Economic miracle was a long time coming

As the 21st century dawns, official Ireland is feeling smug. Between 1994 and 1999, per capita income (GNP) grew at an astonishing 7.9 per cent. Between 1987 and 1998, per capita output (GDP) grew at 6.7 per cent in Ireland, but at only 1.7 per cent in the US, and 1.8 per cent in the rest of Western Europe.

Some commentators seem to think this headlong growth will last, while some politicians seem to think it ought to. Meanwhile, the Economist magazine, which once referred to Ireland as "The Poorest of the Rich" now muses about "what Ireland can teach the rest". However, an historical and comparative view of the Irish boom yields a more sobering perspective.

One of the most robust facts about European growth over the past 50 years has been that poorer countries tend to grow faster than richer countries: thus, the fastest-growing economies have been Greece and Portugal, while the slowest growing economies have been Switzerland and Britain (which has, in turn, grown slightly faster than the US).

This "convergence" tendency reflects the ability of laggards to catch up on economic leaders by importing both capital and best-practice technology.

Between 1950 and 1987, the outstanding exception to this general rule was Ireland, which only managed to grow at 2.8 per cent per annum (the same rate as affluent Belgium), while its peripheral peers were clocking up growth rates in excess of 4 per cent.

As the table shows, our recent growth spurt has merely sufficed to give us half-century growth rates more or less in line with what our 1950 income would have predicted: about the same as Spain, but lower than Portugal or Greece.

Viewed in this light, the interesting question is not why Ireland has done so well in the last decade, but why it took us so long to catch up. A useful comparison is provided by Italy, another traditionally agricultural economy whose per capita output was roughly the same as Ireland's in 1950. By 1998, its per capita output (if not its income) was 8.8 per cent lower, but it would be wrong to view this as a case of Irish success and Italian failure.

By 1973, GDP per capita was almost 60 per cent higher in Italy than in Ireland, a gap which persisted as late as 1990. The net present value of Irish income, discounted back to 1950, would have been 28.9 per cent higher had it grown at the same pace as Italy throughout, rather than making up for lost ground in the 1990s. The moral is that if you are going to converge on richer countries, then the sooner you do so the better.

If Ireland's long-run performance has not been exceptional, then neither have the mechanisms by which we achieved our belated success. Indeed, Ireland's "Golden Age" bears a striking resemblance to the Golden Age the rest of Western Europe enjoyed four decades earlier, and which lasted from 1950 to 1973.

Then as now, growth was largely due to convergence; then as now, the economies concerned received substantial external funding, giving governments a little extra room for manoeuvre; then as now, this led to a more structured approach towards economic and infrastructural planning; then as now, the bestowers of this largesse (the US government in the earlier episode, Brussels in the later) insisted that market-friendly reforms be adopted by recipient governments.

Most strikingly, social partnership was a key component of the earlier episode, rather than being an Irish innovation. In countries such as Germany, Austria and Belgium, very explicit deals were struck between unions, companies and the government, in which workers agreed to wage moderation in return for high investment rates.

The argument that recent Irish success is due to our educational system has been oversold. For one thing, the timing is wrong: trends in educational spending cannot account for the sharp improvement in our fortunes which occurred from 1987 on.

Second, it is not enough to educate the young, as the notorious 1985 IDA poster featuring 20 UCD graduates ("The Irish: Hire Them Before They Hire You") should remind us: at one stage, 12 of the 20 were applying their skills overseas.

Job creation has played a crucial role during this boom, enabling such graduates to stay at home. This suggests that social partnership was critically important, just as it was in Europe in the 1950s and 1960s.

An historical perspective makes it clear why current growth rates cannot last: rapid growth is only possible while economies converge on the frontier economy (in practice, the US). Once all possible convergence has been achieved, further growth will only be at the rate at which the frontier itself expands, or, historically, 2 per cent.

Even boosters of the "new economy" and the Nasdaq only claim that long-run frontier growth has increased from 2 per cent to 3 per cent. It would be folly to expect that Ireland could do much better than this in the long run.

Indeed, US technology firms have played such a crucial role in Irish growth that it is tempting to conclude that our boom has been largely a product of the Greenspan boom. On this view, the possible implications of an American crash are worrying.

History also emphasises the political nature of the Irish boom. Labour's share of national income has declined steadily during the 1990s, but workers have until now been bought off with tax cuts (rather than the improved welfare benefits which mollified an older generation of European workers).

Europe's Golden Age ended when the oil crises heightened distributional tensions to the point where they became unmanageable. We look forward to speculating about why Ireland's social partnership experiment finally collapsed - was it the political scandals? the McCreevy budgets? or EMU entry and the consequent housing crisis? - when we have an adequate historical perspective on the question. Say 50 years from now.

Prof Cormac O Grada and Dr Kevin O'Rourke are members of the UCD Economics Department. As of July 1st, Mr O'Rourke will be the director of the Centre for the Economics of Globalisation, TCD. A longer version of the argument above may be obtained from the Centre for Economic Research, UCD.