Introduction

Abstract

The first part of this chapter introduces the Celtic tiger boom, presenting facts and figures on trends in economic growth rates, average incomes and employment with international comparisons, as well as trends in unemployment, emigration and immigration. The second part of the chapter sets out the approach and structure of the book. It notes that the general approach is to treat Ireland as a relative latecomer to economic development and it explains what that implies. It then sets out the structure of the book, outlining the content and issues to be included in each chapter. It is noted here that a fundamental objective of the book is to explain what caused the long boom.

For a period of about twenty years, starting in the late 1980s, the rate of economic growth in Ireland was exceptionally high compared with most other countries. Incomes rose from little more than 60% of the average level in the EU to well above the average level. The number of people in employment almost doubled, the unemployment rate declined from 17% to 4%, and the traditional flow of emigration from a country where jobs had usually been scarce was transformed into a substantial flow of immigration.

This episode, or part of it, is commonly called the Celtic Tiger boom. Of course, there is no strictly precise definition of that term, and its usage varies. The phrase “Celtic Tiger” was originally coined in 1994. It referred to the fact that by that time Ireland’s growth had been relatively fast for seven or eight years when compared to wider international experience. During the remainder of the 1990s, “Celtic Tiger” was generally understood to refer to the period since about 1986 or 1987. However, by about 2000, some people were arguing that the real Celtic Tiger boom was the period of about seven years around 1993–2000 when the rate of growth was even higher than previously, regularly exceeding 8% per year. For many people nowadays, the phrase “Celtic Tiger” mainly recalls the four or five years leading up to 2007, when there was a massive construction boom and an ultimately destructive property price bubble leading to financial collapse.

This book is concerned with the whole two decades or so when Ireland’s economic growth was relatively fast compared with most other countries, encompassing all the years that were ever described as the Celtic Tiger boom. It examines the nature of that growth and it aims to explain why the long boom occurred. The focus of the book is primarily on economic events, economic causes and economic policies, rather than the social or political aspects of the boom. Before examining matters in more detail in later chapters, this introductory chapter first sets out some of the principal facts and figures relating to the boom, and then outlines the approach and structure of the book.

1.1 Dimensions of the Boom

Before the boom began, the Irish economy had experienced a long period of slow growth or recession in 1980–1986 when GDP grew by just 1.5% per year and GNP did not grow at all (Table 1.1). The economy then recovered and grew by 3.9% per year in terms of GDP and 3.4% per year in terms of GNP in 1986–1993. Although these may not seem like particularly impressive growth rates, this was in fact a strong performance by international standards in a period that included an international recession. It can be seen in Fig. 1.1 that Ireland’s growth had been slow compared with the EU and USA in 1980–1986, particularly when measured in terms of GNP, whereas Ireland’s growth was relatively fast compared with these other countries in 1986–1993.

Table 1.1 Annual percentage change in Ireland's GDP and GNP

Fig. 1.1

(Notes Since GNP data are not available from this source, the figures for Ireland’s GNP in this chart are estimates based on the GDP data together with Irish National Income and Expenditure data on GDP/GNP differentials. EU-15 includes the 15 countries that were already members of the EU prior to May 2004. They are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden and UK. Source: European Economy, Spring 2010, Statistical Annex, for GDP data. Creative Commons Attribution BY 4.0)

Average annual growth rates in Ireland, USA and EU-15

When the growth rate of the international economy increased in 1993–2000, Ireland’s growth accelerated to an even greater degree, resulting in remarkably high absolute growth rates as well as continuing fast growth in relative terms (Table 1.1 and Fig. 1.1). During the international slowdown of 2000–2002, Ireland’s growth slowed too, particularly when measured in terms of GNP, but it remained relatively fast. Then in 2002–2007, Ireland’s growth rate increased again to around 5% per year and this continued to be relatively fast growth by international standards.

During the two decades from 1986 to 2007, Ireland’s average income per head of population grew faster than the average in the EU or the USA in almost every year (Fig. 1.2). GNP per head rose from 62% of the average EU level in 1986 to 72% in 1993, 97% in 2000 and 114% in 2007. GDP per head rose from 69% of the average EU level in 1986 to 81% in 1993, 114% in 2000 and 133% in 2007. By 2007, GDP per head in Ireland had almost reached the level of the USA, which generally ranged between 132 and 140% of the average EU level.

Fig. 1.2

(Note All figures in this chart are in terms of purchasing power parities. Source: European Economy, Spring 2010, Statistical Annex, for relative GDP per head; together with Irish National Income and Expenditure data to derive relative GNP per head for Ireland. Creative Commons Attribution BY 4.0)

GDP or GNP per head of population relative to average level in the EU (EU-15 GDP per head = 100)

GDP is conventionally used as the principal measure of the size of a country’s economy, and the change in GDP is normally used as the basic measure of its economic growth. In many countries, GDP and GNP are almost equal so that it makes little difference which of these two indicators is used. In Ireland, however, there was a substantial and usually growing difference between the two throughout the boom period. GNP amounted to just 90.6% of GDP in 1986 and, since it usually grew more slowly than GDP, it amounted to only 85.9% of GDP by 2007. The main reason for this was because GDP included large and growing amounts of profits of foreign-owned multinational companies (MNCs), which were mostly withdrawn from the country rather than accruing to anyone in Ireland. GNP did not include such profits of foreign MNCs that were withdrawn from the country.

In view of this situation, it has often been argued that GDP gave a misleading and exaggerated impression of the size of the national income that was available to Irish residents, and the growth of GDP exceeded the growth of the national income whenever the activities of foreign MNCs were growing relatively fast. Consequently, GNP was often preferred to GDP as an indicator of trends in the national income that were relevant for Irish residents. As can be seen in Figs. 1.1 and 1.2, Ireland’s economic boom looks somewhat less remarkable when measured in terms of GNP than it does in terms of GDP, but it is nevertheless clear from the GNP trends that an exceptional boom did occur.

The issue concerning the best way to measure Ireland’s economic growth became a good deal more complicated in the years after the end of the boom in 2007. FitzGerald (2015) discussed several important causes of such complications, including the “patent cliff” for pharmaceutical products, the effects of “redomiciled plcs”, and changes in national accounting rules for aircraft leasing and for goods and services produced offshore for companies resident in Ireland. Although such issues had important effects on national accounts later on, they were of little or no significance in the period up to 2007, which is the focus of this book. For our purposes here, the trend in GNP can be regarded as a meaningful indicator.¹

The trend in employment provides further evidence that the boom was very real and substantial. Total employment in Ireland rose by 89% between 1986 and 2007, which amounted to an average growth rate of 3.1% per year. As shown in Fig. 1.3, the growth in employment was a little slow to take off at first in the late 1980s and early 1990s, but the slowly rising trend at that time was a marked improvement from the declining trend that had prevailed earlier in the 1980s. From about 1993 onwards, there was very strong growth in employment and it is clear from Fig. 1.3 that employment growth in Ireland was unusually fast by international standards.

Fig. 1.3

(Source Derived from European Economy, Spring 2010, Statistical Annex. Creative Commons Attribution BY 4.0)

Employment Index, Ireland, USA and EU-15 (1986 = 100)

Employment as a percentage of the population had been very low at 31% in 1986, but the strength of employment growth over the following two decades made it possible for that figure to rise to 49% by 2007.² That change on its own, if nothing else had changed, would have been sufficient to raise Ireland’s GNP per head of population from 62% of the average EU level to 98%. Considering that the actual increase that occurred was a rise in Ireland’s GNP per head of population from 62% of the EU level in 1986 to 114% by 2007, it is clear that rapid employment growth was a highly influential factor underlying the rise in average incomes.

As regards labour productivity growth during the boom years, GDP per person employed rose by 2.9% per year in 1986–2007 while GNP per person employed increased by 2.2% per year.³ For comparison, the average annual growth rate of GDP per person employed was 1.7% in the EU-15 and 1.6% in the USA in the same period.⁴ Thus Ireland’s productivity growth was somewhat faster than in these other countries but it was not really outstanding. Seen from the viewpoint of Ireland’s own longer-term experience, productivity growth during the boom was not particularly impressive since it was actually a little slower in 1986–2007 than in 1970–1986. Rather, it was the strong trend in employment that was the impressive new feature compared to Ireland’s previous experience.

The rapid growth of employment was accompanied by a number of related changes, namely a fall in unemployment, a decline in net emigration followed by a rise in net immigration, and a rise in the participation of women in the labour force.

The fall in the rate of unemployment is illustrated in Fig. 1.4. The unemployment rate declined from 17% in 1986 to 4% by 2001 and then it stabilised at a level well below the average in the EU and a little below the USA. During the early years of this long-term decline in unemployment, the trend was interrupted and reversed temporarily in 1990–1993, which was primarily a result of an international recession that also raised the unemployment rates in the EU and USA at that time (see Fig. 1.4).

Fig. 1.4

(Source: European Economy, Spring 2010, Statistical Annex. Creative Commons Attribution BY 4.0)

Unemployment rate, Ireland, USA and EU-15 (%)

Although the Irish economy had been growing relatively fast by international standards since 1986, there probably was not a popular perception of an economic boom until well into the 1990s because of the trends in employment and unemployment in 1986–1993. Although economic growth was relatively fast in 1986–1993, it was actually not a great deal faster than labour productivity growth, which meant that employment growth was fairly slow in those years. Then the unemployment rate had scarcely begun to decline in 1986–1990, and it was still at a very high level, when it was pushed back up again temporarily in 1990–1993 by the international recession.

The trend in net migration is shown in Fig. 1.5. Net emigration of over 40,000 per year in the late 1980s was transformed into net immigration of about 70,000 per year by 2006 and 2007. Net emigration was equivalent to about 1.2% of the population per year in the late 1980s, whereas net immigration amounted to about 1.6% of the population per year in 2006 and 2007.

Fig. 1.5

(Source Department of Finance, Budgetary and Economic Statistics, October 2012)

Net migration, Ireland (thousands)

As regards female participation in the labour force, while the increase in male employment was substantial at 49% in 1986–2006, female employment rose by as much as 135% in the same period. Women accounted for just 32% of all those at work in 1986, but this figure rose to 43% by 2006. Or to look at this another way, in 1986 just 28% of females aged 15 years and over were at work compared with 60% of males. By 2006, the figure for females rose to 48% compared with 66% for males.⁵

The Irish government had been struggling with a serious financial crisis for a number of years before the boom but that problem was brought under control quite rapidly from 1987 onwards. The current budget deficit dropped from more than 7% of GNP in 1985 and 1986 to little more than 1% of GNP throughout 1988–1995 and then turned into a surplus every year until 2007. The total exchequer balance, including the current and capital account, followed a similar trend. Thus, the total exchequer deficit was over 11% of GNP in 1984–1986, falling to just 1–3% of GNP in 1988–1996, and then turning into a small surplus most years until 2007. Consequently, the national debt as a percentage of GNP declined every year from a peak of 118% in 1987 to just 23% by 2007.⁶

There had also been a major crisis with the balance of payments earlier in the 1980s but that issue ceased to be a problem during the boom, at least until its closing years. The deficit on the current account of the balance of payments had amounted to at least 7% of GNP each year in the period 1978–1984. However, it then dropped sharply and throughout 1987–2004 any deficits that occurred were never more than 1 or 2% of GNP, while surpluses were just as common and were mostly somewhat larger than the deficits. However, a significant current account deficit opened up again in the last few years of the boom, amounting to 4% of GNP in 2005 and 2006 and 6% in 2007.⁷

There was generally no serious problem with price inflation during the boom, with the important exception of property prices which clearly did become a major issue relatively late in the boom period. The rate of increase in the consumer price index (which does not include property prices) had generally been in the range 10–20% per year for a decade up to 1983, but it then dropped substantially in the mid-1980s. In 1987–1999, it mostly ranged between 1.5 and 3.3%, rising somewhat to a range of 2.2–5.0% in 2000–2007.

The boom did not have a substantial overall impact on income distribution in Ireland. Various summary measures of income inequality remained rather stable from the late 1980s until the mid-2000s. Nolan (2009) also found that “Ireland’s position relative to other EU and OECD countries has also been broadly stable over the past quarter-century, insofar as comparative data allow that to be reliably assessed”. Some factors such as rising profits tended to increase inequality, but they were counteracted by other factors with the opposite effect such as falling unemployment (Nolan 2009). However, as Nolan (2009) observed, if everyone experiences the same proportional increase in their incomes, which would leave measures of income distribution and inequality unchanged, there would be widening absolute gaps in incomes. Such widening absolute gaps could be particularly striking when incomes are rising as rapidly as they did during the boom.

In the mid-2000s, the degree of inequality in Ireland’s income distribution was above average among developed economies, although it was not unique or exceptional. According to a number of summary measures of income inequality, Ireland ranked 10–12th within the EU-15, 17–18th within the EU-27 and 18–22nd within the OECD. Income inequality in Ireland was similar to the UK, Spain, Italy, Australia and Canada, for example (Nolan 2009).

It is well known that part of the Celtic Tiger boom was an extraordinary construction boom, which involved soaring property prices and excessive construction output relative to actual market requirements, financed by imprudent lending by banks which were able to source large amounts of funding from abroad. This naturally raises the question to what extent was the Celtic Tiger boom real and sustainable economic growth, as opposed to being an artificial product of a debt-financed property and construction boom. This issue will be considered in more detail in Chapter 7, but it may be useful to make a few brief points about it at this stage to put it in some perspective.

In particular, it is clear that abnormal or excessive growth of construction played no part in about the first two-thirds of the twenty-year boom. In the 1960s–1980s, employment in construction had generally been in a range of 6–9% of total employment, and that continued to be the case throughout the 1990s. However, construction employment increased to 10% of total employment in 2000 and it rose further to 13% by 2007.⁸ Construction output also grew faster than the total economy in this period.

Property-related lending and construction activity probably started to become excessive and unsustainable sometime during 2001–2004. However, in those years this was still very largely financed by Ireland’s own domestic savings rather than by additional injections of funding sourced from abroad. This was reflected in the fact that balance of payments current account deficits were small in that period, averaging just 0.7% of GNP. In that sense, the overall rate of economic growth was not too high to be sustainable. The economy could have had much the same growth rate even if there had been no property and construction boom, if the investments that went into that sector had been spent in more usual ways.

Then in 2005–2007, borrowing abroad by banks for property-related lending increased rapidly and this was reflected in a rise in the current balance of payments deficit to 4.1% of GNP in 2005 and 2006 and 6.2% in 2007. Thus, in those final few years of the boom, it was the case that a large inflow of finance from abroad for property-related lending was making it possible for the economy to grow at a rate that was unsustainable and that would not have been attained otherwise.

1.2 The Approach and Structure of This Book

The remainder of this book examines the nature of Ireland’s economic growth in more detail, and it aims to explain what caused the long boom.

The general approach of the book is to treat Ireland as a relative latecomer to economic development. Such latecomers face certain significant difficulties.⁹

For example, since economies of scale are common in many industries, the consequent presence of large established firms in a range of important industries in advanced industrial countries, presents a substantial barrier to the development of those industries by new or small firms in a relatively late-developing country that trades freely with advanced countries. For they generally lack the resources that would be required to enter into competition on a competitive scale of production, or to survive a period of initial loss-making while building up to an adequate market share to support a competitive scale of production.

There are also other significant types of barriers to entry for new or small firms arising from the strength of established competitors in other industries. For example, it can be very difficult for new or small firms to match the technological capabilities already developed by established companies in sectors where technology is of key importance. Similarly, if strong marketing is a key requirement for an industry, the established marketing strength of existing firms presents an important entry barrier for new or small firms.

In addition, the advantages of external economies, which are enjoyed by firms in existing industrial centres or districts, can represent a further obstacle to the development of newcomers in late-industrialising countries. Such external economies consist mainly of the advantages of close contact with related firms, specialist suppliers and services, pools of specialised labour skills, supportive institutions and perhaps a large local market. These types of advantages, in some form, are commonly reflected in the existence of large and often specialised industrial towns and geographically concentrated clusters of related industries. If advantages of external economies are important in an industry, it may be relatively easy for many new firms to emerge and grow within existing locations of that industry while, at the same time, this is a good deal less likely to happen in late-industrialising countries that do not have strong industrial centres or districts and would have to compete with the existing industries.

Given this understanding of the context faced by a relatively late developer such as Ireland, important issues to be considered in this book are whether, and how, did Irish indigenous companies make progress when faced with such barriers, and whether the alternative strategy of attracting foreign direct investment (FDI) proved to be an adequate substitute.

As regards the structure of the book, Chapter 2 outlines the historical experience of the economy before the boom. This chapter is relevant for the purpose of the book since it aims to explain how the economy came to be in the difficult situation that it was in before the start of the boom, with very low growth, low-income levels, high unemployment and emigration rates, and a high level of government debt. Thus, the chapter serves to illuminate the obstacles and problems that had to be overcome in order for stronger growth to be attained. It also shows how the difficulties confronting late developers had shaped the experience of the Irish economy before the boom, and it outlines the limitations of previous strategies for growth that had been attempted before the boom.

Chapter 3 contains a survey of the literature that has aimed to explain what caused the boom. It briefly presents the various explanations that have been put forward in the quite extensive literature on this topic. In addition, it includes some assessment of the suggested explanations, concluding that a number of them are not convincing or not very important whereas the others will merit further consideration and assessment in later chapters in this book.

Chapter 4 analyses the contribution made by different sectors to economic growth during the boom. In doing this, it pays attention to the very large outflows of profits from foreign-owned multinational companies, noting that the profit outflows came disproportionately from certain sectors. Since this naturally raises the question whether those sectors were really as important for the Irish economy as they appeared to be, this chapter aims to clarify this issue. It focuses particularly on the contribution of sectors to exports because, in a small and very open economy, export growth makes an essential contribution that drives the rest of the economy. As an essential part of this, it estimates how much net foreign earnings remained in the Irish economy after deducting the profit outflows and payments for imported inputs that were associated with each sector’s exports.

Chapter 5 examines the role of Irish indigenous companies in the boom. As noted above, a key issue to be considered in this book is whether, and how, did Irish indigenous companies make progress when faced with the barriers to late development. The role of foreign-owned MNCs has generally had a higher profile but some have argued that Irish-owned companies also played an important part. In this context, we again pay particular attention to exports and net foreign earnings. This chapter also examines matters such as the changing sectoral composition and size structure of indigenous industry, trends in R&D and innovation, and the impact of industrial policy in assisting the development of indigenous companies. The chapter looks at the record of manufacturing and services in two separate sections.

Chapter 6 is concerned with the role of foreign-owned MNCs in the boom since it is well known that foreign MNCs were an important part of the story. This chapter again pays particular attention to exports and net foreign earnings. It also examines aspects of foreign MNCs such as their purchasing linkages in Ireland, R&D, pay levels, their motivation for investing in Ireland, and secondary effects on the economy including the balance of payments and their effects on indigenous companies. An important issue here is the extent of industrial upgrading in terms of skills and technology, and the extent to which foreign establishments may have become more embedded or integrated in the Irish economy. Such issues are relevant to the question whether attracting FDI could be an adequate alternative to indigenous development.

Chapter 7 deals with the final phase of the boom and its end. Although export growth slowed down after 2000, this chapter argues that fast economic growth continued to be sustainable until 2005 because there continued to be strong growth in net foreign earnings due to the changing sectoral composition of exports. It was only in its last two years or so, from about 2005 until its end in 2007, that the boom came to be largely driven by a debt-fuelled housing boom which ultimately had disastrous consequences.

Finally, Chapter 8 presents the conclusions. The first part of this chapter aims to explain the causes of Ireland’s long boom. It draws from material in the survey of literature discussed in Chapter 3 and from the findings of Chapters 4–7. The second part of the chapter discusses some other conclusions from Ireland’s experience in the boom.