Is Ireland's economic success replicable?

Is Ireland's economic success replicable?

Is Ireland's economic success replicable?

Events beyond our borders.
Dec. 27 2004 11:00 AM

Tiger, Tiger, Fading Fast

Could other countries replicate Ireland's economic transformation?

Thirty years ago, Ireland was a Third World country, viewed through the same "do-they-have-indoor-plumbing-yet?" prism that the moderately well-informed observer of today might apply to, say, Paraguay or Malawi. Ireland tended to evoke images of potatoes, IRA bombs, and town drunks named Paddy. Today, Ireland is one of the world's wealthiest countries since its economy has grown nearly five-fold since 1973. It boasts one of the world's highest levels of GDP per capita, some 20 percent above the European average—while 30 years ago it was 35 percent poorer than the average.

Ireland's economic growth model has been hailed as an example of development done right, with everyone from professors in Pittsburgh to investment agencies in Armenia trying to figure out how to replicate the success of the Celtic Tiger. Now Paddy is a software programmer or a biochemist. Farming—particularly of potatoes—is a quaint afterthought.

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But it's not all sugar and spice. Part of the price of prosperity has been a rapidly rising cost of living, characterized by a brutal real-estate bubble (with prices up 187 percent since 1997, the highest of any major market bar South Africa) and escalating poverty. Worse, the so-called Irish miracle is over: Although still strong in the context of economically challenged Europe, Ireland's rate of economic growth has been decelerating sharply, a trend set to continue. Would-be imitators of the Irish experience—such as the 10 most recent entrants into the European Union—could pick up a few pointers. But much of the country's unprecedented growth is a function of a unique confluence of events and developments impossible to replicate.

What brought about Ireland's dramatic transmogrification? One study suggests that it was simply more people working more effectively. Starting in the early 1970s, an almost unprecedented extended period of strong productivity growth resulted in productivity levels (as measured in output per hour worked) above those of the United States, the global productivity gold standard. Meanwhile, around a decade ago, Irish growth was fueled by a surge in the number of workers, from 1.2 million in 1993 to 1.8 million in 2003—in part as unemployment rates dropped and large numbers of women entered the workforce.

Of course, if that were all there was to it, labor camps run by productivity experts would be popular models of development. Instead, the Irish recipe is a combination of Economics 101, luck, and an almost otherworldly persistence. Long before globalization became a geopolitical cliché, Ireland subscribed to free trade in part as a way to increase domestic competitiveness. It also recognized how protectionist policies, like high tariffs, can distort the path of economic development and investment. It implemented policies focused on facilitating foreign investment and created incentives to aggressively attract it; now Ireland accounts for one-quarter of all U.S. foreign direct investment in Europe. Tax rates were cut, both for businesses and individuals, and the country's fiscal and monetary house was brought into order. In the 1980s, a broad social partnership between industry and trade unions paved the way for positive and constructive relations and helped restrain wage growth. And, as in other European countries, Ireland's education policy has been broadly successful in creating a large supply of young workers.

Admittedly, Ireland has enjoyed a number of unique advantages. Investors from the United States—the single-largest foreign investor in Europe—feel more at home in a country where English (albeit of a funny-sounding brand to American ears) is a mother tongue. Ireland's relative geographic proximity to the United States has also helped. The Irish diaspora, which has been estimated to number as many as 60 million people (roughly half of whom are American), has been a source of investment, expertise transfer, and tourism. Irish membership in the European Union, which it joined in 1973, has provided significant funds for infrastructure development—while allowing for access to the European market. And, finally, it helps that Ireland is small: It's much easier to get a country of around 3 million (now 4 million) all rowing in the same direction than it is a nation of 40 million.

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The lessons of Ireland's success are obvious enough to border on common sense, in the same way that eating less is the key to losing weight. Support free trade. Create an environment that is amenable to investment. Educate your population. Align the interests of industry and workers. And, most of all, have patience and persevere; it took decades for Ireland's efforts to bear fruit, and the path to prosperity was twisted at best. But even a country that is a dedicated follower of the Irish way could find that linguistic or geographic bad luck might mean that its perseverance would not be rewarded.

Of course, any number of wobbly Third World hellholes has a flock of venal bureaucrats who—thanks to the largess of developmental aid—are fluent in the language of economic openness and investment attraction. Unfortunately, developing countries usually fail to create an (admittedly deceptively) simple and straightforward plan—and stick with it for the following 40 or so years. In much of the Third World, long-term refers to the period required for a crooked minister to siphon off enough cash to leave town in his Mercedes SL-class roadster. The institutional credibility of Ireland's legal, regulatory, and administrative infrastructure (which was pretty solid, in relative terms, to begin with) was cultivated over decades. And progress didn't happen in a straight line; as recently as 1988, for example, Ireland's unemployment rate stood at the nosebleed level of 16 percent.

In any case, though, the Irish tiger's stripes are fading. Growing by 8 percent a year is a lot more difficult for a $130 billion economy (Ireland in 2003), than it is for a $25 billion economy (Ireland in 1973). Many of the drivers of Ireland's growth were one-off (even if relatively extended) events, like the sharp increase in workforce participation and massive inflows from the European Union. Corruption has worsened over the past eight years, according to watchdog Transparency International. Perhaps most worryingly, Ireland is a victim of its own success: High prices and rising wages are eating away at the foundations of Ireland's competitiveness. A deep-seated complacency, particularly in the services industry, will in time undercut one of the key appeals of Ireland as an investment destination. The country's infrastructure is struggling to manage the explosive population growth—highly unusual for Europe, due to both a relatively high birth rate and significant immigration—of recent years, with no slowdown in sight.

Of course, there's no shame in becoming a normal First World country. And even now, Ireland's anticipated 4 percent growth in 2005 is around double European averages. Crowning its turnaround, an annual Economist Intelligence Unit survey named Ireland the best country in the world to live in (the United States came in 13th). As billboards throughout the country have it, the Guinness is great—at more than $5 a pint, it had better be.