I wrote about the disaster that is the Irish economy about eighteen months ago, just after Fianna Fáil government, true to form, had bought up bad property assets from its crony capitalists on unduly generous terms. I was revisiting the Irish economic miracle ahead of a workshop in Dublin this week, and found an interesting structural explanation of the Celtic Tiger boom in Fintan O’Toole’s book Ship of Fools. It’s not the explanation of “business friendly” policy, low tax and light regulation that’s normally offered, and it has implications that go beyond Ireland.

In that earlier post, I quoted the economist David McWilliams as saying that the Irish boom was built on “easy credit, cheap oil, and ready sources of migrant labour”; all three have now gone. (McWilliams is a good – if populist – economist, and this is his ‘elevator’ explanation for lay people). Certainly the consequences of the crash have been disastrous. Ernst and Young’s latest economic report on the country was characterised by Amárach Research as “Biblical. In the ‘seven lean years’ sense…”. Just the headings of that report (opens pdf) paint a grim picture:

“Domestic economy very weak… as austerity measures damage consumption… while investment will fall due to weaknesses in the construction and banking sector.”

Ireland’s demographic dividend

O’Toole’s analysis in Ship of Fools puts one of the main explanations for the years of the Celtic Tiger boom down to the downwards fertility shift in the country as the influence of the Catholic Church declined and contraception became more readily available:

Irish fertility had been startlingly high well into the 1980s, with the result that there were a lot of youngsters around in the 1990s. At the same time, those fertility rates dropped dramatically as women gained more freedom… In 1986, every ten workers in Ireland supported 22 people who were too young or too old to work, who were women working in the home, or who were unemployed. By 1999, those ten workers were supporting just fourteen dependents, and by 2005, just five.

As it happens, this is a familiar story about economic development, told by Fred Pearce in his book Peoplequake, which I summarised in my recent World In 2020 report for The Futures Company. As Pearce says, “As countries move from high to low fertility, they experience a period of a couple of decades when demographic conditions for rapid economic growth are near perfect”. Much of China’s long boom was an unintended consequence of the ‘one child’ policy, which – unintentionally – created just such a demographic dividend.

Not all countries which get this demographic windfall succeed: the decisive factor is the “literacy years” – the average number of years for which people are literate – of the population, according to the geographer Wolfgang Lutz. But here, Ireland was blessed with one of the most educated workforces in Europe, as a result of heavy public investment n education.

Catching up on under-development

There were other factors as well. The long boom in the global economy meant that almost all countries gained economically. Ireland’s long period of under-development (a century long) meant that it was, to some extent, just catching up with its potential. In this they were helped, lavishly, by the redistributionary policies practised by the European Union, which designated Ireland as one of its disadvantaged areas, and poured in some IR£8.6 billion of European investment funding between 1987 and 1998.

It is worth remembering how successful the Irish economy was in the 1990s. Unemployment levels halved, and the level of consistent poverty fell by two-thirds. Between 1986 and 1999, GDP per head of population climbed from tw0-thirds of the EU average to being above the average (and higher than that of the UK). Ireland’s share of foreign investment by US corporations rose from 2% to 7%. And so on.

But as Ian Jack observes in his long NYRB review, the incoming Fianna Fáil government in 1997, under Bertie Ahern, thought it could do better.

The new government, however, believed it had discovered a quicker-acting formula for wealth creation: tax cuts to stimulate consumption, property to replace manufacturing as the source of wealth, Dublin to become a tax haven for businesses seeking to avoid the more rigorous regimes of London and New York.

Well, we know how all of that turned out.

Throwing it all away

O’Toole is cross – actually, he’s furious – about the way that Ireland’s economic opportunity of the 1990s has been squandered, and with good reason. As a country, you only get one shot at the demographic dividend. China shows what you can do if you manage the opportunity well. Ireland, in contrast, is an example of how to blow it even when you should be perfectly poised to take advantage.

Effectively, O’Toole argues that Ireland’s political system was under-developed: that the country was part of a modern global economy with a pre-modern political system. The specific history of Ireland is relevant, and the close personal and political connections in particular between Fianna Fáil and property developers which go back to the ’50s and ’60s. Inevitably this was a recipe for corruption, and some of the corruption reported in Ship of Fools is eye-watering, as was the ability of governments and business people to ignore judicial findings of fraud. The result was a dangerous cynicism about politics which has only now, it appears, been dislodged by Fianna Fail’s humiliation in the general election following their acceptance of the IMF’s bail-out terms.

Economic success stories are contingent

There are two wider lessons here which go beyond the Irish context. The first is about how we understand successful economic growth stories. The so-called ‘Miracle of the Celtic Tiger’ was a lucrative source of lecture circuit income for Ahern after he stepped down as Taioseach, and the ‘business friendly’ narrative he proposed attracted other admirers, from George Osborne to John McCain. But closer inspection of the reasons for economic miracles always reveals them to be highly contingent, rooted in their own specific circumstances. Close analysis of the long success of Silicon Valley, for example, shows the same thing. As the economist John Kay notes in The Foundations of Corporate Success, ‘copycat strategies’ don’t work because they are unable to distinguish between which aspects of the growth story are essential and which are peripheral.

The second point is that most of Ireland’s growth came from structural, social, and external factors which were not created by the country’s business class. The effect of Fianna Fail’s aggressively pro-business tax and economic policies had little impact on developing the underlying economy in the short-term, and was disastrous in the medium term. But they had a huge impact in ensuring that the profits from growth were pocketed by a tiny minority – at the expense of the Irish public, and the public good.

The picture of Dublin’s ‘Spike’ is from the photo site Creamy Goodness, and it is used here with thanks.