Ireland’s economic miracle: A story of delayed catch-up
Patrick Honohan Trinity College Dublin Dublin, 12th June, 2007
Ireland: before & after the “Celtic Tiger” • The Celtic Tiger period is explained as a belated catch-up to the leaders after a deep recession • Some numbers mislead – it was a marvel of employment…not of productivity • Since about 2000, the Celtic Tiger has matured…the current boom is an old-fashioned property bubble, fuelled by EMU, immigration and (latterly) credit financed by foreign borrowing of the banks
1: A hare not a tiger
1973: Ireland on the brink of modernization • Too little of the population at work in the “modern” sector • But the policy response to the oil-shock generated a deep 15-year recession and balance of payments crisis – Back to macro equilibrium only by late 1990s
• (Government spending triggers inflation, soaring debt…parallels with UK pre-Thatcher but more severe)
Non-agricultural employment as % of population, 1973 50 45 40 35 30 % 25 20 15 10 5 0 UK
Ireland
Labour productivity in UK and Ireland, 1973 £3,000 £2,500 £2,000 UK Ireland
£1,500 £1,000 £500 £0 Agriculture
Rest of economy
The hare goes to sleep.. then wakes up • Was long-deferred – Convergence to UK share of population at work in modern sector not accomplished until c. 2000 – Agricultural employment did decline steadily – But a surge in unemployment … …and delayed/discouraged female participation …kept living standards down
• When the turnaround came, availability of – young, educated workforce, – returning migrants – and (eventually) immigrants from W. and E. Europe, China, Nigeria
• became a fuel not an obstacle
Non-agricultural employment as share of population 45
40
35
30
25
20 60
65
70
75
80
85
90
95
00
Non-agricultural employment as share of population 45
40
35
30
25
20 60
65
70
75
80
85
90
95
00
Non-agricultural employment as share of population 45
40
35
30
25
20 60
65
70
75
80
85
90
95
00
The 25-year business cycle delays the catch-up 18 1987 16
1993
Unemployment rate % (ILO basis)
14 12
1990
10 1997
1981
8 1975
6
1979
4
2006
2000
1974
1961 2 0 -6
-3
0
3
6
9
BOP Current a/c deficit as % GNP
12
15
18
2. Fiscal crisis: Struggling with the debt escalator • Fiscal sea-saw in the 1970s leaves debt high • Delayed adjustment with rising tax rates (and adverse UK and other external factors)… …Sends economy into deep recession 1982-86 • Decisive fiscal correction and more favorable external environment after 1987 restores balance
Government surplus 1970-2001
10
Saving Surplus
5
Primary
% GNP
0
-5
-10
-15
-20 70
75
80
85
90
95
00
Government Debt 140 120
% GNP
100 80 60 40 20 0 70
75
80
85
90
95
00
Balancing the Budget: Taxes and Current Expenditure
55
50
as % GNP
45
40
35 Taxes Current Expenditure
30
25
20 70
75
80
85
90
95
00
Escalators: Interest and Transfers
22 20 18 16
as % GNP
14 12 10 8 Interest
6
Transfers 4 2 0 70
75
80
85
90
95
00
3. Why did the employment ratio recover so well after the demand recession of the 1980s? • Union weakness • Moderate wage settlements negotiated centrally • Personal tax reductions cemented the deals • Migration increases as full employment is reached • Deeper factors: organization of production, computerization, expectations of new cohort?
Distribution of population change by economic status
100 thousands per annum
80
non-ag employment ag. employment
60 40
unemployed
20 0
non-active
-20
Over 64
-40
Under 15
-60 61-71
71-86
86-91
91-01
01-06
Components of population change Net migration
thousands (annuak average)
80
Natural increase
60 40 20 0 -20 -40 61-71
71-86
86-91
91-01
01-06
Union Density (non-agricultural)
50
48
46
44
42
40
38 60
65
70
75
80
85
90
95
120
1800 Wage competitiveness Total employment (rhs)
1700
115 1600 1500
110
1400 105
1300 1200
100 1100 95
1000 75
80
85
90
95
00
Income tax rates (incl. social contribution) Single person on average earnings 70% 60% 50% 40%
Average
30%
Marginal
20% 10% 0% 1979
1984
1995
2002
4. The role of FDI and productivity • Was it introduction of low corporation tax rate that created the inflow of FDI? (No) • How much of the MNC value added stayed in Ireland? (Less than you think) • Beware of crude numbers: because of exceptionally high profit component, much of GDP, exports, “productivity” distorted.
Convergence of per capita GDP
ARG AUS AUT BEL
120
CAN DNK FIN FRA
Percent of US (PPPs)
100
GER HKG ISL IRL
80
ISR ITA JPN NLD
60
NZL NOR
IRL-GNP
SGP ESP
40
SWE CHE GBR USA
20 1970
1975
1980
1985
1990
1995
2000
IRL-GNP
Aggregate productivity growth 5 4 3 2 1 0 75/70
80/75
85/80
GDP/Empl
90/85
95/90
00/95
GDP less MNC profits/Empl
05/00
Ireland’s share in the stock of US Manufacturing FDI in the EU 3
6
2
4
1
2
0
0 70
75
80
Assets (lhs)
85
90
FDI stock (rhs)
95
5. Construction: the EMU interest rate shock • As convergence achieved, the economy’s motor switched from exports to construction… …boosted by the EMU-related fall in interest rates …and by immigration • After 2004, a credit-fuelled second wave of property price increases and construction activity • All models of underlying housing demand underpredict current housing prices – Residential property prices are now falling slightly
Real interest rates 1983-2007 deflated by 4-quarter future inflation
20
15
EMU
10
5
0
-5 83
85
87
89
91
93
95
97
99
01
03
05
07
Irish Real New House Prices 1970-2006 4 Index, 1970=1
3.5 3 2.5 2 1.5 1 0.5 1970 1975 1980 1985 1990 1995 2000 2005
Real domestic credit & house prices rolling 3-month growth rate 1997-2007
12 10
credit house prices
8 6 4 2 0 -2 -4 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Net position of credit institutions in Ireland
% of GDP
vis-a-vis Irish residents 50 45 40 35 30 25 20 15 10 5 0 1999
2000
2001
2002
2003
2004
2005
2006
Employment in building as % of total employment, 1990-2006 14.0 13.0 12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0 90
95
00
05