Diversifying external linkages: the exercise of Irish economic sovereignty in long-term perspective

Political independence is usually associated with an attempt to reduce economic dependency on the former dominant or colonial power. For most of the early period since Irish independence the attempt to reduce exposure to the UK was implemented through tariff protection and restrictions on foreign ownership. Inward orientation eventually ran out of steam, culminating in sustained emigration and deep recession in the 1950s. The genesis in the mid-1950s of Ireland’s low corporation tax regime facilitated later trade liberalization and diversified the economy away from the UK. These developments facilitated the full convergence on UK and broader Western European living standards that was eventually achieved in the 1990s. From 1979 the UK would diverge from most of the rest of Western Europe on exchange-rate policy, and Ireland was forced to choose between the two. The resulting difficulties can be ascribed to design flaws in the European monetary project and Ireland’s failure to recognize the constraints that the new regime imposed.