Keywords

The first part of this chapter draws together findings from earlier chapters to explain what caused the boom. The second part of the chapter then discusses some other conclusions from Ireland’s experience in the boom.

8.1 Causes of the Boom

Chapter 3 outlined a wide range of possible explanations for the boom that were put forward in previous literature on this subject. In Sect. 3.2, some of those suggested explanations were assessed and it was concluded that they were not convincing or not very important and that it would not be necessary to consider them further. That left eight possible explanations that could have been important—namely, foreign direct investment, the single European market, education for fast-growing industries, the small/regional nature of the economy, Irish indigenous industry, strong demand growth in export markets, EU structural funds, and social partnership/wage moderation. This section presents a brief account of the causes of the boom, referring to each of those eight suggested explanations as well as some other factors that were found to be significant in earlier chapters of this book.

Foreign direct investment was a large part of the explanation for the boom. FDI was by no means new to Ireland since foreign-owned companies had already been prominent in the economy long before the boom, but their contribution to growth had weakened during the 1980s compared to the 1960s and 1970s. Consequently, the strong acceleration in their growth during the boom gave a substantial new impetus to the growth of the economy. The share of foreign-owned companies in Ireland’s employment, output and exports all increased during the boom years.

Until about the late 1990s, foreign-owned companies in the manufacturing sector were the main driver of that growth and, within that trend, it was the high-tech and medium–high-tech sectors that were largely responsible for the growth of foreign-owned manufacturing. From about the end of the 1990s, the trends in foreign-owned manufacturing weakened a good deal, but the contribution of foreign-owned services then rapidly became more prominent.

This book has stressed the importance of exports for growth in the small and very open Irish economy. More than that, what matters most is the growth of net foreign earnings, meaning the part of the value of exports that remains in the Irish economy after deducting the outflow of profits that arise from exports and the payments for imported inputs that are used in producing the exports.

Net foreign earnings were generally a much lower proportion of the value of exports in foreign-owned companies than in Irish indigenous companies. Nevertheless, the growth of exports from foreign-owned companies was so strong during much of the boom that the growth of their net foreign earnings made the principal contribution to the growth of the economy. The share of foreign-owned manufacturing and services in total net foreign earnings increased from about 56% in 1985 to 73% in 2000 and then declined a little to 70% in 2007. By that criterion, foreign companies made the major contribution to economic growth over the full period of the boom.

Within the period of the boom, however, the indigenous contribution to growth was relatively important in the late 1980s and again in the 2000s, whereas the foreign-owned contribution was far more important in the 1990s.

The single European market made a significant contribution to causing the boom, primarily because of its effect on FDI. As was discussed in Chapter 6, the motivation for FDI in Ireland had always lain in the areas of tax concessions, government grants, market access and labour. The surge in FDI that occurred during the boom was not mainly caused by new developments in Ireland relating to tax concessions or grants. Rather, the major new developments that initiated the surge occurred outside Ireland, particularly the introduction of the single European market programme and the rise of new fast-growing high-tech industries.

The single European market significantly improved Ireland’s ease of access to the EU market because it aimed to remove non-tariff barriers to trade between all EU countries. It was generally expected that one effect of the single European market would be to attract more FDI into the EU from external sources, because of the increased attraction of producing and selling in such a large integrated market. In fact, there was quite a dramatic increase in flows of US FDI into the EU, and it was commonly concluded that improved market access within the single EU market was a major cause of that increase.

In addition, another major new trend in the international economy was increasing the supply of FDI from external sources that was potentially available for the EU and Ireland—namely the emergence and very rapid growth of new industries based on new technologies, particularly in the USA. Such industries included computers, telecommunications equipment and related hardware, as well as software. Later, the development of the internet led to further strong growth. In addition, there was also very rapid growth and development of some longer established high-tech industries, including pharmaceuticals and medical instruments & equipment.

The emergence and rapid growth of such high-tech industries, together with the single European market programme, ensured that there was going to be a substantial increase in the supply of FDI going to the EU. Ireland was already an attractive location for FDI, with a disproportionate share of FDI in the EU relative to its size. Consequently, Ireland was always likely to receive a sizeable share of the new incoming FDI, but in fact, its share of the inflow increased substantially. This increase was not because of significant new policy measures in Ireland, apart from the exceptional case of new tax concessions for financial services. Rather, it was mainly because existing practices in Ireland were very well suited to attracting the type of industries that predominated in the rising wave of FDI.

In particular, Ireland’s concessions on corporation profit tax were most attractive for companies that were highly profitable, such as much of the new wave of fast-growing high-tech industries.

Education of technical graduates for such fast-growing industries, and especially the regular interaction between the third-level education system and the industrial policy system, was another aspect of existing practice in Ireland that was well suited to attracting FDI by new fast-growing high-tech companies. This regular interaction had the aim of adjusting the supply of technical graduates from the education system in response to the changing employment opportunities and requirements in growing industries.

This feature meant that, as the opportunities emerged to attract substantially more FDI in the high-tech sectors, the Irish education system was able to respond and adapt to the latest requirements of such industries more rapidly and flexibly than most other EU countries. In this way, the attraction of Ireland’s labour supply for FDI could be enhanced relative to some other countries which adapted more slowly. Thus, it became noticeable during the boom that shortages of graduates with the relevant skills became more common in some other countries than in Ireland.

It was possible for FDI to have a major impact on the Irish economy because it is a small and very open economy, and like a regional economy in some respects. The amount of FDI that was available could not have had a comparable effect in a much larger country. In addition, the very open labour market in the small open Irish economy meant that the return of former emigrants and the growth of new immigration facilitated and prolonged the boom by preventing labour shortages from emerging.

There was also a substantial improvement in the growth and development of the Irish indigenous industry in the late 1980s, against a background of prolonged weakness before the boom. Its performance became more uneven later, with some strong points as well as some weak points which grew more evident over time.

More specifically, the trends in indigenous manufacturing looked strong at first in the late 1980s, including exports. Then in the 1990s export trends continued to be good in the high-tech and medium–high-tech sectors, but overall indigenous manufacturing exports looked relatively weak by international comparisons. In the 2000s, export trends also became weaker in the high-tech and medium–high-tech sectors. However, in indigenous services, the trends mostly remained better for longer and exports continued to grow relatively fast by EU standards up to the end of the boom.

Industrial policy was partly responsible for the improvement that occurred, since a series of changes were made in policy for indigenous companies beginning in the mid-1980s and the new policy measures were quite effective in some significant respects. In general, it seems that the industrial policy system had considerable success in promoting the growth of small and medium-sized firms, particularly in the high-tech and medium–high-tech sectors, and in enhancing R&D and innovation. But such success continued only up to a certain point. Few of the companies concerned in the higher-tech sectors became large and the more prominent ones often became takeover targets for foreign MNCs, so that the overall growth momentum tended to weaken over time.

The indigenous contribution to growth over the whole course of the boom was a good deal less than the contribution of foreign-owned companies, when assessed in terms of growth of exports and net foreign earnings. Consequently, indigenous companies’ share of exports declined from about 30.0% in 1985 to about 13.4% in 2007, while their share of net foreign earnings declined from about 44.2% in 1985 to about 30.4% in 2007. Thus, the indigenous contribution to net foreign earnings remained much greater than its share of exports, but the indigenous share of net foreign earnings was declining due to faster growth among foreign-owned firms.

The indigenous contribution to the boom was particularly significant at certain times. It was relatively important in the late 1980s and again in the 2000s, whereas the foreign-owned contribution was far more important in the 1990s. This point concerning the late 1980s was seen in Sect. 5.1 where it was shown that Irish indigenous manufacturing exports grew a little faster than exports from foreign-owned manufacturing in 1986–1990, while they also grew significantly faster than manufacturing exports from the EU and the OECD. This was very important at that time since indigenous companies still accounted for almost 40% of manufacturing net foreign earnings. There are no adequate data on services exports by nationality of ownership in the 1980s, but services exports were quite small then.

In 2000–2007, indigenous exports and net foreign earnings grew faster than foreign-owned exports and net foreign earnings, as seen in Table 5.7. Consequently, the indigenous share of total net foreign earnings increased from 27.5% to 30.4%. That was a period when there was a very marked deterioration in trends in foreign-owned manufacturing, particularly in electronics, while the contributions of indigenous companies and foreign-owned services were essential for sustaining a relatively high rate of economic growth.

Thus, the indigenous contribution was influential at the time when the economy was pulling out of the lengthy recession of the 1980s and embarking on a prolonged period of rapid growth, and it was influential again later in maintaining a relatively high rate of growth well into the 2000s.

In fact, the improvement in performance in indigenous industry in the late 1980s was probably the most important change that got the boom started at that time. The value of exports from foreign-owned industries was already growing quite fast before the boom, whereas the trend in indigenous exports was much weaker. Consequently, when indigenous manufacturing export growth then accelerated to more than match the growth of exports from foreign-owned industries, that was a major turnaround which probably changed the trajectory of the economy.

Strong growth in demand in export markets also made a significant contribution to the boom in Ireland, given that the boom was export led. This was shown to be true in the case of strong demand from the UK in the late 1980s (Bradley et al. 1997), while a similar point applied to strong demand from a wider range of countries in 1993–2000.

The rate of growth in Ireland’s GNP was at its highest in 1993–2000, at 8.8% per year. Kennedy (2000/2001) pointed out that, in that period, overseas demand for imports was growing rapidly, more rapidly than might have been expected from looking at GDP growth of the countries concerned (see also O’Leary 2015). For example, in the EU GDP grew by 2% per year whereas imports grew at a much higher rate of 8.1% per year, perhaps because of the Single European Market. The volume of Irish exports increased by 16.5% per year in 1993–2000 and this can be broken down into 8.0% per year being attributable to the growth of overseas demand for imports while 7.8% per year was attributable to Ireland’s performance in gaining market share (Kennedy 2000/2001; NESC 2003). Thus, fast growth in demand in export markets was clearly important for Ireland at that time, although a good deal remained to be explained by other causes of Ireland’s exceptional growth.

Although Ireland’s economic growth was particularly fast in absolute terms in 1993–2000, it is worth bearing in mind that its growth was always relatively fast compared to the EU or USA throughout the two decades between 1986 and 2007 (see Chapter 1), even in periods when Ireland’s growth was considerably slower than in 1993–2000 in a less favourable international environment.

Another potential explanation for the boom that emerged from Chapter 3 was the substantial increase in Ireland’s allocation from the EU Structural Funds from 1989 onwards. There has not been much cause to refer explicitly to that issue in this book, but the funds concerned were often at work facilitating measures that were undoubtedly important. Most of the funds were spent on education and training, aids and incentives for investment by private companies, and physical infrastructure. Thus, they helped to encourage and facilitate some of the key trends that have been discussed above, such as increases in FDI and improvements in policy measures for indigenous companies.

Chapter 3 outlined the findings of a range of studies of the structural funds, and it is reasonable to accept their general conclusion that the funds helped to increase Ireland’s growth rate, while also noting that this positive effect was probably relatively minor compared to the scale of growth involved in the Celtic Tiger boom.

Finally, another potential explanation for the boom that emerged from Chapter 3 was social partnership, including wage moderation. Again, there has not been much cause to refer explicitly to that issue in this book, although one relevant point was the finding, in Sect. 6.4, that average weekly earnings in the “traditional” (mostly indigenous) manufacturing sector increased more slowly than the value of its net output per head in 1986–1992. Consequently, the profitability of traditional manufacturing was protected and enhanced. This was consistent with the wage moderation aspect of social partnership, which sought to underpin economic growth by delivering competitive national wage agreements.

This point supports other evidence, already cited in Chapter 3, which showed that there was wage moderation during the boom. However, it does not shed any light on the question, discussed in Chapter 3, whether wage moderation was caused by social partnership or by market conditions such as high unemployment and the influence of the UK labour market. Although we cannot resolve that issue, we can at least observe that social partnership was the main way of doing wage bargaining during the boom, that wage moderation did occur, and that economic growth was very successful at that time. These facts were at least consistent with the idea that social partnership facilitated wage moderation and helped to provide suitable conditions for strong economic growth. Even if labour market conditions were initially responsible for wage moderation, one might have expected rapid employment growth during the 1990s to have caused wages to rise faster than they did if social partnership was not having a significant moderating influence. There were also other aspects of social partnership, apart from wage formation, which are widely agreed to have been helpful, such as the scarcity of major industrial disputes, as well as the achievement of widespread agreement on a range of public policy issues.

8.2 Other Conclusions

It was sometimes claimed that the Celtic Tiger boom was bogus or phoney. One version of this is that it was an accounting mirage, created by the practices of MNCs seeking to maximise tax advantages. Another version is that it was merely an unsustainable effect of a debt-financed property boom. It has been shown here that this type of view is far from the truth. Granted, the practices of MNCs and the property boom both tended to exaggerate or magnify the reality of the boom in the economy, but the economic boom was nevertheless real and substantial.

Compared to the state of the economy in 1986 before the boom began, the period from that time until about 2005 amounted to a significant economic success. This is certainly not to say that all problems were resolved, or that there was progress in every respect, but the contrast between the mid-1980s and 2005 is clear and undeniable.

In the mid-1980s, just before the Celtic Tiger period began, the long-standing failure to generate sufficient employment was very much in evidence as there was an unprecedented level of unemployment together with a substantial rate of emigration. The proportion of the population that was in employment was very low at just 31%. Average incomes (GNP per head of population) were low at little more than 60% of the UK or EU levels, and there had been little sign of convergence towards EU levels for decades. In addition, the national debt as a percentage of GNP was very high and rising.

Starting from this bleak situation, the Irish economy began two decades of exceptional growth. By the mid-2000s, the employment situation was transformed, attracting a continuous flow of net immigration, while average income levels were above the average UK and EU levels, and problems with the national debt were a distant memory.

However, despite this undoubted success, some significant problems remained. Most obviously, it quickly became clear that the housing boom was unsustainable and it turned out to have disastrous financial consequences, as discussed in Chapter 7. For some years after the boom, the severe problems resulting from this issue dominated the economic and political agenda in Ireland.

Apart from the housing boom, there were also more long-term issues concerning the type of economic growth that had been occurring since the late 1980s. In Chapter 1 (and again in Chapter 2) we discussed barriers or difficulties confronting relatively late developers such as Ireland. We also noted that important questions to be considered in this book are whether, and how Irish indigenous companies made progress when faced with such barriers, and whether the alternative strategy of attracting foreign direct investment proved to be an adequate substitute.

As regards indigenous companies, the conclusions are that they did make some progress and that industrial policy measures were important in explaining how this happened. However, despite the progress that was made, the overall results remained unsatisfactory, mainly because of the scarcity of larger companies emerging in the high-tech and medium–high-tech sectors and because of the common tendency for the more promising companies to be taken over by overseas companies.

As regards the role of FDI in Ireland, foreign-owned companies contributed very substantially to growth, especially through the growth of their net foreign earnings. They also increased their skill levels as more advanced activities were introduced. This made them more integrated into the Irish economy and more capable of sustaining higher pay levels. However, with their low purchasing linkages and relatively low R&D intensity compared to the same industries in advanced economies, they did not become as deeply rooted in Ireland as they would be in their home countries, and most of them probably did not develop the sort of capability base that could continuously generate higher standards of living over the long term.

Of course, it would be reasonable to ask whether such shortcomings really mattered. It was seen during the boom that outstanding results for the economy were achieved by a policy of relying heavily on such FDI and accepting a more limited role for indigenous companies. Would it not be logical to continue indefinitely with such a policy?

There are two main reasons why these issues matter. First, the type of FDI that grew in Ireland might sometimes prove to be unstable, which could mean declining or closing down rather abruptly for reasons that could be mostly external to Ireland. An example of this was seen in the case of the electronics manufacturing sector at the end of the 1990s, but it was fortunate that a rise in services FDI was on hand to soften the potential adverse impact at that time. Later, in 2005–2007, the growth of net foreign earnings in foreign-owned companies ceased, while continuing growth of net foreign earnings in indigenous companies showed that general conditions were not unfavourable for growth. However, these trends were overshadowed by the housing boom that was occurring at the same time.

It is also worth remembering that, although Ireland’s policies for FDI were much the same before the boom as they were during the boom, they were much less successful in the earlier period before external events caused a surge in FDI in Ireland. This shows again that the results of a policy of heavy reliance on FDI can vary greatly for reasons that can be external to the Irish economy.

The second main reason for concern about heavy reliance on FDI is that the corporation tax concession regime in Ireland, which has been the most important attraction for FDI, has periodically caused resentment in other countries with whom Ireland needs to maintain good relations. This policy has commonly been seen by others as damaging to their interests, and Ireland has repeatedly come under pressure to change it. Although Ireland has mostly succeeded in resisting the pressure to make fundamental changes, this must come at the cost of some loss of goodwill and a weakening of the country’s negotiating position on other important matters.

The implication of these issues for present-day policy is that heavy reliance on FDI may be a strategy that could work out well for Ireland in some periods, but it is a strategy with risks so it is also possible that it might have quite poor results at other times.

In order to achieve more lasting and sustainable success in economic development, Ireland needs to put greater emphasis on the development of indigenous companies. For that purpose, it would be necessary for industrial development agencies to invest more substantially in developing the scale and capabilities of selected promising companies, going beyond the scale of investment in companies that was normal for the agencies during the boom. Crucially, too, there needs to be a way of deterring or preventing foreign takeovers of the more promising indigenous companies. Such a policy of focusing greater resources on selectively building stronger companies would not be a completely new departure for Ireland, since it would amount to a significant enhancement of the policy that was implemented during the boom. Since the policy applied during the boom had proven although ultimately limited success, and was clearly a substantial improvement over the 1980s, it should be possible to learn from and build further on that experience to develop a more effective approach.