The Good Friday Agreement at 25: has there been a peace dividend?

The Good Friday Agreement ended a three decades-long conflict in Northern Ireland. Peace has brought some economic improvements, including lower unemployment, higher wages for low earners and the arrival of new industries. But progress in other areas – particularly productivity – has been limited.

The Belfast or Good Friday Agreement was the deal signed on 10 April 1998 that brought a cessation to the Northern Ireland Troubles. The statistics on Northern Ireland’s security situation make for grim reading: between 1969 and 1998, 3,720 people were killed, 47,541 were injured, 16,209 bombings took place and there were 36,923 shootings.

The key part of the Good Friday Agreement was devolution and power-sharing. In other words, unlike the devolved legislative assemblies in Scotland and Wales – where the party with the majority of seats forms the government – the Northern Ireland Assembly has a power-sharing executive. This means that unionists and nationalists both participate in governing Northern Ireland, and that cross-community support from both groups is required for legislation to be passed.

While this system offered a pathway to peace, there is a downside to power-sharing government and cross-community consensus: without agreement from both sides of the sectarian divide, a government cannot be formed. Further, if one side withdraws support, the whole government collapses.

Since the Assembly’s inauguration in 1999, Northern Ireland has been without a government for nearly nine of the past 23 years. Most recently, the Assembly was suspended from 9 January 2017 to 11 January 2020 and from 4 February 2022 to the present day.

On the occasion of the 25^th anniversary of the Good Friday Agreement, it is germane to reflect on the extent to which Northern Ireland’s economy has changed since the cessation of the Troubles. The way that economists pose this question is to ask whether the nation has enjoyed a peace dividend.

What is a peace dividend?

The number of deaths due to the security situation in Northern Ireland has remained low ever since the signing of the Good Friday Agreement (see Figure 1). This success was also mirrored in a dramatic fall in other terrorist activities. But did this cessation of violence benefit the economy? In other words, was there a peace dividend?

A peace dividend is typically defined as theeconomic boost that a nation or region receives from the cessation of conflict. This boost comes about because governments can reduce security spending and reallocate the money saved to more productive economic activities. The economy can also benefit from a decrease in uncertainty and a more stable political environment, which encourages investment.

Figure 1: Number of deaths due to the security situation in Northern Ireland, 1969-2021

Source: Conflict and Politics in Northern Ireland (CAIN) and Police Service of Northern Ireland, 2022

Has Northern Ireland’s economy grown since 1998?

The Troubles are estimated to have reduced Northern Ireland’s GDP by up to 10% (Dorsett, 2013). In 1998, the nation’s GDP per capita was 20% lower than the overall UK level, albeit higher than either Wales or the North East (the poorest region in England).

By 2019, prior to the Covid-19 pandemic, Northern Irish GDP per capita had grown 27% in real terms, but the gap with the UK level remained relatively unchanged, at around 21% (see Figure 2). This widened to 22% in 2020, but Northern Ireland continued to outperform Wales and the North East, which were 27% and 30% below the UK level respectively.

Figure 2: Real GDP per capita, 2019 prices

Source: Office for National Statistics (ONS), 2022; regional gross domestic product, all ITL regions

The failure of Northern Ireland to close the GDP gap reflects its poor productivity performance. It has the poorest productivity of any UK region, with a 17% gap to the UK level, when measured per hour worked. Despite being unsuccessful in closing the productivity gap with the UK level since 1998, the difference between Northern Ireland and the next worst performing UK regions, namely Wales and the North East, has reduced, due to the productivity of those regions declining (see Figure 3).

Figure 3: Productivity, output per hour (UK = 100)

Source: ONS, 2022; regional productivity time series

Are individuals better off since 1998?

The clearest improvement in the Northern Irish economy is in the labour market. High unemployment was a persistent feature of the economy during the Troubles.

Since 1998, it has experienced the strongest employment growth of any region outside London. The total number of people employed had increased by 22.7% by 2022.

Unemployment has also fallen over this period. Between 1992 and 1997, Northern Ireland’s unemployment rate averaged 11.0%, above the UK average of 8.9%. From 2000, this rate decreased rapidly, with unemployment falling below the UK level for the first time in 2005 (see Figure 4). Since then, it has continued to follow a similar pattern to the UK level, and remains lower than in Scotland, Wales or the North East.

Figure 4: Unemployment rate

Source: ONS, 2023, Labour Force Survey

There is some evidence to suggest that wages for the lowest paid in Northern Ireland have improved relative to their UK peers. Figure 5 shows the relative performance of both median and low-paid (10^th percentile) full-time employees in Northern Ireland, relative to the equivalent UK-wide groups. Low-paid employees in Northern Ireland received wages that were 12% below their peers in 1998, but this gap had shrunk to 5% in 2022.

This experience is also repeated for full-time employees earning below the median. But the apparent closing of the gap for those earning the median wage in Figure 5 is within the Labour Force Survey’s confidence interval, which means that there is no evidence of a relative improvement for this group.

Figure 5: Gross weekly pay (UK = 100)

Source: ONS, 2023, Annual Survey of Hours and Earnings

Other labour market outcomes show Northern Ireland still lagging behind other UK regions. It has the highest rate of economic inactivity – those not in employment but not seeking work within the last month – of any UK region, at 26.4% for the three months ending in January 2023 (ONS, 2023).

It also has the lowest rate of employment for individuals with disabilities of any UK region, with this gap only falling marginally since 1999 (Ulster University Economic Policy Centre, UUEPC, 2022).

Is Northern Ireland still overly reliant on the public sector?

There has been much talk of rebalancing the economy in Northern Ireland towards a greater role for the private sector (HM Treasury, 2011; Teague, 2021). Equating any peace dividend with reducing the absolute and/or relative size of the public sector may misdiagnose Northern Ireland’s underlying economic problems (Birnie and Brownlow, 2018).

During the Troubles, public expenditure was used to stabilise the economy, and public sector employment grew dramatically as a result. In 1960, public sector employment in Northern Ireland accounted for 22% of total employment, but by 1970, this had reached 25%, and by 1987, it had risen further to 42% (Hewitt, 1990).

As Figure 6 shows, by 1998, public sector employment had already fallen to 29%. Northern Ireland continued to follow the UK’s downward trend, reaching 27% in 2022. Nevertheless, it has remained significantly higher than the UK share of 18%.

Figure 6: Public sector employment as a percentage share of total employment

Sources: Department for Education, 2015, Quarterly employment survey public and private sector split, March 2015; Northern Ireland Statistics and Research Agency (NISRA), 2023, Quarterly Employment Survey Historical Tables December 2022; ONS, 2013, Public sector employment time series; ONS, 2023, Public sector employment

The weakening of Northern Ireland’s economy during the Troubles, and increased levels of public expenditure, resulted in an increase in the Northern Ireland subvention. This is the fiscal transfer made from the UK government to cover Northern Ireland’s fiscal deficit, due to total public expenditure exceeding public revenue raised locally.

Northern Ireland’s fiscal deficit in 1999/2000 was 34% of total public expenditure (see Figure 7). This meant that one-third of public expenditure in Northern Ireland was financed by the UK government.

While Northern Ireland’s fiscal deficit has deteriorated in absolute terms over time, reaching 38% in 2019/20, it has improved relative to the rest of the UK. The deficits of both Wales and the North East reached pre-pandemic levels of 33% and 31% respectively, while Scotland has also seen its deficit worsen over time. Only London, the South East and the East of England have fiscal surpluses, while the UK as a whole runs a fiscal deficit.

Figure 7: Fiscal deficit as a percentage of total public expenditure per person

Source: ONS, 2022, national and regional public sector finances, UK, financial year ending 2021

Has Northern Ireland attracted higher levels of investment?

Northern Ireland experienced a decline in foreign direct investment during the Troubles. The number of externally-owned manufacturing plants fell by 41% between 1973 and 1990 (Hamilton, 1993).

Peace would be expected to drive more external investment. Between 1995/96 and 1997/98, an average of 23 successful direct inward investment projects per year were funded in Northern Ireland. But despite a brief uptick to 31 projects in 1998/99, the average remained unchanged at 23 projects per year between 1998/99 and 2004/05 (Regional Trends, various years).

Figure 8: Total value of foreign direct investment position held by foreign companies, 2015-2020 (UK = 100)

Source: ONS, 2022, foreign direct investment involving UK companies by UK nation and region

Today, Northern Ireland is placed ninth among the UK’s 12 regions for the level of foreign direct investment in the local economy (see Figure 8). This suggests that it has seen a partial reversal of its previous lack of foreign investment. But figures for 2021 and 2022 suggest that Northern Ireland is performing no better than the UK average (excluding London) for new inward investment projects (Department for International Trade, 2022).

Northern Ireland has seen the growth of new industries in the private sector. Between 1998 and 2022, employment in financial and insurance activities grew 36%. This is higher than in any other UK region.

Similarly, jobs in information and communication grew by 99%, the second highest of any UK region (ONS, 2023). Other new industries include TV and film production, which contributed approximately £300 million to the local economy between 2018 and 2022 (NI Screen, 2022).

Why has the peace dividend been relatively small?

The overall evidence suggests a mixed picture for the extent to which Northern Ireland has benefited from a peace dividend. Unemployment is lower, wages have improved for the lowest paid and new industries are growing. But there has been relatively little progress relative to the UK’s other nations and regions, particularly in productivity, the key driver of better living standards over time.

In reality, distortions that emerge in response to a crisis such as the Troubles are not fully reversible, even once the crisis ends. This observation provides a useful framework for explaining the disappointing size of the peace dividend.

Just as the sectarian enmities that helped to sustain violence during the Troubles did not just disappear in 1998, so the economic scars caused by political violence have not fully healed since the signing of the Good Friday Agreement.

In terms of the peace dividend’s size, there should be an acknowledgement that there is asymmetry in economic activity: what goes up in one direction need not go back down to its original starting point (Peacock and Wiseman, 1961). In this regard, one study notes that irreversibility becomes a major issue when uncertainty interacts with ‘sunk costs’ – the term economists use to refer to investments that have been incurred but cannot be recovered (Bloom, 2014).

For example, political violence and the associated high levels of uncertainty deterred businesses from investing in projects characterised by sunk costs. This meant, for example, that indigenous and foreign manufacturers did not build new plants or invest in state-of-the-art production facilities. Conversely, it is less obvious that once businesses got into the habit of responding to uncertainty by avoiding such investments, the restoration of greater political stability alone could quickly reverse matters.

Similarly, since 1998, economic policy has not always converted political stability into a focus on productivity. Just as the Troubles made it necessary to have large public expenditures to stabilise overall economic activity, so the peace process required investments to consolidate the political settlement.

What needs to change?

The lack of a functioning executive, and poor governance even when the executive has been sitting, have plagued Northern Ireland since 1998. The exceptionally poor performance of the NHS in Northern Ireland is just one long-standing example of such poor governance (Appleby et al, 2022; O’Neill, 2022).

Another example relates to the governance of Invest NI, the region’s inward investment agency (Independent Review of Invest NI, 2023). A recent report on its performance found major issues, including divisions at senior levels within the organisation, a small number of client companies receiving repeated public support, and a failure to focus on raising productivity.

No simple ‘silver bullets’ can solve all of Northern Ireland’s economic problems, even if we acknowledge that improving skills and productivity will take it in the right direction (Fitzgerald and Morgenroth, 2019).

Recent improvements in the sphere of diagnosis, as well as recognition of poor governance, will go much of the way to formulating better policy prescriptions. For example, the recent focus on identifying the sources of weak productivity, as well as improving value for money in the region’s public finances, are welcome (Brownlow, 2022).

Where can I find out more?

Devolution economics Northern Ireland style: Graham Brownlow discusses Northern Ireland’s devolution in the National Institute Economic Review.
Northern Ireland productivity dashboard 2022: David Jordan and John Turner compare Northern Ireland’s productivity drivers to those of the rest of the UK.