The Irish Economic Miracle

[alocispepraluger102]

The Irish Economic Miracle

One part fiscal; one part openness.

By Reuven Brenner

How did Ireland go from being among the poorest places in Western Europe to one of the richest? How did it attract the headquarters of 1,000 international companies? How did it come to rank, by some measures, among the EU’s top 15 original members? With per capita GDP estimated at $37,800 (U.S.), Ireland is now tops in Western Europe.

The Irish deserve applause for initiating drastic fiscal and regulatory changes that have gone against the trends set by the EU’s more sclerotic members. But it would be misleading to infer that any society can now emulate these policies and expect similar success. There’s more to the Irish lesson.

Ask first these questions: What happened to the financial center that was once in Montreal? It moved — together with some 400,000 people — to Toronto. Where are the Cuban brains? In Florida, and that’s where they prospered while Cuba lapsed into dire poverty. Where is Mexico’s human capital? Ten percent or more has come to the United States. Where did hundreds of thousands of Russian scientists, engineers, and technicians go? Israel. And where has the talent been flowing in Europe? To Ireland: Over roughly a decade, more than 400,000 newcomers have moved there, an addition of 10 percent to the Irish population.

Here’s what Ireland did — or had to do — to attract this wave of talent and ambition to its shores.

To begin, the obvious: In 1986, Ireland slashed spending in areas such as health expenditures, education, agricultural spending, roads and housing, and the military, while abolishing agencies such as the National Social Services Board, the Health Education Bureau, and regional development organizations. By 1993, government non-interest spending declined to 41 percent of GNP, down from a high of 55 percent of GNP in 1985. Subsequently, it significantly lowered corporate tax rates to 12.5 percent, at a time when the lowest corporate rates in Europe were 30 percent and U.S. rates stood at 35 percent. Since 2004, Ireland also has offered a 20 percent tax credit on research and development.

But the true miracle came when, due to these policy changes, Ireland attracted capital and pools of ambitious young people from around the globe. By now, Ireland has one of the youngest populations in the Western world.

Between 1995 and 2000, 250,000 people migrated to Ireland (about half of Irish ancestry), which had in 1996 a population of only 3.6 million. Ireland later allowed, along with Britain and Sweden, unrestricted migration to its labor markets from the 10 countries which joined the EU in 2004. Since then the number of people of Irish origin migrating to Ireland has diminished. However, more than 130,000 Poles now live there and, according to recent reports, 10,000 Eastern Europeans arrive every month, on average. A young Polish immigrant to Ireland was recently quoted saying, “If you have ambition in Poland, you come to Ireland.”

Not only Poles, but Danes, Iranians, Swedes, Chinese, and Nigerians have come to Ireland, filling both low- and high-skilled jobs. Google’s European headquarters, located in Ireland, employs 800 people. Seventy percent aren’t Irish, and these workers speak 37 languages. According to reports, the company plans to hire another 600 university-educated people, mostly from abroad.

Ireland’s population increase is due largely to the influx of low- and high-skilled immigrants. Combined with a significant inflow of capital, this open-door policy has not led to any of the forecasted negative effects that are now at the center of the heated immigration debate in the United States. The unemployment rate in Ireland is now about 4.5 percent; it was in the 15 percent range in 1993. As noted, the country has become much richer, too.

Whether speaking countries or companies, success is a result of the ability to attract and retain capital and talent. Businesses and financial markets, rather than unaccountable government bureaucracies, make proper matches between the two. They leverage creativity and ambition to better channels.

Fiscal and regulatory changes are a necessary part of the prosperity equation, but they make up the easier part. The harder part is to attract and retain talent. Ireland succeeded not only because of its fiscal changes, but because the country embodies the Western tradition of openness to many tribes.

With this in mind, Western countries should keep their borders open to the movement of those hard-working “vital few.” This policy may not only bring enhanced riches to the West, but also turn out to be its best weapon against the dictatorial, close-minded, backward-looking governments from which talent would escape.

— Reuven Brenner holds the Repap chair at Desautels’ Faculty of Management, and is partner in Match Strategic Partners. This article draws on his book, Force of Finance.

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National Review Online - http://article.nationalreview.com/?q=ZDNjZ...ZGRiOWQ0Y2IxNjk

[Guy Berger]

I'm guessing this will sooner or later have to be moved to the politics forum.

Anyway, the Irish economic miracle is indeed remarkable. I wonder what a 1900 Brit would have said had you suggested to him that 100 years later, Ireland would be a wealthier country than Britain.

Guy

[Big Wheel]

Where are the Cuban brains? In Florida, and that’s where they prospered while Cuba lapsed into dire poverty.

You'll forgive me if I'm skeptical of an economic article from a publication that employs a clown like Donald Luskin and holds him up as a model of brilliant thinking.

Anyway, I'm having trouble seeing the correlation between human capital and economic dynamism here. Most of Cuba's big slide has occurred in the period since 1991 or so. This period was not marked by a huge wave of brainy Cubans to Miami, as Brenner seems to suggest should be the culprit. To the extent that that happened at all, it happened mostly in the 1960s and early 1970s. On the other hand, something that did coincide with Cuba's biggest decline was the sudden disappearance of a large, powerful, and paternalistic trading partner, the USSR. Despite what the wacky Randians would have you believe, external structures matter a lot more than the movements of gifted ubermenschen.

Edited September 30, 2006 by Big Wheel

[alocispepraluger102]

Where are the Cuban brains? In Florida, and that’s where they prospered while Cuba lapsed into dire poverty.

You'll forgive me if I'm skeptical of an economic article from a publication that employs a clown like Donald Luskin and holds him up as a model of brilliant thinking.

Anyway, I'm having trouble seeing the correlation between human capital and economic dynamism here. Most of Cuba's big slide has occurred in the period since 1991 or so. This period was not marked by a huge wave of brainy Cubans to Miami, as Brenner seems to suggest should be the culprit. To the extent that that happened at all, it happened mostly in the 1960s and early 1970s. On the other hand, something that did coincide with Cuba's biggest decline was the sudden disappearance of a large, powerful, and paternalistic trading partner, the USSR. Despite what the wacky Randians would have you believe, external structures matter a lot more than the movements of gifted ubermenschen.

perhaps a more formidable opinion:

http://www.aims.ca/library/TJNotes.pdf

[Big Wheel]

Note that FitzGerald's analysis directly contradicts Brenner on the subject of investment in education. Starting in the 1960s the Irish government pumped a huge amount of cash into the Irish educational system. I'll bet that a look at the data will show that the 1986 retrenchment that Brenner lauds had little to do with how Ireland is doing today.

[alocispepraluger102]

Note that FitzGerald's analysis directly contradicts Brenner on the subject of investment in education. Starting in the 1960s the Irish government pumped a huge amount of cash into the Irish educational system. I'll bet that a look at the data will show that the 1986 retrenchment that Brenner lauds had little to do with how Ireland is doing today.

i would think that Fitzgerald's opinion, though self-serving is more on the mark.

[Guy Berger]

Where are the Cuban brains? In Florida, and that’s where they prospered while Cuba lapsed into dire poverty.

You'll forgive me if I'm skeptical of an economic article from a publication that employs a clown like Donald Luskin and holds him up as a model of brilliant thinking.

I agree that in general the NR's economic analysis shouldn't be taken seriously. That said, I think it's worth making an exception for this article.

Anyway, I'm having trouble seeing the correlation between human capital and economic dynamism here. Most of Cuba's big slide has occurred in the period since 1991 or so. This period was not marked by a huge wave of brainy Cubans to Miami, as Brenner seems to suggest should be the culprit. To the extent that that happened at all, it happened mostly in the 1960s and early 1970s. On the other hand, something that did coincide with Cuba's biggest decline was the sudden disappearance of a large, powerful, and paternalistic trading partner, the USSR. Despite what the wacky Randians would have you believe, external structures matter a lot more than the movements of gifted ubermenschen.

The Cuba example is possibly a poor one.* Regardless, economists tend to think that human capital is in fact quite important to the "wealth of nations", and I don't think it's crazy to think that it played an important role in Ireland's growth boom.

FWIW, here are the per capita GDP growth numbers for Ireland broken down into five year intervals:

1961-65 3.6

1966-70 4.2

1971-75 3.4

1976-80 3.2

1981-85 1.8

1986-90 5.0

1991-95 4.2

1996-2000 8.6

2001-2005 3.4

Guy

*I don't get the impression that Brenner is using 1991 as a breaking point. Rather, he is probably just assessing Cuba's current income levels and thinking "they're still poor." That makes little sense since they were probably poorer than Ireland in 1961. Of course, what matters is how fast they have grown per capita over the same period. I only have data for 1995-2004, when Cuba's GDP per capita grew by 3.7% -- not bad.

[Guy Berger]

Note that FitzGerald's analysis directly contradicts Brenner on the subject of investment in education. Starting in the 1960s the Irish government pumped a huge amount of cash into the Irish educational system. I'll bet that a look at the data will show that the 1986 retrenchment that Brenner lauds had little to do with how Ireland is doing today.

1) I don't think the two necessarily contradict each other. F is talking about a multi-decade period starting in the mid 60s. B is talking about the period since 1986. It's possible that education spending rose in the mid-60s and then fell after 1986. Unfortunately I don't have data on Irish education spending.

2) F agrees with B about the importance of fiscal tightening to Ireland's growth miracle. It probably helped facilitate Ireland's investment boom.

Guy

[Big Wheel]

Note that FitzGerald's analysis directly contradicts Brenner on the subject of investment in education. Starting in the 1960s the Irish government pumped a huge amount of cash into the Irish educational system. I'll bet that a look at the data will show that the 1986 retrenchment that Brenner lauds had little to do with how Ireland is doing today.

1) I don't think the two necessarily contradict each other. F is talking about a multi-decade period starting in the mid 60s. B is talking about the period since 1986. It's possible that education spending rose in the mid-60s and then fell after 1986. Unfortunately I don't have data on Irish education spending.

2) F agrees with B about the importance of fiscal tightening to Ireland's growth miracle. It probably helped facilitate Ireland's investment boom.

Guy

My point in 1) is that I think Brenner is cherry-picking dates to suit a laissez-faire agenda (that is, that one of his overarching goals in this piece is to prove the point that "cutting education spending good, all government spending bad"). To do this, he has to overlook any years that suggest that education spending over a long period was actually very important to growth later down the road.

I'm not denying that human capital and fiscal discpline are important determinants of economic success. But Brenner seems to me to be clearly overreaching in an effort to make Ireland fit into the model of a right-wing capitalist utopia. IOW, I think it's sensible to look for correlations between human capital improvements and growth, but Brenner's test cases attempting to "prove" that this point is of supreme importance in explaining growth aren't very good at all.

And the last paragraph just comes off as silly:

With this in mind, Western countries should keep their borders open to the movement of those hard-working “vital few.” This policy may not only bring enhanced riches to the West, but also turn out to be its best weapon against the dictatorial, close-minded, backward-looking governments from which talent would escape.

"We have to get out of this backward, dictatorial shithole!"

"You're right. Let's leave for the south of France!"

"But their corporate taxes are so high and their fiscal discipline...not so good."

"Shit! I guess we're stuck!"

Perhaps this is being a little unfair to Brenner. I just have a tough time seeing how welcoming smart people here is going to magically be an effective "weapon" that will transform their home countries into happy singing liberal democracies.

Edited October 1, 2006 by Big Wheel

[Big Wheel]

Ah, I had the date slightly off. Cuba's economy started tanking when the Warsaw Pact regimes started crumbling in 1989, not when the USSR broke apart in 1991. Cuban GDP fell 35% from 1989 to 1993, at which point it started rising again. At 3.7% a year from 1995 onward, that means it took Cuba about a decade to get back to where it was in 1989.

[The Magnificent Goldberg]

Fitzgerald's analysis is mostly right. And as far as I can remember from studies of the Irish economy that I made while I was at work, there was no great cutback in education. Indeed, the re-focusing of Irish Development Agency activity on financial services was accompanied by a refocusing of education policies to match.

Some things Dr F omits.

The Irish have maintained close links with their diaspora - much closer than the Welsh or Scots. To what extent this may have been influenced by the IRA and its search for funding I do not know. But what it meant was that the IDA was able to follow up contacts and draw inward investment from the USA to a much greater extent than we were in Wales (and we did very well by comparison with a lot of Britain).

Second, although Ireland was a member of the EU and subject to the same regulatory regime with regard to business subsidies as the other countries, it did not follow the rules and was, in effect, given a free pass for many years. So, for example, the tax regime initially targeted inward investors by offering them big reductions. Then specific geographical areas (the old port area of Dublin and Shannon Airoport are specific examples) were designted in which the tax regime was virtually zero. These sorts of tax breaks are illegal under EC rules. My colleagues and I tried for years to get the European Commission to let Wales do the same, but were only able to get them to stop letting Ireland do it. So then Ireland developed the idea of a generally low corporation tax, offsetting the tax loss by higher personal taxes. (It is, of course, unsurprising that Dr F leaves out these details.)

These huge subsidies to industry do work. However, the deadweight that Irish academic studies found in evaluating them was huge. In other words, almost (but not quite) all of the money was being paid to encourage firms to do what they were probably going to do anyway. But anyone who thinks that providing huge subsidies to industry is the right wing way is greatly mistaken.

A third point was the emigration FROM Ireland. What that turned out to lead to was a generally younger population. (This has been boosted subsequently by the immigration into Ireland.) One of the things a generally younger population does is make education policy work much more quickly through the economy as a whole.

MG

[alocispepraluger102]

Fitzgerald's analysis is mostly right. And as far as I can remember from studies of the Irish economy that I made while I was at work, there was no great cutback in education. Indeed, the re-focusing of Irish Development Agency activity on financial services was accompanied by a refocusing of education policies to match.

Some things Dr F omits.

The Irish have maintained close links with their diaspora - much closer than the Welsh or Scots. To what extent this may have been influenced by the IRA and its search for funding I do not know. But what it meant was that the IDA was able to follow up contacts and draw inward investment from the USA to a much greater extent than we were in Wales (and we did very well by comparison with a lot of Britain).

Second, although Ireland was a member of the EU and subject to the same regulatory regime with regard to business subsidies as the other countries, it did not follow the rules and was, in effect, given a free pass for many years. So, for example, the tax regime initially targeted inward investors by offering them big reductions. Then specific geographical areas (the old port area of Dublin and Shannon Airoport are specific examples) were designted in which the tax regime was virtually zero. These sorts of tax breaks are illegal under EC rules. My colleagues and I tried for years to get the European Commission to let Wales do the same, but were only able to get them to stop letting Ireland do it. So then Ireland developed the idea of a generally low corporation tax, offsetting the tax loss by higher personal taxes. (It is, of course, unsurprising that Dr F leaves out these details.)

These huge subsidies to industry do work. However, the deadweight that Irish academic studies found in evaluating them was huge. In other words, almost (but not quite) all of the money was being paid to encourage firms to do what they were probably going to do anyway. But anyone who thinks that providing huge subsidies to industry is the right wing way is greatly mistaken.

A third point was the emigration FROM Ireland. What that turned out to lead to was a generally younger population. (This has been boosted subsequently by the immigration into Ireland.) One of the things a generally younger population does is make education policy work much more quickly through the economy as a whole.

MG

thanks for helping us further understand the reasons for the revival.

[The Magnificent Goldberg]

PS - I should point out that the 12.5% tax rate for corporaations is still a subsidy (albeit a legal one). The Irish Government has decided to subsidise corporate businesses (not small owner-operated businesses or professional partnerships) at the expense of other businesses and the population at large.

MG