|SocialismToday Socialist Party magazine|
The endangered Celtic tiger
Is the current growth in the Irish economy the start of a return of the ‘Celtic Tiger’ – the ‘economic model’ held up, in particular, by the capitalist elites of the new EU entrants in Central Europe? Even if there is a decline in the world economy, could significant growth in Ireland be maintained? KEVIN MCLOUGHLIN analyses the nature and evolution of the Irish economy, the basis for the ‘Celtic Tiger’ boom, and the situation today.
AT A DISADVANTAGE to other countries in terms of capital formation, technique and productivity, the capitalist establishment in the Irish Republic tried to develop an industrial base by protectionism from the early 1930s to the early 1960s. This involved shielding Irish industry from foreign competition by imposing tariffs on imports.
The bind that Irish capitalism faced and which stunted its development was its inefficiency and backwardness, which reflected itself in its inability to be competitive in internationally tradable goods and services. This meant that the potential way towards economic development, achieving a greater portion of world trade and the world’s markets, was extremely difficult to realise. Certainly, the policy of protectionism pointed in the opposite direction to developing trade and was incapable of developing the economy.
Protectionism was dropped in the 1960s and the establishment decided to look towards foreign capitalism and imperialism as the best way of developing an industrial base. Generous grants were offered and zero corporate tax rates were also offered for years.
The new policy improved the situation somewhat and growth in the economy averaged between 3–5% in the 1960s and 1970s. However, it was based on the foreign-owned companies. These companies had tenuous linkages to the economy. They tended to import a lot of their raw materials, their goods were overwhelmingly exported and the vast bulk of their profits were repatriated back to their home base.
The domestic economy remained very weak. Domestic industry actually lost some of its share of the domestic market to foreign companies, which illustrated that it remained at a competitive disadvantage. There was no major development in terms of jobs growth.
When the 1980s arrived, the economy had the features of a poor regional economy connected to Britain. Seventy percent of everything that was produced was exported, which showed the weakness of the domestic economy and the dependency on the international situation.
The serious international recession of the late 1970s and early 1980s made things worse. Unemployment spiralled close to 20%, and 250,000 young people left as mass emigration re-emerged. The concessions to big business and the weak economy meant that the tax base was weak, which the government compensated for by imposing very high levels of tax on workers and by going into deeper debt. Reflecting the economic and financial crisis, the bulk of the 1980s was characterised by political instability.
The internationally owned, export orientated sector recovered much quicker from the recession and was experiencing an export boom by the mid 1980s. Transfer pricing (where multi-national corporations – MNCs – exaggerate the figures for production here to reduce their overall tax bill) existed. But the internationally owned sector undoubtedly experienced real growth although this had a limited overall effect.
THE 1990s, HOWEVER, saw a dramatic turn around, with the bulk of the decade seeing rapid economic growth. After a sharp slowdown in the early 1990s, linked to the international situation, average GNP growth for the decade was 7.9%. For 1998 it was 7.8%; 1999 – 7.8% and 2000 was the high point at 8.6%. Unlike before, this rapid growth was accompanied by a convergence of wages to the EU average and a substantial reduction in unemployment.
Between 1989 and 1999, there was an average increase in take-home pay of 35%, two thirds from pay rises and the rest from tax cuts. Between 1989 and 1997, net new jobs increased by 23% or 248,500. The numbers at work increased from 1.09 million in 1989 to 1.22 million in 1994; to 1.34 million in 1997 and 1.67 million by 2000. The growth in the labour force was particularly large between 1997 and 2000, and reduced unemployment qualitatively from a high of 10.3% in 1997 to a low rate of 4% in 2000.
The ‘Celtic Tiger’ was not a product of mystical forces, it took place for definite reasons and understanding these factors helps us develop a perspective for the Irish economy.
The key factors that contributed to the boom initially were: the capitulation of the trade union leadership through social partnership and the fact that it ushered in a period of industrial, fiscal and political stability; the growth in strategic foreign direct investment (FDI) taking advantage of Ireland’s membership of the EU and the existence of a plentiful supply of cheap labour. EU structural funds contributed only to a limited degree; it is estimated that they added around half a percent to annual growth in the years they were received.
The growth in FDI reflected the decision by MNCs to use Ireland as a platform into the Single European Market and beyond. There are different sources for the figures of FDI. However, the general picture is clear, there was a massive growth year-on-year of FDI into Ireland. In 1989, it was $85.1 million but by 2000 it was $25,501 million ($25.5 billion)!
The inevitable consequence of such investment was a surge in exports. Between 1990 and 1999, the value of Irish exports grew from £14.3 billion to £52.2 billion. The largest increases were in organic chemicals, computer equipment and electrical machinery. Foreign owned companies produced 65% of gross output and exported on average 89% of what they produced, rising to 95% for US-owned companies.
The weak euro at the start of the new century made exports to non-EU countries cheaper, and around the same time the US began to take over 20% of exports. Add in investment and Ireland had become deeply connected to the US economy. That was illustrated by the close, parallel slowing in both economies in 2001. Forty percent of foreign plants were US-owned, 16% were British and 14% German.
Recovery in domestic industry
INITIALLY, THE KEY factors pushing along the economy were international based, ie increased foreign investment to match the growing EU market for exports. However, as the 1990s progressed, domestic demand and the productivity and competitiveness of domestic industry improved and this deepened the boom particularly after 1997.
Against the world trend, Ireland experienced a substantial expansion in manufacturing jobs. Even in domestic industry employment increased by 9% from 1988–97, concentrated not in new firms but in ones that had survived the recession of the 1980s.
The boom in the domestic economy inevitably tended to create stronger knock-on jobs growth than the international sector. The increased numbers at work helped create an improved sense of security and changed attitudes to savings and credit. The growth in property prices gave some people increased assets and together all these factors gave a boost to consumer spending. There was also a substantial increase in tourism with the numbers visiting the country reaching record levels.
What was the basis of the growth in the historically weak indigenous industrial sector? Had Irish capitalism advanced and become innovative world-beaters? In 1986, investment on research and development (R&D), as a percentage of GDP, was just 38% of the EU average. By 1995, that figure had increased to 87%. So companies in Ireland, domestic and foreign combined, were spending a much higher percentage of a much bigger figure on R&D than before. The figure is similar to the percentages spent by economies similar to Ireland like the Netherlands and Denmark. However, the foreign sector accounted for the vast bulk of this, 65% of the investment in R&D!
This obviously indicates an improvement and undoubtedly had an impact on the productivity of domestically owned industry. But it still does not indicate that Ireland has caught up in terms of investment in R&D, which in the long run is the only real basis upon which a company or country can keep ahead of its competitors. However, this, combined with a number of factors, created an improvement in domestic industry’s competitive edge.
Irish industry stopped shedding jobs and began to recover its home market share in 1988. Net output per worker in manufacturing in Ireland as a percentage of the UK levels was 82% in 1968 but by 1985 it was 128%. These figures do not take account of the exaggeration of output and productivity as a result of transfer pricing. In 1985, Ireland was still behind Britain in real terms. However, that changed and by 1990 the figure was 151%, which economists have adjusted to take account of transfer pricing to 110% of the UK level.
Undoubtedly, a key part of improving costs and productivity was the rationalisations and speed-ups that the bosses were able to enforce because of mass unemployment. Again, through rationalisations there were also reductions in the costs of electricity, telecommunications and post.
In the mid-1980s, the average profit rate for domestic industry was 1% of the sales level. That increased to 4% in 1989 and up to 6% in 1995, a six-fold increase in ten years. Domestic industry exported 26.6% of its produce in 1986, 33.4% in 1990 and 35.9% by the mid 1990s. Industry was also assisted in many ways by the state and the devaluation of the Irish punt by 10% when it crashed out of the European Exchange Rate Mechanism in the early 1990s.
All of this indicates an improved competitive position for domestic industry in internationally tradable goods and services which had been the key historic weakness holding back the development of the Irish economy. However, this was not achieved on the basis of a transformation in productivity based on strong investment and a catch-up in R&D. It was achieved for the variety of reasons indicated.
Ireland is as dependant today on the world situation as before. Factors such as foreign investment and the growth in export markets created the context in which the domestic economy has grown. Its relative position has improved during a time of growth in the world markets. However, its continued weakness in terms of reserves, innovation and investment can be exposed as the global situation declines and the rivalry between companies intensifies.
In summation, the key factors in the development of the ‘Celtic Tiger’ were: The vast amounts of FDI that came into the country to exploit the plentiful supply of labour, which had an impact on the domestic economy; the recovery and improved competitive position of Irish-owned industry, flowing out of the crisis times of the 1980s. These together created the record levels of growth of the 1990s.
The change after 2001
THE HIGH POINT of the ‘Celtic Tiger’ was 2000. In 2001, reflecting the weakening of the economic situation globally but particularly in the US, there was a collapse in the growth rate with the economy flattening out in the latter part of the year. In 2002, growth remained poor at around 1.5% of GDP. In 2003, there was a certain pick up and by 2004 growth had reached 4%. Estimates for 2005 at the start of the year were for 5% growth. In fact, some economists were predicting such growth rates till the end of the decade and beyond. Is it possible or likely that the ‘Celtic Tiger’ boom will return? Is it possible that the Irish economy can continue to grow even if there was a decline in the world economy?
There is currently growth in the economy and substantial growth in the numbers at work. However, the rate of growth is not comparable to that during the ‘Celtic Tiger’ years and crucially the factors and the nature of the growth are also very different. Increasingly, the international stimulants of investment and trade are diminishing and more finite domestic factors are becoming dominant.
The importance of FDI to the Irish economy is indicated by the fact that throughout the EU countries foreign companies account for on average 19% of manufacturing output. In Ireland they account for more than 50%. Worldwide, the nature of FDI has changed somewhat since 2001. More is now related to finance and services. The yearly growth of FDI into Ireland was a key factor in the boom. In the four years since 2000, the rate of FDI has stopped growing. In two years it was similar to the figure for 2000, in the other two it was way down (2001 - $9,572m, 2002 - $29,131m, 2003 - $26,599m, 2004 - $9,100m, according to UNCTAD).
Exports from Ireland are also growing at a significantly slower rate, reflecting the weakening of global markets and the fact that exporters from Ireland are losing their competitive position in the tighter market conditions that exist.
We will have to await the outcome for growth in 2005 to see if the government’s projection of 5% growth in GDP was achieved. But the indications of late 2004 and the early part of 2005 were that the economy was growing at a rate of around 2.5%, ie experiencing a slowdown. It is possible that it has picked up somewhat since.
Marc Coleman of the Irish Times summed up the real situation when he wrote on 19 August: "But it is the quality, rather than the overall level of that growth, that matters now. What growth there is comes increasingly from domestic demand, driven in turn by consumption and construction. This is, in turn, related to strong borrowing growth. The construction sector, for example, accounts for a hugely disproportionate share of overall employment growth. This sector has peaked or is peaking and when it slows down it will take growth rates down with it".
While there has been significant growth in jobs the trend is away from well paid, manufacturing jobs and towards lower paid service and casual employment. Up to 30,000 manufacturing jobs have been lost since 2001 and an editorial in the Irish Independent (24 August) said one hundred manufacturing jobs had been lost every working day for the last two years! Therefore, like the changed position regarding FDI, the second key factor of the ‘Celtic Tiger’ boom, the development of a competitive position of domestic industry and the growth in its exports and employment, is also being eroded. The conditions, including a ready supply of cheap labour, do not exist currently for a repeat of the ‘Celtic Tiger’.
Not a world beater
THE PROSPECTS FOR research and development investment don’t look encouraging. Business investment in R&D was just 1% of GNP in 2002, compared to the average in the OECD countries of 1.6%. Public investment in R&D was likewise behind the main competitors. According to the National Competitiveness Council, by the end of 2003, Ireland’s price level relative to its trading partners, when measured in a common currency, was 8% above what they considered to be its long-run sustainable level. The Irish capitalist class is not seriously embracing or pioneering the development of productivity through investment in R&D. The Irish Times editorial went on: "An economy based entirely on service jobs and on construction (which cannot continue at the present phenomenal level in the long term) may not be solid or sustainable beyond the next few years".
The growth in the economy and in the number of jobs is taking place at the same time as the exploitation and attacks on workers’ rights and conditions are intensifying. Figures released in the summer indicated that average wages grew by 2.5% in the year to June 2005. Inflation is close to 3%. It is clear that the situation that exists today cannot be compared to the nature and rate of growth during the 1990s, that the situation post 2001 is different.
There are contradictory developments in the economy. Even in advance of an international recession, the weak international situation with its tighter competition seems to be impacting on the Irish economy. It is possible that growth in construction, which creates nearly one in every two jobs at the moment, could be cut across as the commentators mentioned earlier. Yet it is also possible it could be maintained and the economy could continue to grow for some time yet.
If construction continues it will increasingly represent a significant bubble in the economy. The OCED recently indicated that it thought property prices were already overvalued by 15%. At a certain point, there will have to be a correction but that can happen in a gradual or abrupt fashion. At a certain stage, demand for housing will diminish and speculative investment in that market will diminish. Even if those with money to invest try to invest elsewhere, who is to say it will be in Ireland? Even if it is, it’s very unlikely to have the same job intensive impact as construction has had. A slide in construction employment at a certain point is inevitable and will have a serious impact. The central bank has also noted its concern about the potential that even quite minimal increases in interest rates (expected over the next months) may cause significant hardship for a minority of borrowers.
Construction, borrowing and consumer spending are all interconnected. The level of borrowing here is still behind that in Britain but that will not be the case for long. The current level of debt can evidently be sustained as things stand, but the rate of growth of credit and debt cannot. It is true that the money held in the 1.2 million SSIA (Irish government savings scheme) accounts is a counter balance to the debt levels, but it is only a small counter balance. At the end of September 2004, the total amount of household debt was €85 billion. It is now more than €100 billion. In other words, the amount in total that will mature from the SSIAs (€15bn) was added to household debt in the last year alone. The ratio of household credit to disposable income increased from 112% last year to 133% in the latest figures.
Consumer spending is going ahead, probably boosted by the significant numbers of migrant workers coming to the country. Retail sales in September were 5% higher than in 2004 in real terms, although the month-on-month figure was much lower. Again, such levels of consumer spending, which is increasingly based on borrowing, will diminish either of its own volition as people make adjustments, or could be cut across by shocks in the world economic situation, attacks on wages or job losses. It is impossible to say when and how consumer spending will be cut across, but what is crucial is the direction of the process and the general limits in the situation.
These factors – construction, borrowing, consumer spending and government spending – have been very important in sustaining growth since 2001 and they are likely to maintain growth for a period but that will be at the price of stoking up problems for later. We cannot be definitive or very detailed about the timeframe for economic perspectives. However, the weaknesses that have emerged in the Irish economy over the last years are clear. As a result, it is very difficult to see how the Irish economy could possibly continue to grow when the world economy is hit by a recession. Even a significant infrastructural public investment programme would be unlikely to be enough to overcome the effect of a diminishing market, job losses and the credit crunch that would develop in the context of an international crisis for capitalism.