This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L SECTION 01 OF 04 DUBLIN 001719 
 
SIPDIS 
 
E.O. 12958: DECL: 11/23/2014 
TAGS: OVIP ECON PREL ETRD EINV PGOV EU
SUBJECT: SECRETARY SNOW,S DISCUSSIONS WITH THE ARCHITECTS 
OF THE CELTIC TIGER ECONOMY 
 
 
Classified By: Ambassador James C. Kenny for reasons 1.4 (b) and (d) 
 
¶1.  (C) Summary: The November 14-15 visit of U.S. Treasury 
Secretary John W. Snow was an opportunity for discussion on 
 
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the "secrets" of Ireland,s success with policy-makers and 
businessmen who were the architects of Ireland,s Celtic 
Tiger economy.  These key figures noted that while the 
concepts behind Ireland,s reforms had been simple, the 
political will to carry out the reforms had only come in the 
context of an economic meltdown in the mid-1980s.  They said 
that good-faith relations with labor, investment in 
education, and a "dictatorial" leadership that exposed 
industries to the full discipline of the market had been key 
to success.  Ireland,s skill in securing substantial EU 
support funds and in exploiting U.S. policy on corporate tax 
deferral was another important factor in Ireland,s economic 
turnaround.  Looking ahead, the policy-makers cited both the 
need to ensure Ireland,s continued competitiveness as a 
magnet for foreign direct investment and also the role of 
education in shaping Ireland as an innovation-based, 
higher-value economy.  Secretary Snow,s classroom discussion 
at Dublin City University (DCU) highlighted the role of 
higher education in promoting innovation and 
entrepreneurship.  End summary. 
 
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Introduction 
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¶2.  (U) The November 14-15 visit of U.S. Treasury Secretary 
John W. Snow was an opportunity for substantive discussion on 
the "secrets" of Ireland,s economic success.  During a 
dinner hosted by the Ambassador and a lunch arranged by the 
Ulster Bank, Secretary Snow spoke with 16 policy-makers and 
businessmen (listed in para 12) who were instrumental in the 
emergence of the Celtic Tiger economy.  A breakfast with the 
American Chamber of Commerce and a classroom exchange at 
Dublin City University (DCU) reinforced the points made by 
these key figures.  The following are the principal insights 
that emerged from Secretary Snow,s visit (which are 
organized thematically, not in the sequential order in which 
they were discussed). 
 
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In the Beginning: Political Will and Industrial Peace 
--------------------------------------------- -------- 
 
¶3.  (C) Although the concepts behind Ireland,s reforms had 
been simple, the political will to carry out the reforms had 
only come in the context of the mid-1980s, economic 
meltdown, said Padraig O,hUiginn, former Secretary General 
in the Office of the Taoiseach (Prime Minister).  O,hUiginn 
recalled drafting a proposal for economic recovery during 
that era, using ideas that were "apparent to any first-year 
economics graduate student" ) cut the fiscal deficit, spur 
competition, lower corporate taxes, etc.  The ruling party at 
the time, Fine Gael, did not act on the proposal, but the 
Fianna Fail government elected in 1987 made the document the 
basis for the Program of National Recovery (PNR), which set 
forth the policies that underpinned Ireland,s economic 
turnaround.  Fianna Fail,s "great advantage" at the time, 
said O,hUiginn, was Ireland,s economic crisis; with 18 
percent unemployment and government debt at 130 percent of 
GDP, the political opposition, industry, and labor could not 
afford politically to impede solutions.  The PNR,s linchpin 
was labor,s decision to accept a moderate wage increases in 
exchange for income tax relief, which became the basic 
approach to successive national wage-setting (Social 
Partnership) agreements.  O,hUiginn recounted that the 
Government offered Irish pounds 700 million in tax relief in 
1987 and also cut the fiscal deficit, forcing the closure of 
several hospitals and the retrenchment of 16,000 civil 
servants.  He noted that the moderate wage increase 
incorporated in the PNR laid the foundation for Ireland,s 
competitiveness as an export platform and as a draw for 
foreign direct investment (FDI). 
 
¶4.  (C) The Government,s good-faith dealings with unions in 
negotiating Social Partnership agreements were, and remained, 
central to Ireland,s economic success, said Peter Cassells, 
former General Secretary of the Irish Congress of Trade 
Unions.  According to Cassells, a shared understanding 
between unions and the Government on the importance of decent 
wages and housing for workers was the basis of labor,s 
commitment to the Social Partnership approach.  He added that 
the transparency and inclusiveness of wage-setting 
negotiations, in which even the most disgruntled union 
representatives were given voice, were also instrumental to 
success.  The typical industrial relations model in which 
union chiefs and politicians hammered out back-room 
agreements, in the mode of Lyndon Johnson and Lane Kirkland, 
would not have secured labor buy-in to economic reforms, 
Cassells asserted.  He further observed that the Social 
Partnership approach might not be replicable in other EU 
Member States, which typically were more populous than 
Ireland and had more diffuse union structures. 
 
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The Key: Human Capital 
---------------------- 
 
¶5.  (C) The chief source of Ireland,s success has been its 
educated labor force, said EU Commissioner-designate and 
former Irish Finance Minister Charlie McCreevy.  He noted 
that the introduction of free primary and secondary education 
in the 1960-70s initially benefited other countries as much 
as Ireland, due to the emigration of educated Irish workers. 
As a young parliamentarian, moreover, McCreevy had warned 
that the 1970s, baby boom was a looming disaster, on the 
pretext that Ireland,s small, weak economy could not 
accommodate a future surge in labor, even with emigration. 
As it turned out, this large pool of young, educated workers 
became Ireland,s principal resource and the main attraction 
for foreign multinationals to establish subsidiaries in the 
country.  Far from a disaster, the period 1987-2003 saw the 
addition of 600,000 jobs to the economy and drop in the 
unemployment rate from 18 percent to 4 percent.  This 
success, concluded McCreevy, was primarily attributable to 
Ireland,s investment in human capital. 
 
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"Dictatorial" Leadership 
------------------------ 
 
¶6.  (C) The implementation of reforms that underpinned 
Ireland,s economic recovery had required "dictatorial" 
leadership, said McCreevy.  This involved incenitivizing 
industries to achieve efficiencies by exposing them to the 
full discipline of the market, even at the risk of 
bankruptcies.  The challenge in this approach, explained 
McCreevy, was to press ahead with reforms in the face of 
elections, which provided temptations for politicians to 
adopt softer, more populist economic platforms.  Secretary 
Snow observed that whereas the gains from economic reforms in 
any country tended to be diffuse, the losses were often 
concentrated in particular sectors or geographic areas, 
making it easier for those affected to organize political 
opposition.  McCreevy commented that the test of any 
government was how well it explained to dislocated workers 
that the reforms responsible for their plight were good for 
the country.  Indecon Economic Consultants CEO Alan Gray 
separately pointed out that Ireland had succeeded, through 
education, in giving workers the skills to move across 
industries, to the point now where those laid off did not 
ask, "Do I have any hope of a job?" but rather "Which one of 
my new employment choices should I take?" 
 
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EU Help 
------- 
 
¶7.  (C) EU tools, primarily structural support funds, were 
another factor in the emergence of Ireland,s Celtic Tiger 
economy, explained former Prime Minister (1992-95) Albert 
Reynolds and Ray McSharry, former EU Commissioner and Irish 
Finance Minister.  Reynolds said that the Irish Government 
did not shy from viewing such tools as entitlements, since 
Ireland, as an island nation, faced additional challenges 
trading within the European Community.  He and McSharry 
recalled that Ireland had negotiated well to maximize the 
level of EU support.  For example, Reynolds claimed that he 
had obtained over euro one billion from Brussels as a result 
of a discussion with Chancellor Kohl in which Reynolds agreed 
to support Germany,s push for rapid EU enlargement.  EU 
Commissioner-designate McCreevy separately echoed Reynolds, 
points, saying that French Finance Minister Sarkozy,s 
proposal to reduce EU support for new Member States that 
applied low corporate tax rates was shortsighted.  McCreevy 
said that any EU measures to increase growth in the new 
Member States would redound to the benefit of the entire EU. 
 
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U.S. Policy on Tax Deferral 
--------------------------- 
 
¶8.  (C) The U.S. policy of tax deferral for foreign 
subsidiaries of American firms, combined with Ireland,s 12.5 
percent corporate tax rate, underpinned the large influx of 
U.S. investment to Ireland during the Celtic Tiger period, 
observed Padraic White, former CEO of Ireland,s Industrial 
Development Authority (IDA).  White recounted his numerous 
trips to the U.S. House of Representatives, Ways and Means 
Committee to defend tax deferral, and he argued that Senator 
Kerry,s plan to reverse tax deferral would have "killed 
Ireland," had he been elected.  White believed that 
complaints by the U.S. public about the job outsourcing that 
accompanied U.S. investment flows were wrong-headed.  U.S. 
subsidiaries in Ireland, he argued, were the principle reason 
that the United States had penetrated the personal computer, 
software, and pharmaceutical markets in Europe.  He further 
observed that under-performing U.S. companies were typically 
those that had not attempted to expand overseas.  Secretary 
Snow concurred that U.S. companies that were outsourcing 
overseas were those creating the most jobs in the United 
States.  He highlighted, however, the political difficulty of 
explaining outsourcing to the U.S. public, recalling slogans 
during the recent election campaign that criticized "Benedict 
Arnold CEOs." 
 
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A Propitious Lack of Monetary Policy Tools 
------------------------------------------ 
 
¶9.  (C) An ironic feature of Ireland,s success has been the 
Government,s lack of monetary policy tools, remarked Cormack 
McCarthy, Chief Executive of the Ulster Bank.  One might 
think that a country that had performed so well in terms of 
exports and investment would have relied heavily on interest 
rate and exchange rate levers, said McCarthy.  As a euro-zone 
member, in fact, Ireland had ceded control of its monetary 
policy to the European Central Bank.  The positive result, 
said McCarthy, were low interest rates.  He believed that if 
Ireland had remained control of monetary policy, the 
Government would have been tempted to raise interest rates to 
slow rapid growth in the late 1990s.  Instead, the low rates 
set by the ECB had been a boon to Ireland,s private sector 
and had lent a sense of stability and consistency to the 
Irish market for foreign investors. 
 
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Looking Ahead: Competitiveness and Education 
-------------------------------------------- 
 
¶10.  (C) Looking ahead, the principal danger for Ireland is 
complacency, said Eoin O,Driscoll, Chairman of Forfas (the 
Government think-tank) and the Government-commissioned 
Enterprise Strategy Group (ESG).  Echoing the ESG,s recently 
published findings, O,Driscoll cited the need to ensure 
Ireland,s continued competitiveness as a magnet for foreign 
direct investment (FDI), which, he said, had driven the 
country,s economic transformation.  (U.S. and Irish 
businesspersons who attended the November 15 American Chamber 
of Commerce breakfast with Secretary Snow made similar 
points, noting that multinationals were increasingly 
attracted by low-cost manufacturing opportunities in China 
and India.)   O,Driscoll said that, just as industry and 
Government had collaborated in the 1990s to make Ireland a 
base for leading bio-pharmaceutical and IT companies, the 
country needed a new shared vision to go another rung higher 
in the production of innovative, high-value goods and 
services.  He note that this challenge would involve marrying 
innovation to better business practices, particularly in 
sales and marketing, and he praised the U.S. model of 
perfecting product designs in the market, as opposed to the 
European preference of the laboratory.  While Secretary Snow 
cautioned against government attempts to pick winners in the 
market, he ventured that the key to economic prosperity 
rested with countries like the United States that fostered a 
culture of innovation and entrepreneurship. 
 
¶11.  (U) Secretary Snow,s classroom discussion with 
students, professors, and administrators at Dublin City 
University (DCU) was a venue for further discussion on the 
role of innovation, entrepreneurship, and academia in 
strengthening the Irish economy.  The event took place at 
DCU,s "Invent Center," which serves as a business incubator 
for student entrepreneurs and community start-up companies. 
Secretary Snow highlighted the centrality of education and 
 
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intellectual capital to the modern, knowledge-based economy, 
and he explained that to embrace a market economy was to 
embrace ever-changing needs for new ideas and skills.  He 
also noted the difficulties that economists had encountered 
in finding ways to capture creativity, "that spark," in 
modeling economic activity.  DCU president Ferdinand von 
Prondzynski commented that the university had encountered a 
similar challenge, but espoused the belief that 
entrepreneurship could be taught, in the same way as poetry, 
painting, and other modes of creativity.  Prondzynski also 
stressed that innovation meant little without business 
skills, and he cited DCU requirements for students to 
establish relationships Irish entrepreneurs who had both 
succeeded and failed in bringing new ideas to the market. 
 
-------------------------------- 
Participants in the "Architect" 
Discussions with Secretary Snow 
------------------------------- 
¶12.  (U) Participants in the Ambassador,s November 14 dinner 
for Secretary Snow were: Charlie McCreevy, EU 
Commissioner-designate and former Irish Finance Minister; 
Dermot Desmond, financier; Eoin O,Driscoll, Chairman of 
Forfas and the Enterprise Strategy Group; Padraig White, 
former CEO of the Industrial Development Authority; and 
Padraig O,huiginn, Former Secretary General in the Office of 
the Taoiseach.  Attendees at the November 15 Ulster Bank 
lunch were: Ray McSharry, former EU Commisioner and Minister 
of Finance; Lochlann Quinn, co-founder of Glen Dimplex; Peter 
Cassells, former Secretary General of the Irish Congress of 
Trade Unions; Albert Reynolds, former Prime Minister 
(Taoiseach); Allan Gray, Chairman of Indecon Economic 
Consulting; Willie Walsh, CEO of Aer Lingus; Bill Harris, 
National Science Foundation Director; and Cormack McCarthy, 
David Pierce, and Michael Torpey of the Ulster Bank. 
 
¶13.  (U) This cable has been cleared by Treasury DAS Nancy Lee 
KENNY