Catching Up with the Leaders: The Irish Hare

Article excerpt

FOR MANY DECADES Ireland's output per capita ranked about twenty-fourth among the world's industrial nations. Suddenly, in the mid-1990s Ireland started to move up, from twenty-second in 1993 to eighteenth in 1997 and an amazing ninth in 1999. (1) The many facets of Irish success over these years, from a disproportionate representation in popular music to the largest current account surplus in the industrial world, caught the public imagination at home and abroad. This paper examines the startling turnaround in Irish economic performance that began in the mid-1980s. By comparison with Ireland's previous economic performance there is indeed a miracle to explain, but from a global perspective the question is surely why it took so long for Ireland to catch up with the rest of Europe.

Although most attention has focused on aggregate output growth Rates--real GDP growth averaged 10 percent a year over the period 1995-2000--we will show that the salient feature of Ireland's catch-up has been an increase in the proportion of the population at work. This is partly a function of demographic trends and partly of a remarkable reduction in the rate of unemployment, neither of which can be repeated. When the data are correctly interpreted, there has been no productivity miracle, as some have claimed, and Ireland's ranking in terms of average living standards has not been quite as good as implied by the conventional statistics quoted above--although the performance of the labor market during the 1990s was marvelous. Dissecting the sources of output growth and understanding the transformation of the labor market are the two central tasks of this paper. In addition, we describe how inappropriate fiscal and perhaps monetary policies held Ireland back in earlier years, with the result that convergence, when it occurred, was telescoped into a short period. (2)

Catching up, and doing so rapidly, requires a favorable institutional, policy, and external environment. Several individual institutions and policy entities in Ireland are each quietly confident that it is the unique source of the turnaround. As our story unfolds, it will become evident that the credit must be widely shared, and that a much improved external environment also played its part.

Background

In a letter to David Ricardo in 1817, Robert Malthus said, "a population greatly in excess of the demand for labour" was "the predominant evil of Ireland." (3) This was a generation before the famines of the 1840s triggered large-scale emigration and a decline in the national population that continued until the 1960s. Irish adjustment during the nineteenth century has been cited as a good example of how globalization fostered convergence of living standards. The island was transformed from a poverty-stricken, peasant economy that had served as a source of cheap labor for booming cities in Britain and North America to an economy that, at the start of the twentieth century, boasted wages--in some sectors of the urban economy at least--close to those prevailing across the Irish Sea. (4)

But the rural population and unskilled urban workers, who predominated, continued to lag behind, and in the course of the twentieth century Ireland seemed--like Aesop's hare--to take a breather. Feeding Britain through two world wars provided adequate export revenue for what was still primarily an agrarian economy, especially that part of the island that became the Republic of Ireland, which is the subject of this paper.

Economic historians characterize the third quarter of the twentieth century as the "Golden Age" of European growth. (5) Most Western European economies, having recovered from wartime damage by around 1950, continued to grow more rapidly than before or since until the first oil shock in 1973. Ireland did not share in this happy experience--indeed, only the United Kingdom had a lower rate of per capita output growth over those years. …