Why was Ireland so poor


The Irish success story deserves closer attention. If the conditions for success could be generalized, the new, even poorer candidates from Central and Eastern Europe would have a model to orientate themselves on.

Ireland's growth has been above the EU average for decades, but not at a noticeable rate. Only in the 1990s did growth pick up strongly and was several percentage points above the EU average. During this period, the growth difference of 4.6% clearly exceeded that in the literature [See. Robert J. Barro and Xavier Sala-I-Martin (Convergence across States and Regions "Brookings Papers on Economic Activity 1: 1991, pp. 107-182.] 2% often recorded as the standard value for convergence processes.

Table 3: Ireland and EU growth rates in comparison

Source: EU Commission "European Economy" Vol. 70, 2000

What caused this sudden growth spurt? Only two of the usual five suspects, of which the first three act on the supply side and the last two on the demand side, turn out to be effective in the Irish case:

  1. More use of capital: The Irish savings rate was - in contrast to Asian countries - not particularly high (below 20% until 1995). The state budget mostly showed deficits. But capital flows (i.e. savings) flowed into Ireland from outside, mainly in the form of direct investments and EU aid. With about 1500 ECU / capita net foreign investment between 1987 and 1996, Ireland ranks second in the EU after Belgium / Luxembourg, but with the highest share (4.2%) of the gross domestic product. [See. EU Commission Sixth Periodical Report on the Socio economic Situation of the Regions of the European Union , Brussels 1999, p. 221] The current account balance was strongly negative in the 70s and 80s, sometimes up to over 10% of the gross domestic product (GDP). The growth in gross fixed capital formation, however, only temporarily reflected these external savings, and it usually fluctuated strongly. The investment rate (also mostly below 20%) in Ireland was often below the EU average. [See. Denis O Hearn Inside the Celtic Tiger. The Irish Economy and the Asian Model "London / Sterling 1998, p. 84 f.] However, savings and export surpluses increased with growth in the 1990s.
  2. More use of work: The population grew only slowly and the number of people in employment even fell in the 1980s when around 200,000 Irish net emigrated. [See. . Paul Sweeney The Celtic Tiger. Ireland s Continuing Economic Miracle "Dublin 1999, p.37] The number of employees rose from 1.05 million in 1961 to only 1.1 million in 1981 and only to 1.5 million in 2000. Unemployment remained very high until the mid-1990s. With the exception of the 1970s, immigration only took place again during the boom of the 1990s. So we can only speak of employment-based growth from the mid-1990s.
  3. Higher productivity of the factor input: If neither particularly high capital and labor input are responsible on the supply side, then only productivity remains. Indeed, productivity in Ireland has risen sharply and is relatively high. Hourly productivity was 8% above the OECD average and productivity per employee was 13% above the OECD average thanks to longer working hours (the value for the EU is 103 and 98, respectively) [Bart van Ark and Robert H. Mc Guckin (International comparisons of labor productivity and per capita income) Monthly Labor Review July 1999, p. 36] . An EU study from 1996 also sees productivity growth as the key to Irish growth. [European Commission - The Economic and Financial Situation in Ireland: Ireland in the Transition to EMU "special issue of European Economy 1996 (quoted in O Hearn, p.85).] Productivity growth in Ireland, at 3-4%, was significantly higher than in the EU (below 2%). [See. Economic and Social Committee of the EU (CES) - Opinion of the Economic and Social Committee on The EU Economy 1999: Review "369/2000, Appendix - Ireland: An Example of Economic Policy Success"]
  4. higher domestic demand: Domestic demand can hardly explain the growth either. The state budget showed deficits in the 1970s and 1980s, but from the late 1980s onwards it successfully tried to consolidate its budget and reduce its debt. On average, private consumption growth has always lagged behind GDP growth.
  5. higher foreign demand: Indeed, the export sector has been the main driver of growth. With average annual growth rates of 8.5% in the 80s and 13.5% in the 90s, it significantly exceeded GDP growth.

To sum up: Ireland received important capital inflows in the form of EU transfers and direct investment, but the main reasons were productivity gains, which in turn guaranteed high export competitiveness. The influx of additional workers (even Immigration again!) and higher savings are the result and not the prerequisite for the boom. The decisive increases in productivity certainly result from the modern systems and production processes of the foreign subsidiaries and the good other prerequisites such as infrastructure and education, but especially in the important sector of multinational companies, these explanations only tell half the story.

The other half is revealed on closer inspection of the productivity development. Productivity is added value divided by the use of factors. What stands out in Ireland is that high proportion of added value multinational corporations in the total economic value added (= GDP). It rose from 15% in 1990 to 23.8% in 1995. This added value cannot be understood independently of its distribution: profits make up the lion's share (around 60%). The profit rates of foreign, especially American, subsidiaries are unusually high (computers: 35%, pharmaceuticals: 50%; beverages: 70%). They are higher than the rates for equivalent American companies elsewhere or Irish companies. In addition to the low wages, low taxes and government investment aid is transfer pricing a major cause of this phenomenon. The high profits are only partially generated in Ireland, but the multinational companies operating in Ireland also generate profits elsewhere in the Irish tax haven. A CocaCola essence factory in Drogheda became known, whose "superworkers" made two million pounds profit per capita. [See. Paul Sweeney, op. Cit., P.51]

Since around 1995 this system has tended to accelerate itself: Ireland levies low taxes on profits and companies as a whole. Foreign companies set up shop and concentrate their added value in Ireland for accounting purposes. Last but not least, the Irish tax authorities benefit from this: despite low rates, they are generating increasing income thanks to the growing base, which allows them to lower tax rates further, which in turn attracts investors (e.g. financial services in the Dubliners dock lands). The budget surpluses are also used for other necessary improvements in investment conditions, e.g. education, infrastructure. This is how a Irish virtuous circle - but also at the expense of other countries with higher tax rates.

Ireland's spectacular catch-up process in the 1990s has made it one of the richest EU countries today. His per capita income (2001: 117) has by far exceeded the EU average (100) and is now in the top group in the EU. According to EU data, only Luxembourg (194), Denmark (141) and Sweden (127) surpass the green island, which was one of the poor houses in Europe for decades and has now even overtaken Great Britain and Germany. [All data from Eurostat / EU Commission European Economy No. 70, 2000, p. 186f.] In contrast to the Mediterranean countries, purchasing power in Ireland is (and has been in times of much greater poverty) pretty much the EU average.

Be Dependent growth model however, it produced other oddities. If one differentiates from Irish GDP the gross national product (GNP), i.e. the GDP minus the factor income generated in Ireland by foreigners (especially profits from foreign investors) and plus Irish income abroad, this is around a fifth (!) Below GDP . In terms of GNP, growth rates are also lower, but still high enough to achieve convergence with the EU, albeit at a slower pace.

Table 4: GDP and GNP growth in Ireland compared

Source: Eurostat; own calculations

This means that Ireland is again one of the poorer countries in Europe in a GNP comparison, as can be seen in Table 5 below. It has the most - measured in terms of GDP per capita EU member states overtaken without the Irish citizens with their GNP / head den Have caught up with the EU average. Ireland pays a large part of its national income to foreigners. In the real economy, this income transfer corresponds to an export surplus.

Table 5: Comparison of the GNP of the EU Member States in 2000

Source: Eurostat; own calculations

All of this is also reflected in the Distribution of income contrary. The share of wages in the gross domestic product has fallen from 77% to 58% in the last twenty years, although the number of employees rose sharply in the 1990s. The development of poverty was rather worrying, at least until 1994. While the percentage of those earning less than 40% of median income fell slightly from 8% (1973) to 7% (1994), the percentage of those earning less than 60% rose from 25% to 34%. In the structure of poverty, the unemployed made up the largest part of poor households with 33%. The tremendous decline in unemployment since 1993, from 15.3% then to 4.3% today, is likely to have also reduced this poverty or at least changed its composition. But even in 1997 a fifth of the population was still living on an income of less than half the average income and the most important poverty reduction organizations still saw a considerable need for action. [See. ders., loc. cit., p.170-180.] Ireland also shows a particularly high income dispersion compared to other OECD countries, which increased from 1987 to 1994. [See. Tim Callan and Brian Nolan Income Inequality in Ireland in the 1980s and 1990s "in Frank Barry (ed.) Understanding Ireland s Economic Growth" Basingstoke / London 1999, p.176.] After all, they too have regional disparities increased within Ireland. [See. European Commission, Unity of Europe, Solidarity of the Peoples, Diversity of Regions. Second report on economic and social cohesion Statistical Annex Brussels 2001, Table A2, according to which the standard deviation of GDP per capita in PPS increased from 13.9 (1993) to 17.3 (1998).]

© Friedrich Ebert Foundation | technical support | net edition fes-library | September 2000