Catching Up with the Leaders: The Irish Hare

Abstract

FOR MANY DECADES Ireland's output per capita ranked about twenty-fourth among world's industrial nations. Suddenly, in 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 disproportionate representation in popular music to largest current account surplus in industrial world, caught public imagination at home and abroad. This paper examines startling turnaround in Irish economic performance that began in mid-1980s. By comparison with Ireland's previous economic performance there is indeed miracle to explain, but from global perspective question is surely why it took so long for Ireland to catch up with rest of Europe. Although most attention has focused on aggregate output growth Rates--real GDP growth averaged 10 percent year over period 1995-2000--we will show that salient feature of Ireland's catch-up has been an increase in proportion of population at work. This is partly function of demographic trends and partly of remarkable reduction in rate of unemployment, neither of which can be repeated. When 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 conventional statistics quoted above--although performance of labor market during 1990s was marvelous. Dissecting sources of output growth and understanding transformation of labor market are two central tasks of this paper. In addition, we describe how inappropriate fiscal and perhaps monetary policies held Ireland back in earlier years, with result that convergence, when it occurred, was telescoped into short period. (2) Catching up, and doing so rapidly, requires favorable institutional, policy, and external environment. Several individual institutions and policy entities in Ireland are each quietly confident that it is unique source of turnaround. As our story unfolds, it will become evident that credit must be widely shared, and that much improved external environment also played its part. Background In letter to David Ricardo in 1817, Robert Malthus said, a population greatly in excess of demand for labour was the predominant evil of Ireland. (3) This was generation before famines of 1840s triggered large-scale emigration and decline in national population that continued until 1960s. Irish adjustment during nineteenth century has been cited as good example of how globalization fostered convergence of living standards. The island was transformed from poverty-stricken, peasant economy that had served as source of cheap labor for booming cities in Britain and North America to an economy that, at start of twentieth century, boasted wages--in some sectors of urban economy at least--close to those prevailing across Irish Sea. (4) But rural population and unskilled urban workers, who predominated, continued to lag behind, and in course of twentieth century Ireland seemed--like Aesop's hare--to take breather. Feeding Britain through two world wars provided adequate export revenue for what was still primarily an agrarian economy, especially that part of island that became Republic of Ireland, which is subject of this paper. Economic historians characterize third quarter of twentieth century as 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 first oil shock in 1973. Ireland did not share in this happy experience--indeed, only United Kingdom had lower rate of per capita output growth over those years. …