The rise & fall of the Celtic Tiger

In this second of a two-part series on the historic failure of capitalism to develop the Irish economy, Cian Prendiville looks at the rise and fall of the Celtic Tiger.

The main stream media and politicians often seek to portray the current economic crisis as a ‘blip’, and the task is therefore to return Ireland to ‘normality’, usually through brutal austerity measures. This notion is even reflected outside of the mainstream, by some on the broad left, who propose stimulus measures instead of austerity to ‘shock’ the economy back to normality. This series refutes that false history of the southern Irish economy, bringing together information from various books by authors such as Conor McCabe, Peadar Kirby and others, to argue that in fact economic uncertainty, mass unemployment and emigration are the ‘normality’ for capitalism in Ireland.

In the first part, I outlined how mass unemployment and emigration were near constant features of the economy from 1922 to 1992, reflecting an underlying inability of indigenous capitalism to develop the economy and the sporadic and shallow nature of multinational-led growth. In this second part I look at the rise and fall of the Celtic Tiger, and argue that, despite temporary appearances, these fundamental weaknesses were not overcome.

The Celtic Tiger seemed to represent a huge turn in the fortunes of capitalism in Ireland. For most of 14 years, from 1994 to 2008 the Irish economy was booming, going through two distinct phases either side of 2001. The previous problems of unemployment and emigration were largely eliminated, through first a phase of multinational-led growth, and then, in ‘Phase 2’, a construction boom.

Employment & Immigration – a rapid turn around

The longstanding problem of mass unemployment seemed to melt away. From having 211,000 or 14.3% unemployed in 1994, by 2001 there were only 65,000 unemployed, a rate of just 3.8%.This figure was considered to be as low as unemployment could go. Unlike in previous times, this was not reflected by a rise in emigration, but in fact by a huge decline in the numbers emigrating, and a rise in the numbers returning or immigrating to the country. In 1996 Ireland had the highest rate of immigration in all of the EU, in a dramatic turnaround of fortunes, net immigration of over 60,000 a year at that stage1.

Underlying this was a huge surge in the numbers of jobs being created in the economy. After 70 years of stagnation in the number of jobs, employment skyrocketed. From 1.2m jobs in 1994, this rapidly rose to 1.7m by 2001 and 1.9m in 2005. Whilst there were pockets that didn’t really see this growth which was very unevenly spread, the rise in employment generally had an impact on living standards and well-being, with incomes rising, in particular between 1994 and 20012.

At the same time as a rapid rise in the numbers working, the productivity of those workers was also rising, and total domestic production (GDP) grew at rate of 8.6% per year from 95 to 2002, and 5.5% from then until 20083.

On the surface, at least, the Irish economy appeared to have been transformed. But had the previous fundamental weaknesses of capitalism in Ireland been overcome?

Phase one: Multinational-led growth

From 1994 to 2001 the key motor of the Celtic Tiger was a dramatic increase in levels of Foreign Direct Investment (FDI – multinationals investing in Ireland), far beyond what Ireland had experienced before. This then unleashed domestic demand, which further boosted the economy. Inward FDI flows increased from the equivalent of 2.2% of GDP in 1990 to 49.2% by 2000. US multinationals were the biggest source of FDI, and at one stage it was estimated that Ireland was the home of one in every four greenfield sites being developed by US multinationals in the EU. By 1995 multinationals accounted for one quarter of total output, and almost three quarters of economic growth, according to some4.

These multinationals were not focused on the domestic market, but instead were ‘export-oriented’, that is Ireland was used as a base within the EU free trade area to access the European market. Other factors also came together to bring about his boom in investment, including an international boom, and in particular an increase in FDI generally; as companies moved to lower waged economies, the availability of cheap, educated and English speaking labour, and very low taxes on profits or regulations compared to elsewhere in the EU at the time. The FDI was primarily focused in two key industries: Pharmaceutical and Electronic (including computers).

Following the 2001 bursting of the dotcom bubble in the US, the levels of FDI began to decline. It fell from approx €27bn in 2002, to 18bn in 2003 and only 9.1bn by 2004). The decline was even starker in non-financial companies. By 2004, only €1.5bn of FDI was spent in non-IFSC companies, down from 15.7bn the year before. Rapidly 30,000 manufacturing jobs were lost and one third of all jobs in the computer and software industries were gone by 20045. However, at this stage capitalism avoided a severe decline through building up a huge bubble in construction, in particular, house-building.

Phase two: Domestic, construction-led growth

During the 90’s boom, there was an increase in domestic industry, which saw employment rising 9%, however, as I’ve argued above, it was not the key driver of the economy. Even in industries where Irish companies developed rapidly, they were still mainly riding the coattails of multinationals. So, for instance, in the software industry, the “most spectacular success story” of the 90’s boom, Irish companies only accounted for €1bn of the €16bn worth of products and services produced here, even though they accounted for 85% of all companies in the industry. The other €15bn was produced by a small group of large multinationals based in Ireland6.

After 2001, however, with multinationals no longer providing a motor for the economy, domestic industry became a key driver for the economy. With a decline in the value of merchandise exports, domestic demand became key. However, the key motor to this growth was a huge rise in construction, particularly housing.

While house prices had risen throughout the 90’s, a huge price bubble developed in the new millenium. The average house price rose from €67k in 1991 to €76.5k in 1995 and then jumped to €331k by 2007. Prices were even higher in Dublin. Hand in hand with this went a dramatic increase in the number of houses being constructed and by 2007, the peak of the boom, 93k houses were being built a year, three times the rate of the 1990’s and 40% higher than even the Spanish per person rate. This boom also resulted in a dramatic expansion of the numbers employed in construction, with hundreds of thousands of jobs created. Construction made up over 13% of the workforce, slightly above manufacturing. In addition to this, there was also a boom in financial services, which added an extra 200,000 jobs between 2002 and 2006 and reached 14% of the entire workforce7.

For many the Celtic Tiger represented a coming of age of Irish capitalism, out of it’s ‘infantile’ state, finally overcoming the problems which dogged it for decades. Quite clearly, the Celtic Tiger did represent something new in Ireland, with a huge expansion of employment and unprecedented levels of investment. However, were the underlying weaknesses outlined in part one overcome?

Multinational-led growth still no saviour

The first phase of the boom did see deeper multinational investment than previously. Growth rates in Ireland, far from lagging behind European averages as during other periods of FDI growth, were far higher than other countries. However, even this development still proved to be: 1) dependent on international events, 2) shallow and 3) unreliable.

A key contributory factor to the Celtic Tiger was the rapid expansion of US FDI, as American companies sought to down size their domestic operations and move to other countries, and also sought easier access to the EU market. US investment abroad as a whole more than quadrupled from 1987 to 978. Ireland managed to ‘capture’ a disproportionate amount of this FDI, particularly in two or three industries, which had a big impact on the economy.

This growth still bore all the hallmarks of shallow development. To use Paul Murphy’s analogy, Ireland was used largely as a giant aircraft carrier off the coast of the EU. Materials (e.g. for computers or chemicals for pharmaceuticals) were flown in, altered slightly, and then flown on to their final markets in Europe, with very little corporation tax taken from the profits as well. McCabe estimates that as much as 80% of the money generated by IDA-backed companies (export oriented multinationals) completely bypassed Ireland, with only 20% going to local costs (materials and labour) or taxes9.

The low level of research and development spending in Ireland is another illustration of the shallowness of this investment in Ireland. While there was an expansion in the level of R&D spending, it never caught up with the EU average. This meant that in terms of the products produced in Ireland, the research and development “was all done before and in the US”, according to Michael Casey, former chief economist at the Central Bank10.

This shallowness of multinational-led development meant that Ireland maintained a ‘hunter-gatherer’ model to FDI reliant on a flow of new companies to invest. It also meant that the companies that were based here could, relatively easily, move elsewhere. All this meant that the growth provided was very unstable, as demonstrated after 2001 when this ceased to provide a motor and many multinationals, most famously DELL, pulled out.

What about domestic capitalism; did it manage to overcome its historic weakness through the Celtic Tiger?

Domestic capitalism still infantile

As detailed earlier, indigenous industrial development was very weak during ‘Phase 1’ of the Celtic Tiger which saw a rapid expansion of industry. As in the software example given earlier, at best Irish companies rode the coattails of multinationals. However, very low levels of Research & Development spending held back Irish companies from becoming world beaters.

While the proportion of GDP spent on R&D did rise, it still lagged way behind other countries. For instance, being around half that of Germany and one third of Finland (Index Mundi). Even then, almost three quarters of the money spent on R&D in Ireland was from multi nationals – domestic companies were investing even less. This meant that “the indigenous sector has a very poor record in developing patentable processes or inventions”, and consequently lagged behind multinationals (Barry quoted in Kirby pg 40). In fact, only 10% of indigenous manufacturing qualified as ‘high-tech’, partly explaining how in 1998, despite making up 85% if the plants, and 53% of the employment, Irish companies only accounted for 28% of the total manufacturing output11.

The major ‘success’ story of indigenous industry in the Celtic Tiger was in construction, where Irish companies had less competition from outside. However, this boom was largely “driven by debt-financed domestic demand”12, that is it was on a very unhealthy and unstable basis. Quite simply, Irish industry was still infantile, and provided no motor for genuine economic development.

Crash

It is only when we understand this backdrop – historically weak capitalism in Ireland, that didn’t overcome this weakness despite the boom – that we can properly understand the collapse of the economy since 2008.

The economic crash in Ireland in 2008, and the following crisis which continues to this day, has resulted in the rapid return of unemployment and emigration, on scales even beyond anything that existed before. The total number of people unemployed skyrocketed from 99k in 2006 to 323k in 2012 and the official ‘seasonally adjusted’ rate puts unemployment at 15% at the start of 2012. Emigration has also gone through the roof, with a total of 358k having left Ireland the five years from 2008 to 2012, reaching 2% of the population emigrating in 2012 alone, twice the rate of the 1980s13.

Construction in particular faced a rapid collapse, as the housing market bottomed out. Construction employment fell from 273k to less than 100k, while the numbers employed in industry also declined by 70k. The collapse in the housing market also resulted in knock on debt crises; for developers who were unable to pay back their debts, banks who weren’t getting paid, and increasing homeowners struggling to pay mortgages.

A crucial part of this economic decline was the collapse in investment. While household consumption declined by €15bn (16%) between 2007 and 2011, investment (measured by ‘Gross Fixed Capital Formation’) declined by €32bn (66%). The figures are even more stark when looked at as a percentage of overall GDP. Consumption has declined in line with the general decline in GDP, and therefore still makes up around 50% of GDP. ‘Capital formation’ (investment) as a percentage of GDP, has fallen from 27% down to a mere 10% for two years in a row (2011 and 2012). This rate of investment is far lower than even in the 1970’s or 1980’s, when it was generally double that14.

This collapse in investment has resulted in stagnation in the Irish economy. Previous motors for growth, multinational investment and domestic debt-fuelled investment in construction, have broken down, and the economy is without a motor. The underlying weaknesses of Irish capitalism have reasserted themselves: Irish capitalists are unwilling to invest, and multinationals provide no serious way forward.

Capitalism provides no way out

The current economic crisis in Ireland is no blip, it is not a mere aberration. As we discuss and debate out solutions to this crisis and alternatives to austerity we must remember that what is needed is not simply to return the economy to ‘normality’. For Irish Capitalism, this is normality. Mass unemployment and emigration are not temporary problems, but near permanent features of capitalism in Ireland. This flows from the weakness of Irish industry, due to both weakness of indigenous capitalism, and the fleetingness of FDI.

The blip was the Celtic Tiger. That boom, unfortunately, did not fundamentally overcome the underlying weaknesses. Domestic industry remained infantile, and multinational investment shallow. The result is that once the sugar rush of the boom disappeared, the economy ended up back where it was before, but this time with massive debts from a speculative property boom.

If we are to escape the twin problems of mass unemployment and emigration, and break out of stagnation and crisis, we will have to also break with reliance on the private sector and capitalism. Instead, socialist change, as detailed elsewhere on this site, is desperately needed. We cannot sit and watch as the huge wealth of the rich sits idle, condemning workers and the unemployed to misery. Instead, that wealth should be used to create the jobs and services we so desperately need, and to develop indigenous, democratically owned and controlled industries producing for the needs of the millions, not the greed of the millionaires.


This article is based on research Cian Prendiville is doing for an ongoing project at the University of Limerick. The author welcomes any enquiries or feedback on cian@socialistparty.net

To read more about the Celtic Tiger we suggest this 2006 article by Kevin McLoughlin, titled ‘The Endangered Celtic Tiger’

And for a more on the economic crisis, check out Paul Murphy’s three part special from 2010

References
[1] Unemployment figures: Andy Bielenberg & Raymond Ryan, An Economic History of Ireland Since Independence 2013 pg 173, Emigration/immigration figures: Paul Sweeney The Celtic Tiger: Ireland’s Continuing Economic Miracleg 58

[2] Peadar Kirby Celtic Tiger in Collapse Jobs figures pg 3 & income figures page32

[3] Kieran Allen Ireland’s Economic Crash 2009 p40

[4] FDI Percentages: Bielenberg & Ryan pg 194, Multinational proportion of output & growth: Deniis O’Hearn Inside the Celtic Tiger (p88)

[5] Decline in FDI: Kirby pg 38, Loss of jobs: Bielenberg & Ryan 2013 pg 90

[6] Kirby pg 40

[7] House price and construction figures: Allen 2009 40 & 44. Construction and financial employment figures Kirby 35 & 36

[8] Kieran Allen  The Celtic Tiger 2000 pg 23

[9] Sins of the Father: Tracing the Decisions that Shaped the Irish Economy pg 88

[10] Quoted in Kirby pg 38

[11] Multinationals spending on R&D: Billenberg & Ryan pg 184, Barry quoted in Kirby pg 4o, figures on indigenous industry Kirby pg 40 & 41.

[12] Quoted in Kirby pg 35

[13] Unemployment/Employment figures: CSO 2013 (http://www.cso.ie/en/statistics/labourmarket/principalstatistics/), Emigration figures: CSO 2012 (http://www.cso.ie/en/media/csoie/releasespublications/documents/latestheadlinefigures/popmig_2012.pdf)

[14] Index Mundi (http://www.indexmundi.com/)