From Famine to Feast: Historical Perspectives on the Celtic Tiger. Part 1

Ba mhaith liom a rá ar dtús go bhfuilim an-bhuíoch dóibh siúd a d’eagraigh an léacht seo agus a thug cuireadh anseo dom. Mo léan go raibh oraibh é a chur ar ceal i Mí na Márta, ach is deas liom bheith anseo anois mar chuid de One World Week na hOllscoile. I am very grateful to the organisers for inviting me here, and delighted that the original event could be re‑invented as part of the university’s One World Week.

Introduction

Last year Ireland’s GDP grew faster than anywhere else in the world. In 2001 Ireland still remains at the top of the OECD growth league. Nonetheless, though the Irish economy continues to attract the headlines, gone is the euphoric tone of even a year or two ago. Now attention focuses more on plant closures by (mainly U.S.) multinationals, on the vulnerability of the economy to external shocks, and the downward revision of growth forecasts. For the past year or more economists have been debating the prospects of a ‘soft landing’ and the sustainability of growth rates half or less of those experienced in the 1990s. The sense of vulnerability has increased, of course, since the shocking events of 11 September.

Still, the achievements of the last decade or so have been indeed notable. So much so that I am reminded of the sense of wonder that Edmund Burke, who was born in Dublin in 1729, showed in the course of a tirade against the policies of the East India Company in 1783. ”Could it be believed”’ said Burke, “when I entered into existence... that on this day, in this House, we should be employed in discussing the conduct of those British subjects who had disposed of the power and person of the Grand Mogul?”

Similar remarks might be made about economic progress in the developed world and in Ireland over the twentieth century. Who would have believed in 1900 that living standards in western Europe and North America would rise fivefold or more over the following century? The like had never happened before. Who would have believed a century or even a decade ago that output per head in Ireland in 2000 or 2001 would exceed that of both the United Kingdom and the EU as a whole? Comparing the tone of the three Economist feature articles on Ireland in 1977, 1988, and 1997 capture the shift very effectively.

On a more parochial plane, who would have believed, again even a decade ago, that output per head in the Republic of Ireland would exceed that in Northern Ireland by a comfortable margin in 2001? This shifting North‑South balance lends a certain poignancy to those ‘orange marxist’ interpretations of the partition of Ireland in 1920 which depicted it as a product of southern economic backwardness rather than of political loyalties or sectarian tensions per se. The contrast confidently drawn between ‘bustling progressive industrial Ulster’, and ‘backward’, ‘stagnant’, ‘peasant southern Ireland’, was very real a hundred or even fifty years ago, but it was always dubious as the reason for partition, and seems a very naive rationalisation now.

All of this has led to a degree of self‑confidence in the South that borders on smugness. Gone is the national inferiority complex, the sense of victimhood of old. Gone too is the sense that Ireland is some kind of neo‑colonial Third World economy. Today Ireland ranks about fifteenth in the world in terms of GDP per capita and about eighteenth in terms of the UN’s more comprehensive Human Development Index. Its income per head (adjusting for PPP) is thirty times Ethiopia’s today (it was only nineteen times in 1987). It is ten times India’s and four times Iran’s. Far from Ireland being a Third World Country the last decade has greatly widened the gulf between Ireland and the world’s poorest countries.

Living Standards: Does More Mean Happier?

The twentieth century has been truly the seculum miraculosum in global economic history. In Ireland, as almost everywhere else in the developed world, this past century has brought improvements in living conditions unprecedented in human experience. The difference is that the improvements came relatively late to Ireland.

A century ago that artificial statistical construct, the average Irishman, earned in real terms perhaps one‑fifth of what he might earn today. Real earnings before the Famine were perhaps one‑tenth of what they are today. For the average Irishwoman progress has been even more marked. Certainly such averages conceal considerable and undesirable differences between rich and poor people and between the old and the not‑so‑old. But it is also almost certainly true that the gap between rich and poor in Ireland is narrower today than it was a century ago. Regional inequalities have always attracted more controversy in Ireland than inequalities between people and between households. Why that is so bears reflection, but the fact remains that over the century most of the gap between richer and poorer regions has been eroded.

Not only does the average Irishman have more, he is also much healthier. He is born bigger, reaches adult height sooner, and in adulthood is about three inches taller than his great‑grandfather was a century ago. He is likely to live more than half as long again. All age‑groups have benefitted from the improvement, but the spectacular drop in infant mortality in Ireland over the past century – from about one in ten then to less than one in a hundred today – means that the prospects of new‑born infants have improved more than those of any other age‑group. And note too that the average Irishman works fewer hours and takes longer holidays than fifty or a hundred years ago. Putting a value on leisure consumed is a somewhat controversial issue, but what is indisputable is that the increase in leisure has benefitted the blue‑collar worker more than the managerial and professional worker. In a modest way this too has narrowed the gap between rich and poor.

This lecture is being sponsored by the Wales Famine Forum. Even a century ago memories of the Great Famine were still raw, especially in the west of Ireland. In 1905 a Belmullet hackney‑car driver gave the young playwright John Millington Synge a graphic account of ”people dragging themselves along to the workhouse in Binghamstown, and some of them falling down and dying on the edge of the road”. Such memories, second‑ and third‑hand, were still common three or four decades later.

But the Great Famine had brutally brought the era of true famines in Ireland to an abrupt end. This point, however obvious, adds an important perspective to the social and economic progress made both before and after the turn of the new century. Minor ‘famines’ in the early 1860s and the early 1880s had produced hardship and increases in workhouse admissions in parts of the west, but little excess mortality. That is not to deny that for some remote and isolated households a century ago destitution still posed a threat. Such places contained some people living ”at the edge of subsistence and constantly in danger of dying of starvation”.

A century ago poverty was greatest in the peripheral or so‑called congested districts in the west. In his survey of those districts for The Manchester Guardian playwright John Millington Synge noted that it would not be easy to improve conditions in them ”by any particular remedy or set of remedies”. He believed that some way of making the potato crop more dependable would help, but it was also ”obvious” that the people should be earning enough ”to make them more or less independent of one particular crop”. Far easier said than done. Nor would land purchase help, because in the poorest districts there was little land to purchase. Getting rid of the rural trader‑moneylender or gombeenman and his “vague system of credit” might also help, Synge could “not see at once what method could be found to take its place.” To an extent Synge was confusing symptoms and causes. The gombeenmen both reflected and depended on the poverty that surrounded him. Synge favoured improved communications, but he dismissed cottage industries as “a small affair”, and noted that the revival of fishing had been spotty. Only “the restoration of some national life to the people” would stem the emigration of young people. In that respect, reasoned Synge, Home Rule would do more – at a time when creameries and cooperation were the flavour of the month – than “half a million creameries”.

However, neither the version of Home Rule that materialised in the 1920s nor the more radical version that followed in the 1930s proved a panacea for the congested districts nor, indeed, for Ireland as a whole. Recent research suggests neither productivity nor living standards improved much in Ireland between the 1900s and the 1950s. Indeed several commentators in the 1950s were beginning to despair of the viability of an independent Irish economy . Even during the 1960s and 1970s, which were good decades in Ireland compared to what went before, growth was too slow for Ireland to catch up or make up for lost ground. Amazingly, half of the five‑fold improvement in living standards in Ireland over the past century has occurred in the past decade or so. Since the late 1980s output, employment, and living standards in Ireland have grown faster than probably at any time in our history.

The impressions conveyed by comparing national accounts and real wage data is broadly corroborated by other evidence. One has only to look at the consumption of consumer durables such as cars and mobile phones in the last few years. The fact that Ireland has become a country of net immigration rather than emigration tells its own story. Belatedly, Ireland is into hedonism and consumerism.

Consumption is seen as a proxy for living standards because we take it as axiomatic that ‘more’ means ‘happier’. But has happiness increased in tandem with consumption? Arguably not is the implication of an attitudinal survey carried out by the European Union’s Eurobarometer. Twice a year since its creation in 1973 this survey has asked random samples of EU citizens the same question about how satisfied they were with their lives. The outcomes are subject to some perplexing fluctuations but in general they suggest that from the outset the Danes have been the happiest and the Italians and the French the least happy in the EU.

By this measuring rod Ireland’s performance is remarkable, however. In Ireland the trend in the share of the ‘very happy’ has been markedly downwards between the early 1970s and now. But it is a reminder that the pursuit of limitless riches will not make us happier. It also gives pause to reflect on the downside of recent progress: more tension, more uncertainty, less community, less belief, more crime.

But the outcome is very reminiscent of the results of work from U.S. economist and demographer Richard Easterlin, who has long argued that although affluence has undoubtedly increased throughout the developed world over the past half‑century, self‑measured happiness has not. Easterlin puts this down to the facts that wants grow with income and that we all relate to relative, not absolute, income levels. He cites with approval Samuel Johnson’s quip – “Life is a progress from want to want, not from enjoyment to enjoyment”. If that is so, the prospects are not great. They mean that we will forever be stuck on what psychologists call a hedonic treadmill. Easterlin’s new‑agey solution is that we should all spend more time taking it easy, on leisure and quiet contemplation.

Nor does the story end there. If you ask Irish people today how they rate their life as a whole compared to, say, five or ten years ago many of them will list a decline in friendliness and in personal safety as minuses, but a sizeable majority will still declare that they are better off. Very few would want to go back to where they were.

The Tiger as a Historical Episode

Just as there was no hint that a Celtic Tiger was about to roar in the economic commentary of the early 1990s, there was little sense either that the experience might prove temporary in the commentary of the late 1990s. Accounts of the Irish economic miracle – and there are several good ones – tended to be very present‑centred. Reading them just a few years later, they seemed to imply that Ireland had switched definitively to a new, higher, steady state growth regime. So much so that for a few years policy makers from far and near sought the key to achieving rapid sustained economic growth from Ireland. It became the turn of IDA personnel and Irish economists to travel abroad offering rather than seeking advice.

A longer‑term, more historical perspective suggests a less dramatic spin. Measuring the performance of the Irish economy against that of the OECD convergence club between mid‑century and the mid‑1980s implies serious under-achievement. In this period only the 1960s offered a ray of hope. The 1950s were a ‘lost decade’ of virtual stagnation and mass emigration, while between 1973 and the mid‑1980s the record was one of initial growth fuelled by reckless fiscal deficits and a bloated public sector, followed by a painful fiscal correction. However, applying the same simple convergence framework to the 1950 – 1998 period as a unit suggests that Ireland was ‘on track’, in the sense that it grew as fast as an economy with its 1950 income level might be expected to grow. This, and signs that the economy is now returning to more modest growth rates, suggest that the Celtic Tiger’s main achievement was catching up with the rest. Seen from this perspective, the signs that growth is slackening are nothing to be concerned about. Press commentary evokes a sense of disappointment, however, and public policy, with its focus on the need for yet more and more imported capital and imported labour seems hell‑bent on the pursuit of continued rapid growth.

The current slow‑down suggests the following interpretation of the half century. Before the late 1980s decades of protectionism followed by wrong‑headed fiscal policy widened the gap between Ireland and almost every other economy in western Europe except Britain. At the same time the Republic had developed some of the prerequisites for faster economic growth: an underemployed labour force; a stock of emigrants willing to return, given better job prospects; ample energy supplies; an underutilised transport network; a competent and honest public service. An attractive tax package for U.S. multinationals attracted by the prospect of the single European market, and the conviction that Irish policymakers had learned from the mistakes of the late 1970s and early 1980s, did the rest. There followed the hectic Celtic Tiger interlude, and by the end of the 1990s Ireland had made up the ground it had lost.

This record is summarised by the fact that Ireland, where GDP per head was the same as in Italy in 1950, fell far behind in the following three decades or so, and then more than made up all the lost ground from the mid‑1980s on (in 1998 Ireland’s GDP per head was 8% higher than Italy’s). So is the bottom line that Ireland had caught up and that its new growth trajectory would sweep it pass not just Italy but everybody else? Not so. The present value of Irish GDP per head, discounted back to 1950, would have been 28.9% higher had it experienced Italian growth rates over the period as a whole, with the slightly lower Italian average growth over the period, but concentrated at the beginning rather than at the end.

So what produced the Tiger? One of Ireland’s leading macroeconomists, Brendan Walsh, has argued that several factors played a role, and that “we cannot establish the relative importance of each”. Still, it is hardly surprising that a recent acclaimed account by an ex‑politician (Ray McSharry) and an ex‑head of the Industrial Development Authority (Páraic White) would give pride of place to politicians “who took a long‑term strategic view on a number of specific issues”, and the “rifle-shot, rather than the scatter‑gun, approac” to seeking out multinationals adopted by the IDA since the 1980s. Other factors often highlighted in the literature include fiscal restraint, generous tax incentives to multinationals, EU largesse, plentiful human capital, a pliable labour force, and social partnership. It is the contention of this paper that some elements in this package of factors have been oversold, and that others were geared to delivering catch‑up, but not limitless growth at the rates achieved in the 1990s.

Human Capital

Government spokesmen and the IDA frequently stress the part played by Ireland’s human capital in Ireland’s ‘economic miracle’. I believe that the argument has been overdone, for two reasons. The first hinges on the economic distinction between the social and the private return to a productive input. That distinction is too often neglected in this context. Ironically in the 1970s and 1980s analysis focused on the gap between private and social returns, at a time when there was increasing concern about the permanent emigration of so many of those with third‑level qualifications. Such graduates benefitted from public spending in Ireland but would end up paying their taxes somewhere else. The dilemma was highlighted in an IDA marketing campaign, “The young entrepreneurs: Hire them before they hire you”, which featured a photograph of a group of UCD graduates in their graduation costume in the early 1980s. A few years after the photograph was taken, it was revealed that most of the graduates were earning their crust abroad. [They included a friend of ours, now like most of the others, back in Ireland.] The IDA decided to use models rather than real people in their future campaigns. In those circumstances, investing more instead in infrastructure such as roads and telecommunications might have yielded a better return to the economy or to those who remained on.

The recurrent claim from quarters such as the IDA and education lobbyists that schooling has boosted growth often in effect assumes – and here I can’t help talking like an economist – that public spending on schooling had no opportunity cost. Ireland’s investment in education is now undoubtedly producing high private and social returns, quite apart from ‘new growth theory’ gains, but who is to say that less investment in schooling at times in the past would have been the more sensible option?

The second and easier‑to‑explain reason why the case for investment in human capital in Ireland has been oversold is that, for all the hype about Ireland0’s highly educated workforce, recent international comparisons show it in a less than stellar light. Ireland passes muster when measured by the Third International Mathematics and Science Study (TIMMS). TIMMS tested samples of schoolchildren in their early teens in 39 countries in 1995, and in these tests Irish schoolchildren came fourth out of the thirteen EU countries included. However, the much‑cited International Adult Literacy Test (IALS), which focuses on those old enough to be in the labour force, is more relevant. IALS, which measured adult literacy skills across OECD member-states in 1995, returns a less impressive verdict. By this measure Ireland came ahead of only Portugal of the ten EU economies included.

These data suggest that commentary in the 1990s exaggerated the quality of the Irish labour force. Perhaps fluent English meant more to U.S. multinationals than high IALS scores. That, however, is hardly a function of policy, nor specific to the 1980s or 1990s.

Fiscal Policy

What part did fiscal policy play? The government elected in 1977 with the biggest percentage of the vote in the history of the state was also, in economic terms, the most irresponsible and incompetent in the state’s history. It got elected on the promise to spend its way out of the downturn caused by the OPEC‑linked increases in energy prices, and sought to deliver on its promise. In the following few years it nearly bankrupted the economy, in the literal sense that defaulting on debt seemed a real possibility.

From the early 1980s on, despite the inevitable slanging matches, there was a broad consensus on the need for drastic fiscal measures in Ireland. The efforts at setting its public finances right that followed attracted a good deal of attention abroad. In 1989 MIT economist Rudiger Dornbusch scorned at a ‘failed stabilization’, which a few years later would spawn the concept of an expansionary fiscal contraction (EFC). An EFC occurs when the deflationary effects of budgetary surpluses on aggregate demand are outweighed by their positive impacts on private expectations, investment and consumption. For a time the role of EFC in jump‑starting Irish recovery was the subject of much debate. The latest consensus is against it. Of course, this does not rule out a role for stabilisation policy. McSharry and White deem fiscal stabilisation “the main precondition for a sustained economic recovery”, and the case is more formally stated by economist Patrick Honohan. Unquestionably without the dramatic, unequally‑borne fiscal corrections of the 1982‑7 period, DFI would gone elsewhere and the Tiger would not have roared. However, had the economy not almost self‑destructed from the late 1970s the corrections would have not been necessary in the first place. In other words fiscal stabilization was about making up lost ground, not achieving a new steady state.

The transfer of about IR£9 billion at 1994 prices to the Irish exchequer between 1989 and 1999 through the EU’s Community Support Frameworks (Delors I and Delors II) arguably eased the challenge of fiscal stabilization, as Marshall Aid did for other European economies in an earlier generation. But macroeconomic simulations suggest that in accounting for the Celtic Tiger the transfer was an ‘also ran’. A study by three Dublin economists found that without it GDP would have been 3 to 4 percentage points less in the late 1990s. This must be set against the doubling of real GDP between 1990 and 2001.

Since 1987, when the Tiger was born, and today the ratio of government revenue to GDP has dropped from 40.3 to 33.2%, and the ratio of public expenditure to GDP from 48.5% to 27.7%. The Irish public sector is now the smallest in the EU in relative terms. Over the same period the ratio of national debt to GDP has fallen from over 100% in 1987 to 38% by the end of 2000. The timing suggests that Ireland’s current status as a low tax, low public debt economy is a product of the Celtic Tiger, however, not its cause.

Social Partnership.

A similar argument can be made about social partnership, introduced in 1987. Irish economists were initially very sceptical of it, but the scepticism soon gave way to a conviction that social partnership was a distinctively Irish contribution to economic success. Some now even argue for social partnership as a recipe for long‑run growth in a full employment context. Here too history has something to say. This ‘Irish solution to an Irish problem’ bears a close resemblance to the tripartite contract between labour, capital and the state developed in many other European economies in the early 1950s. In those cases organised labour made a commitment to wage moderation in return for a capitalist commitment to re‑invest profits and the state’s commitment to the welfare state. The particularly Irish feature of social partnership in the 1980s and 1990s, in an era when the welfare state was under threat in any case, was the state’s undertaking to reduce personal taxation instead.

Social partnership worked well in the mess left behind by governments in the late 1970s and early 1980s. The commitment to wage moderation made sense when unemployment was high, and contributed to the share of wages and salaries in GDP plunging from 57.5%0 in 1987 to 46.3% twelve years later. Wage moderation in the heavily unionised public sector was a boon to the public finances. Social partnership also kept down the number of industrial disputes and workdays lost. The system has persisted, its most recent embodiment being the Programme for Competitiveness and Fairness. However, in an economy like Ireland’s in 2001, where unemployment is 3%, the scope for social partnership 1980s and 1990s‑style is less compelling. Note too that Ireland’s labour force participation rate has risen a lot in the 1990s (from 61.9% in 1990 to 68.1% in 2000), a decade when it was static or falling slightly elsewhere. Wage moderation simply leads to excess demand for labour and loss of credibility for the trade union movement.

Ironically, key features of social partnership – centralised bargaining, wage moderation, low wage dispersion – were identified by some labour economists as reasons for the poor performance of some European economies in the 1980s (I am thinking here of much‑cited work by Calmfors and Driffil and by Richard Freeman). For social partnership to continue working in the future it needs to re‑invent itself.


Part 2

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