What caused the Celtic Tiger phenomenon?

 

The Celtic Tiger period, during which Ireland caught up on its previously much more prosperous EU neighbours, extended from 1993 to 2001. In those eight years our economy grew at a rate that has no precedent, so far as I am aware, in European history.

And since 2001 we have moved ahead of most of our neighbours, to the point where, in per capita purchasing power terms, our national output is now about 10 per cent higher than that of the rest of Western Europe, and about 20 per cent higher than that of the enlarged EU.

Throughout the world this achievement has evoked intense interest and curiosity. I can testify to this personally, for in the past few years I have been asked to speak on this subject in more than two dozen countries in four of the five continents. But, curiously, back here in Ireland I have found relatively few echoes of that intense external interest in our Celtic Tiger phenomenon.

Of course, everyone in our State is pleased at our economic performance, for we are all beneficiaries of this extraordinary development. But the question of how and why it happened - issues that have engaged governments and informed opinion worldwide - are rarely asked in the country where this development actually occurred.

Great emphasis is rightly placed by economists, and by politicians and business people, upon the role played in economic growth by increases in labour productivity - output per worker. In Ireland between 1993 and 2001, output per worker improved by almost one-half, growing by over 5 per cent a year. Elsewhere in Europe, it increased at only one-third of that rate.

Undoubtedly a major factor in this was the arrival in Ireland during that eight-year period of almost 300 new mainly high-tech industrial projects.

These increased almost fivefold the value of our manufacturing output, trebled the volume of exports, and, most important of all, virtually quadrupled the reported money value of the average industrial worker's output.

However, the increase in labour productivity explains less than half of the more-than- doubling of the volume of output per head of population that took place during this brief period.

Whence came the remainder of this huge boost to our people's purchasing power? It came from an unprecedented increase of almost one-half in our workforce, a process that involved bringing into paid employment very many people who had previously been outside the labour force, viz. unemployed people, students, or women who had been working in the home. All these had until then been dependants, either supported by bread-winning parents or spouses, or, in the case of the unemployed, by the State through social payments.

In addition, a significant proportion of those who had emigrated during the financial crisis of the 1980s returned during this period to join the Irish workforce.

Through these four processes, the proportion of dependants to workers in our society was transformed. In 1993 every 100 workers had to support, as well as themselves, over 220 dependants - more than 320 people in all - either as members of their own families, or through the taxes they paid to support the unemployed.

But by 2001 the number of workers had been so increased, and the number of dependants so reduced, that on average each group of 100 workers was now supporting only 124 dependants - 224 people in all, including the 100 bread-winners themselves.

So, by 2001 the average worker was both producing 46 per cent more output - and needed to share this increased output amongst 28 per cent fewer people.

That meant that the resources available per head of population were double what they had been back in 1993. (Check the calculation yourself: 146/72 = 2.03).

Thus our ability to catch up with our EU partners during the Celtic Tiger years owed everything to a happy timing coincidence between the period of peak demand by foreign industry for Irish labour in Ireland and a parallel peak in the availability of Irish labour from all four potential sources - the growth of all of which slowed markedly after 2001.

It is worth looking at these changes individually.

First of all, the years from 1993 to 2001 were a period during which the flow of young people out of the educational system into employment was growing rapidly - quite simply because the Irish birth rate had risen sharply in the 1970s, peaking in 1980. During those eight years the ratio of the annual flow of education-leavers to the size of the existing workforce was 60 per cent higher in Ireland than in the rest of Europe.

Next, up to the 1990s, female participation in the Irish labour force was very low.

In 1993 the proportion of women outside the labour force had been one-third higher here than in the rest of Europe.

But during the Celtic Tiger period so many more women entered the workforce that the Irish female workforce grew almost five times faster during these years than was happening in the rest of Europe.

Moreover following the economic crisis of the 1980s, Ireland in 1993 still had an unemployment rate half as high again as in the rest of Europe.

During the following eight years the scale of the Irish flow from unemployment into work was almost four times faster than that of the rest of the EU. This factor alone added one-eighth to the number of people at work.

Finally, during this Celtic Tiger period about one-quarter of the large outflow of emigrants during the financial crisis of the 1980s returned to work in Ireland, adding further to the supply of experienced labour.

The consequence of this temporary combination of favourable labour demand and supply factors - for which there has been no European precedent - was that during this brief period Irish employment was able to grow five times faster than in the rest of EU!

And that contributed even more to our increased prosperity than the increase of almost one-half in labour productivity during those years.

It should, perhaps, be added that, although since 2000 our growth rate has decelerated, reflecting a slower rate of improvement in labour productivity as well as a slower decline in dependency than in the Celtic Tiger period, nevertheless by substituting immigrant labour for the much reduced growth in our domestic labour supply after 2001, up to the early months of this year our economy continued to outpace by a margin of almost three to one what had become a more sluggish European growth rate.

It now remains to be seen to what extent our current housing downturn will affect our ability to continue to outpace in this way the rest of the European continent.

My guess is that our recent substantial margin of advantage in growth vis-a-vis our European neighbours will henceforth contract rapidly and substantially.