We can defeat the crisis and emerge stronger
ANALYSIS:FOR MORE than two decades – from 1986 to 2007 – Ireland’s gross domestic product (GDP) grew every year, rising by 266 per cent, while the unemployment rate fell from 17 per cent to 5 per cent and employment almost doubled. It was a remarkable performance, vaulting Ireland from poor also-ran at the fringe of Europe to one of the world’s wealthiest nations, writes JONATHAN HAUGHTON
Then came three lean years, during which GDP fell by 11 per cent, unemployment shot back up to 14 per cent, the banking system became insolvent, and record budget deficits emerged. The property bubble had to burst but, by bad luck, it coincided with a global recession – world GDP fell in 2009 for the first time in half a century.
Then the fundamental weaknesses – high prices, undisciplined budgeting – became evident; in the words of billionaire investor Warren Buffet: “You only find out who is swimming naked when the tide goes out.”
The exuberance of the go-go years may have been replaced by the gloom of the present, but this is an appropriate moment to step back. How did Ireland become so rich? And can this affluence be sustained?
By almost any relevant measure, Ireland is as affluent as its western European peers: life expectancy exceeds that of the US and is above the EU average; crime rates are low; incomes are high; the air is clean; and we have as many cars and houses (per head) as in the US or EU. In surveys of lifetime satisfaction, Ireland typically ranks in the top dozen.
So the economic boom, which began about 1995, was not mere smoke and mirrors. It was also completely unexpected, except in retrospect. The initial growth spurt – from 1995 to about 2001 – occurred because all the economic planets came into alignment at the same time. A booming US economy provided firms there with the profits to invest abroad; a 10 per cent tax on manufacturing profits attracted them to Ireland, as did the relatively light regulation of labour and product markets; a pool of young, well-educated, English-speaking workers was available; the creation of the single European market allowed firms to serve the EU efficiently from an Irish base; the government had a credible and prudent macroeconomic stance; wages were restrained due to the inertia built into early rounds of national agreements; and there was entrepreneurial activity.
Ireland’s share of world trade peaked in 2001 – that was also the year of highest manufacturing employment. US firms now account for one-quarter of manufacturing employment and one-half of manufacturing output and exports. Economically, Ireland is an outpost of the US within the EU.
The boom created a virtuous circle, raising – with a lag – demand for housing, cars, and services such as restaurants and banks. This fuelled the second growth spurt – from 2001 to 2007 – which was driven by domestic demand rather than exports. The advent of the euro in 1999 reduced Irish interest rates almost to the levels of those in Germany.
Consumers responded by taking on more credit, and the banks happily obliged: the average new housing loan rose from €75,000 in 1998 to €266,000 by 2007. In 2006, nearly 95,000 houses were completed, or twice as many as would normally be needed; by 2010 this number had fallen to 15,000.
The boom was prolonged by rapid increases in public-sector spending. Between 1994 and 2008, employment in the public sector rose by half, while the population rose by one-quarter. This largesse was unsustainable, and risky, because tax revenues were heavily reliant on levies on home sales and corporation profits, which are inherently volatile.
The period of rapid economic growth is over and will not return. But can Ireland maintain its position as one of the most productive countries in the world? Sweden, admired in the 1970s for its affluence, later stagnated. So did Japan. Is Ireland destined for a decade of economic mediocrity?
The pessimists can make a strong case. Ireland is not seen as highly competitive: the World Economic Forum ranked it 29th in 2010 in its “global competitiveness index”, and the country remains expensive, despite price cuts in housing and hotels. And the high minimum wage is a drag on employment.
Education is good, but not extraordinary; the investment rate is solid, but no longer delivering the expected increase in labour productivity growth; and the OECD argues that the public sector is not universally honest, transparent, or efficient. Moreover, the industrial sector is fragile: in 2007 there were 292,000 jobs in industry, yet since 1970 an estimated 274,000 industrial jobs have been lost. Given the turnover of industrial jobs, the sector could shrink fast.
Yet I tilt towards optimism. Ireland has resilience. People are not afraid of working: the average retirement age is 64, compared to an EU average of 61. More young people have acquired a higher education than in any other EU country (except Cyprus). Ireland ranks ninth by the World Bank’s measure of the “Ease of Doing Business”. Per capita GDP is still well above the EU average.
Export competitiveness has already improved sharply, and labour markets are open and flexible. The entrepreneurial spirit has not yet been extinguished, and there is a strategy for mastering the fiscal mess and recapitalising banks. Sweden faced a comparable crisis in 1992 and emerged stronger.
We have been here before. In 1987, after a decade in which per capita consumption actually fell, Ireland faced a financial and fiscal crisis as capital fled the country. Ending years of dithering, the government benefited politically by facing the problem squarely – imposing budget cuts and fiscal discipline.
By 2001, after seven fat years, the memory of the 1980s had faded. The recession of 2008-2010 has reminded us to be vigilant and disciplined once again. That should keep us going for the next decade, although one is reminded by American humorist Will Rogers that “even if you are on the right track, you’ll get run over if you just sit there”.
Jonathan Haughton is professor of economics at Suffolk University, Boston, Massachusetts