Prosperity in the debate about reunification

By Michael Burke

The question of economic prosperity is not as central as it might be in the debate on the de/merits of the Union with Britain or a United Ireland. This is a large topic but it is important to set out some facts to inform that debate and to push this issue up the agenda.
The key issue in all economics is, or should be, what determines the optimal growth in the living standards of the population? A key measure of that is the level and growth rates of per capita GDP.
Chart 1 shows the levels of per capita output in 1921 in what were later to become Northern Ireland (NI), the Republic of Ireland (RoI) and the UK.

    Chart 1.

Prosperity in the debate about reunification - Chart 1 photo chart1_zpsa5fb7ab5.jpg

The industrial area around Belfast had long been the most prosperous part of Ireland and enjoyed a particular boom during the course of the First World War. As a result, despite the post-World War I decline the UK Treasury estimates show that per capita GDP was fractionally higher in NI than the UK as a whole at that time. By contrast outside of Dublin the rest of Ireland was largely rural. On UK Treasury estimates at the time of Partition per capita GDP in what is now the RoI was 45% of the level of what is now Northern Ireland.
Chart 2 shows the most recent data, from the OECD (using their estimates of Purchasing Power Parities, which are comparable but not identical to the Maddison data cited above). This shows two opposite trends. In the 90 years following Partition per capita GDP in the RoI has caught up and then surpassed that of the UK (around the turn of the 21st century). Meanwhile per capita GDP in Northern Ireland has relatively declined, to just under 80% of the level in the UK. While incomes in the North have grown by five times in 60 years, in the South they have grown by twenty times.

    Chart 2.

Prosperity in the debate about reunification - Chart 2 photo chart2_zps8538f213.jpg

There can be no single explanation for these trends. But similar trends have been noted elsewhere. In particular, colonies always face two key problems in relation to the metropolitan centre relating to the relative lack of investment and ‘closed’ trade patterns (not integrated into the world economy through trade).
This can be illustrated by Chart 3 which shows three former colonies of Britain and their cumulative growth pre- and post-independence. The 3 colonies are China, India and Ireland. For each country the 100-year period of growth in per capita GDP between 1850 and 1950 is shown (Maddison).
For China there was no growth on this measure at all over the course of a century. Per capita GDP actually fell by a quarter under British/French/US and then Japanese rule. In India per capita GDP grew by one-sixth over that period while in Ireland it almost doubled.

    Chart 3.

Prosperity in the debate about reunification - Chart 3 photo chart3_zpsd4bd5eb0.jpg

However, taking the shorter 60-year period from 1950 to 2010 the growth rates of per capita GDP have been transformed (Maddison & OECD). In India per capita GDP has increased by over 330% in 60 years. In RoI it has increased by more than 10 times. In China it has risen by more than 16 times.
It might be argued that this was simply a tendency to ‘catch-up’ with the living standards of more advanced western economies. But that would not explain why Ireland was able to surpass the UK at the end of last century. Crucially, it cannot explain why that catch-up did not occur in any case while the 3 countries remained colonies.
The technical objection that Irish GDP is inflated by the tax accounting activities of multinational companies is valid and widely-known. But so too is Britain’s GDP inflated, though less discussed through its related network of ‘offshore’ financial centres. If unidistorted measures such as value added in industry are used the same conclusion is drawn; per capita output in the RoI surpassed the UK before the turn of this century and remains there despite the crisis.
This does not exhaust the questions relating to economic policy and Northern Ireland’s place in the Union or its potential place in a United Ireland. Neither should it be interpreted as an endorsement of the economic policy of successive Dublin governments. In the view of this author, the exceptional growth rate of the Irish economy for part of the post-1921 period was caused by the combination of globalisation meeting a wave of increased investment, mainly from the EU. But it does highlight the difficulties of all colonies in maintaining relative prosperity and their greater potential to prosper once the colonial status has ended.

How Reunification can fail

In general, the larger the size of the home market, the greater potential exists for raising the productivity of the economy. That potential can only be realized through both increasing participation in the division of labour (including the international division of labour) and high rates of investment.
If we look at a reunification in Europe that has failed to deliver on the potential the most important recent example is Germany. The growth rate of the German economy is lower now than prior to reunification, as shown in the chart below.
Prosperity in the debate about reunification - Chart 4 photo chart4_zpsebc78bfe.jpg

The home market for German firms certainly increased with the fall of the Berlin Wall and Germany increasingly participates in the international division of labour through growing international trade (in 1990 exports and imports combined accounted for 40% of GDP. Now they account for 97% of GDP). However the rate of investment has been falling from around 24% of GDP to less than 17.5% of GDP in 2012.
Without investment, the potential arising from increasing a home market cannot be realised.