The Irish economy has so far avoided the so-called ‘Dutch Disease’, where a focus on certain booming sectors like oil and gas can lead to a decline in other sectors, despite the dominant role played by multinationals, research from the International Monetary Fund (IMF) has found.
However, the IMF analysis found that multinationals have had limited linkages with domestic firms and the indigenous economy may be missing out on an important growth engine.
In a document titled ‘Boom Without Disease?’, the IMF said Ireland’s foreign direct investment (FDI) driven model has created a two-tiered economy, exposing the country to potential risks associated with the ‘Dutch disease’, referring to the decline in the Dutch manufacturing sector in the 1970s following the discovery of valuable gas fields in the North Sea.
The phrase is used for other economies that benefit initially from a resource boom which in Ireland’s case is the high levels of FDI.
“Multinational enterprises (MNEs) have played a dominant role in creating high-paying jobs and boosting corporate income tax revenues in Ireland,” the analysis states.
“However, analogous to discoveries of natural resources, a sudden FDI boom, if not prudently managed, could give rise to adverse effects associated with the so-called ‘Dutch disease’.
“In 2022, the stock of FDI totaled more than 300% of GDP, well above the euro area’s (EA) median of about 60%. This positions Ireland ahead of most of its EA peers,” the IMF said.
The analysis found that many countries had positive spillover effects from a booming natural resource including Norway, Australia, and the US while there were negative impacts for countries like Angola and Venezuela.
The IMF said many aspects of the Irish economy bore symptoms of the ‘Dutch Disease’ including the rapid growth of the services sector and the growth in weekly wages.
However, they said Ireland has exercised fiscal prudence since the financial crisis, which might have prevented excessive wage pressures in the public sector and more broadly domestic demand pressures.
They also said Ireland’s flexible and inclusive labour market might have absorbed some wage and price pressures and said in conclusion that Ireland has not shown clear symptoms of the ‘Dutch disease’ in its post-crisis period.
However, in the same analysis, the IMF said multinationals based in Ireland have had limited links with indigenous firms and that the country is missing out on the ‘Norwegian blessing’ effect of potential growth opportunities.
The IMF noted the close connections with smaller domestic firms that large corporations often make in other countries referencing the the automobile industries in Germany and Japan where deep supply-chain linkages were made and sustained between big automakers and small local suppliers.
“While not a conventional symptom of the ‘Dutch disease’, a simultaneous absence of large domestic firms and spillovers from large MNEs could potentially hinder the growth of Ireland’s indigenous economy.”
“Facilitating links between MNEs and domestic firms via supply-chain linkages, labor mobility, and innovation cooperation could help raise productivity of domestic firms and the overall resilience of the economy.”
