As one explores the course of Irish economic history, several dramatic events have been the center of equally dramatic changes. The first of these events is the great Irish potato famine of the late 1840's. Prior to the famine, the Irish economy was one primarily of agricultural prominence. However the great famine wiped out a large percentage of Irish crops and devastated the agricultural sector of the Irish economy. One other major impact which the famine had on the economy of Ireland was its reduction in the population and in turn the labor force. The famine wiped out a large percentage of the Irish population, and also led to mass emigration of Irish workers to countries with more prosperous economies. This large migration of workers away from Ireland created a regional economy in Ireland. In the wake of the famine, the 19th century witnessed the de-industrialization of Ireland. As the industrial revolution flourished in the United Kingdom, Irish industry began to decline. Ireland’s industrial success up to this point had always been attributable to their competitive advantage of low wages, however, as British industry grew this comparative advantage was taken away. As transportation costs were lowered, the British goods being exported to Ireland far outweighed those being exported to Britain causing a large number of small Irish businesses to disappear. The effect of this de-industrialization in a time of foreign industrial revolution, led to the emergence of Ireland as an agricultural hinterland at the turn of the 20th century.
As the 20th century wore on and Ireland achieved its independence from Great Britain in 1920, the economy of Ireland became one based on protectionism. This protectionist era which lasted from 1932 to the early 1960's, was initially successful.(Barry 1999, 31)
Ireland’s economic history consists of decades of almost economic ignorance after declaring its independence from Britain. Employment growth in manufacturing grew from 1.6% per year in the early years of independence, to 3.1% per year in 1950.(Barry 1999, 32) Most of the Irish industries during this period were exclusively home market oriented, causing the protectionist era to run out of steam in the 1950's. After World War II, as most of Europe experienced an economic boom, or miracle, Ireland was still watching its inward oriented economy decline. Ireland wanted to be a self-sufficient economy and not rely on imports or foreign aid. This policy cut ties to any foreign trade or non-Irish companies, leading to small, inefficient companies of its own. In the 1950s, the economy was at a low point where per capita growth averaged 2.2%, less than half of the Western European average.(Barry 1999, 33) During this period, the Irish people were not inspired by their leaders to change and therefore accepted the economy the way it was.The overall failure of the protectionist era brought about an era of outward orientation which began at the end of the 1950's. This aggressive new policy, reduced tariffs, and encouraged trade with foreign countries. In 1966, Ireland signed the Anglo Irish Free Trade Agreement, and actively sought Foreign Direct Investment (FDI) by offering capital grants and a zero corporate profits tax rate.(Barry 1999, 34) This new economic outlook increased Irish productivity, with the industrial sector catching up to the average levels of the European Union. Traditionally low productivity sectors were replaced by new higher productivity sectors. In the late 1960s, the Industrial Development Agency(IDA) was set up by the Irish government, to attract successful foreign companies to their country. They looked at growing industries such as pharmaceuticals and technology that desired a location in Europe. Eventually, companies such as Johnson&Johnson began building plants in Ireland. The IDA also strongly recruited technology companies such as Intel, and Digital-Equipment. Throughout the 1960's, 70's, and 80's, these new high productivity sectors, were not greatly increasing the level of job creation, and it was not until the 1990's that large increases in job creation were seen.(Barry 1999, 37) One shift which did occur during this outward orientation, was the shift into the service industry. During the 1980's, Irish businesses paid high relative prices for postal service, telecommunications, and utilities. During the 1990's, however, there was some de-regulation of government controlled industries, which led to more cost competitiveness with other countries. These sectoral shifts have produced tremendous growth in tourism and financial services.