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What we did right
28 March 2010 By Michael J O’Sullivan and Rory Miller in London
This is a critical point in Irish history, perhaps the most important since the foundation of the state in the early 1920s.
By the turn of this century, Ireland was widely regarded as the poster child for globalisation and as an economic model other countries could copy. This great transformation of Ireland into a ‘brand state’ inspired other countries, yet the rapid onset of the financial crisis in 2008 and the ensuing sharp contraction in the Irish economy has sown deep doubts about the quality of the Irish economic miracle.
By now, most other nations are in recovery and are studying necessary post-credit crisis reforms. But Ireland is still in rescue mode, and the sense that we are now lagging behind is hard to escape.
In order to sow the seeds of our economic recovery, Ireland must learn from its past mistakes.
There is still little serious debate in Ireland on what our long-term recovery may look like, or indeed what its place might be in a post-financial crisis world. What Did We Do Right? Global Perspectives on Ireland’s ‘miracle’, aims to contribute to the debate on how to recover by seeking the views of outsiders policy advisers, senior politicians and leading academics from across the globe to help underline what we, the Irish, did right, along with uncovering what we did wrong.
The damage being wrought in the world economy makes it more important than ever that the driving factors behind the Irish transformation are understood. The implementation of wrong policies or the adoption of unsuitable economic models now would be costlier than at any time in living memory.
At a time of great uncertainty over Ireland’s economic future, policy-makers should be reminded of what worked, in order to illuminate a path forward. Most are cognisant of the negative effects of Ireland’s classic asset price bubble that developed in recent years. However, there is less focus on the worthwhile work done during Ireland’s ‘catch-up’ years (1990-2001) in driving the economy, and the value of Ireland’s ‘intangible infrastructure’ - the factors that develop human capability and permit the easy and efficient growth of business activity – as an important driver of growth.
The decade of the 1990s, which began with the collapse of the Soviet Union and ended with the collapse of the Twin Towers, was a period of uncertainty, hope, realignment and, ultimately, disappointment and tragedy in world affairs. Equally, at the start of the 1990s,writers such as Francis Fukuyama were prematurely and triumphantly proclaiming the ‘‘end of history’’ in the sense that liberal democracy and, by extension, the Anglo-Saxon sociopolitical model had won the day.
Yet, at the beginning of 2010, this economic model and the certainty that many invested in it have been left ravaged by the credit crisis, and now faces credible alternatives in the shape of some European models and the Asian ‘do it my own way’ approach.
In many respects, Ireland was the exemplar of the Anglo-Saxon model and, in keeping with the zeitgeist, the 1990s and beyond was a period when Ireland and the Irish came of age at home and abroad. In so doing, we left behind decades if not centuries of economic underachievement, as summed up by historian Joe Lee in 1989: ‘‘How has Ireland achieved and sustained this level of relative retardation?"
Jonathan Powell
My personal hope is that we will come together in the face of new common challenges such as immigration, economic reform in the EU and surmounting the global financial crisis that is challenging Ireland’s economy and the strength of the City of London.
I hope Britain and Ireland have finally established a relationship of equals and a new habit of talking to each other that will permanently replace the barbed relationship of the past.
Jonathan Powell, chief of staff to Prime Minister Tony Blair, 1995-2007 and chief British negotiator on Northern Ireland from 1997-2007.
Ireland’s meteoric transformation from one of Europe’s poorest and least developed economies into the Celtic tiger increased its global profile and prestige. Politicians, economists and businesspeople from California to China tried hard to work out the best way to emulate the Irish model.
During the 1990s, Ireland’s newly gained status as an economic powerhouse was matched by a more substantial role in the cultural sphere and notably by our growing reputation as skilled practitioners of conflict resolution following our role in facilitating the 1998 Good Friday peace agreement in Northern Ireland. In his chapter, Jonathan Powell provides testimony of how Ireland, the Troubles and the relationship between Britain and Ireland changed before his eyes.
All of these developments, topped off by Ireland’s election to a temporary two-year stint on the United Nations (UN) Security Council beginning in 2000 and its presidency of the EU in 2004, have fundamentally altered the world’s view of Ireland’s international relevance and opened the way for a decade during which all things Irish flourished in the international arena.
There is no doubt that the hard-won achievements of recent years are now being thoroughly stress tested by the global financial crisis, which may well uncover social, political and foreign policy fault lines as the Irish approach comes of age. But this in no way reduces the value to policy-makers and scholars from across the world of examining the key aspects of the Irish story for their own countries.
Khuong Minh Vu, a Singapore-based leading expert on Asian economies who contributed the chapter on Vietnam to this collection, reminds us of the ‘method’ behind Ireland’s early success: ‘‘The lessons learned from the success of the Irish are relevant for all countries. This is especially true for developing countries for the following reason: Ireland’s success did not come from a good ‘design’ but from a vigorous process of reviews and reforms. In fact, Ireland’s take-off was enabled by a thoughtful review and decisive reform initiatives sparked at the depth of a severe economic crisis [in 1986]. Ireland’s success did not rely on a unique political model . . . The success came from the society’s shared determination to reform and a strategic partnership among key social partners."
Indeed, the unprecedented challenges that both the developing and developed worlds face makes an examination of the lessons of Ireland’s journey by experts from around the world more relevant than ever.
For instance, countries in Ireland’s old economic peer group like Greece and Portugal face profoundly difficult economic and financial challenges ahead. Other countries, such as Vietnam and India, have arguably brighter economic futures, but even they are concerned that they have strayed off the path to growth, and have much to learn as they move to the next level of economic development.
Andreas Antoniades
Once more, the Irish model was used in ideological terms as an instrument for political purposes by domestic [Greek] political actors. Ireland, however, was not to stay alone for long as the weak link of the eurozone. It was soon joined by Greece, which also faced mounting fiscal deficits and an excessive public debt. This dynamic threw the spotlight back to the Greek politico-economic system and its structural weaknesses. As one commentator put it, ‘although we did not follow Ireland in its‘miracle’, we now live together the economic ‘nightmare’.
Andreas Antoniades, lecturer in Global Political Economy at the University of Sussex
It is possible to divide our economic ‘miracle’ over recent decades into two independent, though overlapping, phases.
The first, ‘catch-up’ phase was based primarily on investment in Ireland by foreign multinationals and an increasingly stable investment climate.
Foreign Direct Investment (FDI) inflows increased fromUS$2.6 billion in 1996 to approximatelyUS$26.9 billion in 2003, and explained the extraordinary fact that US investment in Ireland in 2003 was more than two and half times greater than US investment in China, for example.
It is hardly surprising then that inward investment to Ireland over the last two decades led to the creation of an export-oriented and high-skilled Irish industrial sector that is based on high technology manufacturing such as electronics, healthcare and pharmaceuticals.
By the early 2000s, according to Enterprise Ireland (EI), 13 of the top 15 world pharmaceutical companies had substantial operations in Ireland, and six out of ten of the world’s top-selling drugs were produced here. It also played host to seven of the world’s top ten Information and Communication Technology (ICT) companies such as IBM, Intel, Hewlett Packard, Dell, Oracle, Lotus and Microsoft, with annual exports exceeding €21 billion and direct employment of around forty-five thousand people.
Buoyed by the boom in jobs, money and optimism achieved through attracting such investment, the second phase saw the domestic economy, especially the property and construction sectors, come to the fore, aided and abetted by low real interest rates and easy credit. Since the latter half of 2008, this has followed the patterns of asset price bubbles through international economic history back to the Mississippi Scheme of 1721 and, as such, serves primarily as a warning to other nations tempted to base economic growth on an unsustainable property boom and cheap, unaccountable credit.
Christophe Gillissen
French observers have underlined the ‘dark side’ of the Celtic tiger, such as a deficient infrastructure, high levels of inequality and of relative poverty. The fact that Ireland had one of the highest growth rates in 2005 but also one of the highest rates of poverty in the EU was noted with some surprise.
Christophe Gillissen, specialist in British-Irish Studies, the University of Paris, Sorbonne
Although most expert opinion concurs that Ireland’s economic success emerged due to a number of factors, including the Irish education system, an English-speaking workforce, credit growth, the state’s role in supporting inward investment, membership of the European Union (EU) and a flexible labour market, there is significant divergence of opinion when it comes to pinpointing the relative weight of each of these individual factors in igniting Ireland’s economy after so many years of slumber.
This is even more relevant given that many of these factors – from an English-speaking workforce to government underwriting of foreign investment were in place during the darkest, most stagnant years for the Irish economy.
Alex Salmond
The point is one which we would do well to remember, not only in pursuit of our own ambitions in Scotland, but also in evaluating where Ireland’s 20-year boom has taken her – that economic growth creates its own challenges. It is important to recognise that economic growth is not of itself a panacea; it does, though, create the potential to solve those self-same challenges and, in the process, raise everyone’s standard of living. The credit crisis brings this home all the more powerfully and helps to support the argument for a more balanced view of the relationship between society and economy.
Alex Salmond, First Minister of Scotland and leader of the Scottish National Party (SNP)
The Irish experience highlights the need for countries to marry positive domestic factors with external factors such as the falling cost of international capital, the opening up of international markets and the advent of new technologies in other words, the ingredients that we now view as key to economic globalisation.
The role of intangible infrastructure in economic success and social development in Ireland cannot be underestimated. In 1755, the economic philosopher Adam Smith said that ‘‘Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things."
From Smith through to the most contemporary literature on economics, there is increasing consensus that intangible factors such as human capital or institutional quality are determinants of economic performance, especially where structural change is concerned.
Intangible infrastructure has been defined as the set of factors that develop human capability and permit the easy and efficient growth of business activity.
These factors can be essentially political, legal or socio-economic in nature, such as the rule of law, a strong institutional framework or intellectual property, but in terms of hard dollar spend, they relate mostly to companies in the education, healthcare, technology and innovation, and financial and business services sectors.
The strands of intangible infrastructure are closely interrelated and interdependent. It is unlikely, though not impossible that a country with a high degree of technology penetration would not also have a fairly comprehensive education system. In the same way, financial systems would struggle in the absence of a legal framework and advances in technology might falter without property rights to support cutting-edge research and development.
Finance is a good case in point, as the power of intangible factors such as legislation, regulations and standards (notably, international accounting standards) influence how financial systems evolve. Moreover, they are decisive in determining why some countries and cities have strong financial sectors and others have weak ones. Important issues such as investor protection, transparency, political stability and regulation are by nature intangible, but are nonetheless vital in determining the strength of banking systems and flows of capital into countries
Today Ireland is struggling in terms of competitiveness, a range of institutions are performing poorly and the country appears to have lost its way in terms of policy-making. We very much need to learn the lessons of our past success. If we fail to do this, we will likely see economic growth fall to a lower trend rate.
It is now widely accepted that it was the existence of strong intangible infrastructure that helped Ireland to overcome its small size, its location on the margins of Europe and lack of natural resources, and become a success. While intangible infrastructure will be a key to economic success going forward, it will also need to be adapted to meet new global economic challenges at a time when the credit crisis demands that both leverage and deregulation give way to lower leverage and more regulation.
The Folly of Imitation
With its stable political climate, business friendly economy, and general respect for intangibles like the rule of law and education, Ireland has fitted well into a globalising world, and there is no doubt that the dramatic phoenix-like turnaround in its economic and political fortunes, combined with its title as ‘most globalised’, makes it an interesting test case of the process of globalisation.
In the past, policy advisers, academics, business schools, journalists and institutions like the International Monetary Fund (IMF) have all made reputations from preaching that one country should adopt the policies of another more successful one. One has only to think of the dissection of the Japanese manufacturing sector ‘miracle’ of the 1980s,which sought to apply Japanese management techniques to US companies, as well as the more recent attempts to show European governments and companies the need to adopt a more Anglo-Saxon financial approach.
However, blindly imitating another country’s success can prove foolish because, despite the growing integration of national economies, deep structural economic, cultural and legal differences exist between states. For example, one of the main complaints of opponents of global institutions like the World Bank is that such institutions readily apply a policy formula to developing countries that has had success in some developed countries, and, in so doing, take little account of local factors and complex structural differences between nations.
Even within the EU which, more than any other regional integration project, has stripped away social and economic barriers, measures that would be acceptable in, say, Ireland would be found unworkable in France. This is the main reason why the EU’s Lisbon Agenda for economic reform has so far proved anything but a success. Ireland, for example, is perhaps the leading nation in terms of emigrant ties to other English-speaking countries. One should not underestimate the practical significance of such ties in explaining Ireland’s successful embrace of globalisation.
The benefits of these relationships with English-speaking nations based on profound emigrant links cannot be replicated in other countries. But such considerations aside, many policy measures, such as structurally low tax rates, can and are being copied.
In the 1980s, Ireland’s economic problems led its political class to jettison political ideology (ie nationalism) in favour of a much more pragmatic attitude to policymaking and a sharp focus on the need to create jobs. In turn, this approach bolstered the consensus-led social partnership agreements.
Indeed, it is fair to say that this pragmatism was the glue that bound together many of the other intangible factors that were the key to Irish success. This pragmatic attitude is also easily copied by other countries, though it often requires very poor economic circumstances as a catalyst.
The road ahead
No matter what part of the world you come from or whether your nation is rich or poor, large or small, there is much to be learned from the things that Ireland did right.
These include a focus on intangible infrastructure as the bedrock for a modern society and a developed economy; pragmatism in policymaking; harnessing your country to the forces of globalisation while constructing buffers to limit the side effects of this; an acute wariness of asset price bubbles; and the adoption of innovative fiscal policies to counteract larger, ‘inappropriate’ macro effects.
Above all, the one country that now needs to take heed of these lessons is Ireland, as we search for a path to economic recovery and necessary institutional rebuilding. Having been admired by so many other countries, Ireland now needs to look at how other countries are changing, adapting and developing, and learn from their example. What Did We Do Right? provides a constructive starting point for this journey.
Extracted from What Did We Do Right? Global Perspectives on Ireland’s‘ Miracle’, edited by Michael J O’Sullivan and Rory Miller, published by Blackhall Publishing.
Available for €23 (RRP €25) by quoting coupon code 811 at www.blackhallpublishing.com or by calling 01-2785090
Michael O’Sullivan is author of Ireland and the Global Question (Cork University Press, 2006). He was educated at University College Cork, Ireland and Balliol College, Oxford, from where he obtained MPhil and DPhil degrees as a Rhodes Scholar. He has taught finance at Princeton University and Oxford University, and has worked in the City of London for the past 12 years
Rory Miller was educated at Trinity College Dublin and the University of London. He is professor of Middle Eastern Studies at King’s College London, where he is also a College Innovation Fellow. He is the author/ editor of seven books.
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