SECRETARY SNOW,S DISCUSSIONS WITH THE ARCHITECTS

C O N F I D E N T I A L SECTION 01 OF 04 DUBLIN 001719

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E.O. 12958: DECL: 11/23/2014
TAGS: OVIP ECON PREL ETRD EINV PGOV EU
SUBJECT: SECRETARY SNOW,S DISCUSSIONS WITH THE ARCHITECTS
OF THE CELTIC TIGER ECONOMY


Classified By: Ambassador James C. Kenny for reasons 1.4 (b) and (d)


1. (C) Summary: The November 14-15 visit of U.S. Treasury
Secretary John W. Snow was an opportunity for discussion on

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the "secrets" of Ireland,s success with policy-makers and
businessmen who were the architects of Ireland,s Celtic
Tiger economy. These key figures noted that while the
concepts behind Ireland,s reforms had been simple, the
political will to carry out the reforms had only come in the
context of an economic meltdown in the mid-1980s. They said
that good-faith relations with labor, investment in
education, and a "dictatorial" leadership that exposed
industries to the full discipline of the market had been key
to success. Ireland,s skill in securing substantial EU
support funds and in exploiting U.S. policy on corporate tax
deferral was another important factor in Ireland,s economic
turnaround. Looking ahead, the policy-makers cited both the
need to ensure Ireland,s continued competitiveness as a
magnet for foreign direct investment and also the role of
education in shaping Ireland as an innovation-based,
higher-value economy. Secretary Snow,s classroom discussion
at Dublin City University (DCU) highlighted the role of
higher education in promoting innovation and
entrepreneurship. End summary.

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Introduction
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2. (U) The November 14-15 visit of U.S. Treasury Secretary
John W. Snow was an opportunity for substantive discussion on
the "secrets" of Ireland,s economic success. During a
dinner hosted by the Ambassador and a lunch arranged by the
Ulster Bank, Secretary Snow spoke with 16 policy-makers and
businessmen (listed in para 12) who were instrumental in the
emergence of the Celtic Tiger economy. A breakfast with the
American Chamber of Commerce and a classroom exchange at
Dublin City University (DCU) reinforced the points made by
these key figures. The following are the principal insights
that emerged from Secretary Snow,s visit (which are
organized thematically, not in the sequential order in which
they were discussed).

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In the Beginning: Political Will and Industrial Peace
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3. (C) Although the concepts behind Ireland,s reforms had
been simple, the political will to carry out the reforms had
only come in the context of the mid-1980s, economic
meltdown, said Padraig O,hUiginn, former Secretary General
in the Office of the Taoiseach (Prime Minister). O,hUiginn
recalled drafting a proposal for economic recovery during
that era, using ideas that were "apparent to any first-year
economics graduate student" ) cut the fiscal deficit, spur
competition, lower corporate taxes, etc. The ruling party at
the time, Fine Gael, did not act on the proposal, but the
Fianna Fail government elected in 1987 made the document the
basis for the Program of National Recovery (PNR),which set
forth the policies that underpinned Ireland,s economic
turnaround. Fianna Fail,s "great advantage" at the time,
said O,hUiginn, was Ireland,s economic crisis; with 18
percent unemployment and government debt at 130 percent of
GDP, the political opposition, industry, and labor could not
afford politically to impede solutions. The PNR,s linchpin
was labor,s decision to accept a moderate wage increases in
exchange for income tax relief, which became the basic
approach to successive national wage-setting (Social
Partnership) agreements. O,hUiginn recounted that the
Government offered Irish pounds 700 million in tax relief in
1987 and also cut the fiscal deficit, forcing the closure of
several hospitals and the retrenchment of 16,000 civil
servants. He noted that the moderate wage increase
incorporated in the PNR laid the foundation for Ireland,s
competitiveness as an export platform and as a draw for
foreign direct investment (FDI).


4. (C) The Government,s good-faith dealings with unions in
negotiating Social Partnership agreements were, and remained,
central to Ireland,s economic success, said Peter Cassells,
former General Secretary of the Irish Congress of Trade
Unions. According to Cassells, a shared understanding
between unions and the Government on the importance of decent
wages and housing for workers was the basis of labor,s
commitment to the Social Partnership approach. He added that
the transparency and inclusiveness of wage-setting
negotiations, in which even the most disgruntled union
representatives were given voice, were also instrumental to
success. The typical industrial relations model in which
union chiefs and politicians hammered out back-room
agreements, in the mode of Lyndon Johnson and Lane Kirkland,
would not have secured labor buy-in to economic reforms,
Cassells asserted. He further observed that the Social
Partnership approach might not be replicable in other EU
Member States, which typically were more populous than
Ireland and had more diffuse union structures.

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The Key: Human Capital
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5. (C) The chief source of Ireland,s success has been its
educated labor force, said EU Commissioner-designate and
former Irish Finance Minister Charlie McCreevy. He noted
that the introduction of free primary and secondary education
in the 1960-70s initially benefited other countries as much
as Ireland, due to the emigration of educated Irish workers.
As a young parliamentarian, moreover, McCreevy had warned
that the 1970s, baby boom was a looming disaster, on the
pretext that Ireland,s small, weak economy could not
accommodate a future surge in labor, even with emigration.
As it turned out, this large pool of young, educated workers
became Ireland,s principal resource and the main attraction
for foreign multinationals to establish subsidiaries in the
country. Far from a disaster, the period 1987-2003 saw the
addition of 600,000 jobs to the economy and drop in the
unemployment rate from 18 percent to 4 percent. This
success, concluded McCreevy, was primarily attributable to
Ireland,s investment in human capital.

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"Dictatorial" Leadership
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6. (C) The implementation of reforms that underpinned
Ireland,s economic recovery had required "dictatorial"
leadership, said McCreevy. This involved incenitivizing
industries to achieve efficiencies by exposing them to the
full discipline of the market, even at the risk of
bankruptcies. The challenge in this approach, explained
McCreevy, was to press ahead with reforms in the face of
elections, which provided temptations for politicians to
adopt softer, more populist economic platforms. Secretary
Snow observed that whereas the gains from economic reforms in
any country tended to be diffuse, the losses were often
concentrated in particular sectors or geographic areas,
making it easier for those affected to organize political
opposition. McCreevy commented that the test of any
government was how well it explained to dislocated workers
that the reforms responsible for their plight were good for
the country. Indecon Economic Consultants CEO Alan Gray
separately pointed out that Ireland had succeeded, through
education, in giving workers the skills to move across
industries, to the point now where those laid off did not
ask, "Do I have any hope of a job?" but rather "Which one of
my new employment choices should I take?"

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EU Help
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7. (C) EU tools, primarily structural support funds, were
another factor in the emergence of Ireland,s Celtic Tiger
economy, explained former Prime Minister (1992-95) Albert
Reynolds and Ray McSharry, former EU Commissioner and Irish
Finance Minister. Reynolds said that the Irish Government
did not shy from viewing such tools as entitlements, since
Ireland, as an island nation, faced additional challenges
trading within the European Community. He and McSharry
recalled that Ireland had negotiated well to maximize the
level of EU support. For example, Reynolds claimed that he
had obtained over euro one billion from Brussels as a result
of a discussion with Chancellor Kohl in which Reynolds agreed
to support Germany,s push for rapid EU enlargement. EU
Commissioner-designate McCreevy separately echoed Reynolds,
points, saying that French Finance Minister Sarkozy,s
proposal to reduce EU support for new Member States that
applied low corporate tax rates was shortsighted. McCreevy
said that any EU measures to increase growth in the new
Member States would redound to the benefit of the entire EU.

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U.S. Policy on Tax Deferral
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8. (C) The U.S. policy of tax deferral for foreign
subsidiaries of American firms, combined with Ireland,s 12.5
percent corporate tax rate, underpinned the large influx of
U.S. investment to Ireland during the Celtic Tiger period,
observed Padraic White, former CEO of Ireland,s Industrial
Development Authority (IDA). White recounted his numerous
trips to the U.S. House of Representatives, Ways and Means
Committee to defend tax deferral, and he argued that Senator
Kerry,s plan to reverse tax deferral would have "killed
Ireland," had he been elected. White believed that
complaints by the U.S. public about the job outsourcing that
accompanied U.S. investment flows were wrong-headed. U.S.
subsidiaries in Ireland, he argued, were the principle reason
that the United States had penetrated the personal computer,
software, and pharmaceutical markets in Europe. He further
observed that under-performing U.S. companies were typically
those that had not attempted to expand overseas. Secretary
Snow concurred that U.S. companies that were outsourcing
overseas were those creating the most jobs in the United
States. He highlighted, however, the political difficulty of
explaining outsourcing to the U.S. public, recalling slogans
during the recent election campaign that criticized "Benedict
Arnold CEOs."

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A Propitious Lack of Monetary Policy Tools
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9. (C) An ironic feature of Ireland,s success has been the
Government,s lack of monetary policy tools, remarked Cormack
McCarthy, Chief Executive of the Ulster Bank. One might
think that a country that had performed so well in terms of
exports and investment would have relied heavily on interest
rate and exchange rate levers, said McCarthy. As a euro-zone
member, in fact, Ireland had ceded control of its monetary
policy to the European Central Bank. The positive result,
said McCarthy, were low interest rates. He believed that if
Ireland had remained control of monetary policy, the
Government would have been tempted to raise interest rates to
slow rapid growth in the late 1990s. Instead, the low rates
set by the ECB had been a boon to Ireland,s private sector
and had lent a sense of stability and consistency to the
Irish market for foreign investors.

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Looking Ahead: Competitiveness and Education
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10. (C) Looking ahead, the principal danger for Ireland is
complacency, said Eoin O,Driscoll, Chairman of Forfas (the
Government think-tank) and the Government-commissioned
Enterprise Strategy Group (ESG). Echoing the ESG,s recently
published findings, O,Driscoll cited the need to ensure
Ireland,s continued competitiveness as a magnet for foreign
direct investment (FDI),which, he said, had driven the
country,s economic transformation. (U.S. and Irish
businesspersons who attended the November 15 American Chamber
of Commerce breakfast with Secretary Snow made similar
points, noting that multinationals were increasingly
attracted by low-cost manufacturing opportunities in China
and India.) O,Driscoll said that, just as industry and
Government had collaborated in the 1990s to make Ireland a
base for leading bio-pharmaceutical and IT companies, the
country needed a new shared vision to go another rung higher
in the production of innovative, high-value goods and
services. He note that this challenge would involve marrying
innovation to better business practices, particularly in
sales and marketing, and he praised the U.S. model of
perfecting product designs in the market, as opposed to the
European preference of the laboratory. While Secretary Snow
cautioned against government attempts to pick winners in the
market, he ventured that the key to economic prosperity
rested with countries like the United States that fostered a
culture of innovation and entrepreneurship.


11. (U) Secretary Snow,s classroom discussion with
students, professors, and administrators at Dublin City
University (DCU) was a venue for further discussion on the
role of innovation, entrepreneurship, and academia in
strengthening the Irish economy. The event took place at
DCU,s "Invent Center," which serves as a business incubator
for student entrepreneurs and community start-up companies.
Secretary Snow highlighted the centrality of education and

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intellectual capital to the modern, knowledge-based economy,
and he explained that to embrace a market economy was to
embrace ever-changing needs for new ideas and skills. He
also noted the difficulties that economists had encountered
in finding ways to capture creativity, "that spark," in
modeling economic activity. DCU president Ferdinand von
Prondzynski commented that the university had encountered a
similar challenge, but espoused the belief that
entrepreneurship could be taught, in the same way as poetry,
painting, and other modes of creativity. Prondzynski also
stressed that innovation meant little without business
skills, and he cited DCU requirements for students to
establish relationships Irish entrepreneurs who had both
succeeded and failed in bringing new ideas to the market.

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Participants in the "Architect"
Discussions with Secretary Snow
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12. (U) Participants in the Ambassador,s November 14 dinner
for Secretary Snow were: Charlie McCreevy, EU
Commissioner-designate and former Irish Finance Minister;
Dermot Desmond, financier; Eoin O,Driscoll, Chairman of
Forfas and the Enterprise Strategy Group; Padraig White,
former CEO of the Industrial Development Authority; and
Padraig O,huiginn, Former Secretary General in the Office of
the Taoiseach. Attendees at the November 15 Ulster Bank
lunch were: Ray McSharry, former EU Commisioner and Minister
of Finance; Lochlann Quinn, co-founder of Glen Dimplex; Peter
Cassells, former Secretary General of the Irish Congress of
Trade Unions; Albert Reynolds, former Prime Minister
(Taoiseach); Allan Gray, Chairman of Indecon Economic
Consulting; Willie Walsh, CEO of Aer Lingus; Bill Harris,
National Science Foundation Director; and Cormack McCarthy,
David Pierce, and Michael Torpey of the Ulster Bank.


13. (U) This cable has been cleared by Treasury DAS Nancy Lee
KENNY