Created in 1959 to lure foreign investors with tax breaks, the Shannon Free Zone proved revolutionary across the world. But in today’s world of looser trade and tax havens, Ireland’s innovators face an uphill battle to stay relevant

When Wen Jiabao visited the small Irish town of Shannon in 2005, it was like a religious pilgrimage for the then Chinese premier and arguably the world’s second most powerful man. He was the latest in a long line of high-level Chinese dignitaries to come and pay their respects to the site on the west coast of Ireland where they believe China’s rise to superpower status really began.

In the buildup to the visit, the Chinese ambassador had told his Irish hosts that they wanted time to allow Wen to pause for reflection on the “plateau” – a spot on Tullyglass Hill that overlooks a grey, windswept, industrial estate. “To us it was just this nondescript place on the top of a hill, but for the Chinese, they wanted to see where it all started,” said Kevin Thompstone, president of the Shannon Chamber of Commerce, pausing at the memory of this incongruous spectacle. “This was the leader of China, a country with a population of 1.3 billion!”



Shannon is a tiny town with a population of just 9,673 in the middle of rural County Clare. But it is famous in the history of economic development, widely considered the site of the first modern “special economic zone” (SEZ). The industrial estate that Wen would have gazed upon that day is the Shannon Free Zone — a 2.5 sq km stretch of land that was carved out and given to foreign investors in the late 1950s, an audacious attempt to attract investment in exchange for tax holidays, tariff reductions and other incentives.



Facebook Twitter Pinterest Chinese vice president Xi Jinping visits Shannon in 2012. Photograph: Peter Muhly/AFP/Getty Images

Today there are thousands of these zones around the world, the best-known of which are in China where they are credited with helping fuel the country’s dramatic economic boom over the past quarter century. The zones have attracted millions of people from around China looking for work and in the process created hundreds of new cities. Shenzhen, the country’s first SEZ, which opened in 1980, currently harbours 300,000 migrant workers, while Pearl River Delta Economic Zone is home to 42 million people. These areas have been integral to China’s rapid urbanisation in recent decades.



“Obviously they took it to a much bigger scale than anything that we did,” said Thompstone. “The Chinese were able to develop and grow on the back of this model from this little place called Shannon … and there’s something in their spirit that says, ‘You know those people who went before us, where did it start? Where did it come from?’”



The story goes back to the 1940s, when most of the first transatlantic flights would arrive in Europe and refuel at Shannon airport, before continuing on to their final destinations. But within decades aerospace technology had improved and planes were able to fly longer distances. With the increasing use of jet engines in civilian aircraft, there was no longer any need to stop in Shannon, and the town faced economic collapse.



Enter one of the region’s most celebrated innovators – the man who, in Shannon’s origin myth, is the town’s Founding Father. Everyone who has lived here long enough has their own anecdote about Brendan O’Regan, whose initials BOR have, in Shannon, come to mean “Bash On Regardless”. “He was a great person to motivate other people,” said Tom Kelleher, an economist who worked with O’Regan in the late 60s and 70s. “Anything was considered, no matter how outlandish.”

A former caterer, O’Regan had a long string of innovations behind him, including the establishment of the world’s first duty free shop at the Shannon airport in 1947 after the Irish parliament passed a new law, the Customs Free Act, which exempted transit and embarking passengers, goods and aircraft from normal customs procedures.



Faced with the prospect that planes would now fly over the town, O’Regan famously argued that Shannon would have to “pull the airplanes out of the sky”. His proposal for doing this was to create a small zone just outside the airport where foreign investors could be free of onerous regulations and taxation from the central government in Dublin.



The Shannon Free Zone offered companies tax breaks and exemptions on value-added tax on imported goods and goods used for the production of exports. Corporate taxes were also cut. Grants were offered to companies to support research and development in the zone. Over the years, companies including Zimmer, and subsidiaries of DeBeers, GE, Intel and Lufthansa set up shop there. Despite this influx, the population of Shannon never ballooned as it has in other SEZs around the world, as many skilled workers ended up commuting from nearby cities such as Limerick and Galway.



Facebook Twitter Pinterest A TWA passenger plane at Shannon airport in the 1950s Photograph: Clarke/Getty Images

“Even at my own school, we would have children from all over the world because their dads or moms were working or doing research in Shannon,” says Mary, 63, a retired school principal. “They might just come for a year, they might come for six months, they might come for five years, but we would have people from all over.” Sitting with a friend in a small cafe next to the historic Shannon Free Zone on a weekday afternoon, Mary, who was born in Shannon, says it’s been an exciting place to live.

The airport – which, thanks to the Free Zone and the traffic that it brought, did not end up closing – added a touch of glamour, too. “We thought we were in the middle of the world!” says Mary. “Flights coming in from New York and Boston … I remember when President Kennedy came through, oh my God, the whole country stopped. Thousands of people went to the airport, it was amazing.” She chuckles. “It wasn’t quite the same when Ronald Reagan came.” Other dignitaries to have come through Shannon over the years include Fidel Castro and Barack Obama.

US troops are coming through Shannon on planes, carrying weapons. Ireland is prostituting itself Edward Horgan, activist

Paul Ryan, an economic consultant who grew up in the town, describes Shannon as “Ireland’s first new town in 300 years … built from scratch and very much Milton Keynes-esque, The 1960s approach of, ‘Let’s turn it around, make the back of the house the front,’ all of these green areas, common areas – it was all very much in that style.”



Today SEZs are found worldwide, from Argentina to Cambodia. But in 1959 the idea was revolutionary. O’Regan entered history as the man who created this model – which would eventually be a major policy prescription recommended to poor countries by the World Bank.



Many of the world’s SEZs have been set up with advice from consultants from Shannon. Ryan, who works for a firm called Shannon International Development Consultants (SIDC), says the attraction of these zones is the possibility of testing policies out in a small area, before rolling them out nationwide. “Let’s say you want to try something, in a developing country, and you want to introduce new ways of doing business … having a zone, having an area that is ringfenced and set aside from the rest of the economy, where you can try new approaches, is part of what makes it work,” he said.



One of the keys to Shannon’s success, says Ryan, was the construction of a second zone. Smithstown, an industrial estate next to the free zone, was developed as a satellite location for mainly Irish businesses who became sub-suppliers to the larger businesses. “You have to provide the Smithstown, you have to provide that indigenous industry starting point,” he said. Otherwise, local businesses and the local economy might not benefit much from having an SEZ in the area.



Facebook Twitter Pinterest Jiang Zemin (front row, third from right) pictured on his visit to Shannon in 1980. Photograph: Courtesy of Shannon Group Plc

As early as the 60s and 70s, advisers from Shannon worked on projects for free zones in Taiwan, Malaysia, Egypt and Sri Lanka. Training courses on how to develop free zones were also organised in Shannon, attended by representatives from dozens of countries. Jiang Zemin, who would later become China’s president, visited as a junior customs official in 1980 and took a three-week training programme on how to set up an industrial free zone. At that time, Chinese leader Deng Xiaoping was experimenting with opening up the country’s economy and the idea of “testing” reforms in specific areas was appealing. The Shenzhen SEZ – China’s first – opened the same year Zemin returned from Shannon.



But according to some, Shannon’s status as the first modern SEZ is just a convenient narrative for those who favour its expansion across the world. Patrick Neveling, a social scientist at Utrecht University in the Netherlands, argues that the first SEZ in modern times was actually established more than a decade earlier than Shannon’s, in Puerto Rico in 1947. But its status as a de facto American colony might have made the model look like an imperial imposition.



“In the 1950s or 60s it was advisable to have Ireland – a country that can portray itself as a victim of English imperialism – come up with this concept, or to make it look like they came up with it,” says Neveling. “They were not a non-aligned country, but they were a nation that was supposedly outside of the western world – they were the poorhouse of Europe and so forth. This way you could sell this SEZ model to the rest of the world as a kind of postcolonial endeavour, whereas in Puerto Rico of course it looks very much like a colonial endeavour.”



The World Bank and other multilateral organisations that promote the establishment of SEZs also use examples of historical “free zones” in Roman antiquity as a different way of making this model seem natural, Neveling suggests. “It’s like saying: ‘Ever since we exited the Stone Age we’ve done this.’”



At a crossroads

Walking around Shannon today, it is hard to square the town’s disproportionate international influence – symbolic or otherwise – with its tiny size. Ryan suggests that Shannon stayed small precisely because of its success in attracting foreign investment to Ireland. “Shannon grew to a certain point, and then what worked in the free zone could be applied to the rest of the country. So you could spread that economic development to other towns and cities, and the need to have Shannon, this controlled area, went away. But Shannon continued to be an excellent brand – even today it is a big name.”

Since 2001, the use of Shannon airport by the US military been the subject of protest from antiwar campaigners. Photograph: Niall Carson/PA

Since 2005 the Free Zone has had the same 12.5% corporate tax rate as the rest of Ireland. Now most businesses in the zone are in services, not manufacturing. Incentives on offer to companies in the zone are on the whole no different to those offered in the rest of the Irish economy. EU state aid rules have also made it illegal in most cases to carve out specific territories and afford them special laws or exemptions to regulations.



“The nature of the business has changed and over time the fence that was around the zone, and the custom control points, they disappeared,” says Thompstone at the Chamber of Commerce. “They were originally set up because of the 0% tax rate, that then was extended to other parts of the country … then we joined the EU in 1973 and the free zone regime no longer fitted with that, but even at that point we didn’t need it anymore. So the fences came down and the benefits of a free trade zone were no longer so relevant because most of the exports were going to the EU, which was duty-free anyway. Really, today the Shannon Free Trade Zone name that you see on the entrance, is there more for marketing.”



There is another dynamic that has put Shannon in the headlines in recent years. Since 2001 the Irish government has let the US use Shannon airport for its military planes, and an estimated 2.5 million US troops have since passed through. An activist group called Shannonwatch has formed, which campaigns against “the use of Shannon airport by the US military on their way to and from their wars in Afghanistan and Iraq”.

Edward Horgan, a long-time activist with Shannonwatch, walks with us to the gates of the airport. “That’s one right there,” he says blithely, peering through binoculars at a plane across the runway. “The bulk of troops would have passed through on chartered civilian aircraft [but] we do know that those troops are carrying those weapons with them on the planes.” Among the planes to have gone through Shannon is the Lockheed C-130 Hercules military aircraft, which can come in various configurations, including weaponised versions.



Facebook Twitter Pinterest A US Hercules Transporter military aircraft parked at Shannon airport. Photograph: John Cogill/AP

For Horgan, Ireland’s loan of Shannon airport to US warplanes is a violation of Irish neutrality, as stated in Article 28.3 of the country’s constitution. It is also similar to the Free Zone and Shannon’s history of welcoming foreign corporations to set up shop tax-free. “Ireland is prostituting itself,” he says.



In 2016, Shannon seems once again to be at a crossroads. In a world of trade liberalisation and the proliferation of tax havens, there is very little states can now offer private capital that differentiates them and makes them a better candidate for investment.



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“In the modern EU environment there is very little differentiation that we can achieve as a general purpose free zone, so that isn’t going to cut it,” says Patrick Edmonds, Shannon Group’s strategy director and the man tasked with devising the future model. “Ireland is already an attractive location for [foreign direct investment] for national-level reasons. So how do we actually differentiate Shannon?” The Shannon Group’s brass will need all their creativity to come up with workable proposals to this dilemma.



In many respects, Shannon seems like a microcosm of world history, touched in strange and unlikely ways by the grand currents that have driven global events since the end of the second world war. From the industrial free zone innovation that would spur China’s rise to power in the 21st century to becoming part of the infrastructure in US conflicts in the Middle East, Shannon has been involved in some way. But attracting the coveted hot money – a preoccupation for policymakers around the world – means Shannon needs a new O’Regan more than ever. Can plucky Shannon innovate its way out of this one?

This article was amended on 20 April 2016 to clarify Ireland’s constitutional position on neutrality



Travel for this story was supported by the Pulitzer Center on Crisis Reporting



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