The 'celtic tiger' - an analysis of ireland's economic growth performance

Robert Schuman Centre for Advanced Studies
The ‘Celtic Tiger’ - An Analysis of Ireland’s RSC No. 2000/16
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Poor Ireland
In January 1988 The Economist published a survey of the Republic of Ireland.
The title was ‘Poorest of the Rich’ and it was accompanied by a young girl withher child begging on the street. The opening lines of this survey conveyed analmost Beckettian bleakness: “Take a tiny, open ex-peasant economy. Place it next door to a much larger one, fromwhich it broke away with great bitterness barely a lifetime ago. Infuse it with apassionate desire to enjoy the same lifestyle as its former masters, but without thesame industrial heritage of natural resources. Inevitable result: extravagance,frustration debt.Ireland is easily the poorest country in rich north-west Europe. Itsgross domestic product is a mere 64% of the European Community average”.
Less than ten years later the Economist highlighted Ireland on its front coverwith the title ‘Europe’s shining light’. In the lead editorial it remarked: “Just yesterday, it seems, Ireland was one of Europe’s poorest countries. Today it isabout as prosperous as the European average, and getting richer all the time”. (TheEconomist, May 17, 1997, 15) The Irish economy’s current performance is most impressive. High and sustained economic growth, low inflation, a current account balance ofpayments surplus, falling unemployment, net immigration and a growingbudget surplus are the stuff of macroeconomists’ dreams. All the keymacroeconomic indicators are positive. Ireland, traditionally a laggard behindthe U.K. economy, has now a per capita GDP which exceeds that of the U.K.
The metaphor, the Celtic Tiger, first coined by Morgan Stanley in August 1994,has become the fashionable neologism for the Irish economy. Many articleshave been written about the Celtic Tiger as commentators highlight thetransformation of the Irish economy. These articles have been followed bybooks - Barry (1999), Gray (1997) and Sweeney (1998).
Theorists have examined the phenomenon wondering if the Irish performance can be modeled and explained by the new growth theory. How cana country with a very sluggish growth performance move to a high growth pathso quickly? How can a country with chronic budget deficits and a high level ofindebtedness suddenly become one with a rising budget surplus and a low levelof indebtedness? How can a country with a very high level of unemploymentand net emigration be transformed into one with close to full employment andnet immigration? The Irish economy, as it moves towards the millennium, isfascinating not only because of the extent of the transformation of its growthperformance, but, also, by the speed of the transformation. Indeed the speed ofthe transformation provides part of the answer to in explaining the Irishsuccess.
The theme of this paper is that it is wrong to over ascribe to Ireland some unique magical qualities, some potion magique that transformed it from a lowperformance economy to the Celtic Tiger. Ireland’s transformation, oneprimarily caused by multi-nationals, was facilitated by the phenomenon ofglobalisation and in particular the shifting closer together of two economictectonic plates that of the United States and the European Union. Ireland, at thegeographic periphery of the latter, but, as the closest European ethnic partner ofthe former - remembering that 40 million U.S. citizens are of Irish extraction -has flourished, rather than been crushed, by the inner shifts of these economicplates. The geographic factor, albeit between Ireland and the U.K., which wasidentified by The Economist as the cause of the problem in 1987, suddenlybecomes part of the explanation behind the surge in growth in the 1990s.
Globalisation enabled Ireland to move from the periphery towards the centre of the new global economy. Now Ireland is the second largest exporter ofpackaged computer software in the world after the United States, twelve ofFortune’s top twenty electronic companies and all of its top ten pharmaceuticalcompanies have plants in Ireland. From having virtually no major exportindustries (Guinness and Irish whiskey representing two exceptions) Ireland hasbecome a significant platform for U.S. high-tech companies competing in theEuropean market.
In this new global economy, or more specifically, this Euro-US economy, is it sensible to talk of core and periphery, to discuss convergence and catch up?These were terms that were appropriate in the industrialised world wheretransport and communication costs conferred benefits to countries at the coreand where investment from core economies could gradually help peripheralcountries to converge towards them. In the post-industrial high-tech world coreand periphery have become anachronistic. There is, in the words of PaulKrugman, a new economic geography.
This new economic geography flips traditional theory on its head.
Convergence, at least in Irish terms, needs to be replaced by leap-frog becauseIreland has successfully moved from the equivalent of a donkey-and-carteconomy to a high-tech economy by leap-frogging over the intermediate humpof industrialisation. Indeed, it will be argued that the absence of a largeindustrial base actually helped Ireland in that it enabled the government toprovide significant tax advantages which would have been difficult, if notimpossible, to make if a large industrial base already existed. Furthermore thelack of industrialisation meant the absence of obsolete capital and rigid labourpractices. Ireland was not to follow the path of industrialisation. Instead analternative path emerged, a high-tech path configurated by a different economicterrain.
The Irish case raises issues as to whether other pre-industrial countries can be transformed to post- industrial economies and whether it can be done asspeedily as the Irish case.
The Economist’s article of 1987, though harsh, was realistic. Ireland was a poor struggling economy. Table 1 shows that economic growth had averaged0.2% over the previous five years during which time there were three years ofnegative economic growth. Unemployment amounted to 18% of the labourforce, and the national debt amounted to 125% of GNP. Some commentatorswere comparing Ireland to a heavily indebted banana republic.
When did all this change? Paradoxically many identify 1987 as the take- off year for the economy, when a policy of fiscal retrenchment was introduced,to correct the economy from the excesses of the late 1970s and early 1980s.
Even here, as will be explained later, the forces for change were global ratherthan specifically domestic. But while 1987 ushered in some hope with goodgrowth in GNP registered for 1987, 1989 and 1990, the familiar pessimisticrefrains were heard between 1991/93. This may be seen by examining thegrowth in GNP and the growth in employment since 1987: GNP Employment
The period 1991-93 produced little that was spectacular in terms of economicgrowth with the total number of people at work actually falling in 1991.Highinterest rates associated with the exchange rate crises that hit the EuropeanUnion countries in 1992/3 severely dampened demand. The old questionsstarted to be asked once again. Where was the country heading? Even thoughemployment had grown by some 72,000 between 1988 and 1993 unemploymentwas 3,000 greater at 220,000.
Suddenly everything changed and the change was dramatic. From 1994 there has been a period of sustained growth in GNP and in employment. GNPgrowth has averaged 7.5% in the six years between 1994-1999 (GDP growthhas averaged 8.4%), employment has grown by over 390,000 andunemployment is expected to average just 6% in 1999. The public sector deficithas moved into substantial surplus and the national debt/GNP ratio now below60% is half what it had been in 1987. Domestic demand is strong and there isan effervescence effect running through all forms of expenditure ranging fromnew car sales to house purchases. Table 1 shows the extent of the contrastbetween the growth of the second half of the 1990s with the experience ofgrowth in the 1980s. So why has there been this transformation? Why has theeconomy moved to a very high and sustained growth performance? A Short Primer on Ireland’s Recent Economic History
In order to explain the new economic configuration and how a predominantlypre-industrial economy leap-froged to a post-industrial high-tech economy soabruptly it is first necessary to outline some of Ireland’s recent economichistory. Using a broad brush the following periods may be identified: • 1922-32 - The first decade of independence marked by a continuation
of existing policies. In 1927 an independent Irish currency wasestablished but kept at a one-to-one parity with sterling.
• 1932-38 - The era of protectionism. There was an economic war with
the U.K. and an attempt to build infant industries behind high tariffwalls. The Control of Manufactures Acts were introduced prohibitingthe ownership of Irish industry by foreigners.
• 1939-45 - World War II during which Ireland remained neutral.
• 1946-57 - The period of economic stagnation marked by heavy
emigration - net emigration averaging over 40,000 during the 1950s.
• 1957 - The removal of the Control of Manufactures Act.
• 1973 - Ireland joined the European Economic Community.
• 1977-81 - Expansionary macroeconomic policy used in an attempt to
provide full employment. This policy, which resulted in the PublicSector Borrowing Requirement (PSBR) constituting over 20% ofGNP, failed creating balance of payments problems and pushed thepublic sector debt up to 120% of GNP. Paradoxically, during thisperiod of fiscal excess, Ireland joined the European Monetary Systemin 1978.
• 1979 - As a result of joining the ERM of the EMS the Irish pound’s
one-to-one parity with sterling was broken in March 1979.
• 1981-86 - Attempts at fiscal retrenchment largely aborted by conflicts
amongst the partners of the Coalition governments of the period.
• 1987 - Fiscal retrenchment introduced. The International Financial
• 1988 - The first tax amnesty. This helped to reduce significantly the
• 1992 - Single European Market. Ireland signed up for the first phase
of EMU at Maastricht. Abolition of exchange control regulations.
• 1992/3 - Exchange rate crises. Devaluation of the Irish pound
(January 1993) and move to wider exchange rate bands (15%+/-) • 1999 - Ireland in the EMU.
The above is not a comprehensive listing of the events which helped to shapethe Irish economy in the twentieth century but it does show a number ofimportant issues: (1) the fluctuating openness of the economy; (2) the recourseto independent policies to solve economic problems; (3) the growingEuropeanisation of the Irish economy.
The Openness of the Irish Economy
An economic mantra, familiar to students, consists of the statement Ireland is asmall open economy. The smallness element does not need discussion. Ireland’sGDP constitutes about 1% of the European Union’s GDP. It is the third smallestof the OECD economies, ahead of only Iceland and Luxembourg. The opennessissue is different for Ireland has had varying degrees of openness since 1922 asmay be seen from table 2. In the first ten years of independence the Irisheconomy continued its free trading relationship with the U.K. Its bankingsystem was closely linked to that of the U.K. and even when the Irish poundwas established in 1927 it was decided to maintain a one-to-one parity withsterling. Irish labour moved freely to the U.K. and U.S. and capital movedfreely between Ireland and the U.K.
When Mr. De Valera assumed office in 1932 the openness of the Irish economy was sharply reduced, both with respect to commodities and capital.
Commodity openness was considerably lowered by the economic war with theU.K. and the attempt to build up infant industries behind high tariff walls.
While the economic war finished in 1938, many tariffs were kept in place in thecontinuing effort to build up infant industries.
An even more significant legacy of that period was the continuation of the Control of Manufactures Act which was first introduced in 1932. TheControl of Manufactures Acts 1932 and 1934 prohibited foreign ownership of Irish industry by stipulating that Irish people had to control 51% of the votingshares in manufacturing companies. Effectively this ensured that foreign capitalwould not move into the Irish economy. These acts continued until theirremoval in 1957. Though it could be argued that there was no great reason forforeign companies to invest in Ireland between 1932 and 1957, the Actssuggested that, even if they contemplated such action, they were not welcome.
As O Gráda noted ‘Fianna Fáil [the governing party] sought to reserve thedomestic market for Irish capital’ (O Gráda, 1994 : 407).
Paradoxically, Irish capital was free to move out of Ireland - at least to the Sterling Area. Capital outflows from Ireland were endemic in the 1940s and1950s as the banking sector invested a considerable portion of its deposits inexternal assets such as British government securities. With foreign capitalprohibited from investing in the manufacturing sector and the Irish bankingsystem investing largely outside the economy it was not surprising to see littleeconomic development in Ireland during the 1940s and 1950s. The cost of thislack of development was a stagnant economy which missed out on theEuropean post-war boom and net annual emigration of over 40,000 during the1950s.
The abolition of the Control of Manufactures Acts in 1957 signaled the beginning of a new approach aimed at welcoming foreign capital into Ireland.
In 1958 Dr. T.K. Whittaker, the secretary of the Department of Finance,produced a report Economic Development which was highly critical of theinfant industry argument and proposed encouraging foreign capital with taxconcessions and other incentives. Moves towards free trade were initiatedthrough the signing of the Anglo-Irish Free Trade Agreement in 1965 andIreland’s joining of the EEC in 1973.
Joining the EEC marked the first step in the reduction of Ireland’s close links with the U.K. economy. This process was accelerated by Ireland’sdecision to join the European Monetary System in 1978, a decision that led tothe breaking of the one-to-one parity with sterling in 1979. The process wasfurther accelerated with the decision to move towards European MonetaryUnion by signing up to the Maastricht Agreement in 1992 and full commitmentto join EMU, which Ireland did in January 1999, even though it was known thatits largest trading partner was not committed to monetary union.
This process of Europeanisation had significant implications for capital movements. The break in the exchange rate link in 1979 heralded the start of anenforced floating exchange rate with sterling. The Irish pound newly linkedwith the currencies of the ERM floated against sterling according as theEuropean currencies fluctuated against sterling. In an effort to protect the Irishcurrency the Central Bank, in 1979, introduced exchange control regulations limiting capital transactions outside the Sterling Area! However, the growingcommitment to European Monetary Union, led to the dismantling of theseexchange control regulations in the early 1990s. With the abolition of the lastvestiges of these exchange control regulations in 1992 and the introduction ofthe Single European Market the Irish economy had become a fully openeconomy, not only for commodities and labour but, also, for capital.
The immediate consequences of this full openness produced a strong deflationary period for the economy in 1992/3. The sterling devaluation of thelate summer of 1992, Ireland’s continued identification with the U.K. link andthe weakness of the other ERM currencies led to a period of continuedspeculative attacks against the currency. In an attempt to defend the currencythe Irish authorities pushed up domestic interest rates to very high levels, anaction which considerably dampened domestic demand. Full openness initiallyproduced high interest rates and depressed domestic demand. The move towider ERM exchange rate bands in August 1993 and the commitment to EMUwere successful in removing these exchange rate pressures and theirimplications for interest rates. The more stable exchange rate environment post1993 along with the growing confidence that interest rates would fall toGerman levels as European Monetary Union approached were key elements inassisting the very sizeable growth in domestic demand which has beenmanifestly evident in the economy since then. Using as the criterion foropenness the ratio of the sum of export and import values to GDP Ireland is thesecond most open economy in the OECD with imports and exports constitutingmore than 1.7 times GDP in 1997.
Openness and Independent Policies
The failure to understand the significance of the openness of the economy to theinternational economy led to important domestic policy failures. The first ofthese failures, as shown above, was the closure of the economy in the 1930s,one legacy of which was the continued prohibition on foreign capitalinvestment until 1957. This resulted in a neglect of the role of internationalcapital in fostering economic growth.
The second openness related policy failure was that of the period 1977- 81 when there was an attempt to force growth on the domestic economy withoutconsideration of the balance of payments consequences triggered by thesegrowth led policies. The view of the government at the time was that fiscalpump priming, arising through a combination of tax cuts and increasedgovernment expenditure, would push the economy to a high growth path andeventual full employment. This was an uncritical approach to Keynesianmacroeconomic policy - the policymakers having failed to read Keynes’s cautionary views on expansionary policy in an open economy which heelaborated in the ‘Notes on Mercantilism’ in The General Theory ofEmployment Interest and Money (1936). To finance the high and growingpublic sector borrowing requirement (PSBR) the government resorted tosubstantial domestic and foreign borrowing. This policy helped to promote acertain amount of short term growth as may be seen from table 1. However, thepolicy did not take into account Ireland’s high marginal propensity to importwhich resulted in most of the budgetary stimuli exiting on imports. The increasein importss in turn caused the balance of payments to move into substantialdeficit. By 1981 the balance of payments deficit was running at 14.6% of GNP(as against 5.3% in 1977) and inflation was 20.4% at a time when the U.K.’sinflation rate was 11.9% and the EU average 12%.
Ireland’s growing macroeconomic crisis was not addressed immediately.
Though politicians were prepared to use retrenchment rhetoric they were notprepared to support this rhetoric with appropriate economic policies. This inpart was due to the coalition mix of the Fine Gael/Labour governments whichgoverned for the period June 1981 to February 1987 except for the short periodof Fianna Fáil rule between February and November 1982. The failure of themacroeconomic policy to redress the situation may be seen by the absence ofeconomic growth between 1982-86 and from the growing burden ofgovernment indebtedness which reached 125% of GNP in 1987, over 50% ofwhich was held externally.
1987 was to prove a crucial year in Ireland’s recent economic history.
The new Fianna Fáil government, which had committed itself in the generalelection to increasing public expenditure, turned volte face and committed itselfto fiscal retrenchment. Notwithstanding the electioneering excesses this changewas recognised as necessary by most people. Honohan (1999) suggests that ‘thereal fear was of a financial meltdown with foreign and domestic financialmarket refusal to rollover debt’. The new commitment to fiscal retrenchmentwas epitomised by Fine Gael, the chief opposition party, promising not toprecipitate an election providing the appropriate fiscal measures wereundertaken by the government. For once at a critical juncture in the country’shistory there was a consensus on the appropriate economic policy to follow.
A third policy failure relating to the openness issue was the initial unwillingness to recognise that the abolition of the exchange controlregulations in the early 1990s left the economy open to speculative foreignexchange attacks. Ireland’s commitment to Europeanisation meant that theauthorities felt obliged to maintain the exchange rate in the narrow ERM bandseven after sterling had been devalued in August 1993. This commitmentprovided speculators, both Irish and foreign, with a certain one way bet againstthe Irish currency. In order to defend the currency the authorities resorted to anexpensive policy of protecting it through high interest rates. These high interest rates stifled domestic demand in the second half of 1992 and the first half of1993. The short term costs of Ireland’s increased openness were evident in1992/3 but the benefits of this increased openness, particularly the process ofEuropeanisation, were also about to manifest themselves.
The Growing Europeanisation of the Irish Economy
In discussing the growing Europeanisation of the Irish economy it is helpful tohighlight some of the most important dates in this process: • 1973 - Ireland joined the EEC
• 1978 - Ireland joined the EMS
• 1979 - The break in the one-to-one parity with sterling consequent on
commitments to the Exchange Rate Mechanism of the EuropeanMonetary System.
• 1987 - Fiscal retrenchment forced on the authorities by fear of of
financial markets refusing to rollover debt.
• 1990 - Dismantling of exchange control regulations.
• 1992 - Ireland became part of the Single European Market.
• 1992/3 - Breakdown of narrow-band ERM of the EMS.
• 1997/8 - Harmonisation of Irish interest rates to German interest rates.
• 1999 - European Monetary Union.
Europeanisation has been a key element in the transformation of the Irisheconomy. The trend towards Europeanisation began in 1973 when Irelandjoined the European Economic Community. The benefits to Ireland’s ailingagricultural sector were obvious and the Common Agricultural Policy (CAP)provided farmers with guaranteed prices for many of their products. Ireland alsosoon became adept at encouraging inflows of European structural and cohesionfunds. Barry (1999) recently suggested that European Union structural fundsmay have raised Ireland’s GNP to a level of 4 per cent above what it wouldotherwise have been. Furthermore, during the 1990s it contributed ‘only half ofone percentage point of the per annu, growth of GNP’. But while Irelandbecame skilled at taking money from Europe there was still some way to go tolearn the other side to the European story, namely the need to adopt a lowerinflationary profile and to accept stronger fiscal discipline in order to progressthe EEC towards greater integration. Germany had spearheaded the lowinflation/fiscal discipline approach and its chancellor Helmut Schmidt wasinstrumental, along with France’s president, Valéry Giscard d’Estaing, inlaunching, in 1978, the European Monetary System, as an intermediate stage,towards reaching the target of European Monetary Union.
Paradoxically, Ireland committed itself to joining the exchange rate mechanism of the EMS in 1978 at the very time when it had embarked on apolicy of fiscal abandon. The main reason given for joining the EMS, eventhough its main trading partner the U.K. opted out of the new exchange ratemechanism, was the aspiration that the anchoring of the currency to a D.Markbloc would lower the inflation rate. The underlying economic contradiction ofcommitting Ireland to the EMS whilst simultaneously pursuing a policy ofexcessive fiscal and monetary expansion did not seem to register on thepolitical leaders of the time. Instead the breaking of the one-to-one parity withsterling, the inevitable consequence of joining the ERM, in March 1979occupied their attention with the new exchange rate policy perceived torepresent some type of national virility symbol. Ireland had come of age, it wasfelt in some circles, because it had apparently shown that its currency was nolonger inextricably linked to sterling. The púnt was born. Though the initialanti-inflation assumptions behind this move became quickly dated as sterling,due to its enhanced petro-currency status, strengthened and the D.Markweakened, the 1978 decision represented an important step in the orientation ofthe Irish economy. Ireland was committing itself to the Continental Europeancountries and attempting to reduce its dependency on the U.K. This policy wasnot to have an immediate pay-off. However, it did mean that when the move toEuropean Monetary Union gathered momentum at Maastricht there was a typeof seamless policy for the government of the day to follow. Ireland hadcommitted itself to this policy in 1978. Maastricht was just a continuation ofthis policy which would lead to Ireland becoming part of the new monetary blocwhen it fully evolved.
This commitment to Europeanisation was very much in contrast to the United Kingdom which continued to draw its sterling tail in and out of themonetary union negotiations.
How Europeanisation and Globalisation Coalesced to Benefit the Irish
Economy
During the shift in Ireland’s economic tectonic plate towards Europe there wasan even more significant movement towards each other of the US and EuropeanUnion’s economic plates due to globalisation. Silicon Valley was starting toinvade Europe producing in the process a dramatic technological revolution.
Think back ten years ago when most people did not have a portable computer, amobile phone, user friendly computer programmes and access to the Internet.
These are now part of the everyday working tools of people in developedeconomies, tools which have dramatically changed our concepts of economicgeography. These tools of the new high-tech age have broken down distance.
Now an entrepreneur based in the Aran Islands on the periphery of Ireland, which is on the periphery of Europe, may run a business in Prague sellingservices to New York, Frankfurt and Tokyo without moving outside his white-washed thatched cottage. The periphery disappears in this high-tech world oncethe region concerned has good telecommunication facilities.
In this new high-tech world US multi-nationals needed to have a European base from which they could sell their commodities. The creation ofthe Single European Market and the plan for the move to monetary union viathe Maastricht Treaty in 1992 increased the urgency for MNCs to seek locationsin Europe.
By the late 1980s and early 1990s Ireland was well positioned to attract a considerable part of the US MNCs’ business. Why? The first reason was thatthe Industrial Development Authority had targeted in the 1970s and 1980semerging MNCs, particularly in high-tech sectors such as computers, computersoftware, pharmaceuticals and chemicals. The U.S. multi-nationals’ platformhad already been partially moved into Ireland. By the early 1990s the high-techrevolution in these areas had gathered considerable momentum with the adventof sophisticated and user friendly computer programmes, portable computers,CDs, mobile telephones, Internet facilities and a wide range of newpharmaceutical products.
The new MNCs were attracted to Ireland by very low corporate tax rates - initially a zero per cent corporate tax rate on the profits of manufacturedexports, and, later, a 10% corporate tax rate on manufacturing profits andinternationally traded services profits. Ireland was able to offer these attractivetax facilities because of the absence of a well established industrial sectoralready paying substantial corporate taxes. Ireland’s lack of industrialisation,the problem which had restrained the economy in previous decades, suddenlybecame a plus factor in that it enabled the government to provide tax facilitiesto MNCs which were not possible in mature industrialised economies. Imaginethe budget deficit that would be created if France or Germany attempted tointroduce a 10% corporate tax rate. U.S. MNCs were primarily attracted toIreland by the low tax regime and the transfer pricing possibilities raised bysuch low tax rates.
Secondly, Ireland was able to advertise to US MNCs that it was both English speaking but, also, unlike the other English speaking member (theU.K.), fully committed to the Europeanisation process. The U.K.’s hesitancy onthis issue came to the fore in 1992 when sterling broke away from the ERM anddecided to float independently relative to the EMS currencies. This hesitancywas then transformed into a reluctance to progress on the EMU issue with theU.K. voting to opt out of the arrangement. The current strong anti-Europeanstance in the Conservative Party along with the Labour Party’s reluctance to allow EMU membership to become an electoral issue has left the U.K. as thecountry on Europe’s periphery rather than Ireland. US MNCs looking for aplatform to sell into Europe have in many cases decided to locate in the Englishspeaking country that is part of the Euro rather than in the English speakingcountry that appears to want to distance itself from the Euro.
Ireland with its low corporate tax rates, its young English speaking and increasingly computer literate labour force, along with its full participation inEurope through the Single European Market and the European MonetaryUnion, was ideally positioned to act as the pontoon linking the US high-techcompanies to the European Union. The OECD’s recent report on the Irisheconomy noted that ‘US investment in Ireland tripled from 1991 to 1993, just atthe time the SEM programme was being implemented’ (1999 : Note 45). Therewere ‘demonstration effects’ in that the favorable experience of the initial groupof MNCs encouraged their competitors to follow them into Ireland. For someAmericans Ireland has become the fifty first state. McCarthy (1999) shows thatU.S. direct investment in Ireland averaged around 2.75% of GNP between 1994and 1998. Krugman (1998 : 43) points out that US foreign direct investment inIreland is 50 percent higher per capita than in the U.K. and six times as high asin France or Germany. In 1997 Ireland ‘ranked fifth in the world as adestination for US direct investment outflows’. (OECD, 1999 : 12) From this perspective it is the contention of this paper that the Celtic Tiger is a misnomer. It is more accurate to look at it as a predominantly U.S.
high-tech multi-national tiger nurtured in a special Irish tax reserve which ispart of the united states of Europe. A considerable part of the economic growthwitnessed in Ireland is U.S. growth that was waiting to happen somewhere inEurope. Ireland has been able to appropriate and harness this U.S. led growth tofuel its domestic economy. Put another way if the major U.S. MNCs and theInternational Financial Services Centre (IFSC) were to close down in Irelandwould the boom continue? It is highly doubtful.
The MNCs and the Irish Economy
It is the theme of this paper that the high tech multi-national companies(MNCs) have been the sine qua non behind Ireland’s high growth performance.
Furthermore the MNCs growth element has been moved up many extra gears bythe closer linking of the European-U.S. economic tectonic plates in the 1990s In this part of the paper it is intended to: 1. Examine the size and influence of the high-tech MNCs on the 2. Calculate the size of high-tech MNC exports.
3. Present a model which highlights the ways in which the MNCs The Size and Influence of the High-Tech MNC Tiger on the ManufacturingSector A great deal of the activity of the high-tech MNCs in Ireland may be capturedby examining the following five sectors: a) Computersb) Computer softwarec) Chemicalsd) Pharmaceuticalse) Cola concentrates Using the Census of Industrial Production for the years 1993 to 1996 table 3shows net output, employment and net output per person of the five selectedforeign owned high tech sectors in manufacturing. It also shows the totalforeign and total Irish and foreign output, employment and net output perperson statistics for each of these years.
In 1993 the selected high tech five high tech MNCs produced net manufacturing output of £5 billion which constituted 43% of total netmanufacturing output with only 11% of manufacturing employment. By 1994they were producing 46% of total net output with only 12% of manufacturingemployment. In 1995 this had jumped to 52% of total net output with only 13%of manufacturing employment. In 1996 the selected five high tech MNC sectorswere producing £9.6 billion of net output. This amounted to 53% of net outputwith a labour force of only 32,044 workers which constituted only 14% of thetotal labour force engaged in manufacturing activity.
Table 3 shows the extent to which Irish manufacturing activity and its rate of growth is influenced by a small group of MNCs in the high-tech sectors,companies such as Boston Scientific, Coca Cola, 3 Com, Dell, Gateway, IBM,Intel, Hewlett Packard, Macintosh, Microsoft, Motorola, Northern Telecom,Pepsi, Pfizer, Schering Plough, etc. When the other foreign owned companiesare added to these selected high-tech companies it may be seen that foreignowned companies controlled 77% of net manufacturing output in 1996 (up from70% in 1993).
In three years, and these were the three years (1994,1995 and 1996) in which the ‘tiger’ really appeared to manifest itself, the high tech MNCsincreased their net output by £4.5 billion, an increase of 88%. The other foreigncompanies increased their net output by £1.2 billion, an increase of 37%.
However, over the same period, Irish owned manufacturing companiesincreased their net output by only £741 million, an increase of 22%.
The story that emerges from analysing the manufacturing data is as follows. There has been very strong growth in manufacturing output in the1990s but the bulk of this growth may be attributed to a small group of MNCswho are employing only 18% of the manufacturing labour force. Take thesehigh-tech companies out of the manufacturing equation and the manufacuturingperformance is a great deal less impressive.
The relatively sluggish performance of the Irish owned companies compared tothe high tech MNCs is further exemplified by the comparisons between the netoutput per person for the U.S. owned MNCs and the Irish owned companies ineach of the five high tech sectors: U.S. Owned Companies
Irish Owned Companies
Chemicals
Cola Concentrates
Computer Software
Pharmaceuticals
Computers
The very wide discrepancies in output per employee in the U.S. owned hightech MNC sectors against those recorded by Irish companies in these samesectors shows the danger of using aggregated statistics to assess Irish labourproductivity. The MNCs output performance is bloating the output statisticsand giving a very false reading of the real underlying output of Irish workers.
Observe the recent comments of authors such as Paul Krugman on Irishproductivity “Between 1979 and 1995 labour productivity in Ireland’s businesssector rose 3.3% percent per year - more than twice as fast as the G7average.Given the combination of good productivity growth and wagerestraint, the success of the economy is in a macro sense not hard to explain.If Professor Krugman had filtered out the huge artificially generated‘productivity gains’ of the high tech MNCs he would have found a very1 International Perspectives on the Irish Economy, op. cit. p. 42.
different story emerging. He is attributing U.S. workers’ productivity gains toIrish workers and, explaining part of the Irish economic success by reference toa set of Irish output data which is unreliable because of the transfer pricingpolicies of the high tech MNCs.
The OECD’s 1995 report on the Irish economy highlighted the dual nature of the Irish manufacturing sector noting ‘.measures of internationalcompetitiveness for Ireland have to take into account the dual nature of themanufacturing sector. High productivity growth in the modern sector does notimprove competitiveness in the traditional sector. Consequently, formanufacturing industry as a whole, competitiveness measures have to be basedon relative movements of wages.’ How do such wide discrepancies emerge between the output per employee inhigh tech MNCs and that produced in Irish owned companies? Are the Irishworkers in the high tech MNCs a new breed of super-performing workers? Howcan they be producing nine times more output than their counterparts indomestically owned companies? The answer lies in the power of theaccountant’s pen and the scope that globalisation gives him/her to transferproductivity gains from high tax to low tax environments.
Sotto voce the term transfer pricing enters the discussion. It is contended that the differences in output per head between the high tech MNCs and Irishowned companies is indicative of the extent to which the MNCs are involved intransfer pricing activities. Because of Ireland’s low rate of corporation tax onmanufactured goods and financial services (10%) it is in the interests of theMNCs to attribute very high levels of output to their Irish based plants. In thisway growth that is for the most part produced by workers in the United States isattributed by corporate accountants to Irish workers for tax reasons. TheNational Economic and Social Council explained the problem in 1992: There can be little doubt but that the productivity data for Irish manufacturing industry are artificially inflated by transfer pricing practicescarried out by some multi-national corporations. The objective of transferpricing is to optimise the global distribution of profits within a multinationalorganisation, so as to minimise the overall corporate tax bill. In practice, thismeans locating as much as possible of the company’s global profits in a low taxlocation, such as Ireland. This can be done by pricing inputs at less than armslength price and/or valuing outputs at more than the market price. The effect ofthis would be to raise the net output figures for the manufacturing sector 2 OECD Economic Surveys, Ireland 1995, p. 6 (because the profit element is contained in this component of manufacturingoutput), and to raise recorded productivity levels (because this is measured interms of output per employee).
Transfer pricing, produced by the tax skills of corporate accountants, metamorphoses the U.S. high tech ‘tiger’ into an Irish worker who is thenmisrepresented by the local and world media as the ‘Celtic Tiger’. Thismisrepresentation may be more clearly seen by examining the high-tech MNCsexports.
As is the case with the production statistics a great deal of the export story maybe explained by isolating the five main areas of high tech MNC exports. Theseare (1) soft drinks concentrates (cola concentrates, etc) classified under‘miscellaneous edible products’; (2) chemicals - classified under ‘organicchemicals’; (3) medical and pharmaceutical products; (4) computers - classifiedas ‘office/data processing machinery’ and (5) computer software - classifiedunder ‘recorded media’.
Calculating the overall level of these high tech MNCs exports is a difficult exercise. It means delving into the Byzantine labyrinth of the officialtrade statistics where exports are classified by international customsclassifications rather than by more rational economic criteria. Exportclassifications for small, insignificant, and in some cases historically outdatedproducts are deemed sufficiently important for separate headings whereascomputer software and cola concentrates, which are very sizeable exportcategories, are not specifically referred to in the trade statistics! Table 4 presents exports under the five selected MNC high tech sectors, along with remaining exports, from 1988 to 1996.These five sectors, listed intable 4, produced 36% of Irish merchandise exports in 1988. Their share of totalmerchandise exports rose to 39% in 1989, staying at 39% in 1990 and actuallydeclining to 38% in 1991. It rose to 40% in 1992 and then jumped to 46% in1993. It recorded a further increase in 1995 rising from 47% to 50%. Using theofficial trade statistics it appears that the high tech exports share of totalmerchandise exports fell back to 49% of total exports in 1996. This was solelydue to the re-classification of certain cola concentrates and computer software.
By adding £400 million to ‘miscellaneous edible products’ (cola concentrates)and £300 million to ‘recorded media’ (computer software) the revised total for 3 National Economic and Social Council: The Association between Economic Growth andEmployment Growth in Ireland (Dublin, December 1992).
high tech exports amounted to £15,507 million in 1996 - just over 50% of totalexports.
Table 5 shows the rate of growth of exports of these five sectors and the rate of growth of other exports since 1988. The pattern of growth shows somevery sizeable jumps in computer software - 36.5% (1989), 56.5% (1994), 54.8%(1995); organic chemicals - 34.4% (1989), 31.1% (1993), 30.4% (1994);medical and pharmaceutical equipment 33.8% (1989), 28.5% (1994), 32.4%(1996); office/data processing machinery 28.2% (1989), 39.7% (1993) and40.7% (1995).
Between 1988 and 1996 the high tech MNC export sectors increased exports from £4.4 billion to £15.5 billion (my revised estimate), a growth ofalmost 250 per cent. The remaining export sectors increased exports from £7.9billion to £14.9 billion, an increase of 89%. These statistics reveal the verysignificant expansion in exports by the high tech MNCs and the extent of theirdomination of the rate of growth of total exports.
Just as was the case with the manufacturing output statistics prudence needs to be exercised in their interpretation. Take the case of computersoftware. A new computer programme discovered in Silicon Valley may be re-packaged and exported to infinity out of Ireland via the Internet. To what extentdo the resulting export statistics - indeed they are now reclassified into‘invisibles’ in the balance of payments accounts - reflect Irish inputs rather thanthe creative pen of the multi-national accountant? The extent of this profit repatriation may be seen by analysing the outflow of dividend payments, distribution of profits, and reinvested earningsfrom Ireland. Table 6 shows that the total of these payments amounted to £2.6billion in 1990. By 1998 they had risen to £9.3 billion, an increase of nearly260%. This outflow constituted 16% of GDP. Examination of table 6 shows theextent to which the rate of growth of these outflows has increased in recentyears, particularly 1995, 1997 and 1998.
Critics maintain that my position in highlighting the role of the multi-nationalsis excessive. They show that there have been noticeable gains in employmentmost of which have not originated in the multi-national sector. They highlightthe growth in the services sector as evidence of the vitality of the overalleconomy. They point out some of the new indigenous domestic companies thathave spun-off the MNCs. All of these points are correct, but, ultimately, in myopinion, the Irish success story always reverts back to the role of the MNCs. Ifthe high-tech MNCs and the financial institutions based at the IFSC were to de- camp out of Ireland the economy would encounter considerable difficulties.
Employment would fall dramatically as accountants, builders, hoteliers,restauranteurs, solicitors, etc found there was a reduced demand for theirservices. Property prices would move sharply downwards resulting in sharpcutbacks in employment in the construction industry. Tax revenues wouldplummet. These potential effects may be more clearly seen by presenting asmall model of the way in which the MNCs affect the macroeconomy.
Chart 1 presents a model showing the way in which the MNCs influence economic activity in Ireland. It outlines the following four primary areasthrough which the MNCs influence economic activity: 1. Exports2. Gross Domestic Product3. Employment4. Taxes.
The effects of MNCs’ activities in these four primary areas, in turn, create spill-over and feedback effects to other sectors of the economy as may be seen fromchart 1. The growth in exports exercises a strong influence on the growth rate ofGDP. It also has had a positive effect on the balance of payments generating abalance of trade surplus. Part of this surplus is offset on the balance ofpayments on current account through the increase in net factor income outflowscaused by profit repatriation of the MNCs. In the pre-EMU period the balanceof payments surpluses improved foreign financial institutions’ perceptions ofthe Irish exchange rate. A strong exchange rate in turn influenced positively theinflation rate and also fed into interest rate expectations.
Chart 1 suggests that the MNCs have direct and indirect effects on employment. They directly increase employment in the manufacturing sector.
Indirectly, they boost employment in the services sector by generating anincreased demand for a wide variety of services. This increased employmentgenerates increased tax revenue through more buoyant direct and indirect taxes.
They also increase significantly the level of corporation tax. These tax effectshave greatly improved the budgetary situation which in turn has caused adramatic improvement in the national debt/GNP ratio.
Isolating these effects in greater detail is a more difficult task. The effects of the high-tech MNCs on exports has been shown on table. There it wasdemonstrated that by selecting just five of the high tech sectors it may be shownthat they were producing over 50% of the merchandise exports. In an earlierpaper ‘The Celtic Tiger - The Great Misnomer’ (1998) I attempted to deductfrom the national expenditure accounts the contribution of the high-tech MNCsexporting sector. I found that by excluding the high tech MNCs’ exports that the nominal growth in GDP for the period 1990-1996 fell from 55% to 23%. Istressed at the time that this was a somewhat crude technique, but it at leasthighlighted the extent to which the high tech MNCs were the driving forcebehind Ireland’s economic growth. More recently McCarthy (1999) using anoutput approach concluded that ‘.inflows of FDI into the Irish manufacturingsector have boosted the growth rate of the economy over the period 1993-1997by a minimum of 2.25 % per annum. Furthermore, taking multiplier effects intoaccount, would at a minimum, raise this to 3 % per annum.’ Even takingmultiplier effects into account I feel McCarthy’s estimate is too low because thesuccess of the MNCs and more recently the IFSC have generated substantialeffects in other parts of the economy most notably the services sector. A case inpoint is the housing market. Residential property prices have soared because ofthe improved economic situation. Since 1993 residential and commercialproperty prices have more than doubled. O’Connell and Quinn (1999) reported‘In the Dublin area, where prices have risen fastest, the cumulative increase inreal (in excess of the Consumer Price Index) prices, during the period 1994 to1998 was 88.4 % for new houses and 106.2 % for second-hand houses’.
Investment in property has consequently greatly increased. However, if theMNCs and the IFSC had not been in Ireland would the property market haveboomed. Though increased investment in the construction sector may bedeemed to be a domestic activity it has, in my opinion, been induced for themost part by the success of the MNCs and the IFSC. Remove them and the socalled ‘property market bubble’ will quickly deflate. Commentators who stressthe extent to which domestic demand components in the form of consumer andinvestment expenditure have kicked in during the late 1990s to push the growthrate upwards are missing the point. Domestic demand is buoyant because theMNCs and IFSC have generated considerable increases in both direct andindirect employment and boosted confidence to an unprecedented level. Here Ishould express my own mea culpa in that in an earlier work (1993) Iunderestimated the extent of the knock-on effects that the MNCs were about tohave on the rest of the economy.
The story so far has emphasised the way in which the low 10% corporate tax rate attracted MNCs into the Irish economy. But now even this low tax rateis increasingly producing sizeable revenue gains for the Exchequer. Ten percent may appear to be a low rate but when it is ten per cent of sizeable andgrowing profits the revenue gains to the Exchequer start accelerating. In 1990corporation tax amounted to £475 million. By 1998 it had shot up to £2.1billion, an increase of 335% - as against an 89% increase in income tax.
Already in the first half of 1999 corporation tax has produced £1.9 billion forthe Exchequer, so the end on year figure should show a further considerableincrease. Companies such as Intel (Pentium chips), Microsoft (Windowssoftware) and Pfizer (Viagra) in increasing their output, and their profitability,through Ireland are providing the Irish Exchequer with an increasing tax bonanza. It is little wonder that both the budget and exchequer borrowing are insurplus and that the government debt/GNP ratio fell to 59% in 1998. In 1997the Department of Finance estimated that 62% of the total yield of corporationtax emanated from companies subject to the 10% rate on part or all of theirprofits. Further attempts to disaggregate the amount paid by high tech MNCs,the IFSC and by Irish companies are apparently not possible according to theRevenue Commissioners. Using the 62% figure - and it has surely grown since1997 - the 10% taxed MNCs were contributing £1.3 billion in corporationprofits tax to the Exchequer in 1998.
Domestic Inputs into the Growth Performance Whilst this paper has stressed the role and importance of the high-tech MNCs inthe Irish growth performance it must also be emphasised that this success storyhas many Irish components. First of all successive governments since the 1960shave encouraged foreign direct investment in Ireland. This combined with theEuropeanisation approach has meant that Ireland is perceived by the MNCs as agood European base from which to expand their operations. The mistakes ofprohibiting foreign investment resulting from the Control of Manufactures Actswere belatedly learnt in the late 1950s. Since then there has been no antipathyby the public or successive governments to foreign investment. Secondly, theIndustrial Development Authority targeted emerging high-tech companiesacross a range of different sectors such as computers, computer software,telecommunications, chemicals, pharmaceuticals and cola concentrates. TheIDA correctly identified some of the main growth areas of the future and bytargeting these sectors at an early stage of their development created importantfirst-mover advantages for Ireland. There is now a balanced portfolio of foreigninvestment in Ireland so that if one particular company or group of companiesfails or leaves the country the effect will be more dampened than if the exportled growth was dependent on just one specific MNC sector. Thirdly, labour hasshown considerable responsibility in negotiating national pay agreements,which has created a stable industrial relations environment. Fourthly,investment in education has produced a solidly educated young labour force.
Fifthly, fiscal retrenchment was implemented when it was vitally necessary in1987. This fiscal retrenchment aided by two tax amnesties, which greatlyexpanded the tax base, restored equilibrium to the public finances. Indeed thecurrent problem is one of learning how to cope with growing budget surpluses.
Sixthly, Ireland is not a country fettered by excessive bureaucracy or regulation.
Because it is small foreign investors can have quick access to governmentofficials and politicians in order to sort out problems that they encounter inestablishing their companies in Ireland. On the regulatory side there has beensubstantial de-regulation in two key sectors which improve the openness of theeconomy - transport and telecommunications. Now thanks to the pioneeringwork of Ryanair the costs of airline, and also boat, travel between Ireland and Europe have been greatly reduced. This has helped improve the attractivenessof Ireland as a business location and also as a tourist centre. Deregulation of thetelecommunications sector has produced cost cutting rivals to the formermonopoly provider Telecom Eireann, which has been privatised and re-launched as Eircom. Seventhly, there has been a belated diaspora dividend.
Since the middle of the nineteenth century up to recent years Ireland’s mainexport was its people. Unlike the Jewish diaspora with its assistance for Israelover the last fifty years, the Irish diaspora has only taken a real interest inIreland in recent years. John F. Kennedy identified the importance of the Irish-American political grouping. He was followed by Richard Nixon and RonaldReagan, both of whom showed great keenness in identifying their Irish roots forthe purpose of garnering votes from this group. The Irish American lobbyidentified Bill Clinton’s presidential ambitions at an early stage and helped himto the Presidency. He has repaid this cooperation by his intense interest in thepeace negotiations and in his encouragement of US investment in Ireland. NowIreland strikes a strong resonant ethnic note for many Irish American businesspeople who take pride in investing in the country of their ancestors.
Conclusions
For someone who spent nearly three decades of his professional life analysinga poorly performing economy it is gratifying to show the very considerableimprovements and new dynamism in the Irish economy. Decade after decade Iwatched nearly all of my graduating classes in Trinity emigrate. Now it is asource of pleasure to see most graduates finding employment at home and somany of those who emigrated returning to well paid employment in Ireland.
Success has led to more success. MNCs impressed by the performance of theircompetitors in Ireland have been attracted to invest in the country. Young Irishentrepreneurs impressed by the success of the young high-tech U.S.
entrepreneurs have started to establish their own companies geared towards theinternational market. There is now a considerable buzz and effervescence in theIrish economy.
Ireland’s recent economic story would be one’s which emphasises the role of low taxation in promoting economic activity. Low corporate taxes arevital if a region is to encourage foreign direct investment. Aside from the 10%corporation tax rate there have been substantial reductions in tax rates between1985 and 1998. The top rate of income tax has come down from 65% to 46%,capital gains tax has been reduced from 60% to 20% and capital acquisitionstax from 55% to 40%. Well targeted tax breaks can generate worthwhileemployment generating activity.
Another message would be to focus attention on the de-regulation of government monopolies particularly in the areas of telecommunications, energyand transport. Ryanair, the airline born in the era of de-regulation, has been anabsolute boon to Irish business and tourism. A further message would be toencourage greater mobility of students. Most Irish students have worked abroadin the U.S. or Europe for at least two summers prior to graduating fromuniversity. This work experience promotes flexibility and openness whichMNCs appreciate in their labour force.
The most important message is one which encourages participation in the dual processes of globalisation and Europeanisation. It is a message whichstates that rather than demonising and fearing these processes that they mayactually be viewed as being highly beneficial to a country such as Ireland.
Globalisation has abolished peripherality enabling people to work from theregion in which they were born. In the past during industrialisation they had toemigrate to the large cities. In this new high-tech post-industrial world manycompanies are attracted to regions such as Ireland not only because of the taxincentives and a well educated labour force, but, also, by the quality of lifeoffered during leisure time. Aquatic sports, golfing, hunting, shooting, fishing,walking, etc. can all be quickly enjoyed in our two regions rather than spendinghours in futile traffic jams. Equipped with mobiles and modems the new high-tech post-industrial worker may produce un retour à la campagne.
References
Barry, Frank (1999) (ed.) Understanding Ireland’s Economic Growth, London,Macmillan.
Gray, Alan (1997) (ed.) International Perspectives on the Irish Economy,Dublin, Indecon.
McCarthy, John (1999) “Foreign Direct Investment : An Overview”, CentralBank of Ireland Quarterly Bulletin, Winter 1999.
Murphy, Antoin E. (1994) The Irish Economy - Celtic Tiger or Tortoise,Dublin, MMI.
Murphy, Antoin E. (1998) The Celtic Tiger - The Great Misnomer: EconomicGrowth and the Multi-nationals in Ireland in the 1990s, Dublin, MMI.
O’Connell, Tom and Quinn, Terry (1999) “Recent Property PriceDevelopments: An Assessment”, Central Bank of Ireland Quarterly Bulletin,Winter, 1999.
OECD (1999) Economic Surveys: Ireland.
O Gráda, Cormac (1994) Ireland A New Economic History, Oxford.
Sweeney, Paul (1998) The Celtic Tiger Ireland’s Economic Miracle ExplainedDublin, Oak Tree Press.
Table 1. Economic Growth in Ireland 1975-99
*Central Bank forecast Autumn 1999.
Sources: Budgetary and Economic Statistics, Department of Finance, May 199; National Incomeand Expenditure 1998.
Note: Due to the very substantial net factor income outflows - amounting to 13% of GDP in 1999- which for the most part is caused by profit repatriation by the MNCs the GNP growth rate ismore useful the GDP growth rate as an indicator of the annual growth of the economy.
Table 2. Openness of the Irish Economy 1922-1999
Commodities
Table 3. Manufacturing Activity in Ireland 1993-96
Net Output (£ millions)
Employment
Net Output
Per Person
Table 4. Total Exports Breakdown 1988-1996
Export divisions
1. Miscellaneous edible products – cola
concentrates (09)
2. Organic chemicals (51)
3. Medical & pharm. Equipment (54)
4. Office/data processing machinery (75)
5. Recorded media (898.79)
Total (1-5)
Remainder
Total/exports
Source: Trade Statistics of Ireland 1988-1996.
Table 5. Total Exports: Annual Growth rates in exports
Export Divisions
1. Misce. edible products - cola concentrates (09)
2. Organic chemicals (51)
3. Medical & pharm. Equipment (54)
4. Office/data processing machinery (75)
5. Recorded media (898.79)
Total (1-5)
Remainder
Total/exports
Source: Trade Statistics of Ireland 1988-1996.
Table 6. Profit Repatriation by the MNCs
Dividends
Reinvested
Earnings
This table is derived from table 30a Balance of International Payments in National Income and Expenditure 1998. It includes profits repatriated not only by the high-tech MNCs but also by other foreign owned companies. However, it is contended by most of the outflows and, in particular, the rate of growth of the outflows emanates from the high-tech MNC sector.
Since 1994 Ireland has produced a strong and sustained growth performance. Agreat part of this has been due to the activities of the high tech MNCs and theInternational Financial Services Centre. It would be wrong to say that the countrydoes not need these high tech MNCs and the IFSC. They play a key role in theIrish economy and the Industrial Development Authority (IDA) appears to havedone a very good job in identifying those high tech sectors which may flourish inIreland. The high tech MNCs have created employment, encouraged the growth ofemployment in the services sector and made substantial contributions to theExchequer in taxation, most notably through corporation tax.
Nevertheless the debate raises some very significant issues: (1) Ireland’s economic performance, while impressive, is imbalanced in thatit is crucially dependent on the activities of a small group of MNCs. It mustbe emphasised once again that a small group of MNCs employing less than30,000 employees dominate a large part of Ireland’s manufacturingperformance. If some or all of these MNCs were to leave Ireland then thereis the potential for an economic implosion. The closure in Clonmel of theSeagate Technology plant, which manufactured computer disk drives, inDecember 1997, resulting in the loss of 1,400 jobs showed the potentialfragility of such high tech MNC investment.
(2) The raison d’être for these high-tech MNCs locating in Ireland is the lowrate of corporation tax. This policy is now regarded as tax dumping by somemembers of the European Union. Any rapid European Union move towardsfiscal harmonisation of the corporate tax regimes could raise seriousquestion marks as to the long term commitment of the high-tech MNCs tothe Irish economy.
The Irish Economy in the 1990s
Since Morgan Stanley coined the term the Celtic Tiger there has been awidespread perception that Ireland had a high rate of economic growth in eachof the years of the 1990s. This has not been the case. The growth performancein the 1990s has been quite uneven. The average for expenditure and outputdata shows the following annual real growth rates for GNP: Economic Growth
a) Department of Finance estimate.
b) Central Bank forecast.
These growth rates indicate that 1990 produced a very high level of growth butit was followed by three years of modest growth. This was an issue that washighlighted in The Irish Economy: Celtic Tiger or Tortoise? (1994). In thatpaper it was maintained that the evidence over the previous three years did notsuggest that a booming economy. Proxies for domestic demand such as retailsales and the sales of new cars were sluggish.
Volume of Retail Sales
New Private Car
Registrations
The first estimates for economic growth in 1991 and 1992, made in NationalIncome and Expenditure 1992, had indicated growth rates of 3.6% for 1991 and3.5% for 1992. These were substantial overestimates. These growth rates havebeen revised downwards in the subsequent National Income and Expenditureaccounts. The latest estimates of an economic growth rate of 2.2% in 1991 and2.3% in 1992, along with a growth rate of 2.7% in 1993, suggest that there wereno great indications of the ‘tiger’ phenomenon between 1991 and 1993. Since1994, however, there has been a sustained and impressive rate of economicgrowth.
When writing The Irish Economy: Celtic Tiger or Tortoise three knock on effects created by the MNCs had not fully manifested themselves. Thesewere (1) the critical mass effect; (2) the spillover effects into the services sector(3) the effervescence effect on domestic expenditure. These effects have, inrecent years, come to the fore.
The success of some of the established high tech MNCs has attracted their competitors to establish in Ireland.Success has built on success. Surveys ofexecutives working in the MNCs indicate that their decision to base in Irelandwas significantly influenced by the presence of their competitors in Ireland. Thecritical mass effect has been reinforced by developments in the European Unionin the form of the completion of the Single Market in 1992 and the movetowards European Monetary Union. These developments brought home to USMNCs the need to have platforms in the expanding European Union market.
Furthermore the sustained improvement in the public sector finances, started in1987, produced a more stable macroeconomic environment which added toIreland’s attractiveness as a location for US MNCs.
The spillover effects have resulted in increased demand for services rangingfrom legal and accounting skills to increased demand for offices and housing toincreased demand for hotel and restaurant facilities. The demand curve forproperty has shifted sharply to the right due to the growth in employment andthe high incomes earned by executives employed by the MNCs and the IFSC.
With a limited supply of quality residential property coming on the market it isnot surprising to see the continued spiral in property prices.
The effervescence effect that was missing in the early 1990s has been clearlyevident in recent years. Increased consumption expenditure has become a strongfactor pushing up economic growth. Buoyant retail sales and exceptionally highlevels of new car sales suggest that the hesitant and uncertain consumer of theearly 1990s have been transformed into the confident spender of the late 1990s.
The volume of retail sales rose by 6.2% in 1996, by 7.9% in 1997 and by 8.8%in 1998.
On the employment front the total number of people at work increased by only 23,000 between 1990 and 1993. Between 1993 and 1996 the total numberof people at work increased by 146,000. Employment growth continued to surgebetween 1996 and 1999 with total employment expected to average 1,576,000in 1999, an increase of 247,000 on 1996. Unemployment is expected to averageless than 6% for 199.
Against this background it may appear inappropriate to raise question marks about the future of the Irish economy. However, just as the Irish ‘boom’of the 1970s was artificially based on excessive government expenditure andborrowing, there is an imbalanced element in the boom of the 1990s in that it ispredominantly a multi-national phenomenon rather than an indigenous Irishone.

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