Why Ireland's economic miracle isn't a global model yet
Ireland's economic transformation in just 15 years from a Celtic backwater to part of the mainstream global economy has attracted attention far and wide. From Israel to China and from Bulgaria to Chile, governments are wondering aloud whether they can replicate Irish economic success. The country has achieved average growth of 7% per year and a fall in unemployment from 16% to nearly 4% of the workforce, and now boasts one of the most globalised economies in the world, up there with Singapore and Switzerland. Irish society and public life have also changed dramatically along the way. This so-called “Celtic Tiger” economy has been hailed as a new socio-economic model for smaller nations everywhere, but Michael J. O'Sullivan says it's still far too soon to talk of a “model”.
This article is to be published in the Spring 2007 issue of Europe's World (http://www.europesworld.org)
All this international interest poses a question: is there an Irish model that other smaller economies could replicate? Ireland's socio-economic structure has already been much debated because it seems not to fit exactly with the Anglo-Saxon market based system on the continental European social contract, and differs too from the Nordic model with its stress on state involvement in the most research-intensive sectors.
So what are the ingredients that make up Ireland's recipe for success and would this mix work elsewhere? Ireland owes its strong economic performance to a “stew” of external and domestic factors. Falling global interest rates and inflation, coupled with the EU monetary policy framework and low real interest rates that accompany Ireland's membership of the eurozone, have combined to establish a very positive investment climate. Ireland's pro-market policies mean that entrepreneurs have found Ireland an easy place to set up businesses, with financing readily available. The favourable commercial environment has been further bolstered by fiscal policies and an industrial strategy that encourage foreign investment. And the Irish themselves offer a flexible supply of good quality labour.
This marriage between Irish labour and foreign capital and expertise, mostly from America, is a central thread in Ireland's success story. It has embraced elements of globalisation, including US multinational corporations, that the anti-globalisation movement loves to hate. So the good news for countries looking for an “Irish model” is that the secrets of Ireland's success are largely transparent and can mostly be reproduced.
The bad news is that certain key factors – notably Ireland's close relationship with the US and the quality of domestic institutions like the civil service – could be much harder to replicate. This latter point particularly concerns new EU member states seeking to follow Ireland's lead. While these countries are busy copying Irish fiscal policies like low corporate tax rates, many of them are also still struggling to re-build their political and institutional infrastructures.
The fact that many aspects of Ireland's success are being mimicked around the globe shows us that the Irish example is popular rather than exceptional. In reality, the Irish “model” appears to be little more than a close cousin of the Anglo-Saxon model, with some features of the continental European model, like collective bargaining, thrown in. It has few distinguishing characteristics, such as a distinctive Irish industrial type, indicating that recent strong growth may have relatively weak economic foundations. It would therefore seem premature to claim that Ireland's experience represents the emergence of a distinctive new development model.
Even so, Ireland will still make a very interesting socio-economic case study over the next few years. The main question political economists will be asking is whether Ireland can sustain rapid economic expansion and if so whether public services and society as a whole will reap the benefits. These issues present Irish policymakers with an opportunity to meet new challenges with innovative solutions, and a chance to establish an Irish template for managing small open economies in a globalised world. Such a template might prove valuable to fellow eurozone members such as Spain, and set down policy options for newer nations like Georgia to follow.
As well as managing Irish successes, this template will also have to deal with some of the pitfalls of rapid economic expansion which are becoming progressively more evident. Some economists reckon that Ireland is currently experiencing the flip side of the “Goldilocks scenario”. Goldilocks it will be remembered, liked her porridge neither too hot nor too cold, and the term was coined in the 1990s to describe the US economy when it was growing at a rate that was neither too fast nor too slow. Ireland's economic growth pattern is more like Daddy and Mummy bears' porridge – either far too hot or stone cold. The construction sector, for instance, is so overheated that it has been fuelling inflation while domestic industry is “cold” and lethargic.
This economic dichotomy is creating a raft of problems. Inflation is the chief concern, having soared well above the EU average, with the price rises particularly rampant in the property market. Ireland cannot of course apply domestic monetary brakes like interest rate rises to curb price hikes, having surrendered its national monetary policy to the European Central Bank when it joined the eurozone. So Dublin is left to tackle inflation through innovative tax policies and manipulating the timing of public spending projects.
Such limits on the array of economic instruments available to fight inflation illustrate the Faustian pact inherent within the Maastricht Treaty on economic and monetary union. Membership of the eurozone brought low, even negative, real interest rates which spurred economic expansion. But excess growth is now proving much harder to tame without an independent monetary policy.
Meanwhile, Irish industry presents a different set of challenges. Compared with multinational corporations operating in Ireland, domestic companies typically pay less to employees, grow more slowly and invest far less in research and development. Native Irish entrepreneurship and research are in fact now trailing behind other smaller economies like Israel's. Ireland certainly needs better infrastructure to aid competitiveness, but high quality industrial output is even more essential. Government agencies berate industry about the need to invest for the future, but few companies see any reason to change their ways amid the current profits bonanza from property portfolios and the services sector.
Harder still, the Irish government must somehow curb popular expectations that today's booming rates of economic growth and wealth creation will continue. Elevated levels in Ireland of borrowing and consumption, as well as inflation, all signal that optimism over future growth is high - most likely too high.
Policymakers and politicians need to recognise that excessive expectations generate problems beyond the economy. Individuals find it increasingly hard to attain over-ambitious targets, with new trends such as the growth in suicides betraying the nasty, brutish side of Ireland's economic miracle.
Other social trends also underline the downside of success. According to a recent United Nations report, Ireland ranks 4th highest among 177 countries around the world in terms of the overall UN Human Development Index, a basket of measurements on quality of life that include life expectancy and education and living standards. However, this high overall position was largely driven by economic achievement, and Ireland ranked much lower in terms of poverty reduction, gender equality and life expectancy.
The UN report reinforces other studies that suggest economic growth has failed to resolve Irish social disparities. Income distribution patterns in Ireland reflect inequalities seen in countries like Britain and the US rather than other small European states with a fairer division of wealth. Spending on healthcare is also low by the standards of other European countries and inefficient in terms of the results achieved.
The state sector in Ireland is also unusually limited for a small developed nation that is open to the global economy. Government spending and taxation tend to account for a higher proportion of Gross Domestic Product (GDP) in countries such as the Netherlands and Denmark, where policymakers use public expenditure to buffer their citizens from the negative effects of globalisation. Dublin's laissez faire approach is likely to come under greater pressure as the impacts of globalisation intensify, with arguments in favour of more interventionist policies already gaining ground in Ireland.
The transformation of Ireland's economy has been impressive but remains insufficiently distinctive to be branded an Irish model for socio-economic development in the global economy. There is still time, though, for Irish policymakers to set the world an example in the way they manage the very real problems generated by their nation's success – high inflation, lagging domestic industry and persistent social inequalities.
Michael J. O'Sullivan is the author of “Ireland and the Global Question” (Cork University Press)