Rob Brown: Seduction must be subtle to succeed

Offering businesses a plethora of benefits to invest in your country, such as generous tax breaks, may do more harm than good in the long-term

GOVERNMENTS across the globe get up to all sorts to grab the eye of footloose and fancy free multi-national investors. Slashing corporation tax is the fiscal equivalent of fishnet stockings or slipping into a sexy little number - a surefire turn-on for the transnationals.

An unavoidable stage of development for many developing countries, no doubt, but shouldn't a supposedly mature and sophisticated economy have moved beyond such basic seduction techniques? When a nation is in its advanced years don't such antics become a tad undignified or even smack of desperation?

The question needs to be confronted because the devolved governors of both Scotland and Northern Ireland are now falling over each other to adopt a provocative posture in the international marketplace. And they've started to attract wolf-whistles from their normally more prudish counterparts at Westminster.

After receiving evidence from economists, business leaders and trade unions, the Northern Ireland Affairs Select Committee announced this week that there was a convincing case for the state taking a lower percentage of the profits generated in the province in order to stimulate its private sector and thereby reduce its dependence on state spending (which accounts for 78 per cent of its GDP).

This announcement has set hearts astir at Holyrood as much as Stormont. Within a few hours of securing his second term as First Minister, Alex Salmond was on the blower to David Cameron, demanding that Whitehall cede control over corporation tax to the Scottish Government. And he was banging on about the same subject when he met with George Osborne on Monday.

The sexy little number both Scotland and Northern Ireland are eager to slip into is 12.5 per cent, the dazzlingly low corporation tax rate the Republic of Ireland has dangled to seduce multi-nationals for several decades. This is less than half the UK rate of 28 per cent, giving IDA Ireland, the industrial development agency, an obvious ace card in its endeavours to secure inward investment. Still, slicing corporation tax might not be the silver bullet for the Scottish economy that Salmond believes. The First Minister could even shoot himself in the foot if he isn't careful.

If Osborne were to allow the UK's Celtic fringe to undermine its fiscal unity, the quid pro quo might well be an immediate slicing of Scotland's block grant. And global corporations could not be relied upon to flood in that fast to fill the gap.The First Minister should maybe stop badgering Downing Street on this matter and place a few calls instead to informed sources in Dublin. If he seeks a critical lowdown on the strengths and weaknesses of the Irish economic development model, he will discover the downsides as well as the delights of turning a country into a corporate tax haven.

On the surface, Dublin's decision in the 1960s to open the floodgates to FDI (foreign direct investment) has worked wonders. Ireland Inc has for some time been the prime vortex in the EU for American multi-nationals. Glittering global giants such as Microsoft, Google, Dell, Intel and Pfizer, to name just a few, have arrived at its gates fully formed and ready to hire. Overseas branch plants have generated about half of the Republic's annual growth over the past half-century and have become even more crucial since the sudden slaying of the Celtic Tiger. As the graph shows, America accounts for almost half of Ireland's multi-national population, with more than 200 US corporations employing more than 100,000 people directly.

With its domestic economy in the pits, trade is pretty much all that is currently keeping the Republic afloat. Ireland ran up a surplus of €29 billion in 2010 and notched up another record trading performance in the first quarter of this year. Multi-nationals account for 70 per cent of its exports.

But is this situation sustainable? Isn't the gaggle of geese that laid all these golden eggs about to be strangled? That's the thought which is starting to disturb the sleep of not just IDA officials in Dublin these days.

Bitter resentment about Dublin's "beggar thy neighbour" strategy is building up in Paris and Berlin. It has been openly expressed by the German chancellor, Angela Merkel, and by French president Nicholas Sarkozy, especially since the EU lobbed in the lion's share of the €85 billion bailout which saved Irish banks - and the Irish state - from insolvency last November. The Irish are under mounting pressure to increase corporation tax in return for an easing of interest rates being charged on these loans.

Furthermore, there is growing feeling among the leading powers in the eurozone that monetary union will remain fundamentally unstable unless it is bolstered by fiscal unity. By the time the SNP is in any position to negotiate "independence in Europe" the capacity of any country to drastically under-cut other EU member states on corporate taxation may be a thing of the past. The Irish are petrified by that prospect. They know that if they are forced to make any major concession on this front, an exodus of investment could swiftly follow.

And ancestral connections with the oul' sod wouldn't be worth a tinker's cuss.An Irish-American called Thomas Donohue, president of the US Chamber of Commerce in Washington, made that chillingly clear last week when he publicly warned that "US firms will remain committed to Ireland only as long as Ireland remains committed to its competitive strengths".

Barack Obama similarly unnerved the Irish when, shortly after entering the White House, he appeared to indicate a desire to standardise corporation taxes and put a stop transfer-pricing and other practices beloved of multi-nationals. Although that wasn't a topic of conversation when the president quaffed a pint of Guinness for the cameras in a County Offaly pub on Monday, there is a growing realisation at the highest levels of the US federal government that what's good for Google and Microsoft may not be good for America.

It might not be entirely beneficial for Ireland either. One of the Republic's sharpest economic thinkers believes Dublin has developed a dangerous dependence on fickle foreign outfits. Michael Casey, a former chief economist at the Central Bank of Ireland and member of the IMF's executive board in Washington, even argues that his country is now caught in "a condition of arrested adolescence".

In his recent book, Ireland's Malaise: The Troubled Personality of the Irish Economy, Casey says his Ireland has never really grown up. He points out that when Sean Lemass launched his famous programme for economic expansion at the beginning of the 1960s, this former taoiseach and his associates would never have contemplated that it would continue without any serious amendment for the next half-century.

"Their thinking was that Irish entrepreneurs would learn from multi-nationals on their own doorstep and would in time develop their own businesses," he writes. "This did indeed happen to some degree but not on anything like the scale required for autonomous, organic, self-perpetuating growth."

The massive influx of foreign capital also seems to have bred a huge complacency in Ireland's oft-vaunted higher education system - a complacency the multi-nationals are determined to shatter. So unimpressed are they by the calibre of many "first-class" graduates from Irish universities that leading execs from the likes of Intel and Google led a delegation to the department of education in Dublin last year demanding that the government raise standards and tackle "grade inflation".

Casey's concerns are probably even more relevant to this country. Like other under-developed nations, Ireland was left with little choice by the late Fifties but to catch the fancy of footloose multi-nationals. After centuries of colonialism and de Valera's misguided dreams of economic isolation, the southern Irish were desperate.

Scotland was spared many such miseries. But, we also need to start engaging in some serious thinking about how we can construct a true self-sustaining economy and society.If we want to take the high road rather than the low road to real organic development we should not be donning the fiscal equivalent of fishnet stockings - nor tarting ourselves up in a tartan mini-kilt.

• Rob Brown is a Scottish journalist and academic currently based in Dublin