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Ireland and the Celtic Tiger
Free essay example:
What caused the economic boom in Ireland over the last two decades? Was it a case of real development, or was it in some way illusory as has been suggested by some commentators?
Ireland is a trading nation with a global perspective. Its economy is perceived as one of the most globalised in the modern world. The country has benefited enormously from foreign direct investment and extensive external trade. Ireland is in a fortunate position as having one of the world’s most dynamic open economies. It has boasted annual economic growth rates during the “celtic tiger” boom years in excess of averages for the rest of the developed world. (Enterprise Ireland 2006) By the end of the year 2000, Ireland could boast fourteen years of continued economic growth. (Burnham 2003) This translated into an economy that boasted one of the lowest unemployment rates in the EU. The ruling government were in a position of a growing government surplus and a low inflation rate. (Burnham 2003) Record growth was recorded during the 90’s, and with a 10% average rate for the years 1997-2000. (Enterprise Ireland 2006) This has catapulted Ireland from being one of the poorest economies in the EU, to one of the wealthiest. GDP per capita for the year 2005, was equivalent to €38,000. This was only second to Luxembourg in the EU. This is in contrast to the mid 1980’s when Ireland’s unemployment rate was 17%, the government’s finances were chaotic and many Irish citizens saw emigration as the norm. A transformation of the economy, which included changes in fiscal policy and policies in relation to tax, education and telecommunications were put into position in order to kick-start the economy. (Burnham 2003)
These and many other factors contributed to the past two decades of economic prosperity. These factors must be closely examined to determine if the economic boom of the past two decades, were in fact a case of foresight and correct macroeconomic polices, or indeed an illusion as has been suggested by some commentators.
The Celtic Tiger and Economic Growth
Ireland’s period of sustained economic growth began in the early 1990’s. The economic success that was achieved over the twenty-year period is a result of many factors, when combined created a distinctive and intangible asset. (Dorgan 2006) Ireland has reversed the trend of seeing its citizens emigrating, to a country that has a reputation for having a thriving knowledge based economy, and an influx of both foreign and returning Irish workers. (Dorgan 2006) The Irish economy boasts an educated and skilled workforce, which in turn has seen the economy move away from the traditional agriculture and manufacturing sectors, to an economy based on the services industry and highly valued knowledge based employment. (ERSI 2005) In order to get to this particular level, the economy needed to be built on a strong foundation. This foundation was put in place by the 1997 minority government. (Dorgan 2006) The government set out a program for national recovery, and made the exchequers finances a priority. This priority was to bring the states finances under control and to try and eradicate the national debt. A tax amnesty was declared, which resulted in a £500 million injection of revenue to the state. This was in contrast to the £30 million that was forecast. (MacSharry and White 2000) The improved reputation of the country as a result of these measures, brought confidence amongst foreign investors. It also allowed for reductions in tax rates for both corporations and individuals. These foundations allowed Ireland to become an attractive destination for foreign direct investment and were an essential platform for the boom in the years to come. (Burnham 2003)
Factors contributing to the Economic Boom
From the early 1990’s, Ireland’s economic growth has seen GDP almost double in size. (eLib: EuroStat 2009) There are various factors that are attributed to this, and one must look into them more closely to determine how much of an input they had in stimulating the economy.
The turnaround in Ireland's finances from the 1980's has been remarkable. A transformation of the economy was needed in order to move forward. A National recovery program was set out in order to stabilise the economy. The previous two decades of government deficits have been reversed. These previous government deficits have been turned into a surplus, and by 1997 this was the case. This was in stark contrast to the 9% deficit of 1987. This shows that the economic reforms of the 1980's had started to show results, and lay the foundations for future economic success. The improvements in the government’s finances were a result of public expenditure reforms of the late 80's. Which included significant tax cuts, a reduction in borrowing to fund spending and the opening up of the Ireland-UK air routes and investment in a state of the art digital telecommunications network. These reforms have been attributed to kick starting the economic recovery of the country. Increased tax revenues were a result of strong economic growth. This translated into a fall in government debt. This reduction in debt allowed for an ongoing investment in infrastructure in the form of the National Development Plan. Investment in infrastructure was needed as high levels of economic growth ensued. This was in contrast to decades of under investment. The government has also been able to invest in a National Pensions Reserve Fund, which will ensure that future pension liabilities can be met. Without the overhaul of government finances this would not have been possible.
Social partnership in place sine 1987 provided a framework to achieve success. This framework exists as a mixture of macroeconomic and European policies. The social partners, who were made up of trade unions, the government and employers set out a strategy to escape from increasing debt, rising taxes and stagnant economic growth. The Program for National Recovery set out a 13-year plan, to control wage levels in both the public and private sector. (O’Donnell 1998) This was to ensure that Ireland remained competitive in the International stage. Economic and social policies were also agreed in the form of welfare reform, taxation and a commitment to social equality. The approach set out by social partnership underpinned a decade of growth. In the ten-year period of 1986-96 Irish GDP has grown on average by 4.9% a year. This was in comparison to the OECD average of 2.4%. (O’Donnell 1998) With levels of employment and output growing, especially in the services sector, this led to the transformation of the government’s finances. The level of inflation also remained low in comparison to the EU average, and the access to lower levels of interest rates from Europe proved beneficial. The growth of exports and an increase in domestic demand fuelled further growth. These increased exports contributed to the economic boom.
One of the most crucial steps forward was taken in 1973, with Ireland’s entry into the common market. By joining the EEC, Ireland was now presented with alternative markets than the UK and USA, which the economy relied on so heavily. (Burnham 2006) This was an exciting opportunity to open up Ireland to a global economy, and at the same time reduced its reliance on trade with the UK. (Enterprise Ireland 2006) This benefited the agriculture industry, as Irish exports gained access to expanded market places at attractive prices. (Burnham 2003) Surveys show that there is large support for membership of the EU in Ireland. Payments made under the Structural Cohesion Fund and CAP has gone along the way to improving infrastructure in Ireland. Recently Ireland’s receipts have fallen to bellow 1% of GDP, with Ireland becoming a net contributor in the coming years. (Enterprise Ireland 2006) These figures illustrate the success of EU membership in relation to our economy. The decision to join the Euro zone and avail of lower interest rates was necessary to trade. It also showed Ireland’s commitment to Europe. This was seen as a positive step towards the integration of European markets and the low interest rates on offer encouraged investment. This in turn contributed to sustaining growth rates for the future. (Enterprise Ireland 2006) EU membership also allows Ireland to seek out foreign workers, whose language abilities are key to the success of the International support centres operating in Ireland (Burnham 2003)
Ireland’s adaptation of a low tax rate policy is one example of economic success. The attractive corporation tax and income tax rates are seen as a tremendous advantage in enticing multi national companies and foreign workers to come and invest themselves in Ireland. Corporation tax in Ireland accounts for 15% of tax revenues, even though the rate is quite low compared to the rest Europe. (Enterprise Ireland 2006) A prime example of the success of low corporation tax can be seen in the centre of Dublin City. The twenty-seven acre development known as the IFSC, which was established in 1987 to promote the low corporation tax incentive to both local and foreign owned companies basing their offices there. This exemption was also expanded to include firms that operated outside of the IFSC. (Burnham 2003) This highlighted the fact that firms were attracted by this incentive, and chose to set-up a base in Ireland. This in turn provided further employment to the economy and went about reducing Ireland’s unemployment rate.
Without the investment in education and training resources, Ireland would not be able to compete for this direct investment. During the 1980’s the government took the decision to expand state funded higher education. (Burnham 2003) The government invested in two new universities, along with the expansion of Regional Technical Colleges. This strategy was needed in order to supply highly skilled graduates to take up the growing employment positions available in the economy. The IDA played a crucial part in persuading the RTC’s to expand their engineering and Information Technology programs. The labour force in Ireland, boasted the highest level of science and technology graduates between the ages of 25-34, in the 25 OECD countries. (OECD 1999) More importantly, the number of secondary level students graduating also increased. These changes to state run education, can be viewed as contributing factors to the economic success that was achieved. It also ensured that Ireland’s brightest did not have to leave the country in search of employment opportunities. Once these factors came together by the early 1990’s, it enabled the country to start to take full advantage of its educational reforms, and in turn the result was a reverse of emigration to a return of net migration. (Enterprise Ireland 2006) The early 90’s encountered a trend of low emigration, whilst the late 90’s saw an inflow of job opportunities not seen since the 1970’s. (Burnham 2003) This change is reflected by employment growth figures in relation to the rest of the EU, where Ireland constantly outperforms the EU average. (OECD 1999)
Along with the implementation of a program for National Recovery, and investment in education, came the overall upgrading of the telecommunications network throughout the country. This occurred in the late 1970’s and early 1980’s. What was once seen as one of the worst systems in Europe, became one of the most modern. (Burnham 2003) Digital switching was implemented, along with the beginning of an upgrade to fiber optic lines. This was in response to calls from foreign companies and the IDA to have the network improved. This allowed for the companies to keep valuable lines of communication open. It also allowed the government to state that the upgrade of the network was a contributing feature to “wooing foreign firms to our shores” (Burnham 2003) The government maintained that a necessary platform had been put in position to facilitate the boom in the years to come. The availability of cheap and reliable telecommunications was a crucial factor for the financial services industry and international call centres that had set up in the country. Almost 51% of new jobs created during the 90’s were in the financial services sector. (Burnham 2003) By the early 90’s the IDA and Telecom Eireann had established joint marketing programs designed to market Ireland as a country to invest. Their main selling points were the availability of a young and educated workforce, with the ability to speak English in a highly technical and low taxation economy. (Barry 2006) This coupled with the already strong presence of foreign owned companies operating in Ireland, allowed potential investors a high degree of reassurance that Ireland would be a suitable destination to invest. Other advantages of having similar type industries operating here demonstrated to firms that Ireland had a competitive advantage over other EU states to invest. Ireland was seen as a “first mover” in taking advantage of the telecommunications revolution. (Burnham 2003)
The influx or huge levels of foreign investment contributed massively to Ireland’s success. With the IDA acting on behalf of the state, it set out to be a leader in attracting foreign direct investment. (Dorgan 2006) Ireland could boast a competitive cost base and high productivity output, along with a low level of corporation tax. Over 80% of investment came from US based companies. These companies achieved after tax returns of between 20-30% on their investment. (eLib: US Dept of Commerce 2009) Due to Ireland’s small size, the government has tried to remain open, accessible and responsive to Ireland’s changing needs. (Dorgan 2006) These qualities are seen as attractive qualities to potential foreign investors. It promotes an environment that is highly supportive of international trade and business. As the economy is largely export driven. The government’s public policy is driven by many factors. These include the need to enhance international trade, provide the unrestricted movement of capital, and provide a taxation system that facilitates foreign earnings from being taxed twice. (Dorgan 2006) Ireland’s labour laws are also quiet flexible, in the sense that they promote flexible operation in a business environment. This inward investment mainly in high value services has seen Ireland become the biggest exporter of software in the world. (Dorgan 2006) The financial services sector has also increased in size with many of the worlds leading banks, insurers and fund management companies setting up in the IFSC. The IFSC hosts over half the worlds top twenty insurance companies, and half the worlds top fifty banks. Ireland has also become a leading player in the e-commerce sector. Some of the leading companies in the world have set-up operations here. These include Yahoo, eBay and Google. These companies have provided tens of thousands of jobs to the economy. (Enterprise Ireland 2006). These high value service industries are also complemented by the large investment in both the Pharmaceuticals and Medical technologies sector. At present there are 13 of the top 15 pharmaceutical companies with operations in Ireland. These companies produce six of the worlds top selling drugs, which account for €35 billion annually in exports. (Enterprise Ireland 2006) The medical technologies sector would not be as large, but would include annual exports of €4 million and employs in excess of 22,000 people. With competition for direct investment being so intense, Ireland has still managed to entice further investment. A prime example of this would be the €1.8 billion investment by Wyeth in Dublin. With this continued investment, Ireland has moved away from the reliance on agriculture and manufacturing sectors, to an economy that promotes it’s expertise in high value services.
A further contributing factor to our perceived success has been the increase in the nations population and the increase in the labour force. The population of the country has been on the increase since the 1970’s and as of 2006 stood at just over 4.2 million. (eLib: CSO 2009) This has been its highest level in over 130 years. (Enterprise Ireland 2006) High levels of immigration, and a natural increase have fueled this population increase. The labour market had also increased, with the increased levels of female participation in employment. In comparison to the rest of Europe, Irelands population is still quite young. This youthful labour force provides a key to the future labour supply and in turn sustained economic growth. One must also not fail to notice the high levels of immigration, with foreign nationals now accounting for almost 10% of the population. (Enterprise Ireland 2006) The expansion of the EU has played a vital role in the influx of foreign nationals, with Poland and Lithuania being the biggest contributors. Returns to net immigration in contrast to the 1980’s when emigration was a key problem, and a reduction in the labour supply. An extensive labour market is one of the keys in trying to remain competitive. This is particularly the case in the tourism and service sector.
A case of real development or just an illusion
The above-mentioned factors were all essential ingredients to a successful period of sustained growth, but questions must also be asked as to whether these factors alone were solely responsible or was Ireland the beneficiary of luck? Is it possible to suggest that Ireland was simply in the right place at the right time? Or as many have suggested Ireland had benefited form external factors and a boom in the US and global economies. Was the enormous economic growth a chain of chance events and developments, and is Irelands success easy to replicate? These questions must be answered in order to determine if the “Celtic Tiger” was real or just an illusion.
There is no doubt that Ireland went through a twenty-year period of economic success. This can easily be illustrated by figures relating to GDP for the said period. By the year 2005, GDP per capita was €38,000 only second to Luxembourg in the EU. (Enterprise Ireland 2006) When one looks at the GNP figures, Ireland ranks in line with the EU average. This further identifies the economy’s reliance on FDI investment from the US. This investment accounts for 61% of Irish exports as of 2005. (Dorgan 2006) Without this category of investment, would Ireland have been so successful?
Many have cited Irelands education system as being very important to economic success. One can argue that the Irish education system has vastly improved over the past decades. Does this factor alone really account for economic success? By 1995 the International Adult Literacy Test measured Ireland against ten other EU countries. The result was not very impressive. Ireland ranked only ahead of Portugal in 9th place. (Ó Gráda 2002) The Irish government spends little more that the EU average on education, and only one of the countries universities in listed in the world’s top 300. (O’Sullivan 2006) Did these results cast a shadow on the quality of the Irish labour force? Was Ireland’s ability to speak fluent English more of an attraction to potential investors then the perceived image of great education system? If so, this factor is not a result of policy nor was it specific only for the years of boom. I would argue that the improvement in education was not a cause of the boom, but was indeed essential for the growth over the period, and for the ability to sustain this growth in the future.
The issue of fiscal policy and fiscal correction of the 1980’s had gone some way to attracting investment from abroad. Without this large-scale investment, it is my opinion that the “Celtic Tiger” would not have roared so loudly. These fiscal policies were in contrast to the shambolic state of the economy in the late 1970’s. (Ó Gráda 2002) Had the economy not been in such a poor state, would these corrective measures have taken place? If so, would the foreign direct investment have come Ireland’s way? Ó Gráda argues that the increase in growth and increase in GDP levels was merely bridging the gap from previous decades of stagnation, and not a mystery of how Ireland achieved this new found wealth.
A lot of emphasis has been put on social partnership being Ireland’s saving grace, and being a platform for economic success. Ireland merely left it till 1987 to implement while many of our European neighbours had done this in the 1950’s. (Ó Gráda 2002) In those cases, the labour force made a commitment to wage restraint in return for the state’s commitment to providing a welfare state. This had many similarities to Ireland’s social partnership, but our European neighbours had seen the results of economic growth and social equality some 30 years earlier than Ireland. (Ó Gráda 2002) Again Ó Gráda suggests that this contributing factor merely bridged the gap that had built up over this time period, and over inflated Ireland’s true success.
Once Ireland joined the common market, its reliance on the UK for trade began to decrease. Ireland was now in charge of its fiscal policy, and one of the benefits of this was the ability to offer a low level of corporation tax to foreign investors. (Ó Gráda 2002) Ireland’s low rate of 10% in the 1990’s and then 12.5% in 2003 still compared lower than its EU neighbours and offered Ireland a comparative advantage over these countries. A possible downside would have been a harmonization of tax levels throughout the EU. Had this occurred, it would have cost Ireland over 1.3% of GDP between 1990 and 1997. (Gropp and Kostial 2001) Had this occurred, would all or some of the foreign direct investment gone elsewhere? Would this lost investment and a reduction in Ireland’s level of GDP curtailed the “Celtic Tiger”. One might argue that luck played a part in other EU countries not following Ireland’s lead and provide the incentive of a low corporation tax rate. By matching Ireland’s rate or even providing a lower rate, could have had serious implications for Ireland’s future development and at the time cost Ireland employment opportunities. (Ó Gráda 2002)
By the mid 1980’s, the appalling fiscal situation in the country was being brought under control. There was a low corporation tax regime in place and Ireland had access to the common market of the EU. Social partnership encouraged industrial peace and wage restraint. These ingredients, when brought together provided favourable conditions for economic recovery in Ireland. (Ó Gráda 2002) The success story of the “Celtic Tiger” was the economy’s ability to capitalize on these factors and to create a prosperous and well-run economy.
However, on reflection was it a case of foresight and forward thinking that brought about Ireland’s success, or was it a case of Ireland making up ground it had lost over the previous decades. Ireland was now ahead of its European neighbours on many fronts. (Ó Gráda 2002)
In my opinion Ireland benefited from luck, foresight, innovation and the ability to spot and opportunity and to take full advantage of it. The “Celtic Tiger” was real and an economy that promotes globalization to the extent that Ireland does is proof of that. However one may argue that the boom was wasted with the over reliance on the construction industry and cheap interest rates form Europe. An example of this is the relative poor state of infrastructure in the country. All of Ireland’s major cities are still not connected by motorway, even though EU grants were provided to the state. A world-class system is still years from flourishing. There are also further failings on a social level with 21% of the population still living in relative poverty. (O’Sullivan 2006) This is compared to the EU average of 15%.
There was many that made a large deal of money in the boom years. There were also many that enjoyed a much higher standard of living then they previously would have encountered. For these groups of society, they will declare that the “Celtic tiger” was real and it was a case of real development. For the not so lucky 21% who live in relative poverty, they may claim that the “tiger” passed them by and was indeed one big illusion.
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O'Sullivan, M.J. 2006. Ireland and the Global Question. New York : Syracuse University Press.
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