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U.S. DEPARTMENT OF STATE IRELAND: 1994 COUNTRY REPORT ON ECONOMIC POLICY AND TRADE PRACTICES BUREAU OF ECONOMIC AND BUSINESS AFFAIRS IRELAND Key Economic Indicators (Millions of U.S. dollars unless otherwise noted) 1992 1993 1994 1/ Income, Production and Employment: Real GDP 2/ 45,339 42,482 43,296 Real GDP Growth Rate (pct.) 4.9 -0.7 1.5 GDP (at current prices) 2/ By Sector: Agriculture/Forestry/Fishing 4,286 3,752 N/A Industry 17,109 15,809 N/A Distribution/Transport/ Communication 7,572 7,280 N/A Public Administration/Defense 2,676 2,502 N/A Other Domestic 15,633 14,777 N/A Adjustment for Financial Services -1,936 -1,638 N/A GDP at Factor Cost 45,339 42,482 N/A Plus Taxes on Expenditure 8,128 7,158 N/A Less Subsidies -2,487 -2,497 N/A GDP at Market Prices 50,978 47,143 53,607 Exports of Goods and Services 31,744 29,828 33,877 Real Per Capita GDP 21,712 18,207 18,555 Labor Force (000's) 3/ 1,364 1,378 1,391 Unemployment Rate (standardized) 15.5 15.75 15.25 Money and Prices: (annual percentage growth) Money Supply (M3) (year-end) 9.0 22.3 8.4 (year-to-year pct. change) (Aug) Associated Banks' Prime Lending Rate (avg.) 19.00 7.19 5.81 (Sept) Commercial Interest Rates Over 1 Year-Up to 3 Years (avg) 15.25 10.25 8.90 (July) Savings Interest Rate 6.50- 0.75- 0.50- Investment Share Accounts 10.75 4.00 3.00 (July) Investment Rate: 1-Year to Maturity 13.13 5.74 6.16 (July) 10-Year to Maturity 10.12 6.26 8.44 (July) Consumer Price Index 108.2 109.8 117.1 (base 1985 as 100) (2nd qtr) Retail Sales Index 106.2 109.4 116.2 (base 1990 Aa 100) (2nd qtr) Wholesale Price Index 106.4 N/A N/A (base 1985 as 100) Exchange Rate ($/IP) 1.70 1.46 1.53 (3rd qtr) Balance of Payments and Trade: Total Exports (FOB) 4/ 27,853 28,378 32,240 Exports to U.S. 5/ 2,260 2,500 N/A Total Imports (CIF) 4/ 22,137 21,348 24,156 Imports from U.S. 5/ 2,860 2,700 N/A Aid from the E.U. (000s) 6/ 19,465 17,520 18,360 Aid from the U.S. (000s) 15,590 19,211 19,600 Gross Public Sector Foreign Debt 18,455 17,922 18,918 (external government debt) Debt Service Payments (paid) 4,004 3,489 N/A Gold and Foreign Exch. Reserves 5,535 6,246 6,850 (official external reserves) (June) Trade Balance 5,716 7,030 8,084 Trade Balance with U.S. 600 200 N/A N/A--Not available. 1/ Forecasts. 2/ GDP at factor cost. 3/ Annual averages. 4/ Merchandise trade. 5/ U.S. Department of Commerce figures. 6/ Aid from the European Union for the years 1995 through 1997 will be increased to USD 24 million per year following the ceasefires in Northern Ireland. Sources: Central Bank of Ireland (CBI); Central Statistics Office (CSO); Economic and Social Research Institute (ESRI); Irish Trade Board (ITB); Department of Enterprise and Employment (DEE). 1. General Policy Framework Ireland has a small open economy which is very dependent on trade. Exports of goods and services in 1993 were equivalent to 77 percent of GNP, while imports were equivalent to 61 percent of GNP. Government policies are generally formulated to facilitate trade and inward direct investment. Ireland has a market economy, which is based primarily on private ownership. Government ownership and control of companies generally occurs in those sectors which are considered by the government to be natural monopolies, those in which the state has stepped in to assist failing firms, or those of special importance to the economy. In the majority of cases, government owned firms are operated on a commercial basis, and may be in competition with privately owned firms in the same sector. In recent years the government has reduced its share holding in a number of companies which are considered viable. Government policy is heavily influenced by sustained high unemployment, 15 percent seasonally adjusted in September 1994. A young and growing work force will continue to put pressure on the labor market in Ireland through the end of the century and emigration will likely continue at a significant scale. Fiscal Policy: In 1993, Ireland's government debt was approximately IP 30 billion, of which about IP 12 billion was denominated in foreign currencies. The debt has generally been financed by the sale of government securities. The vast majority of the debt was accumulated in the 1970's and early 1980's, partly as a result of oil price shocks, but more generally as a result of expanding social welfare programs and government employment. The debt grew rapidly in the late 1970's and early 1980's due to increased interest rates and large government deficits. However, successive governments have made considerable progress during the past seven years in reducing budget deficits and containing the growth of total debt. Ireland ratified the Uruguay Round agreement and is a founding member of the World Trade Organization. In recent years, most collective bargaining in Ireland has taken place in the context of a national economic program. A new program, the Program for Competitiveness and Work (PCW) was agreed to by representatives of government, unions, employers and farmers in February 1994 and was a major element of the government's success in fostering economic growth. The PCW is Ireland's third centralized pay agreement and replaces the Program for Economic and Social Progress (PESP) which expired in December 1993. These programs are credited with providing a favorable economic climate for strong growth in Irish GNP since 1987. The PCW contains similar provisions to the previous programs for moderate wage increases and improvements in government finances. Government budget deficits fell dramatically while exports, investment and consumer spending showed strong growth. Unemployment has begun to decline, but, the expanding Irish economy is unlikely to make a significant impact on Ireland's high unemployment rate. The Irish labor-economic environment is remarkably open. With over a half-million Irish working outside Ireland, particularly in the U.K., the robust economy usually attracts home many emigres offsetting any temporary reduction in unemployment due to emigration. Projections for 1994 indicate that government borrowing will be about 2.7 percent of GNP. Irish tax policies have a major effect on personal consumption and demand for imported goods. Personal income tax rates are high in Ireland. Over the last few years, in conjunction with the massive reduction in public borrowing which was achieved, the government made substantial progress in reducing the standard and higher income tax rates by six points. Income tax rates did not change in the 1994 budget, however, and remain at 27 and 48 percent. Approximately 62 percent of Irish tax payers are in the 27 percent standard rate bracket. The controversial one percent income levy which was introduced in the 1993 budget was abolished in 1994. Irish value added tax (VAT) rates are among the highest in the European Union (EU) and were streamlined in the 1993 budget, and remain unchanged. The standard corporate income tax rate in Ireland is 40 percent. Manufacturing firms and many exporting firms pay only 10 percent on corporate income under special arrangements designed to boost industrial development. Monetary Policy: Ireland's monetary policies are aimed primarily at maintaining exchange rate stability within the European Monetary System (EMS), which Ireland joined in 1979. Interest rates are the predominate tool used by the Central Bank to affect monetary variables. 2. Exchange Rate Policies Until 1979, the Irish pound was pegged to the pound sterling. In March 1979, Ireland joined the Exchange Rate Mechanism (ERM) of the EMS and broke its link to the British currency. It has, however, endeavored to maintain a stable competitive exchange rate against sterling due to the large amount of trade between Ireland and the U.K. Following changes to the ERM in August, 1993, membership in the ERM now involves a commitment to maintain the Irish currency within a 15 percent band against other ERM currencies. The Irish pound has been adjusted downward three times since Ireland joined the EMS. Adjustments were 3.5 percent in 1983, 8.0 percent in 1986 and 10 percent in 1993. As part of the Common Agricultural Policy (CAP) of the EU, Ireland has maintained multiple exchange rates (known as green currency exchange rates) on agricultural goods subject to the CAP. Devaluation of these rates usually mirror those of the Irish currency. In accordance with Ireland's EU obligations the removal of all remaining existing exchange controls took place in December 1992, bringing to an end the Irish Exchange Controls Act of 1954-1990. New legislation was introduced in order to ensure, among other things, that the government can continue to impose financial sanctions (i.e. on Iraq and the former Yuguslavia) under its international obligations. Ireland is a signatory to Article VIII of the International Monetary Fund Agreement, regarding freedom of current payments (including payments for goods and services imported) between residents and non-residents. In addition, Ireland subscribes to the Code of Liberalization of Capital Movements and the Code of Liberalization of Current Invisible Operations of the OECD. 3. Structural Policies In October 1991, the Irish Government adopted a new Competition Act. The legislation marks a shift from the previous system of restrictive practices orders and administrative control, to a system which allows claims of anticompetitive behavior to be pursued in the courts. As a result, the government has revoked price controls on petroleum products and all other restrictive practice orders. Controls on below cost selling of grocery and food items do exist. Tax Policies: The Irish tax system for corporations favors manufacturing and exporting companies. Those companies pay income tax of only 10 percent, compared to the normal rate of 40 percent. This gap encourages the development of export and manufacturing industries, and discourages growth in other industries. The 10 percent corporate tax rate (manufacturing companies) has been extended by the government to the year 2010. Personal income tax rates are relatively high, encouraging tax avoidance at all income levels, which has led to the creation of a "black economy" estimated at between IP 1.5 and 3 billion, or between five and ten percent of GNP. In the 1994 budget, the standard rate tax band was extended from USD 23,486 to USD 25,092 for a married couple and from USD 11,743 to USD 12,546 for a single person. Together with improvements in personal allowances, this resulted in the threshold for the higher tax rate, in the case of most employees, being increased to USD 33,945 if married, and USD 17,803 if single. While these measures help some lower paid workers, the middle income class still bears a heavy tax burden. Many pay an additional 7.75 percent of their earnings for a variety of social security programs. Value-added tax (VAT) rates are among the highest in the European Union (EU) and were streamlined in the 1994 budget. The national standard rate of VAT remains at 21 percent. The lowest VAT rate of 12.5 percent is to be maintained for labor intensive services, including the construction sector. A zero or 2.5 percent rate, however, will apply to certain items. VAT rates and many excise taxes are the subject of harmonization in the EU. The completion of the Single Market has eased the movement of products between EU member states and has, since January 1, 1993, eliminated many customs controls in Ireland for items of EU origin. Regulatory Policies: Government investment incentives are weighted in favor of high technology, export oriented companies. Capital grants by the Irish Industrial Development Authority (IDA) reportedly have tended to favor capital intensive investments over labor intensive ones. 4. Debt Management Policies Ireland's total exchequer debt amounted to about IP 30 billion, or about 102 percent of estimated 1993 GNP, from 99.6 percent at end-1992. The increase is attributable to the adjustment of the Irish pound within the exchange rate mechanism (ERM). The downward trend in the debt/GNP ratio in evidence each year, from 125 percent in 1987, is expected to resume in 1994 and is now on line to achieve the 60 percent target set by the Maastricht Treaty. While the debt has continued to grow in nominal terms, it has fallen significantly as a percentage of GNP since 1987. The foreign portion of the debt is IP 12.2 billion. As of June 1994, 15.6 percent of foreign debt was dollar denominated, 25.6 percent was in deutsch marks, 16.9 percent in Swiss francs, 11.2 percent in Japanese yen, 10.3 percent was in Sterling, 8.7 percent in European currency units (ECU), and lesser amounts in Dutch guilders, French francs, and Austrian schillings. Debt service costs in 1993 were USD 3.5 billion, about 10.9 percent of estimated Irish exports of goods and services and about 8.4 percent of GNP. In 1991 the government created an independent agency to manage the debt, the National Treasury Management Agency (NTMA). 5. Significant Barriers to U.S. Exports Ireland maintains a limited number of barriers to U.S. services trade. Airlines serving Ireland may provide their own ground handling services, but are prohibited from providing ground handling services to other airlines. The Irish banking and insurance sectors are slowly becoming deregulated. Full deregulation in insurance will not occur until 1998. An immediate opportunity for U.S. companies exists in the Dublin International Financial Services Center (IFSC). This center offers interested U.S. companies the opportunity to establish an EU financial base. The IFSC is attracting international financial services such as asset financing, captive insurance, fund and investment management, and corporate treasury measurement. Qualified financial services companies have a maximum tax of 10 percent, guaranteed by the government through the year 2005. The deadline for granting IFSC licences is December 31, 1994. The special corporation tax rate of 10 percent applies in the IFSC until the end of 2005, but the EU deadline means only companies obtaining licences before December 31, 1994 will qualify for the special tax rate. The United States has the second largest representation at the IFSC with approximately 45 projects. Exchange controls on foreign travel by Irish citizens have been eliminated. Although they have been liberalized in recent years, Ireland still maintains some of the strictest animal and plant health import restrictions in the EU. These, together with EU import duties, effectively exclude many meat based foods, fresh vegetables and other agricultural products. The EU directive on broadcasting activities was adopted on October 3, 1989. The primary purpose of the directive is to promote the free flow of broadcasting services across national boundaries. Separately, the Council of Europe agreed to a convention on transfrontier broadcasting which is largely the same as the EU directive. The main components of the directive are (a) general provisions which require member states to ensure freedom of reception of broadcasts from other member states; (b) provisions for the promotion of distribution and production of television programs; (c) provisions for advertising, sponsorship, the protection of minors, and right of reply. Many of the provisions of the directive have been transposed into law under the Broadcasting Act, 1990. Two sets of statutory regulations were used to transpose the remaining provisions, as follows. (1) The EU Communities (Television Broadcasting) Regulations, 1991 Directive requires broadcasters to reserve a majority of broadcast time for productions of EU origin and to reserve at least 10 percent of transmission time or budget for independently produced European programs. (2) The Wireless Telegraphy (Television Program Retransmission and Relay) Regulations 1991 amends the regulations under which cable and multichannel microwave distribution systems (MMDS) licenses are issued. In short, MMDS operators will no longer require approval in advance of relaying a service. The Irish government is concerned about minority languages and cultures, but has not been a major player on this issue. 6. Export Subsidies Policies Export sales relief (ESR) was discontinued in April 1990 in line with Ireland's EU obligations. Companies manufacturing goods in Ireland benefit from a reduced rate of corporation tax of 10 percent on their profits. Stockholders of companies eligible for this program paid income tax of only 10 percent on dividends received from the company, rather than the normal tax rate (27-48 percent). This program will expire at the end of the year 2010. There are no tax or duty exemptions on imported inputs except for those companies located in the Shannon Duty Free processing zone and Ringaskiddy Port. Ringaskiddy is Ireland's major deep water port located in the Cork harbor complex. The Shannon Duty Free processing zone benefits from the reduced rate of corporation tax of 10 percent, while Ringaskiddy does not. No duties are levied at Shannon Free Zone on goods destined for non-EU countries. The Irish Trade Board (Bord Trachtala), provides a single, integrated range of marketing support services for companies selling in Ireland and developing export sales. As of January 1, 1992, the government provides export credit insurance for political risk and medium-term commercial risk in accordance with OECD guidelines. Export credit insurance for short-term commercial risk is available from the private insurance sector. As a participant in the Common Agricultural Policy (CAP) of the EU, the Irish Department of Agriculture Food & Forestry administers CAP export refund and exchange rate programs on behalf of the EU Commission. 7. Protection of U.S. Intellectual Property Ireland supports strong protection for intellectual property rights. The government encourages foreign investment, especially in high tech industries. Consequently, protection of intellectual property rights has been an important part of the government's business policy. Protection is generally on a par with other developed countries in Europe, and the government is responsive to problems which arise. Patents: Following the enactment in February, 1992 of the Patents Act, 1992, Ireland ratified the European Patent Convention and the Patent Cooperation Treaty. The Convention and the Treaty entered into force, as did the 1992 Patents Act, on August 1, 1992. The Act updates national law in a number of important respects and the substantive law is in line with that of other European countries that have harmonized their laws on the basis of the European Patent Convention. The new legislation will also facilitate speedier processing of patent applications; it provides for a patent term of 20 years and contains provision for the grant of short-term patents (half the duration of the normal patent) in the interest of small/medium innovators. Legislation extending the term of protection of products covered by medicinal patents came into force on January 2, 1993, S.I. 125 of 1993. The amendment of the Constitution approved by the referendum held in June 1992 has cleared the way for Ireland's ratification of the agreement relating to EU patents. Trademarks: Existing trademark legislation in Ireland does not specifically cover service industry trademarks, although some court cases have extended protection to trademarks in service industries. Copyrights: Copyright protection in Ireland is generally considered to be good. However, industry sources have indicated that penalties for infringement of copyrights on video tapes are not sufficiently severe to curb pirating. The entire copyright system is under review and new copyright legislation will be introduced in 1995. EU directives will be included in the new legislation. 8. Worker Rights a. The Right of Association Irish Workers have the right to associate freely and to strike. The right to join a union is guaranteed by law, as is the right to refrain from joining. The Industrial Relations Act of 1990 provides members and officials of unions immunities for industrial actions taken with regard to terms or conditions of employment. The Act contains some limitations on picketing. A code of practice, drawn up by the Labor Relations Commission, was introduced by the government in June, 1993. It lays down guidelines of duties and responsibilities of employee representatives and the protection and facilities to be granted to them by employers. About 48 percent of all private sector workers and 52 percent of all public sector workers are trade union members. Police and military personnel are prohibited from joining unions or striking, but they may form associations to represent them in matters of pay, working conditions, and general welfare.The right to strike is freely exercised in both the public and private sectors. The Irish Congress of Trade Unions (ICTU), which represents unions in both the Republic and Northern Ireland, has 68 member unions with 681,138 members. Mergers have steadily reduced the number of unions affiliated to the ICTU in recent years, but union membership numbers are up by 20,000 since 1987. Both the ICTU and the unaffiliated unions are independent of the government and of the political parties. The ICTU is affiliated with the European Trade Union Confederation. b. The Right to Organize and Bargain Collectively Labor unions have full freedom to organize and to engage in free collective bargaining. Legislation prohibits antiunion discrimination. In recent years, most terms and conditions of employment in Ireland are determined through collective bargaining in the context of a national economic program. Representatives of government, unions, employers and farmers agreed to a new program, the Program for Competitiveness and Work (PCW) in February 1994. It was a major element of the government's success in fostering economic growth. The PCW is Ireland's third centralized pay agreement in recent years and replaces the PESP which expired in 1993. These programs are credited with providing a favorable economic climate for the strong growth in Irish GNP since 1987. The declared aim of the new program, which provides for pay raises amounting to eight percent over three years to employees in the public and private sectors, is to help create a substantial number of new jobs. Pay increases in the private sector will be calculated on the basis of 2 percent of basic pay for the first 12 months of the Agreement; 2.5 percent for the second 12 months; 2.5 percent for the first six months of the third year; and 1 percent for the second six months of the third year. In the public sector, pay increases will be calculated on the basis of 2 percent of basic pay for 12 months starting five months after the expiry date of the PESP pay agreement; 2 percent for the next twelve months; 1.5 percent for the next four months; 1.5 percent for the next three months; and 1 percent for the remaining six months of the Agreement. The government expects the plan to help increase employment by 60,000 over the next three years. It also plans to create 100,000 jobs for the unemployed in community work schemes. Of critical importance to unions and employers are the moderate pay elements of the PCW and the promise of industrial peace. The PCW has been ratified by all the negotiating bodies. The Industrial Relations Act of 1990 established the Labor Relations Commission which provides advice and conciliation services in industrial disputes. The Commission may refer unresolved disputes to the Labor Court. The Labor Court, consisting of an employer representative, a trade union representative, and an independent chairman, may investigate trade union disputes, recommend the terms of settlement, engage in conciliation and arbitration, and set up joint committees to regulate conditions of employment and minimum rates of pay for workers in a given trade or industry. c. Prohibition of Forced or Compulsory Labor Forced or compulsory labor is prohibited by law and does not exist in Ireland. However, portions of the 1894 Merchant Shipping Act are considered by the International Labor Organization (ILO) to be inconsistent with the prohibition on forced or compulsory labor. d. Minimum Age of Employment of Children Under Irish legislation, the minimum age for employment of children is 15 years. Children over 14 years are permitted to carry out light, non-industrial work during school holidays with the written permission of the parents. Irish laws limit the working hours in any week for young persons aged between 15 and 16 years to eight hours per day up to a maximum of 40 hours in any week. The normal working hours are 37.5 hours a week. Young persons aged between 16 and 18 years may work a normal day of eight hours and a maximum of nine hours in any day. The normal work week is 40 hours, with a maximum of 45 hours. These provisions are effectively enforced by the Minister for Enterprise and Employment. The EU is adopting a new directive on the protection of young people at work. e. Acceptable Conditions of Work There is no general minimum wage legislation. However, some workers are covered by minimum wage laws applicable to specific industrial sectors, mainly those in which wages tend to be below the average. A government submission to an EC Commission white paper on "Growth, Competitiveness and Employment" suggested that a minimum wage policy could hinder job creation and recommended that the EC assess the potential effects on employment, of any such proposal to regulate the labor market. In 1993 the average weekly wage was USD 371 (in 1993 IRP 1 was equivalent to USD 1.46) for production and transport workers. Working hours in the industrial sector are limited to 9 hours per day and 48 hours per week. Overtime is limited to 2 hours per day, 12 hours per week, and 240 hours in a year. As part of the new national economic pact adopted in 1993, the standard work week is being gradually reduced to 39 hours. The Department of Enterprise and Employment enforces four basic laws dealing with occupational safety that provide adequate and comprehensive coverage. f. Rights in Sectors with U.S. Investment Worker rights described above are applicable in all sectors of the economy, including those with significant U.S. investment. Extent of U.S. Investment in Selected Industries.--U.S. Direct Investment Position Abroad on an Historical Cost Basis--1993 (Millions of U.S. dollars) Category Amount Petroleum (1) Total Manufacturing 5,122 Food & Kindred Products 363 Chemicals and Allied Products 2,340 Metals, Primary & Fabricated 198 Machinery, except Electrical -14 Electric & Electronic Equipment 762 Transportation Equipment 52 Other Manufacturing 1,420 Wholesale Trade 159 Banking (1) Finance/Insurance/Real Estate 3,389 Services 684 Other Industries 52 TOTAL ALL INDUSTRIES 9,575