OPINION:The Celtic Tiger was built on sand. Lasting economic success comes only from hard work and honest intelligence, writes MICHAEL CASEY.
DURING THE recession years, 2008 to 2011 inclusive, we are likely to see real living standards fall by almost 18 per cent and the unemployment rate shoot up from 4 per cent to over 17 per cent. Even those economists who had pointed to a hard landing had no idea it would be so severe.
Job losses and sharply reduced incomes will result in hardship for many people through absolutely no fault of their own. No one can witness the lengthening dole queues without a sickening sense of deja vu.
Some commentators are now questioning the Government’s almost exclusive priority of stabilising the public finances. These commentators believe that the increased taxes may extinguish whatever spark is left in the economy. This stabilisation strategy was probably insisted upon by the EU who want to keep to their own fiscal rules without any regard for the Irish economy per se. No doubt the Department of Finance and Central Bank also advocated this strategy because of painful memories of excessive government borrowing in the early 1980s.
Apart from the effects on jobs and disposable income, the collapse in growth (an incredible minus 9 per cent this year alone) will have other adverse effects. For example, when Ireland was booming we had a more important voice in international fora. At meetings in the EU whenever structural reform was being discussed, the Irish delegation would usually be asked to explain the flexibility of our labour market or the beneficial effects of low taxation. How had we done what the rest of Europe – still in the throes of Eurosclerosis – could not do?
At meetings of the Organisation for Economic Co-operation and Development, Ireland was grouped with the US and UK as being market-oriented and hence further along the path of structural reform than most other countries. (As recently as a year ago, people actually believed in efficient markets.) It was heady stuff. Instead of being ignored as we were in the 1970s and 1980s, we were now the talking point and an oracle to be consulted.
Many eastern European countries and those from further afield came to our shores to learn from us. For ministers and politicians at all levels, it was an exciting time. The rapid growth of those years no doubt provided a helpful backdrop to the peace process. Northern Ireland also wanted to learn from the Republic – which was growing much faster than the UK – and to join forces in several economic enterprises. Many of our private sector companies went North to do business, and there was enthusiastic discussion about a Dublin-Belfast corridor.
Much of the hype and spin that went on was not really malign in nature; it was the product of euphoria and of unaccustomed bragging rights. But, unfortunately, spin took over, and complacency began to creep in. Senior policy-makers did not stop to consider the growing fragilities inherent in property prices, bank lending, construction, the exchange rate, and the fact that we were awarding ourselves pay increases over twice those in the EU over a 15-year period in the plush tent of social partnership.
The Celtic Tiger period had little to do with government policy or a sudden upsurge of Irish entrepreneurship. It was caused in the main by sharply increasing foreign direct investment (FDI) and by a collapse in interest rates following membership of the EMU. The reason FDI had such a powerful effect on growth was because the investment, which came mainly from the US, embodied the latest technology and the fruits of research and development undertaken in Silicon Valley. We didn’t have to spend money on research or marketing or devising business strategies. This was all done beforehand in the US. It cost us nothing.
The reality is that we had growth too easy. Our own entrepreneurs couldn’t go wrong in a climate of rapid growth and low real interest rates. Virtually any investment was bound to yield a good rate of return, and fortunes were made by the private sector. Policy-makers didn’t have to conceive of alternative strategies or contingency plans. The economy was cruising on automatic pilot.
But the rapid growth did not come from within; it wasn’t organic, as it is in countries like Denmark and Finland. There was always something artificial and unsustainable about our model of growth, based as it was on a preferential corporate tax regime. It was made even more artificial by lavish increases in credit and an overheated property market.
In fact, our economic history is to some degree a story of soft options. There were lavish agricultural price subsidies for years after we joined the EEC; then there were structural funds, followed by generous cohesion funds from the EU. In the late 1970s and early 1980s we relied to an extremely high degree on “expansionary” budgets and relentless increases in foreign borrowing. It was a time when international banks had ample funds from Opec, the Organisation of the Petroleum Exporting Countries, to lend to the governments of other countries. Then we came to depend on FDI, including the jobs and tax revenues created by the International Financial Services Centre. There were also two periods when our exporters made easy gains from devaluations of the currency. But no one in government could see the artificial nature of all of these soft options. There was a belief that we could dine out on free lunches in perpetuity. There was no attempt to devise an alternative industrial model, a plan B.
Instead, we paid ourselves as if the FDI model would continue indefinitely. That was how we lost competitiveness which, of course ensured that the FDI model would have to end.
It was a classic case of an initially successful scheme containing the seeds of its own destruction. For the last 10 years the Central Bank, Economic and Social Research Institute and the Competitiveness Council warned consistently about the erosion of competitiveness but no one listened.
The international recession and banking crisis probably account for one-third of our collapse. We are responsible for two-thirds.
Growing an economy requires hard graft and honest intelligence by entrepreneurs, government, public officials, and employees. It is time to do the hard yards. There are no soft options left.
Michael Casey is a former chief economist at the Central Bank and a former member of the board of the International Monetary Fund