Download Appendix to Chapter 5 Ireland: the Celtic Tiger (Written June 2008)

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Chapter 6 Ireland: the Celtic Tiger
(Revised 2009)
1. Introduction
The history of Ireland’s** economy since independence from Britain (1922) is one of
extremes. Ireland was long considered one of the poorest countries in Europe (“the poorest of the
rich!”). In 1960, the standard of living in Ireland is estimated to have been 63% of the average of
the European Union (similar to Spain, Portugal, and Greece). It was a country beset by violence
(known as “The Troubles”). As late as the 1970s, it was still basically an agricultural country.
Poverty was extensive. The most common experience for a young person with some ambition
was to emigrate, mainly to Britain, the United States, Canada, or Australia. Emigrants rarely
returned to Ireland and were cut-off from family and friends.
The period since 1987, and especially since 1993, saw a complete reversal. Economic growth
rates in Ireland were among the fastest in Europe. By the measure of GDP per capita, Ireland
became the second richest country in Europe (after Luxembourg). Some people question this
measure of the standard of living. But by any measure, Ireland is now one of the richest countries
in the world. In 2005, the United Nations ranked Ireland 5th on its Human Development Index
(the United States ranked 12th). By 2002, Ireland’s standard of living is estimated to have been
25% above the average of the European Union and 14% above the level of the United Kingdom.
Poverty has been reduced. The old class system has been obliterated; commentators now see
Ireland as a middle class nation. The percent of people working in agriculture has fallen
considerably. But rather than having people move into manufacturing jobs, Ireland seems to have
skipped the manufacturing stage altogether. Instead economic growth has come basically in high
technology industries. Housing prices soared to astronomical heights before falling back in 2007
and 2008. And in a complete reversal of its previous history, Ireland experienced considerable
immigration, both from previous Irish emigrants who returned to Ireland and from immigrants
from the Baltic countries and Eastern Europe. The period after 1993 has become known as the
period of the “Celtic Tiger”. (The reference comes from the fact that in the 1980s, the countries
of Korea, Singapore, Hong Kong, and Taiwan were known as the “Asian Tigers”.)
As might be expected, there has been much debate as to the causes of this enormous reversal.
Some people see it as a result of a shift to a liberal market capitalist economy. They claim that
Ireland has followed the precepts of the liberal market capitalist economy more than most other
countries and that this is responsible for the great record of economic growth. Other people see
Ireland’s economic success as a result of globalization and particularly as a result of Ireland’s
entry into the European Union. (Ireland entered the European Union in 1973. At that time, it was
called the “European Economic Community”.) Ireland has been ranked as the most globalized
country in the world. Still other people see Ireland’s economic success as a result of a unique
mixture of the liberal market capitalist economy and the social market capitalist economy. Ireland
has indeed become a liberal market capitalist economy. But its liberal market capitalist economy
is, in some ways, different from the ones found in the United States or the United Kingdom. We
will discuss these differences in this chapter in order to learn what Ireland can teach us about the
two different varieties of capitalism. But first, let us examine the record before 1987.
**Ireland in this chapter refers to the 26 counties known as the Republic of Ireland. The 6 counties known
as Northern Ireland are part of the United Kingdom and are not considered here.
2. Ireland from 1922 to 1987
Ireland achieved full independence from Britain and became a Republic in 1922. At
independence, Ireland’s economy was in the middle rank among European countries. In terms of
policy, little was done until the Great Depression of the 1930s. But in the 1930s, under Eamon de
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Valera, a number of policies were adopted that cut Ireland off from the international economy.
Foreign direct investment was virtually excluded. High tariff rates were imposed on
imports. Between 1932 and 1966, Irish industry was one of the most protected in the world. The
policy was based more on nationalism than on any economic ideology. A protected economy
meant “protection from Britain”. In this period, the Catholic Church controlled the education
system, the provision of health services, and civic life in general. There was a rigid class
structure, similar to Britain. Women were obligated to give up their jobs upon marriage (this
lasted until 1974).
In this period, the government also played a prominent role in the economy. State-owned
companies were created in radio and television, air, sea, road, and rail transport, hotels, food
processing, steel, chemical fertilizers, and many other areas. These state-owned companies had
monopoly power and were inefficient. They hired more workers than were needed and were
obligated to fulfill social objectives that were costly. Much of the housing was “public housing”.
By the 1970s, the role of the Irish government was probably more extensive than in any other socalled “capitalist” country. Correspondingly, taxes were high.
Through much of this period, Ireland had a low savings rate. And much of those savings were
taken by the government to be used in the creation of hospitals and public housing. So there was
little left for business investment spending (private businesses buying capital goods). The low
amount of capital goods led to low rates of growth of productivity for industrial workers.
Ireland’s economy in this period was based on labor-intensive, low productivity
agriculture. About three-fourths of Ireland’s exports were live animals and food products. 90%
of these exports went to Britain, illustrating Ireland’s economic dependence on Britain. Nearly
half of the labor force worked in agriculture, a percent that began to decline in the 1960s. (Today
fewer than 10% of the labor force work in agriculture.) In the 1920s, 2/3 of people lived in rural
areas. (Today, 2/3 live in towns.)
As mentioned above, Ireland’s economy in this period faced considerable emigration.
Over a period of two years in the late 1950s, some 2% of the population of Ireland emigrated.
And it was the most educated and the most ambitious people who emigrated. These high rates of
emigration meant that a large portion of the population was either very young or very old. The
proportion of young adults was unusually small. Emigration had a psychological effect as well,
making people dispirited. Dispirited people are reluctant to take risks. This reluctance, the effect
of a contracting domestic market as people left, and the low amount of savings available all
contributed to the low rate of business investment spending.
Ireland in this period was also characterized by an adversarial labor market, similar to
the system that existed in Britain. Union – management relations were not good. Strikes were not
infrequent, peaking in 1979 when 1.4 million person-days were lost to strikes. The share of total
income going to workers as wages was higher than it has been since 1987.
Although we begin the “Celtic Tiger” era in 1987, there was some turnaround in the 1960s.
This followed a prolonged period of slow growth in the 1950s. That slow growth necessitated a
change in direction in the 1960s. First, there was an end to protectionism and an opening to
international trade. Tariff reductions were made in 1964 and an Anglo-Irish Free Trade
Agreement was passed in 1965. Ireland joined the EEC in 1973. Second, in the 1960s, the
government introduced a system of industrial grants and tax incentives to help Irish industry
modernize. Many of these grants and incentives were designed to attract export-oriented foreign
direct investment. An Industrial Development Authority (IDA) was created to attract foreign
companies to locate in Ireland. (By 2001, the companies that the IDA had attracted to Ireland
were responsible for more than a quarter of all industrial jobs.) Third, the percent of the labor
force working in agriculture had fallen to 24% by 1973 (down from about 50% in 1922). Fourth,
in 1968, second level education was first made available free to everyone for the first time. There
was also an expansion of technical education. This is to lead to a large expansion of educational
attainment. The percent of 17 year olds in secondary education rose from 25% in 1964 to 83% in
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1994, a remarkable rise in just 30 years. Some 80% of those who finish secondary education now
go on to higher education. The school curriculum has also changed to focus more on the needs of
the economy. The result was a continuous economic expansion from the late 1950s to the early
1970s, with living standards rising by more than 40% over that period.
The decades of the 1970s and early 1980s were ones of international economic difficulties.
The great stagflation (recession combined with inflation) began in 1973 and was repeated in
1979, caused by a large increase in oil prices. In the early 1980s, there was another major
recession in the United States and Europe. These international economic difficulties, along with
“The Troubles”, negatively affected Ireland’s economy, wiping out much of the gain that had
occurred in the 1960s. Over the entire period from 1926 to 1985, income per person in
Ireland had increased by an average of 1.8% per year, similar to Britain but less than most
other European countries. From once being in the middle rank in Europe, Ireland was now
one of the poorest countries in Europe. Its economy was poorer than would have been expected
given the ability it should have had to “catch up” to other European countries. Ireland was poorer
than Italy, when it should have been equal. Ireland was poorer than Northern Ireland. By the mid1980s, unemployment was very high (17.1% in 1986). The government tried to increase overall
spending (to lower unemployment) by increasing government spending. The high unemployment
continued, however, and made tax revenues decrease as people had less income on which to pay
taxes. The high government spending (government spending had risen to 62% of GNP**)
combined with lower tax revenues increased the budget deficit to a whopping 15.7% of GNP in
1982. (In contrast, the American budget deficits of 2001 to 2007 equaled about 3% of American
GDP.) The total national debt amounted to 129% of GNP in 1986 (the American national debt is
currently about 67% of GDP). Most of this borrowing was from foreigners. More than one third
of total tax receipts were needed just to pay the interest on the government’s debt. Emigration
once again became significant and it was the most educated people who were emigrating.
Inflation was in double digits, averaging 11% per year from 1981 to 1986. By the mid-1980s,
once again, Ireland’s economy was in crisis. It was time for some major changes.
** There is a distinction between Gross Domestic Product (GDP) and Gross National Product (GNP). GDP
measures all of the production that takes places inside the borders of a country. GNP subtracts the profits of
foreign owners who take their profits out of the country. GNP represents the production that is available
for the Irish population. For most countries, there is little difference between GDP and GNP. But for
Ireland, GNP is about 80% of GDP. In this chapter, we will use GNP as the better measure.
3. Ireland from 1987 to 2008: The Pillars of Economic Success
A. Pillar 1: Public Finances
When the new minority government took over in 1987, its first priority was to restore order to
the public finances. This was agreed to by all political parties. This meant, first of all, a sharp
decrease in the amount of government spending. In 1987, health spending was reduced 6%,
education spending 7%, agricultural spending 18%, roads and housing spending 11%, and
military spending 7%. Nearly 10,000 government sector jobs were eliminated voluntarily through
early retirement and other incentives. The next year, government current spending declined
another 3% and government capital spending declined 16%. Government spending (not
considering interest payments) declined from 55% of GNP in 1985 to 41% in 1990. Reducing
government spending as a percent of GNP was the first step taken by Ireland in the
direction of a liberal market capitalist economy. The decrease in government spending
restored investors’ confidence in the economy. This laid the foundation for the growth of business
investment spending that was to come. The commitment to lower government spending was
enhanced when Ireland signed the Maastricht Treat in 1992 (promising to maintain budget
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deficits below 3% of GDP and to keep the debt-to-GNP ratio below 60%). The Maastricht Treaty
is discussed in the next chapter. Economists call this a “credible commitment” and argue that it
has major effects on business investment spending decisions.
The changes in public finance also involved taxes. In 1985, the standard income tax rate
was 35%. The top income tax rate was 65%. By 1989, the standard income tax rate had been
lowered to 32% and the top income tax rate lowered to 56%. By 2002, the standard income tax
rate had been lowered to 20% and the top tax rate had been lowered to 42%. These rates are
higher than are found in the United States. But they are relatively low rates by European
standards.
The corporate tax rate had been 40%. But Ireland enacted a special 10% tax rate for
corporation involved in international trade. This 10% tax rate was available to foreign-owned
companies that sold most of their goods outside of Ireland. In 2003, this was changed and the
corporate tax rate charged to all companies was set at 12.5%. Since the corporate tax rate in most
other European countries as well as the United States ranges from 25% to 40%, the low
corporate tax rate of 12.5% gives Ireland a large advantage in attracting foreign-owned
companies.
The capital gains tax rate (charged on profits earned from selling stocks or selling homes) was
also reduced in 1999 from 40% to 20%. As a result of all of these tax changes, the ratio of total
tax revenues to GDP, at 31% in 1996, is lower than it was in 1990 --- similar to the percent
taken in the United States, and much lower than the European Union average of 46%. Ireland
is a low tax country.
As have many other countries, Ireland experienced privatization. Privatization was one of the
ways to reduce government spending. In 1980, about 90,000 people (out of a labor force of 1.1
million) worked in government-owned commercial enterprises. Today, about 48,000 (out of a
labor force of over 2 million people) work in these enterprises. The existing government-owned
enterprises mentioned on Page 2 had been created more out of nationalistic feeling than out of
any doctrine. However, by the 1970s, they had come to be seen as high cost, indifferent to
consumers, and in constant need of government subsidies. They were seen as “capturing” the
government agencies that were supposed to control them so as to serve the interests of the
companies. Their products were expensive. They were “overmanned” by a considerable margin.
First to be privatized was the Dairy Disposal Company. The company was sold in 1974 to a
private group. Between 1974 and 1991, the share price quadrupled. In 1984, the Irish Shipping
Company was liquidated. Over the years 1990 to 2003, the state left the production of food
(especially sugar), life insurance, telecommunications, shipping (two former state shipping
companies are now Irish Ferries), fertilizer, oil refining, steel, and banking. The sale of
telecommunications lowered the average charges on telephone calls from above average to half of
the OECD average. Unlike Britain, Ireland did not privatize electricity, natural gas, railways,
seaports, and water. The airline Aer Lingus is still 25% owned by the Irish government. RTE (the
state television and radio network similar to BBC) is still government owned. However, some
new regulatory bodies were created for energy, telecommunications, broadcasting, airports, and
health insurance. These are designed to exercise more independent control over the companies.
In recent years, the high rate of economic growth led to a large increase in tax revenues.
Between 2000 and 2007, Ireland experienced the second highest rate of growth of government
spending (adjusted for inflation) of any country in the OECD. Yet despite this growth of
government spending, the government has had a budget surplus and has used this surplus to pay
down the national debt. It has also used the surplus to start building a fund for future pension
liabilities. The budget surplus equaled 3.5% of Gross National Income in 2006 before declining in
2007 and 2008.
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Pillar 2: Foreign Direct Investment and the Expansion of Trade
As was mentioned earlier, Ireland shifted from an inward-orientation to an outward (export)
orientation in the 1960s. This shift was accentuated after 1987. A major part of this shift to an
outward-orientation was the attempt to attract export-oriented foreign direct investment. As
noted above, the Industrial Development Authority (IDA) was created with this as its purpose.
In 2004, the cumulative amount of foreign direct investment in Ireland stood at 125% of
GDP, the highest percent of any OECD country. As of 2006, United States foreign direct
investment in Ireland totaled over $90 billion. There are nearly 500 American companies in
Ireland, about half of all foreign-owned companies located there. These companies employ more
than 90,000 people and seem to be concentrated in high technology manufacturing (electronics,
health care, and pharmaceuticals) and internationally traded services (software, telemarketing,
financial services, and so forth). At the present time, 13 of the world’s top 15 pharmaceutical
companies produce in Ireland. Six of the 10 top selling drugs are manufactured in Ireland. Seven
of the world’s top 10 Information and Communications Technology companies produce in
Ireland. Dell alone employs more than 45,000 people. And 15 of the world’s top 25 Medical
Technologies companies produce in Ireland. In 1987, Ireland’s government took an old, rundown area on the docks of Dublin and converted it into an International Financial Services
Center, designed to attract foreign direct investment. Now more than 30% of all foreign direct
investment in Ireland is invested there. This Center now employs more than 16,000 people and
has offices of more than half of the world’s top 20 insurance companies and the world’s 50
largest banks.
What attracted all these foreign companies to Ireland? One reason is surely the very low
corporate tax rate. As mentioned in the previous section, Ireland’s corporate tax rate is much
lower than that of other European countries. (This also makes it difficult to evaluate Ireland’s
statistics. Many foreign-owned companies adjust their accounting to take their profits in Ireland
in order to avoid taxes.) A second reason is that Ireland possesses a large number of well
educated young people. That these people were English speaking was a special benefit to
American-owned companies. Indeed, Irish and American cultures are not too dissimilar. In part
because of the skilled work force, labor productivity in Ireland is very high. A third reason is
that Ireland is part of the European Union (EU). As the EU created the Single Market,
location in Ireland would allow American-owned companies to sell in Europe tariff free. Being at
the western edge of Europe, Ireland also offers relatively easy access to the United States. The
European Union is the subject of the next chapter. A fourth reason is that the unions are not
particularly strong in Ireland. The foreign-owned companies were able to create non-union
companies, allowing them more flexibility. In addition, Ireland’s economy is now the least
regulated in the European Union. Ireland also scores well in terms of having a freely
functioning, flexible labor market. And a final reason is that Ireland has an efficient public
administration, allowing for protection of property rights and for the rule of law.
What has Ireland gained from the foreign direct investment? Since most of the
production is exported and a good part of the profits are remitted to the parent company in the
United States, studies seem to indicate that the direct effect on Irish GNP has not been
particularly large. Yet the benefits have been substantial. The most important benefit for
Ireland has been the development of skills useful in the high technology industries. There are
now a large number of highly skilled Irish workers in the high technology industries. Some of
these people have spun-off new companies. Indeed, in recent years, there has been a small, but
noticeable, shift in which Irish companies are buying American companies in Silicon Valley.
Second, Ireland got the benefit of employment. As mentioned, these foreign-owned companies
now employ a large number of workers. They are a major reason that the unemployment rate fell
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from over 17% to around 4%. Most of these new jobs pay well by Irish standards. The higher
incomes generated, and the taxes paid by these corporations, have meant higher tax revenues for
the government. These have allowed the government to lower tax rates and increase government
spending while still eliminating its budget deficit. Third, although these foreign-owned
companies do import a high percent of their parts and materials, there are some linkages to
Irish companies. According to one study, about 27% of the total sales of the foreign-owned
companies are spent in Ireland. This has provided a boost to indigenous Irish companies. And
fourth, Ireland has benefited from the large growth in exports. Some 95% of the production
of the foreign owned companies is exported. In part because of the increase in the number of
foreign owned companies, the value of Ireland’s exports, adjusted for inflation, is now some 40
times the value in 1960. In 2005, exports were equal to 96% of GNP, making Ireland the most
export-oriented country in the European Union. Per capita, Ireland’s exports are seven times
those of the United States and 4 times those of the UK. About 20% of Ireland’s exports now go to
the United States, making the United States the leading export market for Ireland. About half of
Ireland’s economic growth has been attributed to the expansion of exports. Ireland has had a
trade surplus for some time; in 2005, Ireland’s exports amounted to 88 billion Euros while its
imports amounted to 56 billion Euros. There is an index of globalization, bringing together some
13 indicators of global integration. Between 2002 and 2004, Ireland was ranked as the world’s
most globalized country before falling to second place in 2005 (behind Singapore).
Pillar 3: The Expansion of Education
One of the keys to the success of Ireland’s economy has been the expansion of educational
attainment. This developed after secondary education was made available free to all people in
1968. Universities are also free. In 1965, some 20% of the relevant age group went on to
secondary education. In 2005, almost 80% of the relevant age group was going on to secondary
education. In 1965, a bit more than 10% of the relevant age group was in some form of higher
education. In 2005, 60% were. Some 41% of the population aged 25 to 34 has completed third
level education, the second highest rate in the European Union. By world standards, this is a very
high figure. The quality of Ireland’s education is very high, as well. According to a recent OECD
study, Ireland ranked 5th in the world in Reading Literacy (the United States ranked 15th), 16th in
the world in Mathematical Literacy (the United States ranked 19th), and 9th in the world in
Scientific Literacy (the United States ranked 14th). In 2000, Ireland had 16.26 science and
engineering graduates per 1,000 people age 20 to 34, more than the United States (6.85), the
United Kingdom (10.04), or Japan (8.66). In a different study, it was estimated that improved
education increased the effective labor force by 1% per year from 1986 to 1996. A recent index
of human capital employed in the Irish economy (1951 – 100) rose as follows:
Table 1: Index of Human Capital (1951 = 100)
1966
1971
1981
1989
1991
1994
91
92
108
107
115
121
In the 1980s, many of the people who were highly educated migrated to other countries. It was
only in the 1990s that Ireland was able to create enough jobs to keep most of its highly educated
people at home.
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Pillar 4: The Social Partnership
In many ways, Ireland since 1987 has changed in the direction of a liberal market capitalist
economy. However, one way in which Ireland has changed in the direction of a social market
capitalist economy involves labor relations. In this, Ireland has a form of “corporatism” that
resembles Scandinavia or Germany more closely than it resembles the United States or Britain.
Beginning in 1987, in the wake of economic crisis, wages came to be determined via “social
partnership”. Government, unions, farming interests, and employers agreed to come together
every three years to bargain and negotiate future wage increases in both the private and
public sectors. They would also negotiate other areas of government social policy. (This has
subsequently been broadened to include women’s groups, representatives of the unemployed, and
community groups.) The government participates through the Prime Minister’s office. (All major
political parties have agreed to the Social Partnership approach.) The employers are represented
mainly by the Irish Business and Employers Confederation and the Construction Industry
Federation. The workers are represented by the Irish Congress of Trade Unions – an organization
representing 40 unions with some 550,000 members. The main goal was wage moderation.
Wages were increased only 2.5% per year in the first agreement from 1987 to 1990. At that time,
the unions had changed goals; their goal now was employment growth rather than wage growth
for those who still had a job. Lower wage increases would help companies hold down costs and
would help to keep them competitive internationally. Achieving this wage moderation was aided
by a decline in the number of unions, especially the craft unions that had been the most militant,
even though overall union density has stayed close to 50% of the work force. Unions agreed to
lower wage increases because the government promised to offset their sacrifice with tax
decreases. Between 1987 and 1998, average industrial earnings increased 58%. But average take
home pay (after the tax reductions) increased 80%. So about 1/3 of the increase in average
take-home pay was a result of the tax reductions. The government also offset some of the
unions’ sacrifice with improved welfare benefits and increased health spending. In addition, the
government helped workers by reforming the labor laws and introducing a minimum wage.
The seventh and most recent Social Partnership Agreement, “Toward 2016”, is a change from
the previous six agreements in that it is a ten year agreement. It allowed for a 10.4% cumulative
wage increase over the first 27 months beginning in 2006 (with the rest of the ten year period to
be determined later). It included increased enforcement for employment protection and
compliance with European Union labor standards. It promised improved welfare provisions and
improved provision of government services. It should be noted that while in the early Social
Partnership Agreements the focus was mainly on wages, in later agreements, the Social Partners
have focused more on other matters of economic policy (including government finances, inflation
rates, corporate strategy, technical change, work practices, privatization, policies to enhance
certain local areas, active labor market policies, and the European Union).
One result of the Social Partnership Agreements was that wages declined as a share of
national income. In 1985, wages were 60% of national income; by 1997, wages were only 43%
of national income. Another result of the Social Partnership Agreements has been a large
reduction in the incidence of strikes; the number of days lost to strikes declined from more
than one million in 1979 to a bit more than 37,000 in 1998. Partly because of the wage
moderation, there has been a decline in the unemployment rate (from 17% in 1986 to 4% in
2001). This decline in unemployment increased overall production because more people were
working and therefore were producing. It increased tax revenues because workers were earning
and paying taxes rather than being unemployed. The increased tax revenues allowed the
government to reduce the tax rates (the benefit that went to the workers to replace the lower wage
increases). This is called a “virtuous circle”. The wage moderation, the low unemployment, and
the lower tax rates all acted as attractions for the foreign direct investment. Partly because the
Social Partnership Agreements had social welfare provisions, the incidence of severe poverty has
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fallen – from 15% in the early 1990s to 6% in 2002. Finally, it has been argued by some people
that the Social Partnership approach generated a higher level of social solidarity than is found in
liberal markets capitalist economies like the United States or United Kingdom.
Pillar 5: The European Union
A necessary condition for Ireland’s economic success was the entry into the European Union.
(Ireland entered what was then called the European Economic Community in 1973. But its
economic success did not really begin until 1987.) Ireland also joined the European Monetary
System and, in 2002, dropped the Irish pound for the Euro. There are several ways that being a
member of the European Union has contributed to Ireland’s economic success.
First, being a member of the European Union allowed Ireland to re-direct and expand its
trade. The re-direction of trade means that Irish trade has shifted from Britain to the rest of
Europe and the United States. In 1973, almost all of Ireland’s exports went to Britain. Today,
less than 1/5 go to Britain. Indeed, more of Ireland’s exports go to the United States than to
Britain. The same result has occurred for imports. See the data in the table below. So Ireland is
much less dependent on Britain than it used to be. This reduced dependence has strengthened
Ireland’s sense of identity and raised national self-confidence.
The expansion of trade following entrance to the European Union has been enormous.
This is largely a result of the Single Market. Just between 1990 and 2007, Ireland’s imports
nearly quadrupled and Ireland’s exports almost quintupled! As mentioned on Page 6, about half
of the improvement in Ireland’s overall economic performance has been attributed to the increase
in trade.
Table 2:
Imports
Trade by Area
1973
2003
Great Britain
Northern Ireland
Other European Union
USA
Rest of World
47%
4%
21%
7%
21%
29%
2%
25%
16%
28%
45%
9%
21%
10%
15%
16%
2%
43%
21%
18%
Exports
Great Britain
Northern Ireland
Other European Union
USA
Rest of World
Second, a major benefit to Ireland from its membership in the European Union was the
external assistance it has received. Some $30 to $40 billion was directed to Ireland. Much of
this went to agriculture (see below). The rest came from the Structural Funds of the European
Union. This money was to go to countries with GDP per capita less than 90% of the EU average
to help them compete when the Single Market was fully created. Between 7% and 10% of these
funds went to Ireland. Much of the money for major infrastructure projects came from the
European Union. Ireland spent this money on roads, railways, ports, airports,
telecommunications, sewers, water lines, and other infrastructure. By 1998, some 107 projects
had received financial assistance from the European Union. Some of the money that was invested
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in improving education came from the European Union. Since Ireland is no longer a poor country
within the European Union, this external assistance has been recently reduced. But it was
estimated that between 1989 and 1999, the transfers from the European Union raised
Ireland’s GNP 3% to 4% above the level that would have been achieved without the
transfers.
Third, the entrance into the European Union brought considerable benefits to the
agricultural sector of Ireland. As discussed in the next chapter, the European Union has a
Common Agricultural Policy (CAP). The Common Agricultural Policy involves a price
floor well above the market price. Agricultural prices in the European Union areas have
been as high as two to four times the world market prices. At the time it entered the European
Union, Ireland still had a large agricultural sector. Some 25% of the labor force was employed in
agriculture producing about 16% of the GDP. So Ireland’s farmers benefited greatly from the
European Union’s agricultural subsidies. Of the monies that Ireland received from the European
Union up to 1998, more than 70% had resulted from this Common Agricultural Policy. Before
entry into the European Union, Ireland had been subsidizing its own farmers. After entry, much
of this cost was transferred to the European Union. But despite the subsidies, Ireland’s
agricultural sector has diminished in relative size. Today, only about 8% of the labor force works
in agriculture, producing about 5% of the GDP.
Fourth, entrance into the European Union was a major part of the attraction of Ireland
to American multi-national companies. Once the Single Market was agreed to in 1987,
American companies could locate in Ireland and sell their products anywhere in Europe duty-free.
Of course, they could have located anywhere in Europe and done the same. There was great
competition for these companies. But, as mentioned earlier, Ireland had other advantages. It had
an educated, English speaking labor force. It offered a very low corporate tax rate. It was the
closest European country geographically to the United States. Many of the executives of the large
American multi-nationals had Irish ancestry. The Industrial Development Authority (IDA) of
Ireland marketed Ireland very strongly and effectively. It even offered training grants to pay to
train the Irish workers (with part of the money coming from the European Union). The benefits to
Ireland from these foreign-owned companies were discussed in Pillar 2 above.
Fifth, Ireland benefited from the European Monetary System and the introduction of the
Euro. Ireland is a young country; a large part of the population is under age 40. Ireland’s baby
boom came mainly in the 1980s. On the other hand, Germany is an older country. A greater part
of the German population is over age 40. The German birth rate is low. People under age 40 tend
to spend a relatively high portion of their incomes. People over age 40 tend to save a higher part
of their incomes. Germany has been a high savings country. The high amount of savings in
Germany causes interest rates to be low. (Banks have much to lend and need to lower interest
rates to attract borrowers.) Because they are part of the same monetary system, the interest rates
have also been low for Irish borrowers. It was therefore easy for Irish borrowers to borrow funds
that Germans had saved and to borrow these funds at low interest rates. The availability of easy
credit at low interest rates was a major reason for the expansion of Ireland’s economy up to
2008. This also led to a housing boom (as much of the borrowing was for housing) that led to
inflated housing prices. (The housing boom finally ended in 2007.) The collapse of this boom will
be discussed below. As you will see, with the economy went into severe recession in 2008, there
was renewed talk of stopping using the Euro and returning to the Irish pound.
In summary, joining the European Union was a necessary condition for the Celtic Tiger
economy to emerge. The European Union allowed a large expansion of Ireland’s trade and a
reduced dependence on Great Britain. It brought in a significant amount of external funding that
10
was used for development. It brought in substantial subsidies for Irish agriculture. The Single
Market provided an important argument used in attracting foreign direct investment. And it
allowed lower interest rates and an expansion of available credit. In addition, the criteria of the
European Union’s Maastricht Treaty forced Ireland to get its budget deficit in order. The shift to
the European Central Bank took away from Ireland the ability to stimulate its economy and
perhaps cause inflation. All of this generated much greater economic stability. The European
Union labor rules have made it easier for the Social Partners to reach agreements. In all, the case
of Ireland is one of the best success stories since the formation of the European Union.
Pillar 6: Immigration
As noted earlier, Ireland has long been a country subject to high rates of emigration. Indeed,
there are some 33 million people in the United States alone who claim some Irish ancestry. But
beginning in the 1990s, this was reversed and Ireland became a country of immigration. The
process began with the return of Irish-born educated people who had migrated to other countries.
But the immigration has involved other people as well. For example, there is a significant
Chinese community in Ireland. This was augmented in 2004 when Ireland agreed to allow
entrance to people from all of the new countries of the European Union. Thousands of Poles,
Lithuanians, Latvians, and Estonians have come to Ireland. Today, about 15% of the people in
Ireland were born outside of the country. These people are usually young, well educated, and
employed. They have taken jobs in construction as well as “lower level” jobs. They are a major
attraction for the foreign-owned companies and have definitely contributed to economic growth.
And because they are employed, they have not put major demands on government services or on
the welfare system. But they have added to traffic problems and to housing demand.
4. The Economic Results Since 1987
As mentioned at the beginning of this chapter, Ireland’s economy since 1987 (and especially
since 1993) has been a major success story. Virtually every indicator of economic performance
not only improved but has been good by international standards. Real GDP grew at an annual
rate of about 8% per year between 1994 and 2004. This contrasts with a growth rate of about 3%
per year for the United States and 2% per year for the European Union over the same period. In
2006, Ireland had a Gross National Income of $45,580 per person, 6th highest in the world. By
this measure, Ireland’s Gross National Income was slightly higher than that of the United States
($44,970). Gross National Product per person grew from 60% of the European Union average in
1986 to 125% of the European Union average by 2006. As you can see in the chart below,
unemployment in Ireland declined from very high levels to low levels – around 4%.
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Employment increased as well from only 1.1 million people in 1986 to 2.1 million people in
2007. The employment rate rose to 69% in 2007 – 8th highest in the European Union. Between
1997 and 2006, productivity of workers grew at an average rate of 2.9% per year (compared to
0.8% for the entire Euro area). Inflation rates have also been relatively low. After once being
more than 20%, Ireland’s inflation rate averaged only 2.5% in the years from 1994 to 2000 before
increasing to a bit over 4% in 2001 and 2002. Inflation then averaged only 2.7% for the three
years from 2003 to 2005 before rising to 4% in 2006 and 4.1% in 2007. As mentioned earlier,
government spending declined from about 53% of GDP in 1986 to 33% of GDP by 2000. The
government (national) debt declined from 131% of GDP in 1986 to 23% of GDP in 2007. Tax
rates have decreased. The budget of the central government has been in surplus, with the surplus
equaling 4.2% of GDP in 2007. As mentioned under Pillar 4, foreign trade increased greatly.
Exports, which equaled 56% of GDP in 1986, now equal about 96% of GDP. Ireland had a
considerable trade surplus of about $40 billion in 2007. Homeownership rates topped 80%,
one of the highest rates in the world. Even tourism tripled in this period (partially a result of the
deregulation of the airline industry). These numbers document an incredible success story.
Who received the benefits of this tremendous economic performance? One might expect that
the shift to the liberal market capitalist economy would increase inequality. But the data show
some increase in inequality but remarkably little change. The benefits of the rapid economic
growth seem to have been widely shared.
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Table 3:
Decile
1980
1987
1995
Bottom
2
3
4
5
6
7
8
9
10
1.7%
3.5
5.1
6.6
7.9
9.3
11.0
13.0
16.2
25.7
2.2%
3.7
5.0
6.3
7.6
9.2
11.0
13.4
16.5
25.1
2.1%
3.5
4.8
6.0
7.6
9.2
11.3
13.6
16.7
25.1
Gini
0.36
0.352
0.362
In terms of the Gini coefficient of 0.362, Ireland is about average for Europe. The expected rise in
inequality did not happen because of the dramatic increase in the labor force participation rate of
married women – up 12 percentage points. (The inequality in wages is much greater than the
inequality in family incomes.)
While the benefits of economic growth have been widely shared, some people have been left
out. Measuring poverty is difficult and controversial. But in 2006, some 6.9% of the population
lived in consistent poverty, down from over 14% in 1994 (as defined by the Irish government).
However, relative poverty increased from 15.6% of the population to 22%. (One is in relative
poverty if one’s income is less than 50% of the median income.) By the measure of relative
poverty, Ireland has one of the highest poverty rates in Europe. Some 18% of the people are
considered at risk of poverty, slightly higher than the European average of 16%. This results in
part because the social welfare state is so much smaller in Ireland. People who depend on welfare
state benefits are worse off in Ireland than in the countries of continental Europe.
5. The 2008 Recession
Ireland is now facing some very serious economic challenges. It was the first European country
to officially enter a recession – September 2008. First, much of its economic growth was
fuelled by a large boom in property values. As in the United States, the bubble burst and
property values fell greatly from 2007 on. This reduced the value of people’s wealth and therefore
reduced their consumer spending. It also reduced confidence on the part of both consumers and
businesses. (Like Americans, the Irish have increased their precautionary savings.) Foreclosures
on mortgage loans increased. As in the United States, these foreclosures caused many of the
banks to become insolvent. The problems of the banks caused their bank lending to decline
greatly. The housing market virtually collapsed. In 2006, some 90,000 homes were built and
housing accounted for 15% of Irish GDP. In 2009, it is expected that only 20,000 homes will be
built. In addition, there were some questionable deals at Anglo-Irish Bank, causing the public to
lose confidence in the banking system. Anglo-Irish was nationalized. The government also
injected capital into two other large Irish banks as part of a deal to get the banks to increase
lending. Second, because it is one of the most globalized countries, Ireland is affected by the
world economic cycle. At the time of this writing, the world is in a period of recession and rising
unemployment. Growth in Ireland was 5% in 2007; in 2008, the economy contracted by 2.3% --the first contraction since 1983. A further contraction is projected from 2009 through 2011.
Unemployment was 5% at the beginning of 2008; by 2009, it was closer to 8% and rising. Instead
of the previous problem of inflation, Ireland has been experiencing deflation – falling prices. If
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deflation encourages people to postpone purchases in the hope of getting a lower price later, the
current recession could be worsened. In February of 2009, some 120,000 protestors were in the
streets of Dublin, including members of the police and armed forces. There have been several
strikes and other forms of industrial unrest. The approval rating of the governing party fell to
10%. Third, the slowdown of economic activity reduced tax revenues and therefore turned
the budget surplus into a large budget deficit. From February 2008 to February 2009, tax
collection declined by 31%. In 2007, the budget surplus was 0.5% of GDP. By 2009, the
projected budget deficit is 9.5% of GDP --- the highest rate in Europe (and projected to increase
to 12% in 2010). This came at a time when Ireland had committed to a large infrastructure
investment program and increased spending on R&D. Needless to say, this commitment has not
been met, exacerbating the problems of the construction industry. Government spending has been
slashed in many areas. Yet, in the short-term, Ireland is at risk of defaulting on its government
debt. And in the long-term, Ireland, like most countries, will face long-term budget problems
resulting from the aging of its population. Fourth, Ireland rejected the Lisbon Treaty of the
European Union. A second election is expected in October of 2009. The future of the European
Union, and Ireland’s place in the European Union, are in question. There has even been mention
of the idea that Ireland might pull out of the Euro. Fifth, Ireland had benefited greatly from
foreign direct investment, especially of American-owned companies. But today, there is
greater competition for these companies. And American companies are less likely to invest
anywhere in the current economic recession. Ireland has reached the stage where its indigenous
companies must take the lead in providing economic growth. For the first time in a long time,
Ireland’s growth will depend much less on its exports. We have yet to see how well Ireland’s
companies have learned new technologies from their connections to the American-owned multinationals to be able to be a force for growth on their own.
6. Conclusions
Ireland clearly acted to become a liberal market capitalist economy. It decreased its
government spending, reduced its taxes, eliminated its budget deficit, lowered its national debt,
stabilized its money and its exchange rate, opened itself greatly to foreign trade, to foreign direct
investment, and to the free movement of people, deregulated some of its industries, privatized
some government-owned enterprises, and created a very flexible labor market. These are all
policies that are recommended by supporters of the liberal market capitalist economy to
developing countries. (As we will see later, these policies are known as the “Washington
Consensus”.) Although government was involved in the Irish economy, much of what it has done
is consistent with laissez faire. Government provided a system of laws, protected property rights,
administered reasonably efficiently, promoted education, developed infrastructure, promoted
foreign direct investment, and even dealt with the environment (e.g. plastic bags are not allowed
in Ireland). Ireland also experienced some of the problems of a liberal market capitalist economy
including a small increase in inequality and an increase in relative poverty. And Ireland has
suffered more than many other countries from the global recession that began at the end of 2007.
So other countries considering a move to a liberal market capitalist economy can learn much from
Ireland’s experience.
However, Ireland is not a full liberal market capitalist economy. The agreements of the Social
Partners must be considered “corporatist”. Ireland has a high rate of unionization of its work
force. The Irish government is considerably involved with the economy as one of the Social
Partners. The agreements of the Social Partners helped hold down wage increases and also
generated widespread support for the economic policies that promoted economic growth. In this
sense, Ireland was more like Denmark than it is like the United States. But there is evidence that,
in the current global recession, the Social Partnership is breaking down.
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Ireland is now facing the downturn in economic activity that is affecting all countries. How it
comes through this downturn will show whether the Celtic Tiger was a temporary achievement or
a move to a permanent state. Can Ireland come to rely more on indigenous companies and less on
foreign-owned companies? To the extent that Ireland survives the downturn reasonably well and
emerges as a successful economy, it will provide important lessons for other countries, especially
for the countries of Eastern Europe who have just emerged from communism and have recently
joined the European Union.
Assignment
1. Name some ways that Ireland’s policies since 1984 show that it has adopted the philosophy of
liberal market capitalism? In what ways have its policies differed from this philosophy?
2. To what extent do you believe that the adoption of policies adopted from the philosophy of
liberal market capitalism contributed to the success of the Irish economy up to 2007? Give as
many examples as you can. Be Specific.
3. To what extent do you believe that the adoption of policies adopted from the philosophy of
liberal market capitalism contributed to the problems the Irish economy has experienced in 2008
and 2009? Give as many examples as you can. Be Specific.