A tiger slumbers in Maine's northern woods

Geography is no excuse for the state's economic stagnation. Its policymakers should take a leaf from Ireland's book.

Picture two rocky, northern outcrops on the far edges of prosperous regions. Despite great natural beauty, neither of these remote places seemed able to overcome poverty. Their history was rich, their people were resourceful, their potatoes were famous. But, economically, both of them lagged behind and were regarded by others as permanent problem territories. Their names were Ireland and Maine.

Things have changed. For Ireland, as is now known even in the moose lodges of Maine's Great North Woods, has transformed itself over the past 20 years into a global growth model. The US state remains a backwater. These differing outcomes illuminate the limits of some government policies and the value of others.

Two decades ago, Ireland and Maine faced similar challenges. Both states were learning that tourism alone, however enthusiastically promoted, cannot sustain a northern economy. And both were haemorrhaging young people, who routinely emigrated.

There were other ways in which the two places resembled one another. Ireland was a high-tax area and so was Maine. Maintaining rural infrastructure, after all, requires a lot of cash for road-building, power supplies and so on. A needy populace generated high healthcare costs and consumed a lot of pricey social services.

In both places people were at home with the idea of extensive services for another reason: they had come to believe in what might be called "the northern way" or, to be less charitable, "the northern syndrome". This is the idea that the best move for poorer northern regions is to retreat to the comfort of the Scandinavian model.

For a time, politicians in both places pursued similar economic policies. Both sought and won heavy subsidies from distant wealthy capitals - Ireland from the European Union in Brussels, Maine from Washington. Modern highways replaced poor roads; business incubators were duly established. Enormous subsidies went to youth training.

But Irish leaders, both politicians and labour unions, took an additional, courageous step. They gambled that a nation that shed the burden of an over-large government would have a better shot at competing globally. They cut state spending and taxation dramatically. In the 1980s, Charles Haughey, the taoiseach, slashed the size of the Irish government from half of gross domestic product to 40 per cent within two years. Corporate taxes came down and the spending restraint continued throughout the 1990s. Today, government spending equals about 30 per cent of GDP.

This is a dramatic cut - how dramatic becomes clear when you consider that neither of the west's two great free-market radicals, Ronald Reagan and Margaret Thatcher, came near to matching it. The change transformed Ireland in two ways. Local workers and entrepreneurs now had an incentive to stay home and work. And Ireland became a European tax haven, instead of a tax pariah.

The result was the double-digit growth that created the Celtic tiger. Crucial to the tiger's birth was the recognition of the importance of relative competitiveness - that, to succeed, Ireland had to provide an environment that was more than "all right" or "like the UK". It had to offer more, both to its own businesses and to outsiders.

The Ireland of today may suffer setbacks. This month, for example, brought the hard news that Gateway is cutting Irish computer operations. But Ireland is not likely to retreat to the sort of undeveloped poverty it once knew.

In contrast, Maine shunned the smaller government model, following an exclusive "spend to grow" plan. Budgets increased each year; Washington funnelled more cash into the state. Taxes stayed high. And Maine has stayed - in the words of its governor - "ambivalent" about courting investors from outside.

The result has been an environment hostile to the entrepreneurial Everyman. A study by Fred McMahon of the Fraser Institute, Canada's free-market think-tank, rates Maine as one of the worst places to do business in North America. Measured by an index of three components - labour market flexibility, size of government and tax burden - Maine ranks 49th among the 50 states. Only Alaska is worse. Maine's tax disadvantage is particularly remarkable: the US Census Bureau reports that Mainers shoulder a higher tax burden than citizens of other states.

Precisely why Maine so consistently rejected the smaller state model is hard to say. But one answer is that it never grasped the point about relative competitiveness. Maine lawmakers tended - and tend still - to insist that Maine is simply not comparable with lower-tax states to its south.

Matters are not helped by the fact that the Pine Tree State shares a border with a place that maintains an even larger government than it does: Canada. Politicians often excuse their inaction with a line something like the following: "Our government is large but it is not so large as Canada's."

The results of Maine's do-nothing policy have, in any case, been devastating. With its timber industry disappearing and no Dell or General Motors arriving to build new factories, northern Maine is seeing its population drop. Manufacturing jobs are disappearing. Most troubling of all - and counter to the global trend - high-technology jobs are disappearing in favour of unskilled jobs.

Yet there is still the conviction in Maine that colder weather, longer distances, poorer people - in short, the northern syndrome - excuse Maine from competition and explain all. It would be naive - and rather un-Maine - to assume that tax changes could turn Maine around, one economist assured me recently. This argument might be believable - if Ireland hadn't happened.

© Copyright 2001 Financial Times

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