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Celtic Tiger - Does it still possess claws or is it too old to pounce?

Overview
The Economist, an English language weekly publication conducted a survey of republic of Ireland in January 1988. The published survey slammed the Irish economy and titled it as “Poorest of the Rich”. The report portrayed a young girl begging on the street and described the Irish economy as the poorest country amongst the rich north-west Europe.
It seems that the Irish economy just needed a tonic which was well served by the “humiliation” in the January 1988 edition of the Economist. Many desperate measures were taken in the fields of government and unions, investments, taxes and much more. As a result of consistent efforts, Ireland experienced an economic “boom” which completed their extraordinary journey from being considered as a tiny, ex-peasant and poor economy to one of the wealthiest economies.
Just 10 years later, the Economist featured Ireland on its cover page and honored the economy by addressing it as “Europe’s Shining Light” and also remarked that the Irish economy was getting richer all the time.
The term “Celtic Tiger” is used to define Irish economy and the time frame when it rose from rags to riches. This term was coined in August 1994 by Morgan Stanley. Many experts are trying to replicate this model of new growth theory to bring up other economies as other countries are tempted to achieve the same growth.  
Issues
The Irish economy experienced a rapid growth in the period 1995-2007, and this golden period came to a halt in 2008, whereas in 2010 the GDP contracted by 14%.

  • Study the reasons that how the lackluster growth performance moved up to the ladder of high growth path in such a short span of time.
  • The measures which Ireland took to increase the budget surplus and lower the level of indebtedness.
  • In a short span of time, the country transformed its alarming levels of unemployment with almost full employment.
  • Challenges that Celtic Tiger faced in “The Boom” period and the challenges awaiting for it.
  • The fall of Irish GDP and GNP in 2010.

Synopsis
The GNP growth rate that was reported from 1995 to 2000 ranged between 6 to 11% and through 2001 and early 2002, it measured 2%. The GNP rate then jumped back again to an average of 5% and the GDP rose to the second spot in Western Europe.
There has been much debate regarding the causes of Ireland’s growth which are the social partnership between employers, state driven economic development, focus on foreign direct investment, low corporation tax rate, huge investments in domestic higher education for decades, government and unions, hiring of English-speaking people and key EU membership.
Corporation taxation rate – There are many economists which view low corporation rate as one of the main reasons for Ireland’s economic growth. This rate was around 10 to 12.5% in the late 1990’s. Also, the net transfer payments from the EU members like France and Germany which were as high as 4% of GDP contributed towards the growth.
Industrial policies – In 1990’s, Irish state organizations introduced the provision of subsidies and investment capital. This strategy encouraged high-profile companies like Microsoft, Dell, and Intel to enter the Irish market and locate in the country. Other reasons which enabled these companies to establish in the Irish markets were Ireland’s EU membership, government grants, low tax rates as well as relatively low wages. There was a state agency named Enterprise Ireland which provided technical, financial and social support to set up a business. The International Financial Services Center in Dublin created 14,000 job opportunities in finance, legal and accounting sectors. Similarly many such organizations created significant job opportunities.
EU Aid – The European Union aid was utilized in increasing investment in infrastructure as well as in education department. These investments increased the productive competence of the Irish economy which further assisted in making Ireland more attractive towards high-tech businesses. In 1973, Ireland gained the EU membership which opened the doors to large European markets other than its traditional trade partner United Kingdom.
Geographical advantage and workforce – Ireland has a favorable time zone difference which allows the British and Irish workers to work during the first part of the day while their US counterparts sleep. Ireland offered cheap wage costs as compared to UK wages; it also had limited government intervention in business issues as compared to other EU members. Furthermore, a stable business environment was provided by the Irish government owing to the Good Friday Agreement. Irish economy boasted of English-speaking workforce which could effectively communicate with Americans, which was a crucial factor in attracting US companies.
Repercussions of the above measures– As a result of the above measures, the disposable income figures reached record levels which helped the customers to spend more. In the late 1980’s the unemployment was around 18% which reached 4.5% by the end of 2007. The average industrial wages of Ireland grew at one of the maximum rates in Europe. During the “Boom period”, the national debt remained constant whereas the new wealth generated was used in modernizing Ireland’s infrastructure like roads, railways, monuments etc. Owing to the fantastic growth, the Irish economy encouraged risk-taking and entrepreneurship which was not the case when the economy was performing poorly.
Slowdown period, 2001 – 2003 – After almost 7 years of high growth, the Celtic Tiger’s economy lowered sharply which was due to the lack of investment in IT industry. The IT industry was a major reason for Ireland’s growth; in 2002, Ireland exported computer services worth US$10.4 billion, whereas the US export figures for computer services were $6.9 billion. Around half of the mass-market packaged software sold in 2002 in Europe was from Ireland. The tourism sector of Ireland was affected by the 9/11 attacks and Foot and mouth disease and at the same period several companies moved from Ireland to China or Eastern Europe as Irish wage costs went up, insurance premium and the lackluster economic competitiveness. The value of Euro went up which affected the exports. This was also the time, where the economies experienced a slowdown which brought a slowdown in the economic expansion rate of Ireland.
A new resurgence post – 2003 – After a slowdown in 2001 – 2003, Irish economy began to gain pace again in late 2003 and 2004. This resurgence period was termed as “Celtic Tiger 2” and “Celtic Tiger Mark 2”. Amongst the EU-15 states, the Irish growth was observed as highest at 4.5%. This growth was more than that of Italy, Germany and France and there were even more positive forecasts for the Irish economy for 2005. There was an increase in Foreign Direct Investment in 2006 with an increase of job opportunities in IDA supported jobs. According to some analysts, this growth of Irish economy was due to an increase in property values. The tourism sector also picked up after 9/11 attacks and Foot and mouth disease. Around 25% of all European PCs and major computer firms had their operations in Ireland. As the global IT industry recovered, Ireland’s IT sector took pace too with Google opening an office in Dublin.
Challenges –

  • The economic boom in 2004 was a result of soaring property market. The construction industry constituted nearly 12% of GDP and saw the construction of 80,000 new homes.
  • The competitiveness of the Irish economy was lost due to inflation, rising wages and excessive public spending. The wages in Ireland are much more than the EU average. These factors led to a downfall with the professional outsourcing jobs on the rise in Poland and many Irish jobs of big companies were transferred to Poland.
  • Flourishing promotion of indigenous industries is one of the major challenges facing Ireland. There are a few international companies in Ireland with over one billion euros in annual revenue. With an aim of boosting Ireland’s industry, in 2003, the Irish government launched a website to market the process and streamlining of the business in Ireland.
  • Around 80% of Ireland’s energy is produced from imported fossil fuels. Various hydroelectric projects as well as peat bogs were developed by Ireland which has raised concerns of global warming. Thus, the government has shifted to wind and wave power. The government has estimated that by 2020, 40% of the country’s energy requirements will be contributed by renewable sources which are well higher than the EU average.
  • New wealth of Ireland is not evenly distributed. In ESRI report of 2006, Ireland was the 2nd most unequal country in Europe.
  • In September 2008, Ireland became the first country from eurozone to officially declare recession.

Present state of Irish Economy – Irish GDP and GNP

secondly-adjusted-growth-rates
numbers-in-employement

Source - CSO
The early predictions for the second quarter of 2010 show a decline, on a seasonally adjusted basis. This decrease can be seen as 1.2% in GDP and decline of 0.3% in GNP as compared to the previous quarter. Some of the main observations were - when compared to Q2 09; the consumer spending in terms of volume was 1.7% less in Q2 2010. The capital investment, in constant prices decreased by 19.9% in Q2 2010 as compared to Q2 2009. The net exports in constant prices were €884 million more as compared to same period last year. The volume of output of Industry went up in Q2 2010 as compared to Q2 2009 by 1.7%.
Irish employment from 2006 – 2010

Source - CSO
In the second quarter of 2010, the Irish employment boasted of 1,859,100 persons which is an annual decrease of 4.1% or 79,400. This result shows a yearly decline in employment of 5.5% in the previous quarter and thus, a decrease of 8.2% in the year to the 2009 Q2. However, full time employment declined by 83,200 over the year. The overall employment declined on an annual basis in 10 out of 14 economic sectors.
Growth Factor
The International Monetary Fund (IMF) said that after a steep fall, Ireland is looking positive for a nascent recovery. However, IMF also said that high growth rates that gave Ireland title of “Celtic Tiger” is unlikely, but at the same time IMF has estimated GDP growth of Ireland to increase to about 3.5% in 2015.
Ireland can choose the path to recovery and greatness
The journey of Ireland from a “poor economy” to the “Celtic Tiger” has been an extraordinary one. It is worth analyzing that despite the devastation which was caused by the failure of government strategies and the banking crash, there was a continuous focus on the symptoms to cure the downfall. Ireland will soon be paying 20% of the tax revenues on its national debt as compared to 28% in 1991. In 2013, Ireland will become a net contributor to the budget of EU for the first time since 1973. This is after the country received over €40bn in aid.
Thus, as the title suggests can the Celtic Tiger overcome its problems to pounce on the global scene again or will it just lick its wounds and wait for some “miracle”.

The Writer Ravi Krishnani is Senior Editor at Application Nexus India and can be reached at ravi.k(at_the_rate)applicationnexus.com as well on his Facebook Page.

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