The Prophets of Boom 1998

Brendan Walsh, Joe Durkan, Peter Neary and Sean Barrett speak to Vincent Browne about Ireland's economy and the prospects for economic growth.

The Economic Crisis of the 1980s
Vincent Browne:    You all predicted economic or financial collapse 17 years ago. Did it happen?
Brendan Walsh:    No.
VB:    How did we avoid it?
BW:    By a change of policy and by getting policies right and restoring confidence in the economy.
VB:    But that didn't happen for several years; our discussion was in 1981, and arguably the turn-around didn't happen until 1987.
BW:    The seeds were sown earlier than 1987. By then the fiscal policy began to move back in the right direction ahead of the more dramatic changes which occurred.
Joe Durkan: After 1987 they didn't continue borrowing at the same level they were borrowing at before.

VB:    Would you all agree that we avoided financial collapse in the 1980's because the Garret FitzGerald government of 82-87 reversed policies, got the borrowing down and put the budget minus interest payments into surplus.
Sean Barrett: No. The founding of the Progressive Democrats shifted politics at that time quite radically. I suppose these days with the PDs being in a certain amount of trouble, this is hard to appreciate. They must have taken a lot of traditional Fine Gael voters in 1987, who were concerned with the way things were going, and they also persuaded Fianna Fáil to do the right thing in 1987. The best Fine Gael contribution was the responsible attitude of Alan Dukes in the Tallaght Strategy, which contrasted somewhat with previous opposition parties when we were trying to tackle this problem, and it's to his great credit.
Peter Neary:    Some of the foundations were laid before 1987, but the major shift, in cutting spending, only came after that time. The '87 government was lucky, of course, in that their policy shift coincided first of all politically—and Fine Gael supported them, as you say, Sean—but also economically lucky in that external conditions from 1987 onward remained constant. Competitiveness improved. They also brought in a more conciliatory approach or a more consensus-type approach to wage-setting, and over the years this was a contributory factor to the fact that we became, and remained, competitive from 1987 onwards. In two separate respects it was only from then that the economy started to improve.
VB:    The price of our rescue from the economic crisis was paid mainly by the poorer sections of society.
ALL:    And emigration.
BW:    Emigration was constrained by the high level of unemployment in Britain, but once unemployment reduced there people began leaving the country at a rate which hadn't been seen since the 1950s—45,000…
SB:    A whole new generation of Irish-Americans that were undocumented at that time.
JD:    And then there were income losses for those who were here.
BW:    Real income stagnated for about five or six years.
JD:    On average.
VB:    How many people emigrated during that time?
BW:    Emigration didn't really take off until the sort of loss and boom of the end of the 1980s provided really large job opportunities in Britain and the States—at the end of the period 1987-88. I think it was about 45,000 a year and well over 50,000 in the late '80s. The population had been growing quite rapidly and then it levelled off again; it is only since the early '90s that it began regrowing.
SB:    We doubled the debt and the unemployment at the same time.
JD:    In 1979 there were about 74,000 unemployed, which is about five and a bit percent, and then it went up to nearly 17 per cent, from 1979 to 1986.
PN:    It was a period of disastrous performance.
BW:    It is also important to bear in mind that it was disastrous relative to the EU.
JD:    The real exchange rate appreciated up to 1986.
BW:    We devalued in 1986, but we did avoid the overvaluation that staying in with Sterling would have effected. It would have been worse.
VB:    What caused the crisis and what got us out of it? Principally, what were the factors?
JD:    What caused the crisis was the expansion in the late 1970s, which happened at a time when the economy was upturning, and then, when we went into the recession, following the second oil price rise, we ended up with a huge fiscal deficit. It happened at a time when interest rates worldwide were rising—and that's what got us into this unsustainability position. So the correct thing to do when you are faced with this is to reverse the thing that got you into it as much as you can, which was the cut in expenditure. Instead they raised taxes, and the effect that that had, was to push up wage inflation, and that just worsened the situation. So there were two policy mistakes—that's what got us into it. Now, what got us out of it was the growth in the UK, which was very important to us because it relieved the pressure on unemployment to a certain extent. Wage inflation was going down here, whereas in Britain it was rising, so we had this competitive gain, and for the first time we started to see Irish companies begin to sell decently in the UK. That occurred at about the same time that we had a government who actually decided to cut expenditure, and it's that combination that started it. Now of course, what keeps it running is that whole series of other factors, but that's the demand side of the bust and boom.
BW:    You go from a vicious circle to a virtuous cycle. It's almost classic. Once the tax burden began to fall, growth accelerated and that led to further falls in the tax burden. Our tax burden has fallen dramatically since the mid-1980s, whereas the European tax burden has risen. They've just gone slightly up and we've gone down. That almost certainly reinforces the growth.
VB:    What do you mean, our tax burden has gone down?
BW:    Tax take as a percentage of GDP has fallen from about forty-something per cent to about 35 per cent, and it's one of the lowest in the EU now.
VB:    Have the tax rates changed dramatically?
JD:    The top rate was 65 per cent in 1986, and it's 46 per cent now.
We used to estimate that the average margin rate was something like 42 per cent, and that's on income tax. The average margin rate was a funny concept, and now it's probably something under 35 per cent.
VB:    What is the average margin rate?
JD:    Well, it's saying that if income rose by £100 million, 42 per cent would go on income tax straight away, so it's a crude measure of that. And that's across the whole economy, so it takes into account those paying 65 per cent and 35 per cent. The standard rate will be 22 per cent next tax year.

The Economic Recovery
VB:    People who don't remember what happened in the late 1970s and throughout the 1980s would find it remarkable that we can talk of there being such a crisis in the Irish economy at that time and of its being such a huge success now. How did the success come about? Peter?
PN:    A combination of good policies and good luck. In other words, we started doing things correctly domestically and external circumstances improved. Domestically, we can argue about the exact timing, but the budgetary situation was brought under control. From 1987 onwards cuts in expenditure were carried out and implemented. There was also a change of attitude in the public sector, a view that it was possible to change. I always remember the demise of Irish Shipping: they were always reasonably well run but they got involved in speculating and incurred enormous debts. They were just closed down, and this sent shock waves through the state sector.
BW:    Well, they went to the wall. This had never happened before.
PN:    Exactly, they weren't bailed out.
BW:    That was Garret FitzGerald.
SB:    And Jim Mitchell as minister.
PN:    Exactly. From then on, and especially after 1987, there was an increasing approach to efficiency, ruthlessness, market orientation—call it what you like—in the public sector. These were all to the good. Now, the environment was very favourable. There is no doubt of that: our costs were improving, the British market, as Joe emphasised, was picking up. Education was clearly important but I'm not convinced that it is very important in terms of its setting the timing. And also consensus: it has one dimension with unions and employers negotiating under government auspices; it also has a second dimension, which is within the approach to industrial policy.
Economists over the years have been critical of the IDA and the whole thrust of industrial policy, but in practise it's probably true to say that sticking with one set of policies, year in year out, under different governments has proved very successful. It's been an expensive policy and probably gave rise to more capital-intensive projects than were needed. It has almost certainly paid grants to companies that would have located in Ireland anyway. Economists have always been inclined to say that agencies like that should be more involved in giving information and telling companies how well they would do if they located in Ireland, rather than paying them taxpayers' money to do so.
Having said all that, we've had this consistent policy all the way through—and it's paid off. It's clear now that the IDA do have contacts with various industrial centres—chemicals, health-care products and computers, of course—and have succeeded in building up an industrial base.
VB:    Were there any other factors, infrastructural factors—for instance, the investment in the phone system—which contributed to the success?
BW:    Well, there were EU inflows, which peaked around 1990 as a percentage of GDP. We can't dismiss those.
SB:    At the time, I think it was the largest foreign-aid programme in the world, with about 7 per cent of GDP.
BW:    The net inflows were about 7 per cent.
PN:    And on the capital side there were fairly stringent controls on the effectiveness of this EU spending.
BW:    They introduced the concept of rates of return in public-sector spending a proper evaluation of these programmes, which hadn't been done before, up to a point.
PN:    That's not true of farming.
BW:    No, but of the cohesion funds and they had a very important counter-cyclical effect. In fact they continued to flow in during the early 1990s when the recession hit Europe, and they acted as a kind of stabiliser here. They kept the Irish economy afloat in a very adverse time. When Europe entered its worst recession since the war, we were getting these funds—they had just about peaked at this time.
VB:    How crucial do you think the EU funds were in the success?
BW:    As Peter said earlier, it's very hard to attach weights to any of these. We can list about ten factors, but it's very difficult to say.
JD:    It's very hard to divorce one from the other, but if you were asked what initiated anything you'd end up talking about the improvement in the public finances and also what happened in Britain. These could be favoured as the initial causal factors, with everything else just reinforcing it. And, as Peter said, we were lucky. We got the structural funds at the right time—when Europe was going into a recession. The UK recession started in 1990 and the German one started in 1992, so we had three to four years when Europe was going nowhere, and yet we got all this money. The weakest growth was 2.9 per cent.
SB:    In which case it was very important, because the estimate on the funds gives you 2 per cent increase on your growth rate. With growth up to 10 per cent, the funds play a much-diminished role.
JD:    But the effect of it was long gone. What's going on now is different.
SB:    Another factor that is important is the decline in the birth rate. That was a very important demographic bonus, the birth rate reducing from 74,000 to 47,000.
BW:    Well, we didn't save much on primary schools, though. We were still spending as much, although there were fewer kids around.
SB:    In the public sector, too, we had the demographic bonus, but in the family it must have meant women being freed for the labour force in a much greater way. People decide to have families in line with their budgets, so it must have been a big increase in people's sense of well-being that they had fewer mouths to feed.
BW:    We got this incredible improvement in the structure of the population: you got the population bulge moving into the working-age group; they were retained in Ireland, employed in Ireland and began to shoulder the tax burden; and that lowered the tax burden on the whole population. You just got a big increase in the proportion of the population paying taxes. You had all these kids who were in the past a drain on the public finances turning into teenagers and young adults being employed here and contributing to the public finances. That was quite dramatic and we're still enjoying that.
VB:    How significant is fact that EU funding is going to stop?
JD:    I don't think this is going to make that much difference. It'll make some difference, obviously, but it'll be over a long period of time. The economy is growing very fast, so we don't have to do very much to absorb that in terms of public expenditure.
JD:    There is the decision to be made about how to spend all that money. You have to decide what you're going to spend it on. The infrastructure is still as bad—you can see around Dublin that is one of the problems.
SB:    We've always had a policy about taxing road use about four times as much as we spend on road infrastructure. That was our policy, and the EU only slightly relieved it for a few years.
PN:    We don't tax road use at all, Sean. We tax road users on a fixed-cost basis, which is incredibly inefficient. We should tax users more highly but on a pay-as-you-go basis.
SB:    Journey times are rising again after the initial burst of EU activity on projects such as the Maynooth and Kilcock bypasses.
BW:    Economists have to take some blame for not having predicted the growth in demand. Regarding housing, I remember Colm McCarthy producing a document saying that the demographic underpinnings of the housing market would be very weak in the 1990s. None of us warned of the explosion in the demand for housing, for instance.
SB:    If you'd 250,000 extra people working in a five-year period, none of us predicted that they'd need cars and housing.
JD:    If you'd predicted that employment growth would have reached this level, you'd have been laughed at.
SB:    A lot of people said that it was a waste building all those roads, that there would not be the cars available.
JD:    That was said of the M50. Some people said it would never reach the target levels. But from day one it reached them. And then, when they put on the next bit of it, the Westlink couldn't hold the traffic on it.
BW:    Economists deserve some blame for having been too sceptical about the growth.
SB:    By and large, the bias of the profession was to say that this is a mirage. We used to have all sorts of worries about the jobless growth, and then suddenly it turns into 15,000 extra a year after 200 years of emigration.
BW:    One economist who was very optimistic was John Fitzgerald of the Economic and Social Research Institute, and he deserves credit for that. When it wasn't popular he was saying that the economy would in fact benefit from all sorts of things, including the structural funds, the foreign direct investment, the increased tax inflows from the foreign companies. When foreign companies began to pay 10 per cent corporate profit tax, that made an enormous contribution. We went from nought per cent tax to 10 per cent tax on all the profits they're locating here. Some people kept saying these profits are all just bogus, but they pay 10 per cent of them into the Irish exchequer—I'm all in favour of them.
SB:    One of the ones I'm connected with is tourism. It didn't grow at all from 1966 to 1986, but since then it's grown the fastest of any tourism in the OECD. I reckon there's about 100,000 extra jobs. It's the same country, the same climate. Remember this thing of “extending the season.” Well, Kerry is on a 12-month season.
VB:    How did that happen?
SB:    That goes down to access, deregulation and open borders, which are one of the Washington principles, much hated by our friends in the foreign-aid industry. It seems that openness is very good for the Irish economy. Protectionism is extremely bad for it, but we stayed at it longer than anybody else.
VB:    But specifically with regard to tourism, you mean that the deregulation of the airlines…?
SB:    Everybody around this table was a deregulationist, against the airline cartels, but none of us predicted how dramatic the results would be. Dublin is transformed: 50 new hotels in the past ten years, the open-topped tour bus is running all year round at ten-minute frequencies. Some of those things are remarkable, 20,000 more people living in the centre of Dublin, [for example]. In our time, when we came up as students, it was a derelict, damp, awful place.
BW:    Clean air made its own, bizarre contribution. Yuppies would not still be living in Dublin if it was still as polluted.
VB:    Joe, you said we would have to build more roads, bigger roads, better roads. What about rail?
JD:    Rail carries nothing.
SB:    About 4 per cent of the passengers.
PN:    Well, there is one difference, coming back to roads. Rail passengers are charged per journey; road passengers are not. We need to think seriously about moving towards some system of road pricing, but the problem of building more and more roads without any access costs whatsoever is that all you do is get more and more cars.
SB:    We gave the EU a target to raise £150 million in tolls over a five-year period. We haven't done a single jot of this. We prefer for the EU to pay for the roads.
VB:    There's no political will to do it at all. In fact, it's considered outrageous politically to suggest tolling the roads.
SB:    Frank Convery has pointed out that if you are wealthy enough, you can buy a million-pound house in Killiney and proceed to water yourself, your garden and your cars for free. The Irish antipathy to charges is quite a remarkable thing.
PN:    Well, to give credit, a lot of things have changed. We are talking of some of the benefits, but it is significant that it is within the areas of water charges and road charges that there has been no progress.
BW:    Not many countries have real road charges, but every other country in the EU has water charges. Most of us own houses in the Dublin Corporation area, where we don't pay any property tax, rates or water charges.
BW:    It's ludicrous, we don't pay any wealth tax. At least two or three years ago we were paying something, but that's changed with the tax cuts, where we save a couple of thousand pounds a year.
VB:    What other infrastructure problems do we have?
SB:    Well, there's the telephone one. Despite the reductions, we still have people paying a multiple of what an efficient phone system should charge. There was talk that Albert Reynolds invested about £3 billion into the phone system, and it's now worth about £700 million. The bulk of that investment has been appropriated by people employed in the company.
JD:    There's also a water-supply problem in Dublin. The system has to be replaced, and that's a couple of hundred million.
BW:    That is affecting the housing market. There are big constraints on some of the tracts of land, so that you can't open up and get in a proper water supply.
SB:    And in the general pricing thing, obviously the abolition of university fees, as you said, is a completely daft exercise. The gains are quite obviously identified with the people who go to university and not with those who drop out of school.
PN:    The rest of Europe is contemplating removing such free education.
SB:    Mr Blair is already doing so. That's another thing that occurs to me: to have labour shortages coinciding with 243,000 collecting money every Thursday is just utterly daft. Either get to grips with that very fast or we'll cease deporting immigrants and they'll take the jobs. The current 243,000 are really on their last chance to take some of the jobs of the Celtic Tiger.
VB:    Aren't a high proportion of that figure not employable anymore, they've just been out of work for so long?
SB:    Well, the longer you keep doing it, the worse matters get. Irish social welfare pays out more dole relative to average wages, for longer periods, and there's fewer questions asked than anyplace else that you can find—the UK, Sweden and so on.
BW:    We also spend much less on training. Believe it or not, FÁS does not get very much per placement. It's mainly handling Community Employment Schemes, which are more like welfare in disguise.
PN:    They also work quite separately from the dole system. There's no link between them, so the extent to which you get benefits isn't in any way related to your willingness to undergo training.
JD:    The Community Employment Programme goes for people who are unemployed, who are on the live register and who are there for more than a year. There is some evidence from some FÁS work that what happens is that, say in April of last year, 15,000 people have come off that and half of those have actually got employment outside the state sector, so I think that's the way you do it. But it's very, very slow. You're talking about an awful lot of people. If you can only get 7,500 in a year, it takes a long time to make a dent. But it would be a mistake to think that you can't do something about it. They are employable.
There is a big problem between men and women. There seems to be a huge problem in getting men who are long-term unemployed to go on these programmes. Whether that's because they're unemployable in the sense that you use the term or whether they're working, I don't know, whereas women seem to be much more willing to turn up on those things and then move into regular employment.
BW:    It's been a universal problem with older men, meaning people over 50, that when they lose manual jobs they are very hard to reemploy. In America, in areas where they've abolished welfare, like Detroit, the men who got work ended up working for something like $80 a week—incredibly low wages—so even the harshest social-welfare system will find it hard to put some of these older men to work. In your sense they are unemployable; they're demotivated, have no skills, no experience…
VB:    It's not just older men, it's younger men as well.
BW:    That's one thing we could do: we could have a system which differentiates between younger and older men. It's crazy that we give the same dole to a 19-year-old that we give a 55-year-old. The moral hazard involved in telling kids that you can drop out of school and sign on the dole and get a housing allowance and get free fuel and whatever else you can get is daft. They've virtually abolished that in England for under-25s.
SB:    I say no dole for graduates because we've invested enough in them already. Certainly no dole for school-leavers, because they should be doing something else.
BW:    They should be in school, in training or in community employment. If you're able-bodied you can do something useful. There's no reason to tell a kid that he can drop out of school and be able to live, that three or four of you can get an apartment and get by, have enough money to go out two nights a week. That's what in reality is happening among a small minority of people.
PN:    That minority seems to be ghettoised. Unemployed young people are typically the children of older unemployed people, living with their parents. They move within the same area, so we have these black-spots within all major cities, ghettoised.
SB:    It's vital that we don't embark on another round of public-sector house building in large quantities—I think there's a cap of 30 units in any location at the moment—otherwise there are no role models to go to school or to go to work.
BW:    Living in local-authority housing has a very strong negative effect on your employment record, when you've controlled for everything else. When you put in controls for age, skill, everything else, then living in local-authority housing reduces your probability of employment, even of participation in the labour force. So it's a disaster, and that's been found in England too.
The true/official employment rate is now down to around 9 per cent, don't forget, so that 240,000 is a headline figure, but I'd love to get it used much less. The CSO should downplay it.
SB:    On the other hand, our nine per cent compares with 13 per cent in Germany and France, which is a measure of our success. In that respect Ireland has moved from a European labour market (not working) to a North American labour market (working). Except that 240,000 is quite high. It's 7 per cent in the UK, and there's a target of making it 5 per cent. The US is 4 per cent now. That's the goal.

Can the Economic Success last?
VB:    How long more will economic success go on for? Joe?
JD:    Well, we can't predict the demand side, because you could get another recession at any time in Europe, so I wouldn't even attempt to do it. But if you're talking about the supply side, we looked recently at the growth in the labour force—and it'll continue to grow reasonably rapidly up to the end of this decade, and then it'll taper off a little bit. This big bulge of people who were born a long time ago are going into the system and that bulge will run out of the system, and when it does the growth in the labour force will be less. So then it matters what's happening in terms of education.
Now what you have actually is very high participation rates in education. They probably won't increase much more from current levels, so you'll still get some educational effect because the people will be better educated, but it won't continue at the same rate. Now, what that suggests is that the growth will come back a bit from its current level, but you could still sustain a growth rate of four, five or six per cent—easily—until the middle of the next decade. After that I don't know.
BW:    Another reason why the supply side will slow down is that a lot of it is being driven by rising labour-force participation rates among women. You cannot repeat that ad infinitum, you can't go up to 100 per cent participation. There is some evidence that it's peaking in the key age groups because there are constraints in terms of childcare and so on.
JD:    In the research we did, even going to the middle of the next decade, we still ended up with the same participation rate for women (around 48 per cent). That's low compared to many other countries. But the reason it's low is because so many women are in education.
BW:    I think we're all guilty of talking about growth rates and not adjusting for the growth of the labour force. What's been really spectacular has been the growth of employment too, with 4 per cent increases in employment some years. If you take output per worker it hasn't been growing that dramatically, but it's been growing impressively, at three or four per cent, which is very, very good.
There hasn't been as dramatic a productivity miracle as there might have been. What's really extraordinary is our achievement of putting so many more people to work, and that creates a kind of a sausage-machine effect: you pour more people in, you get more output. There hasn't been a change of gear as regards the growth of output per worker, and, as Joe said, that can juggle on even if the labour force becomes fairly static in terms of numbers. If output per worker kept growing at three or four per cent a year, that would be very dramatic, living standards doubling every generation. We can't be greedy.
SB:    Something happened there. The industrial age wasn't a happy experience for Ireland—we made the Ford cars in Dagenham—but the movement towards the intelligence-based industries has suited us, and of course we were always a very suitable people to run the tourism business. We have had some criticisms of telemarketing. Well, for me, telemarketing beats a noisy factory in Longbridge. We were lucky in that a lot of things happened to the economy, which suited us. We're a naturally friendly, hospitable people. It's just you couldn't get into the country for about 20 years!
BW:    Also, we didn't mess up our environment. If you look at parts of the north of England it's going to take centuries to redress what they did in the 19th century, and it's left with eyesores.
JD:    Well, there could easily be another recession. You could find in two years' time that there's a big dip in demand. And it could coincide with a time when the structural funds are coming down, so you would get a lowering in that growth, it wouldn't continue. And even if you're very competitive you're still trying to sell into markets that are in decline, and that's just very bad.
VB:    The economy's grown by about 42 or 43 per cent in the last five years. What's your view of what will happen over the next two years?
JD:    Well, I think this year it will grow another 7 per cent net, and next year probably by 6 per cent net. That would be my guess.
SB:    There's such a momentum there that you wouldn't go into recession straight away.
BW:    I'd go along with that, certainly, barring unforeseen catastrophes.
SB:    The dramatic change is the extent to which it's spread throughout the country. Galway's a booming place, for example, and what about Kerry? When we went there first for our annual economics conference 21 years ago, Kenmare was a little backwater. Now its prosperity is what strikes me, more than Killiney or Dalkey. Something's happened in Irish people. This is for you, you've got the wider picture. Agriculture and attitudes in Ireland have changed. I think if the CAP were abolished Ireland would actually do quite well. There's now confidence that we could outperform any leaders in agriculture. We are outperforming everybody else in tourism. These intelligence-based industries that we've mentioned…
JD:    The scale of it surprised me. I never thought growth would be 10 per cent. I never thought 1996 would have been 8 per cent. I thought we'd grow maybe 5 per cent.
SB:    But did you think it would translate into all those jobs?
JD:    Yes, I did, because I thought there were lags in it, I've argued that all the time—people just didn't believe me! And I've done a budget thing every year for Coopers & Lybrand, but every year they looked at the figures and they didn't believe me. But they believed me in the end. Part of it is the people. You only have to look at the students to realise they're different. They're not sitting around waiting for the state to provide them with jobs, they're willing to go out to see if they can get something and they're willing to hustle. So many of our students went to work for five grand a year just to get a job, and that makes a difference.
SB:    They worked in the States in their holidays and they acquired North American labour habits and that stood to them.
JD:    I had some German MBA students who were in employment here, and they said that the thing that really struck them about Irish people is that we look like we're a bit lazy but actually we come up with solutions very quickly because we're lazy—and then they can spend a bit of extra effort to sort it out. We'll get 90 per cent of the way in problem-solving, which is what an awful lot of modern business is. Then you just need someone else to do the rest, whereas the Germans take a bit longer to do it, and I think that flexibility is what the difference in it is.
VB:    What about the Anton Murphy point that what has happened represents more the American Tiger than the Celtic Tiger?
JD:    We have 1.5 million people employed in this country. The numbers employed in the sectors he's talking about, what are they—50,000? I don't think they're causing what's going on. They're part of it but they're not the prime cause.
BW:    Most of the big companies in California have their headquarters elsewhere, and no one says, “Oh, you pulled the plug on the people in California.” It's just part of globalisation that companies like Intel find Ireland an attractive place to invest, and it's going to be increasingly difficult to tell which companies are from where.
Irish companies are expanding outside Ireland: companies like the big banks and Cement Roadstone and Smurfit and so on are sourcing more than half their profits outside Ireland. It's a two-way street. Their output in the UK or Germany or Kerry Group buying out this English company, that's not going to be part of Irish industrial production. So Anton is picking an almost meaningless statistic to say that it's foreign-owned companies that are driving the Irish economy. We certainly owe a lot to the direct investment that's come in, but to say that it's not an Irish achievement is ridiculous.
PN:    Malaysia is another example. They're going through difficulties right now, but their growth for 20 years has been spectacular, much of it because of the employment of Japanese multinationals, so nobody said anything about that. American and other multinationals have been important in terms of demonstrating new techniques. It has contributed, for example, especially to the development of Irish software.
We have an almost indigenous Irish software industry, which didn't exist ten years ago. It's been absolutely crucial, but it's not as if it's not real. Shortly after the Pentium chip was brought in there was a scare that there might be a fault in it. Intel's shares plummeted and it looked as if there might be a wipe-out in the world computing industry. That might happen—maybe the next chip will turn out to be a dud—but if that industry closes down we still have lots of other sectors. We're specialised but we're not totally vulnerable to any group.
It's interesting if you look at the success stories. It's really quite unpredictable. I don't think anybody 20 years ago would have said which multinationals would succeed. What economists would have said is that there's this old idea of “comparative advantage,” that countries should do what they're good that—and using that perspective you might have predicted that Irish creameries would grow into Irish multinational food companies on a massive scale. Avonmore Waterford is now the fifth-biggest dairy company in the world. Kerry Group is the second-biggest in Europe in food ingredients and so on, a fantastic success. But what about the Irish banks? The Irish banks on their core activities are famously inefficient…they have very high wages, but they use this protected home market as a base. And they were smart enough to see that they can't make any more profits in retail banking in Ireland and that eventually they're going to have their margins eroded there—so they've spread out into other areas and they've done extraordinarily well. In Cement Roadstone and Smurfit, you can see special features in each of these cases, but it's unpredictable. No government agency could have sat down and said, “Look, target these places.”
VB:    What's wrong with the boom?
PN:    The danger of a really strong boom is that you have a hard landing afterwards. You get the housing market still going at an extraordinary rate, and so people end up buying houses where, relative to current house prices, they have plenty of opportunity for funding. But then the house prices crash by, say, 50 per cent, the fall comes off their value and they suddenly find themselves with negative equity. That's the risk. I take Brendan's point that the banks have diversified, but if there were a very severe credit crush the local banks would find themselves less profitable, and there's no question of ticking over their stock value. Right now each of the two Irish banks are worth £8 billion in market capitalisation which makes them invulnerable to hostile takeover. But they would have great difficulty surviving a housing market crash, to which they would be inevitably exposed.
SB:    I think most of their asset book is actually houses now, a complete change from their lending policy.
PN:    In Ireland, yes, but they have big interests offshore, which gives them protection.
VB:    The benefits of this economic success have not been fairly distributed, as evidenced by some of the western Dublin suburbs and the inner-city pockets of deprivation. That is a significant problem, isn't it?
PN:    I'm going to have to make the point about the distributional effects of this boom. It's actually been surprisingly egalitarian, and that's partially reflected in the fact that a lot of people don't believe we have a boom. There was a radio debate I heard where people were saying, “This boom we have, I'm not even sure if we have one.” I know what they mean.
In the early 1980s, when the economy was doing very badly, people in secure public-sector jobs or in media jobs or whatever were surrounded by everyone getting a real job—and at least getting paid extremely well. Whereas those coming onto the labour market, looking for jobs, found little or nothing available. Right now, everyone in this room and most middle-class people are getting very ordinary or very modest increases in real wages from year to year. We're not booming, but to the extent that we own assets we're doing extremely well, and maybe that is the only extra.
SB:    And there's 250 extra thousand punters participating in it, and what's the point in it?
PN:    I agree. There are an awful lot of people doing moderately well and the number at work has increased a lot, so I would say that this is an exceptionally egalitarian achievement. That doesn't deny that there are bad pockets which haven't benefited. They'd be in a much more awful state if we didn't have a boom, it has to be said.
Of course we need policies to deal with this. We need a change in attitude to the people we're targeting with measures. We need to reform the welfare system, which doesn't leave people destitute but gives them incentives at the margin, especially for younger workers to get them into work. I'm not sure that everyone would agree.
JD:    Well, I agree. I think you've hit the nail on the head—you have to get them in. It is the rise in employment that has reduced inequality, but you still have this huge body of people that have been unaffected by it. Now, the best way to help them is to get them into employment, so it's things to get people into work that are the key to everything we do. It's not to give them more money.
BW:    Peter mentioned about the growth of employment, which is very important, but the drop in the unemployment rate from 17 per cent to 9 per cent—that's a fruit and a distribution of the boom. But it's probably true to say that inequality has widened. We're now getting people in the Irish economy being paid very large sums of money. In the past there was a cap. They're now awarding themselves, and all the evidence in America suggests that the economy, for whatever reason, in the 1980s and 1990s has seen a widening gap between the upper 10 per cent and the bottom 10 per cent of the population, and I suspect that happened here. Now that's kind of spectacular, the widening of inequality, which attracts an awful lot of attention and envy.
VB:    Finally, how has the economic success changed Irish society?
BW:    Made it richer. Made it richer, bigger, more populous; there are more people added to the labour force and to the population than there was in all the years since independence. It's just amazing.
SB:    A remarkable improvement is the position of women in Irish society. They've taken 150,000 extra jobs between 1991 and 1996, and you can see that around the place—it's the prosperity around the country and that women have taken over such a dominant role in the labour market that they didn't have before. I guess they really did run the Irish economy, but in the non-wage sector at home. Now they're doing it in the wage sector.
JD:    It's made the people much more self-confident. We feel that we can sort out our problems: that's what the big change is. We messed up for a long time. We messed up in the 1950s, we had a very short period when we got it right in the 1960s and 1970s, and then we went through this awful mess—and we've being doing it right for ten years while around us others have messed up. Now we feel that we can handle things, and that's a huge difference.
SB:    Good international performers in whatever field we partake, that's a sign of self-confidence.
BW:    Apart from Rugby.
PN:    We've managed to succeed in doing something which a lot of commentators claimed we'd never do, which is to hold onto some of the good aspects of traditional Irish society. Irish people actually are far more friendly, they look people straight in the eye, they drink more in pubs, they sing more in pubs and so on—one of our big export industries, by the way, right now. So we've managed to combine that with the constraints of being a very small player in an increasingly mobile/globalised world economy, and we've played to our strengths.
We gave up on trying to protect our domestic manufacturing at the end of the 1950s and it worked fantastically well. Now we're gradually—largely under EU pressure—moving away from protecting our utilities and public-sector firms and so on, and the more openness the better. I agree with what Sean said, that openness is good for us, that it's clear in a global economy/global environment you can't do everything yourself. You have to specialise, and we've succeeded in doing that, and we've held onto much of our heritage. The Irish language is probably doing better now than it was in the 1950s—there's much less support for it but it's very popular: it's got its own radio station, televison station and so on.
SB:    Institutions like the GAA—which in our youth we used to denounce because of the ban—can't find stadiums big enough to hold the crowds now.
PN:    There's a couple in the Waterford Gaeltacht who send TV crews to the local club matches, which have ten or twenty thousand people a week. RTÉ wasn't covering them and the private sector came in and starts selling them. Right now it's terrific to be Irish, and everywhere I go people comment and they want to come here to find out what's happening, on what our secret is. There is no secret: you just try and deal with the obvious problems as they come up.
SB:    It could be very expensive to reconvene this group Vincent. We all could be flying around the world explaining the Celtic Tiger on an international stage.
VB:    That'll be in 2015.
BW:    We have lost out too—let's be gloomy for a while. There are things that once were free that are not free now, like the countryside. Undoubtedly the countryside and cities are more congested, there's probably more pollution of certain types, certainly more litter, for instance, but less air pollution. Ireland is a dirty country.
PN:    But it always was.
BW:    There are more fast-food places. But we haven't tackled water pollution, which is a very serious problem. It's a disgrace that we have to get EU funds to put sewers into Galway.
BW:    Athlone still dumps, untreated, all the sewage into the Shannon.
Some of those things are disgraceful, and then congestion on the Ring of Kerry. You can no longer walk up the mountains—they've become crowded with people, mountain bikes and motorbikes, it's terrible. But those are minor things compared to the gains we've made, and they could be easily reversed by a bit of management.
PN:    There's a role for the public sector in doing an awful lot of things it doesn't currently do, ironically. Economists, especially economists like us, sometimes by reputation are anti-state per se. On the contrary, we need more intervention to police these environmental goods.
BW:    The landscape is ruined forever too. The bloody CAP, with all these bungalows in every other field between here and Galway, and if you drove across Ireland 20 years ago it was a prettier country than it is now.
VB:    In the midst of all this, cynicism towards politicians is now greater than it was before.
PN:    It's very unfair. Politics is an incredibly derided profession. What other profession is exposed to that kind of day-to-day criticism and paid, let's face it, way below the opportunity costs. Look at left-wing politicians who do well, and end up working for trade unions. They get twice the TD's salary. So I think we underpay our politicians. We require an extraordinary degree of commitment from them, we don't exempt their families. We expose them to a 24-hour-a-day scrutiny, and then we criticise every tiny mistake they make. The political system could be reformed in the way of giving more freedom. I'm not saying freedom from media scrutiny, necessarily, but certainly I don't think the position is well paid.
SB:    That highlights for me a media problem. Many journalists are far more interested in scandals than actually telling the story like it is. We still suffer from a strange emphasis in Irish journalism.
PN:    Don't get me wrong, I think it's very important to expose these scandals.
SB:    But trying to pluck defeat all the time from the jaws of victory, it's kind of boring. I can't read the Irish Times anymore for that very reason—they're so boring.