Ireland: An economic miracle with many causes

The conclusion is stark: much of the Irish miracle (ie, higher output) was attributable to one-off changes (ie, greater input) and not to productivity growth (ie, more efficient use of that input).

Some of us are prone to quote one or two of our favorite policies as explaining the success of the ‘Celtic tiger’ — e.g., [1] low taxes or [2] investment in education. Both are important factors, but neither was as big a contributor as the labour-force participation rate step up from 60% in the 1980s to almost 70%, which by some accounts contributed about half of Ireland’s growth rate. Back in October 2004 The Economist offered an analysis of the Irish miracle. It is available here at Univ. of Colorado as a PDF.

The figures recording Ireland’s transition from Europe’s worst- to its best-performing economy are remarkable. In 1987 Irish GDP per person was 69% of the EU average (adjusted to EU 15); by 2003, it had reached 136%. Unemployment fell from 17% in 1987 to 4% in 2003; and government debt shrank from 112% of GDP to 33% (see chart 2). Annual GDP growth in the decade of the 1990s averaged a tigerish 6.9%; GNP growth, usually a more appropriate measure for Ireland (see article), only slightly less. Perhaps even more impressive, after a downward blip coinciding with the American and, especially, the information-technology (IT) slowdowns in 2001-02, the economy is bouncing back: growth both this year and next is expected to be around 4-5%.

Not surprisingly, this Celtic miracle has been carefully analysed. Many different, and sometimes contradictory, explanations have been proposed, but as usual there is no single cause: it was a combination of different factors at different times. To get a more complete answer, it also helps to ask a different question altogether. Seen in a historical context, what is striking about Ireland is not that it grew so spectacularly in the 1990s, but that it did so badly in the 1980s, and indeed for a long time before then. At independence in 1922, Ireland was as rich as most European countries, and only a bit poorer than Britain. But by 1960 it had fallen far behind, and continued to lag the rest of Europe until the late 1980s. On this reading, the emergence of the Celtic Tiger was a belated catch-up after years of underperformance.

There were, nevertheless, a number of special factors that changed Ireland’s fortunes after 1987. Here are some, in ascending order of importance:

Read the original for a discussion of nine key factors. Regarding the Eastern European countries — how can they benefit from Ireland’s experience?

The biggest lessons they should take from Ireland’s experience apply in two areas they risk getting wrong: fiscal policy and labour-market flexibility. Since the late 1980s, Ireland has cut both its overall tax burden and its annual budget deficits; indeed, in most years it has repaid public debt, reducing its debt burden from one of the highest in western Europe to one of the lowest. If they are to act likewise, the central Europeans must be much tougher about cutting public spending, something that many governments in the region are finding politically tricky. And they also need to make their labour markets more flexible, instead of pursuing their current path of importing Europe’s excessive regulation. For the central Europeans, in short, the road to prosperity is the same as it always was: freer markets, deregulation and smaller government.

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