After it was named the “Celtic tiger” in 1994, the southern Irish economy became the archetype of success in terms of growth. In a few short years, after decades cycling around two-thirds of average EU per capita income, the Republic of Ireland surpassed the EU average. Such sharp growth success drew attention; many countries began to ask whether the “Irish model” was a recipe for success. Irish policymakers, basking in glory after years as the “poor man” of Europe, answered “yes” or, at least, “possibly.”

In the midst of this celebration, a bare few of us argued that the Celtic tiger was not a model for poor countries because Irish growth was unsustainable, partly illusory, and had emerged from a strategy that caused rapidly rising inequality and failed to meet the education and healthcare needs of the Irish people. Moreover, calling the Ireland a “model” was absurd: Irish growth was based on attracting forty percent of high-tech foreign direct investment (FDI) into the EU, with one percent of EU population. The UK also received another forty percent. As every schoolchild knows, there are only 100 percent!

Nonetheless, many people continued to speak of the Irish model as if it could be copied and adapted. Some argued that rather than FDI, Irish growth was primarily the result of fiscal conservatism and deregulation. The government began reducing its extreme debt in 1987 by drastically reducing government spending, in order to keep an investment-friendly low-tax regime. This opened the way for historically high flows of high-tech FDI as US companies like Intel and Dell emerged out of the restructuring of the 1980s in an agglomerated pattern of investments that brought all major producers in computers and pharmaceuticals to Dublin and Cork. This inward flow spurred economic growth rates of about ten percent between 1994 and 2000 (Table 1).

THE CRISIS

Economic disaster hit Ireland as quickly as success. Yet they should have seen it coming. FDI began falling at the turn of the century and the stock of FDI fell from 130 percent of GDP in 2001 to 67 percent by 2006. Yet some Irish economists preferred to see this as a sign of Irish economic maturity: economic growth continued at a respectable pace as the motor of growth shifted from foreign industry to construction (Figure 2). Few considered whether the construction sector was sustainable. Money that had been accumulated during the years of the Celtic tiger, partly as the result of the government’s policy of favoring large tax cuts for the wealthy rather than provision of social services, sought an outlet for profitable investment and found one for a few years in construction.

This could not last. The economy took a spectacular dive in 2008 and experts expect a 7-10 percent fall in GDP in 2009. Unemployment rates are expected to reach 15 percent in 2010 and could rise even further.

DEBT AND CRISIS

 
What is the connection between debt and growth? The discussion in Ireland always focused on government debt and on the advice of economists that government must reduce its debt as it opened up its economy to foreign direct investments.

 
Remarkably, few commentators or economists considered that an unregulated private sector with excess wealth leveraging private debt could also cause severe crisis. While the recent plunge in Irish economic fortunes shows how vulnerable a neoliberal economy is to changes of global investment flows, it also shows that unregulated business behavior can be a great source of economic instability during a time when a government clings to fiscal conservatism.

The Celtic Tiger years, however, added a new element to this mix: rapidly rising inequality. As the economy grew after 1994, the government enjoyed rising revenues and budget surpluses despite its low-tax rates. It faced a choice of spending its surplus on social programs, particularly in health and education which were among the worst provided in Europe, or reducing taxes. It chose the latter and did so in a manner that favored the wealthy so much that inequality rose rapidly. New wealth sought an outlet and much of it went into construction and property speculation, creating a huge bubble.

 
The astonishing rise of private debt is shown in figure 3. Construction-based lending (by property developers, real estate speculators, and household mortgage holders) rose rapidly after 2002 and drove a private debt bubble. It has since been revealed that, while driven by the Irish government’s extreme promotion of inequality, the debt bubble was lubricated by deregulation of banking, which encouraged easy and in many cases corrupt lending.  

Although the Irish press tends to associate this trend with a rise in private mortgages, figure 4 shows clearly that the main drivers of private debt in Ireland were developers and speculators, with business lending in construction and real estate rising 800 percent between 2000 and 2007. By contrast, mortgage lending rose less than half as quickly and GDP rose by only 80 percent in current prices.

The resulting crisis was inevitable. Property values fell in 2007 as the interbank market froze up and the Irish banking system went into crisis. One major Irish bank was nationalized and two were bailed out. Regulators and bankers were forced to resign. A “golden circle” of ten superwealthy property developers who received “secret loans” finally came to public light although the regulator apparently knew about them for some years. Construction, now the main source of Irish growth, came to a virtual halt. 75,000 new houses per year were built during the boom, rising to more than 90,000 in 2007 but falling to 52,000 in 2008, 18,000 in 2009 and an expected 12,000 in 2010. Ireland was the first state in the EU to enter recession and its recession has been deepest.

CONCLUSIONS

The Irish growth model was both unsustainable and unique. It created a toxic mix of dependence on FDI and rapidly rising inequality, while failing to provide for basic social welfare. In times of rapid growth, Irish governments followed the prevailing economic advice that they should moderate their spending so that they will not overheat the economy. In time of less rapid growth or stagnation, they heeded the advice that they should moderate spending because they cannot afford to spend. The only time that they paid any attention to popular demands for health and education was when the public demanded it. This, however, only lasted a few years and then it was back to the status quo ante.

Now it is too late. The wealth create under the Celtic Tiger was squandered. Wealth-leveraged private indebtedness grew and now, despite its spendthrift, the Irish state is going deep into debt after spending on bank bailouts and such. The Economic and Social Research Institute in Dublin predicts that public debt will be 76 percent of GDP by 2010, even though as late as last summer a major report praised the Irish Government for maintaining a public debt equal to just 23 percent of GDP.

The state faces the prospect of two debt burdens: its citizens and businesses, after overpaying for property, carry a huge amount of private debt. Private indebtedness reached about 250% of GNP in 2008 (€400 billion). Now, public debt is also soaring and will require more taxation, more foreign borrowing and, ultimately, much lower living standards for citizens. Already at the beginning of 2009, Ireland held the highest external debt in the world, in terms of external debt per capita ($520,000) and as a proportion of GDP (1,240 per cent). By both measures, its debt was more than three times higher than the next most indebted country (Switzerland).

Ireland is now in a “classic debt deflation trap”. The average Irish household holds negative equity of €43,000 and, although house prices have dropped by more than a quarter since peaking in late 2006, they are still more than seven times the average income. Meanwhile, Interbank lending rates have risen substantially.

As the “Celtic tiger,” Ireland was considered to be the most “globalized” economy in the world (using the A.T. Kearney/Foreign Policy Magazine Globalization Index). It was also the most dependent on foreign investment for its economic growth. This was true for several decades but Ireland’s dependence intensified in the 1990s. Since the foreign computer sector began moving out of the country, the main hope expressed by some observers is that FDI will pick up in pharma and call centres. As Paul Kruger recently wrote in the New York Times with respect to Ireland’s economic prospects, “As far as responding to the recession goes, Ireland appears to be really, truly without options, other than to hope for an export-led recovery if and when the rest of the world bounces back.”

Meanwhile, it missed its chance to create a more just society while it had the wealth to attempt to do so. Perhaps the main lesson of the Celtic Tiger for other countries including the accession countries of the EU is that equality within countries is as important as, or even more important than, equality among countries. The chase after economic growth at any price can be deadly, indeed.

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