Ireland in the 1930s
What price protection?

The election of the Fianna Fail government of Eamonn de Valera in 1932 marked a watershed in the economic policies of the Irish Republic. Before the change of government, Ireland had been one of the last predominantly free-trading countries in the world. The interventionist measures introduced by Fianna Fail included a massive increase in protection, aimed to create jobs quickly and to foster an indigenous industrial sector, and a shift of emphasis in agricultural policy from pasture to grain. One index of tariff levels showed an increase from 9% to 45% over the period 1931-6; The Control of Manufactures Acts of 1932-4 also severely restricted foreign capital inflows. Moreover, a long- standing financial dispute with the UK Treasury led to the 'Economic War' of 1932-8, in which both countries erected a wall of punitive tariffs and restrictions on each other's trade.

It could be argued that these policies achieved some of their objectives, despite the general view at the time that they were, at best, misguided. A rise in employment in this period, although not spectacular, probably represented the first sustained increase in numbers in work since the 1846 Famine, and real industrial output rose by 46% from 1931 to 1938. The Economic War hurt farmers badly, especially livestock farmers, but real agricultural output fell by only 2.8% over this period, and cheap food was very popular. Yet surprisingly, there has been little thorough analysis either of the impact of protection on the Irish economy or of who 'lost' the Economic War.

In Discussion Paper No. 117, Research Fellows Peter Neary and Cormac O'Grada examine the effects of these developments on the Irish economy in the 1930s within the framework of international trade theory. The authors use a model of an economy with two sectors, manufacturing and agriculture, each producing a single good whose price is determined by world markets. The supply of all inputs to production is assumed to be inelastic. The model predicts that a tariff on manufacturing imports will expand output in manufacturing and reduce output and employment in agriculture. Neary and O'Grada note, however, that the shift in government policy towards labour-intensive tillage, rather than land-intensive pasture, probably offset these effects on employment in the agricultural sector. This may have accounted for the reduction in the 1930s of the century-old flight of labour from the rural areas.

In Neary and O'Grada's model, the increased return on manufacturing capital will encourage inflows of capital from foreigners wishing to benefit from the protected domestic market, causing both employment and real wages to rise in the manufacturing sector. The Irish government's simultaneous imposition of restrictions on capital inflows was therefore inconsistent with the objective of expanding employment, and it was perhaps fortunate that these restrictions were not very effective. Yet they could be defended on grounds of overall welfare, the authors argue, since capital inflows into protected sectors are often felt to reinforce the distortions caused by tariffs.

In the longer term, however, such employment gains as the tariffs might have achieved were not costless. The infant industries established in the 1930s failed to develop much further, and industrial employment grew by barely 10% from 1938 to 1958. The return to free trade in the 1960s and 1970s led to substantial redundancies in older industries, and these, Neary and O'Grada argue, should be seen as the price of extra jobs in the 1930s. The policies of the 1930s thus involved an intertemporal trade- off which was not foreseen at the time.

Neary and O Grada find it less easy to assess the effects of the 'Economic War' on Ireland. It is unclear how far Ireland's market power in the cattle trade affected UK purchasers of livestock, or how far British exporters could pass the effects of Irish tariffs onto Irish consumers. In terms of overall welfare, substantial losses to farmers from lower export earnings and a dramatic fall in domestic livestock prices may have been compensated by income from Irish duties and by the benefits of cheaper food. Neary and O'Grada also suggest that the losses in consumer surplus from special import duties were likely to have been small. The authors tentatively conclude that Ireland probably did not 'lose' the Economic War, although this conclusion is very sensitive to assumptions concerning the market power of its food exporters and the substitutability of UK imports.


Protection, Economic War and Structural Changes: The 1930s in Ireland
J Peter Neary and Cormac O'Grada

Discussion Paper No. 117, July 1986 (IT)