Ireland’s Long Economic Boom: The Celtic Tiger Economy, 1986-2007, by Eoin O’Malley, Palgrave Macmillan, 264 pp, €53.49 and Open Access, ISBN: 978-3031530692
This book by economist Eoin O’Malley is an excellent, analytical study of the reasons why Ireland, one of the poorest economies in Europe, was transformed within a relatively short period into one of the best-performing economies. Both living standards and, most importantly, the numbers at work doubled in just two decades. O’Malley, formerly of the Economic and Social Research Institute, whose detailed work on Irish industrial economics is well-recognised, brings new insights into the reasons for our Celtic Tiger breakthrough, on the factors behind each reason for the growth and on the different periods of differing types of growth, in each sector.
O’Malley undertakes a particularly deep analysis of the contribution to growth, exports and employment of foreign direct investment (FDI) and of the indigenous industrial sector. The Irish government and some in the media are somewhat obsessed with the role of foreign direct investment (FDI) but O’Malley shows that the indigenous sector also played an important role, particularly in the take-off in this twenty-year period. He also shows that, even during the bubble period of the boom in the noughties, there was sustained actual growth in the manufacturing and services export sector for a few years.
O’Malley sticks strictly to the economics: there is no political economy in his book. If you want to see which parties were responsible for the boom and were responsible for the crash in 2008 you will have to refer to a political calendar of who was in power in the various years of these two decades.
It is recognised that Ireland’s crash in 2008 was one of the deepest. It was exacerbated by the neoliberal policies of the Fianna Fáil/PD government. Neoliberal means deregulation: no regulation of finance; privatisation; tax-cutting during a boom (boosting demand), especially around property; the push for low taxes and downgrading the state and the public sphere. However, all parties did contribute to the foundations for this growth period, many years earlier. The sound policies were the investment in education, in skills and in supporting active state intervention in attracting foreign direct investment (FDI), particularly in choosing growing sectors; and also in most, though not all, of state supports for indigenous enterprise.
In 1973, I, like most of the Irish left, opposed entry in to the EU. We feared that Irish indigenous firms and Irish farmers would be unable to compete with their larger European competitors. In fact O’Malley shows that after EEC membership ‘industry in Ireland was a significant net loser of market share during the transition to free trade’. He quotes McSharry and White (2000) in support, who said ‘the casualty rate amongst Irish industry in this progression towards free trade was horrendous’, and, for the ‘biggest companies with over 500 employees the losses were even more devastating’. Thus there were valid reasons for opposing EEC entry. However, virtually all would agree the negatives were vastly surpassed by what EU membership would later offer.
O’Malley shows that even within indigenous industry some sectors fared relatively well – mainly in food-processing of primary products or in sheltered non-traded activities, such as products with low value to weight ratio, for example building materials, packaging, food and soft drinks. Indeed some successful Irish the companies in food, drink and protected sectors and services have grown into world class multinationals. Thus international Irish companies such as Kerry, Glanbia, Dole (Fifes), CRH, Smurfit Kappa, Kingspan, Grafton Group, DCC and services like Flutter Entertainment, AerCap and Ryanair; small Irish food cooperatives were to merge and also become world leaders too.
O’Malley’s Chapter 3 is a review of the explanations by other economists for the Celtic Tiger boom. These include fiscal stabilisation; tax cuts and smaller government; delayed or belated convergence: strong demand growth in export markets; good supply of labour; education and human capital; single European market; EU structural funds; Social Partnership and wage moderation; FDI; a small open/regional economy; Irish indigenous industry ; privatisation and de-regulation; peace in Northern Ireland; and new ways of working.
He argues that some of these explanations are not convincing and others not important. For example, the plentiful supply of labour in the boom was a necessary condition, but it was also quite normal in other European countries. He dismisses the argument of the delayed or belated convergence argued by Ó Gráda and O’Rourke (2000). This argument has also been criticised by Barry (2002) and others. O’Malley finds the premise that there is a general tendency for convergence of average income levels of broadly comparable economies to be questionable, as there is no evidence of this tendency. He agrees that fiscal stabilisation had long-run benefits.
He found most economists agreed that the EU Structural Funds helped to increase Ireland’s growth between 1989 and 1999, when almost IR€30 billion transferred from the EU to the Irish exchequer. Most of this was invested in physical infrastructure, human resource development and subsidies to the private sector. One study he quotes said that the funds raised GNP in the late nineties to a level of about 4 per cent above what it would otherwise have been. The Structural Funds programme also introduced important development expertise on how to do things better, which helped overall. Economists found that the effect of Structural Funds was small in comparison to the impact of the single market. He also quotes Matthews (1994), who found that Common Agriculture Policy (CAP) receipts were a lot bigger than the EU Structural Funds, at about 10 per cent of GNP in the early 90s compared with the funds at about 3 per cent.
O’Malley argues that there is plenty of evidence that there were increasing levels of educational attainment before and during the boom years and cites arguments in favour of this as a driver. The single European market is widely considered to have boosted economic growth and he cites quite a number of authors in favour of this reason and concludes that it had a major effect on the Irish economic success. Indeed the importance of access to the huge European Single market for Ireland’s economic success was well-known by economists before Britain decided to leave the Single Market. This exit (Brexit) from the biggest world market is a decision now recognised as self-destructive.
Many argued that Social Partnership was a major factor in the boom, together with some wage moderation and employer and union advice on policy priorities for the economy and society. Partnership also led to a general acceptance that competitiveness was more complex than short-term movements in wages, which had been official Irish policy for years. These issues are now widely accepted in Ireland and the World Economic Forum has for a long time listed the labour market and wages as but one of its twelve pillars of competitiveness. O’Malley finds no evidence that tax cuts drove the Celtic Tiger, though he did find that cuts were made after the strong growth period and he is also dismissive of other issues in contributing to economic growth like peace in Northern Ireland; new ways of working; a small state and privatisation.
The significant causes of the boom which he found and analyses in various chapters were the strong demand in export markets, FDI, the EU single market, education for fast-growing industries, the regional nature of the economy, indigenous industry and EU structural funds, as well as the aforementioned social partnership and wage moderation.
Chapter Four is a substantial and deep analysis of sectoral growth and export earnings which seeks to ascertain which contributed to the overall growth of the economy. He examines retained gross value added (GVA) and employment as the key factors in driving growth. He finds four sectors which had well above average growth at some stage during the boom and that other market services had relatively rapid growth. Manufacturing grew exceptionally fast before the 2000s but then much more slowly. Building and construction didn’t grow during the early stages of the boom but did later during the bubble, in the noughties.
O’Malley does not list Ireland’s low corporation tax as a factor in chapter 3. However he does examine its impact later in his analysis of multinational companies’ motivations for investing in Ireland. He finds that it was a factor, along with grants. Market access and skilled labour were also attractions. FDI had weakened during the 1980s but became a major contribution to economic growth during the boom. There were no significant changes in tax breaks and grants as they had been quite stable and it was probably market access to the EU that was the main attraction with the reduction in non-tariff barriers after the Single European Act in 1993. The surge in FDI occurred outside Ireland, but as MacSharry and White argue, the monitoring by the IDA of fast-growing sectors and key companies within those sectors also contributed substantially. There was also an attraction when a certain level of self-sustaining clusters with a critical mass of firms had established in Ireland. There was an increase in services FDI, which grew from a small base. The pool of financial, legal, operational and technical skills contributed to attracting foreign investment, particularly in services.
There is a wealth of detail in the comparison of the performance of Irish indigenous companies to that of foreign companies in terms of output, exports, net foreign earnings and employment before and over the various phases of the twenty years of the boom, from 1986 to 2007. For example in 1983 Irish expenditures of the value of sales in indigenous industry amounted to 79 per cent compared with just 44 per cent by foreign industry. While foreign industry had a good performance in the 1960s and ’70s and in 1980 to ’87 FDI had high growth and output but declining trends in its employment in the 1980s. This was an indication that its contribution to Irish economic growth was not as strong as it had been.
The famous Telesis report in 1982 commissioned by the National Economic and Social Council criticised the heavy reliance on FDI. This led to the split of the IDA into IDA Ireland and Enterprise Ireland under a policy body, Forfás (later abolished). O’Malley says that ‘policy towards indigenous industry became more selective, aiming at developing larger and stronger firms and building on those with a good record rather than assisting a very large number of start-ups indiscriminately’. This policy assisted the success of indigenous industry, but not as much as it should have. Governments’ own enterprise policy has been undermined by contradictory policies, by liberal ideology and short-termism; points returned to later.
Ireland, like most small open economies, has a substantial foreign sector which contributes much to the economy. Government policy is to support both sectors, foreign and indigenous, and has been for a long time. Over two chapters, five and six, O’Malley analyses the role of indigenous companies and of foreign companies’ contribution to the boom. He finds that while there was a long period of weakness in indigenous companies before the boom, that there was a substantial improvement in the growth and development of this sector in the late 1980s. Indigenous services also contributed substantially to the boom, he found.
He argues that ‘the contribution of indigenous firms over the whole course of the boom was a good deal less than the contribution of foreign companies when analysed in terms of growth of exports. Consequently, indigenous companies’ share of exports declined from 30% in 1985 to 13.4% in 2007, while their share of net foreign earnings declined from 44.2% to 30.4%.’ However he makes the point that ‘the indigenous contribution to net foreign earnings remained much greater than it appeared to be in terms of exports, but the indigenous share of net foreign earnings was declining due to faster growth amongst foreign firms’. Thus the indigenous contribution to the boom was very significant at times. It was particularly useful and influential when the economy was pulling out of the deep recession in the 1980s and when it was beginning its long period of rapid growth well into the 2000s. In fact, he argues that the contribution of indigenous industry in the late ’80s was ‘probably the most important change that got the boom started at that time’.
O’Malley gives a lot of credit to the industrial policy of governments for the improvement and changes that were made to help these companies. However, ‘the overall outcome for indigenous development was ultimately not very satisfactory’. ‘Few of the companies in the high-tech sector became large and most of the prominent ones were taken over by foreign multi-national enterprises,’ he says.
In his conclusion on indigenous industry companies, O’Malley writes that they did make ‘some progress’ and ‘industrial policy was important’, but in spite of this progress ‘the overall results remain unsatisfactory’ (my emphasis). This is ‘mainly because of the scarcity of large companies emerging in the high-tech and medium tech sectors and because of the common tendency for more promising companies to be taken over by overseas companies’.
He does not analyse why Ireland’s active industrial policy stops at growing more companies of size and substance – since the subject of his book is the boom. Irish industrial policy has been driven by an active state for many decades with billions of taxpayers’ money spent in support of private firms. Sweeney (2013) estimated between €4.7bn and €6.2bn was spent in financial supports to Irish enterprise in the year 2011. This investment has been largely successful but could have been more so. It is my view that the greatest inconsistency in supporting the growth and retention of indigenous companies of size was the substantial privatisation of commercial state companies, which were exactly what enterprise policy sought – substantial, profitable, large employers, Irish-based and -controlled. The second policy error was the failure to retain Irish start-ups which have been and are helped by Enterprise Ireland and various state funds. The policy to build and retain companies of substance here – and thus discourage foreign takeover – needs to be re-examined. Both of these policies are failing, I believe because an outdated view that private is better than public ownership.
Eoin O’Malley’s book is perhaps the most detailed analysis written of Ireland’s long economic boom, known as the Celtic Tiger period. The strength of its analysis and the detail is excellent. He focuses on indigenous firms and shows how well they performed and also highlights the weakness of the sector at times. It is perhaps because of the success of IDA Ireland in attracting foreign direct investment that the policy on supporting indigenous firms (which has been very active and sustained) has been successful, but as O’Malley says, it has not been as successful as it might be. The policy on indigenous enterprise needs to be reformed to be more consistent, strategic and to take a longer term prospective.
It was seen that the state not just undermined its own industrial policy of building companies of substantial size based in Ireland but it contradicted it. Retention of major indigenous Irish companies was rarely considered, reflecting either a paucity of strategic and intellectual prowess in the civil and public service and in some political parties; or the reasons might have been ideological. Cynics do say that Irish enterprise policy is partly one of ‘privatised losses and socialised gains’. However, despite some inconsistency on the indigenous supports policy, overall enterprise policy has been remarkably successful in raising our living standards from 63 per cent of that in the UK in 1973 to above the EU average and in giving us a modern liberal economy and society.
Selected bibliography:
Barry, Frank, 1999, Irish Growth in Historical and Theoretical Perspective. In Understanding Ireland’s Economic Growth, editor Frank Barry, London, MacMillan.
Barry, Frank, 2002, The Celtic Tiger Era: Delayed Convergence or Regional Boom? QEC, Editors Danny McCoy at al. Dublin, ESRI.
Enterprise Strategy Group, 2004, Ahead of the curve: Ireland’s Place in the global economy, Dublin, Forfás.
FitzGerald, John and Patrick Honohan 2023, Europe and the Transformation of the Irish Economy. Cambridge, CUP.
Honohan, Patrick and Brendan Walsh, 2002, ‘Catching up with the Leaders: the Irish Hare’. Brookings papers on economic activity 2002 1-57.
O’Malley, Eoin, ‘Ireland’s Competitive Performance’ in Upsetting the Apple Cart: Tax based Industrial Policy in Ireland and Europe, editor David Jacobson, Dublin Glasnevin Publishing.
O’Malley, Eoin, 1989, Industry and Economic Development: the Challenge for the Latecomer. Dublin, Gill and McMillan.
O’Malley, Eoin 1998a, The Revival of Irish Indigenous Industry 1987–1997 in QEC, editor Baker et al, Dublin, ESRI.
Jacobson, David and Eoin O’Malley. 2018, ‘Indigenous Industrialisation’ in Upsetting the Apple Cart: Tax based Industrial Policy in Ireland and Europe, editor David Jacobson. Dublin Glasnevin Publishing.
MacSharry, Ray and Padraic White 2000, The Making of the Celtic Tiger: the Inside Story of Irelands Boom Economy, Cork and Dublin, Mercier Press.
Matthews, Alan, 1994, Managing the EU Structural Funds, Cork, CUP.
Ó Gráda, Cormac and Kevin O’Rourke, 1996, ‘Irish economic growth 1945-88’ in Economic Growth in Europe since 1945. editors NFR Crafts and G Toniolo, Cambridge, CUP.
O’Leary, Eoin, 2011, Irish economic development: High Performance EU state or Serial Underachiever?, Abington and New York, Routledge.
Ó Riain, Seán, 2014, The Rise and Fall of Ireland’s Celtic Tiger: Liberalism, Boom and Bust, Cambridge, CUP.
Sweeney, Paul, 2013, ‘State Support for the Irish Enterprise Sector’, in Upsetting the Apple Cart: Tax based Industrial Policy in Ireland and Europe, editor David Jacobson. Dublin Glasnevin Publishing.
Sweeney, Paul, 2008, Ireland’s Economic Success, Dublin, New Island Books.
Sweeney, Paul, 2004, Selling Out? Privatisation in Ireland, 2004, TASC/New Island, Dublin
Sweeney, Paul,1999, The Celtic Tiger, Ireland’s Continuing Economic Miracle, Dublin, Oak Tree Press.
Sweeney, Paul, 1998, The Celtic Tiger, Ireland’s Economic Miracle Explained, Dublin, Oak Tree Press.
1/10/2024
Paul Sweeney is a former Chief Economist at the Irish Congress of Trade Unions and author of three books on the Celtic Tiger, including Ireland’s Economic Success.
