonetheless, the lions share of sales in both economies is retained in the home market at £1,222 per capita for Northern Ireland and £1,600 per capita for the Republic of Ireland.
Over recent months there has been much debate about the so-called 'peace dividend'. In this section I intend to investigate what may result from a prolonged period of stability in the Province.
From a manufacturing industry viewpoint a cessation of violence may lead to a reversal of some of the negative externalities imposed on the Northern economy by the Troubles. Increased inward investment, a strengthening of the manufacturing base, improved transport infrastructure, a reduction in the size of the public sector and a general 'feel good' factor may also lead to increased trade between the two economies. On a realistic level, one must recognise that the overall level of trade between the North and South is not out of line with other similarly sized neighbouring countries in Europe, so we should not in any way expect a Trade explosion. In this light some of the CBI/IBEC claims for example trebling current trade levels with a commitment to increase employment by 75,000 may be optimistic to say the least (NIERC,1994). If one took a more modest figure for example, the doubling of cross border trade in manufactured goods from £1 billion to £2 billion over a five year period, then allowing for some inevitable displacement (say 50% of Northern Ireland and Republic of Ireland sales) producers would still generate a net increase in output of £0.5 billion. It is obviously difficult to put a figure on the increase in employment resulting from this expansion of output, but perhaps a total increase in employment of 7,500 over the next five years would not be unreasonable. This simple calculation would suggest that there exists benefits in the form of increased incomes and jobs which could result from a stimulation of cross border trade in a peaceful environment, but on a more modest level than that espoused by CBI/IBEC.
Other factors which may boost this figure even further is firstly the expansion of operations through cross border acquisitions. Note already the example set by the food and financial sectors, for instance Dunnes Stores(which is now the largest company in Northern Ireland), Golden Vale and Kerry Group. As for the financial sector, the acquisition of Northern TSB by AIB consolidated AIB's position in Northern Ireland with First Trust. The Ulster Bank has also shown interest in expanding in the Republic with bids for TSB and NCB stockbrokers. Secondly, it is important to note the increasing role played by small firms in the Northern economy. Generous grant assistance offered by LEDU (the N.I. small business agency) has stimulated the emergence of the small firm as a major source of employment in the Northern economy. In 1991, employment in small firms accounted for 54% of total employment (absolute number 156,000) in the private sectors of the economy . (B&F, Dec. 1994). Stimulating the small firm sector on both sides of the border to a more export orientd outlook could satisfy niche markets on both sides of the border and thereby exploit possible mutual gains from trade.
The European Union Act of 1993 has provided a wealth of opportunities for firms North and South to work together and carve out niche markets in Europe. Within Europe itself, Northern Ireland and the Republic are small players; however by working together there are obvious beneficial economies of scale. A peaceful environment would make the transition to integrated projects much easier. The IBEC/CBI Northern Ireland Joint Development Programme highlights many areas where joint ventures between the Republic and northern Ireland would bring obvious benefits. Some of the main issues involved include:
(i) A co-ordination approach to the development of North-South transport links including road/rail/port and other related areas.
(ii) The creation of an integrated energy policy between the Republic and Northern Ireland. For example the interconnector between the electricity grids of the Republic and Northern Ireland was damaged by bombs on six occasions before it was closed down in 1975. It is estimated that the absence of the inter connector costs the ESB at least IR£10 million per year. Akin to this, the failure to pipe Southern natural gas to Northern Ireland has no economic rationale.
(iii) The development of an 'Economic Corridor' betweed the Belfast and Dublin regions. The Joint Council issued a report last year entitled A Corridor of Opportunity which concluded that not only was the corridor feasible but that it was essential to North-South economic linkages.
This new Business Development Programme is aimed primarily at the manufacturing sector, but agribusiness and services are also targeted. The main emphases on these sectors is to encourage more companies to plan their businesses on an island basis, more specifically to businesses within the island economy and also increase opportunities to integrate projects within the European market. Finally, whereas for the majority of this essay, I have focused on issues relating to the manufacturing sector in cross border trade, I do not intend to ignore the services sector. Globally, a new trend has emerged where services are becoming an increasingly important component of world trade. In 1987, global exports of services accounted for 20% of world trade which is equal to the exports of fuel/services.
Trade in services could be crudely divided into three broad areas:
(i) Transport of goods/people
(ii) Tourist expenditure at destination
(iii) Private services and income (e.g. telecommunications, financial services)
One has already briefly discussed (i) and (ii) above and shall now focus on Tourism. While tourism in both the North and the South has been adversely affected by the Troubles, Northern Ireland has undoubtedly suffered more. Between the period 1967 and 1972 real tourist revenue fell by 63% and visitor numbers fell by 60% over the same period. During years of escalating violence on the North one can also notice a negative correlation of visitors to the South.To give some idea of the potential size of the industry, one can look at the 1993 figures compiled from the Northern Ireland Tourist Board (NITB). Of the 1.26 million visitors 373,000 were from the Republic and they are estimated to have spent in the region of £30 million of the £17 3 million total revenue generated by staying visitors. This figure is approximately 1.5% of GDP and is just a third of the level enjoyed on the Republic. It is a fair conclusion to note that the Troubles have had a greater adverse effect on tourism in the North when compared with that experienced in the South.
A permanent cessation of violence would I believe have a dramatic influence on the tourism industry on both sides of the border. One would expect increased flows of visitors Northern Ireland and the Republic, and also increased interest from visitors in Europe and Americas. Of relevance here is the recent announcement of a joint venture marketing initiative between Bord Failte and the NITB which will market the whole island of Ireland as a tourist destination. It is expected that this will lead to an extra 92,000 visitors in 1995.
A statistical analysis of Cross Border Trade over the last two decades highlights two important trends. Firstly the increasing balance of payments deficit Northern Ireland has with the Republic of Ireland and secondly the low level of overall trade between the two neighbouring economies. In this essay I have firstly looked at the relevant statistics, secondly attempted to offer an explanation for these trends and lastly discussed the potential benefits to North-South trade which may arise through a permanent cessation of violence.
DKM Economc Consultants, (1994) 'The Economic Impact of the Northern Ireland Conflict'
Business and Fianance, December 1994 'Northern Ireland: Open for Business'
CBI NI, (1994) 'Peace - A Challenging New Era'
Northern Ireland Economic Research Centre, (October 1994) 'The New Economy'
Northern Ireland Economic Council, (October 1994) Autumn Economic Review.
Mike Tomlinson, (August 1994)'25 Years on The Costs ofWar and the Dividends of Peace'
Oxley, Ch. 4. 'The Challenge of Free Trade.'