Identify potential barriers to island wide trade and mechanisms through which to reduce the impact of such barriers

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Economic Overview

The two economies on the Island of Ireland have experienced substantial economic downturns since the financial crisis in 2008. While the experience of property bubbles and subsequent bank failures were notable similarities, the scale of externally imposed austerity and outcomes in the labour market were notably different.

House prices in Northern Ireland increased substantially in the two years prior to the crash before reaching their peak in 2007. In contrast prices in the Republic of Ireland reached their peak following trend growth from the previous decade. Northern Ireland’s property prices still remain just under 50% below their peak value in 2007. Unemployment, which reached a peak of 13% in the Republic of Ireland, only rose to just above 8% in Northern Ireland in early 2013.

While banks and financial institutions in Northern Ireland faced heavy losses the cost of any bank bailouts was borne externally by either the UK or Republic of Ireland governments. While Northern Ireland did experience significant cuts in government expenditure since 2008, this has not been of the same magnitude as that experienced in the Republic of Ireland. Austerity measures totalled almost 18% of GDP in the Republic of Ireland in contrast to 9% at UK level and slightly less and the regional level of Northern Ireland.

Northern Ireland however saw the largest fall in income of any UK region over the course of the recession, and is now the lowest income region of the UK. Incomes in the Republic of Ireland have also fallen substantially, but the downward trend in incomes occurred in 2008/09 in the Republic compared to 2010/11 in Northern Ireland and the rest of the UK.

- Identify potential barriers to island wide trade and mechanisms through which to reduce the impact of such barriers;

Main barrier to all island trade is currency which has become more of an issue due to large fluctuations over the last 10 years. Trade in manufactured goods was roughly equal between both economies from mid-1990s until 2000/01. From 2001 on trade from the Republic of Ireland to Northern Ireland dropped off significantly aided by a sharp depreciation of sterling in 2002. Exchange rates stabilised until a further substantial reduction in sterling’s value in 2008 and 2009 following the global financial crash. The advent of the Euro has meant that exchange rates between Northern Ireland and the Republic are now less sensitive to changing economic circumstances within and between both economies. While this may have had a beneficial impact on wider trade between the Republic of Ireland and the European Union, it may have had unintended consequences here. The more recent depreciation of the Euro following ECB quantitative easing highlights the volatility that plagues efforts toward increased all-island trade.

- Examine methods to enhance island wide trade such as a Border Development Zone;

In regional analysis for both the Republic of Ireland and Northern Ireland the Border region has maintained some of the highest unemployment rates and some of the lowest productivity levels of any region on the Island. However the experience of ‘development zones’ from the UK has shown scant evidence that favourable tax treatment or increased capital allowances can make any significant in-roads in economic development. Perversely, where enterprise zones were found to be successful the increased economic activity was found to be matched by decreased activity in surrounding areas. Therefore there is a danger that focusing on supply side initiatives in one particular geographic region may ultimately create areas of economic underdevelopment in surrounding regions.

That being said, there are opportunities to harness cross-border co-operation to enhance the border region. In particular creating complementarity between public services such as health, education and skills may engender greater cooperation and remove a false limit on economic growth that the border imposes.

- Identify good practice in maximising island wide trade and job creation.

The NERI has been producing research on the need for a significant rethinking of industrial policy both North and South. In particular for Northern Ireland the current trajectory of policy would indicate that the goal of the Northern Ireland Executive will be to attempt to compete with Republic of Ireland in terms of attracting foreign direct investment. In particular the current plans to devolve and reduce corporation tax powers in Northern Ireland signal a dangerous shift away from all-island co-operation and a race to the bottom in terms of policy. The Northern Ireland economy has suffered years of under-investment in both the public and private sectors and any claims that Northern Ireland could emulate the success of the Republic of Ireland economy in the 1990s simply be reducing corporation tax is simply misleading.

Rather than attempt futile competition there should be agreement between both parts of the Island on a joint innovation and industrial policy. Northern Ireland will need significant investment in terms of infrastructure and skills, but there is substantial room for co-operation in terms of identifying key growth areas and prioritising and focusing state research budgets and grants to promote mutually beneficial economic development in these sectors.

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