Why has Ireland done so well?

Irish growth.gif

It’s a question I hope to learn more about.

These kinds of debates always take on heavy ideological overtones.   There was the ‘what made the Asian Tigers roar’ debate of the 1980s in which free traders spoke past protectionists and didn’t get very far.   There was the ‘Why can’t we be more like New Zealand’ debate until it became harder and harder to ignore the fact that it would be the last thing you’d do if you thought results should be your guide.   New Zealand’s performance has been truly aweful – and indeed mysteriously so.

Now of course Ireland’s extraordinary performance can’t be ignored. Their GDP per capita growth has pretty much doubled the next best developed country of any size in the last couple of decades.   It’s produced the amazing graph you see above.

The thing about Ireland is that it looks like it’s pursued something a bit like an extension of the approach to economic policy that we did under the Accord.   There’s a long standing and continually growing accord between the government, labour and business and others.   Is it integral to Ireland’s success?   I don’t know right now, but I hope to know more soon.

But if you’re doing a quick job (pdf) for the Cato Institute, (not to be confused with our own C8to institute) it’s better not to even ask.   Better to just assume the answer, and of course the answer is ‘economic freedom’.   Ireland increased economic freedom and Bob was it’s uncle.

Sure enough wherever the paper goes, it finds that Ireland succeeded because it increased economic freedom.   It doesn’t mention the labour market. And barely mentions education.   Instead it finds significance in this fact. “Although Ireland has had relatively free trade for a long time the mean tariff rate continued to decline from 7.5 percent in 1985 to 6.9% in 1999.

But be assured, and be advised dear readers that Troppo’s chief investigative economist will battle on through it all and report back.

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Patrick
15 years ago

And none of you mentioned the EU. Oh well, each to their own ideological preferences.

Irishdownunder
Irishdownunder
15 years ago

Three key elements:
Continued free education for school leavers, Tax Benefits to multinational corporations and Greed.

At ground level the wealth divide is getting bigger each year with all the follow on social problems…always a good idea to wait for the final act before completing analysis especially when parallel effects of rapid growth are being ignored!

murph
murph
15 years ago

The fact that nobody in Ireland pays tax unless it’s gleaned from wages has alot to do with it.

I recall reading an article in the Irish Times in 2000 which was about the first person ever to be sent down for tax evasion in the history of the Republic. Not only that, but up until that point only 20 people had ever been successfully prosecuted for tax evasion/fraud.

Pat
Pat
15 years ago

Ireland used aggressive industry and innovation policies and incentives to develop and maintain a manufacturing base. Lower corporate tax rates played a small role, but a commitment to education, building business capability and innovation was much more important. Wages in Ireland were among the lowest in the European Union when they commenced their growth leap. Since then wages have grown, but they are still successfully competing against the low paid Eastern European countries that have recently joined the EU.

Ireland is managing to maintain its manufacturing base and expand into growth industries because it doesn’t compete on wages. Most of the multinationals are so embedded in the Irish economy and so dependant on the very skilled Irish workforce and highly capable, innovative, Irish SMEs that it is not worth it for them to move to Eastern Europe for the cheaper labour.

Roy Green has written extensively on the subject. Roy has just returned from being Dean of the Commerce Faculty at the National University of Ireland, Galway and is Dean of the Macquarie Graduate School of Management.

http://evatt.labor.net.au/publications/papers/14.html

Jason Soon
15 years ago

Nicholas
You are making the same mistake as Harry. I blogged about this here and got into a bit of a stoush with him
http://catallaxyfiles.com/?p=2096

As you can see, their index is constructed out of a number of different indicators. A free labour market is only one of them. So it is quite plausible to attribute their success to economic freedom as they have defined it in their index and to say that Ireland scores quite high on it in aggregate.

They actually have a more sophisticated Hayekian (in the sense of The Constitution of Liberty) understanding of economic freedom than you seem to imply.
And I don’t think it’s a case of their calling something what it’s not. Bear in mind that this publication is for a mass audience. They could give it some high faluting name like ‘indicators of effective facilitators of Pareto efficient gains in trade’ but that isn’t going to go down well.

See my comment here where I link what they are doing to some of the academic research that is out there (and bear in mind this was just a result of a 5 minute internet search on my part)
http://catallaxyfiles.com/?p=2096#comment-148740

Lawrence Stedman
Lawrence Stedman
15 years ago

The IMF Finance and Development Quarterly provides some interesting demographic takes on Ireland’s growth – tracing it in part to the legalisation of contraceptives in 1979, see http://www.imf.org/external/pubs/ft/fandd/2006/09/bloom.htm

Jason Soon
15 years ago

Nicholas
I have a comment held up in moderation from too many links.

phil
15 years ago

Substantial (and I mean really massive) investment in education, technology and research. And coming off a low base, as they say. Finally, it was all done on on other people’s money (EU subsidies). If they had been constrained by the normal limitations of national budgets, I suspect it may have been different. But it worked,

Francis X Holden
15 years ago

nic – I’m off to Ireland in October. I’m happy to do field research for a small fee and expenses. A pint of the Blonde in a Black Dress is about 4 Euros. I’ll send the expenses receipts by email and you can pay directly into my bank account online.

Peter Whiteford
Peter Whiteford
15 years ago

Part of the answer – only part – is that there is a wider gap between GDP and GNP in Ireland than in most other places.

According to the OECD Observer http://www.oecdobserver.org/news/fullstory.php/aid/1507/GDP_and_GNI.html :

“Ireland is another country where GDP has to be read with care. Ireland’s position has risen up the GDP per head rankings since 1999, and is now in the top five countries in the OECD. This remarkable transformation has been put down to a mix of factors, of which inward investment in high value-added businesses is one. But does GDP per head accurately reflects Ireland’s actual wealth, since all that inward investment (and foreign labour) generates profits and other revenues, some of which inevitably flows back to the countries of origin?

Another measure, Gross National Income, accounts for these flows in and out of the country. For many countries, the flows tend to balance out, leaving little difference between GDP and GNI. But not so for Ireland, as outflows of profits and income, largely from global business giants located there, often exceed income flows back into the country. This means that in a GNI ranking, rather than being in the top five, Ireland drops to 17th. In other words, while Ireland produces a lot of income per inhabitant, GNI shows that less of it stays in the country than GDP might suggest. …

Ireland remains one of the OECD’s fastest growing economies, and this shows in a sharp rise in real income since the mid-1990s. Compared with 21 OECD countries for which figures adjusted both for inflation and purchasing power differences are available, Ireland’s GDP per capita swung from about 12% below average in 1995 to 22% above the average in 2003. GNI per capita moved from about 20% below average of the same 21 countries in 1995 to a less pronounced 4% above average, which is still quite a leap.”

Irishdownunder
Irishdownunder
15 years ago

@Lawrence Stedman –

Loved the link….

“In the decade following the legalization of contraceptives in 1979, Ireland saw a sharp fall in the crude birth rate. This led to decreasing youth dependency and a rise in the working-age share of the total population. By the mid-1990s, the dependency burden in Ireland had dropped to a level below that in the United Kingdom.” (Booms, Busts, and Echoes David E. Bloom and David Canning)

Andrew Leigh
15 years ago

The Canning and Bloom paper is here. Also, don’t miss a terrific writeup by Malcom Gladwell, and his responses to the critics on his blog.