Case Study 9
The ‘Celtic Tiger’ - Driven by Foreigners?

The performance of the Irish economy during the 1990s has been remarkable. Between 1990 and 1999 Irish GDP growth averaged 7.5%, outstripping the record of all other industrialised countries. Over the same period, EU growth averaged 2.2%, the UK 1.7% and the US 2.6%.

The emergence of the ‘Celtic Tiger’ is all the more remarkable given the very mediocre performance of the Republic since independence in 1922. This transformation has enabled it to leap-frog many countries. During the 1970s and 80s, Ireland remained the third poorest of the current 15 EU members, with only Greece and Portugal poorer. By 1999, it was the fourth richest, having passed out countries such as Germany, France and the UK.

Although Irish GDP or output per head has clearly been forging ahead at great pace, it is noteworthy that Irish living standards have lagged behind. Irish GDP measures the value of goods and services produced in the country. However, not all of this output generates income for Irish residents, since a significant proportion of profits generated by multinational subsidiaries located in the country are repatriated to their owners in other countries. For example, profit outflows accounted for 15% of Irish GDP in 1995. Income accruing to Irish residents, better known as GNP, is a superior measure of Irish living standards. Thus, while Irish GDP per capita was 92% of the EU average in 1995, GNP per capita stood at 81%. Obviously, a significant part of the Irish success story emanates from the foreign multinational sector.

The foreign-owned multinational sector dominates the Computer, Pharmaceutical and Financial Services industries in Ireland. Typically, large corporations mostly from the US, but also from other advanced countries, have used Ireland as an export platform for the lucrative European market. Multinational corporations have been attracted by generous capital grants and relatively low corporation taxes. Indeed, these low taxes have resulted in the practice of transfer pricing, where a multinational parent company sources company profits to the Irish subsidiary in order to avail of the lower rates. This practice undoubtedly accounts for a significant proportion of profit outflows from Ireland. Overall, the multinational sector has made a major contribution to Irish exports (40%), which has been the main source of Irish GDP growth over the last two decades.

Irish indigenous enterprise has also made a contribution. Traditional activities, like food processing and tourism have shown substantial export growth during the 1990s. Moreover, relatively new industries, like the Irish indigenous software industry, which may have emerged due to knowledge transfers from multinationals, have grown impressively. In more recent times the success of the economy has resulted in booming construction and retail sectors.

The causes of Ireland’s success are numerous. The industrial policy of attracting multinationals has been important, but it only supplies part of the story. The economic environment has also been benign. A prime factor here has been the availability of a young, highly skilled, English-speaking labour force. In the 1990s the Irish population had greater numbers at or around school leaving age than other EU members, principally due to high birth, marriage and fertility rates continuing into the 1970s. In addition, participation rates, especially among women, which were relatively low, have been growing markedly in the 1990s. These factors have resulted in large increases in the Irish labour supply. Moreover the quality of labour has been high. Irish second level education, which has long been highly regarded, was free since 1966. Third level education, which has increasingly trained students for the knowledge intensive high-technology industries, was made free in the 1990s with the support of EU Structural Funds. Thus, over the last two decades a young skilled workforce has contributed to the success of the high-tech sectors.

Additional factors include the substantial investment in physical infrastructure, much of which financed by EU Structural Funds, which has been used to develop transport infrastructure and the telecommunications network. The political consensus on incomes policy has helped make Irish wages competitive. Improvements in public debt management, after the debt crisis of the 1980s, have given confidence to international investors. Finally, hitching the Irish pound, first to the ERM and subsequently to the Euro has provided a lucky boost to Irish competitiveness making Irish goods more attractive on foreign markets.

At the beginning of the new millennium the most pressing problem facing the Irish government is inflation, which is running at nearly 6%, nearly twice the EU rate. Debate is raging as to whether inflation is being caused by booming domestic demand or by factors outside Ireland’s control, like the strength of sterling and the dollar and lower interest rates.

However, despite these short-term concerns, medium term forecasts are far from pessimistic. It is widely forecasted that, while Irish growth cannot continue at the 7.5% per annum experienced during the 1990s, an average rate of 5% may be sustainable to 2005. This downward adjustment may be ascribed to changes in a number of fundamental factors. The favourable demographics of the 1990s were a once off phenomenon, causing labour supply to tighten at the same time as shortages are emerging in many sectors. Infrastructural bottlenecks are becoming evident, especially in the Dublin area. The threat of inflation has the potential of causing industrial unrest and jeopardising the national wage round.

However, if this forecast proves accurate, an average growth rate of 5% would, from a historical perspective, be a substantial improvement on the growth performance of the Irish economy for most of the 20^th century. Maybe the ‘Celtic Tiger’ phenomenon has made a difference? The crucial questions to ask are, can the Irish economy remain attractive for multinationals and, more importantly, can Irish indigenous industry remain internationally competitive in its own right?

Eoin O’Leary, Department of Economics, University College Cork.