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Patrick Honohan Trinity College Dublin Dublin, 12 th June, 2007 • The Celtic Tiger period is explained as a belated catch-up to the leaders after a deep recession • Some numbers mislead – it was a marvel of employment…not of productivity • Since about 2000, the Celtic Tiger has matured…the current boom is an old-fashioned property bubble, fuelled by EMU, immigration and (latterly) credit financed by foreign borrowing of the banks Ireland: before & after the “Celtic Tiger” 1: A hare not a tiger
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Ireland’s economic miracle: A story of delayed catch-up
Patrick HonohanTrinity College Dublin
Dublin, 12th June, 2007
Ireland: before & after the “Celtic Tiger”
• The Celtic Tiger period is explained as a belated catch-up to the leaders after a deep recession
• Some numbers mislead – it was a marvel of employment…not of productivity
• Since about 2000, the Celtic Tiger has matured…the current boom is an old-fashioned property bubble, fuelled by EMU, immigration and (latterly) credit financed by foreign borrowing of the banks
1: A hare not a tiger
1973: Ireland on the brink of modernization
• Too little of the population at work in the “modern” sector
• But the policy response to the oil-shock generated a deep 15-year recession and balance of payments crisis– Back to macro equilibrium only by late 1990s
• (Government spending triggers inflation, soaring debt…parallels with UK pre-Thatcher but more severe)
Non-agricultural employment as % of population,
1973
05
101520253035404550
UK Ireland
%
Labour productivity in UK and Ireland, 1973
£0
£500
£1,000
£1,500
£2,000
£2,500
£3,000
Agriculture Rest of economy
UKIreland
The hare goes to sleep.. then wakes up
• Was long-deferred– Convergence to UK share of population at work in modern
sector not accomplished until c. 2000– Agricultural employment did decline steadily– But a surge in unemployment ……and delayed/discouraged female participation…kept living standards down
• When the turnaround came, availability of – young, educated workforce, – returning migrants – and (eventually) immigrants from W. and E. Europe, China,
Nigeria • became a fuel not an obstacle
Non-agricultural employment as share of population
20
25
30
35
40
45
60 65 70 75 80 85 90 95 00
Non-agricultural employment as share of population
20
25
30
35
40
45
60 65 70 75 80 85 90 95 00
Non-agricultural employment as share of population
20
25
30
35
40
45
60 65 70 75 80 85 90 95 00
The 25-year business cycle delays the catch-up
2006 2000
1997
1993
1990
1987
1974
1975
1961
1979
1981
0
2
4
6
8
10
12
14
16
18
-6 -3 0 3 6 9 12 15 18
BOP Current a/c deficit as % GNP
Une
mpl
oym
ent r
ate
% (I
LO b
asis
)
2. Fiscal crisis: Struggling with the debt escalator
• Fiscal sea-saw in the 1970s leaves debt high
• Delayed adjustment with rising tax rates (and adverse UK and other external factors)…
…Sends economy into deep recession 1982-86
• Decisive fiscal correction and more favorable external environment after 1987 restores balance
Government surplus 1970-2001
-20
-15
-10
-5
0
5
10
70 75 80 85 90 95 00
% G
NP
SavingSurplusPrimary
Government Debt
0
20
40
60
80
100
120
140
70 75 80 85 90 95 00
% G
NP
Balancing the Budget: Taxes and Current Expenditure
20
25
30
35
40
45
50
55
70 75 80 85 90 95 00
as %
GN
P
TaxesCurrent Expenditure
Escalators: Interest and Transfers
0
2
4
6
8
10
12
14
16
18
20
22
70 75 80 85 90 95 00
as %
GN
P
InterestTransfers
3. Why did the employment ratio recover so well after the demand recession of the 1980s?
• Union weakness
• Moderate wage settlements negotiated centrally
• Personal tax reductions cemented the deals
• Migration increases as full employment is reached
• Deeper factors: organization of production, computerization, expectations of new cohort?
Distribution of population change by economic status
-60-40-20
020406080
100
61-71 71-86 86-91 91-01 01-06
thou
sand
s per
annu
m
non-agemploymentag. employment
unemployed
non-active
Over 64
Under 15
Components of population change
-40
-20
0
20
40
60
80
61-71 71-86 86-91 91-01 01-06
thou
sand
s (an
nuak
ave
rage
)
Net migration
Natural increase
Union Density (non-agricultural)
38
40
42
44
46
48
50
60 65 70 75 80 85 90 95
95
100
105
110
115
120
75 80 85 90 95 001000
1100
1200
1300
1400
1500
1600
1700
1800Wage competitiveness
Total employment (rhs)
Income tax rates (incl. social contribution)Single person on average earnings
0%
10%
20%
30%
40%
50%
60%
70%
1979 1984 1995 2002
AverageMarginal
4. The role of FDI and productivity
• Was it introduction of low corporation tax rate that created the inflow of FDI? (No)
• How much of the MNC value added stayed in Ireland? (Less than you think)
• Beware of crude numbers: because of exceptionally high profit component, much of GDP, exports, “productivity” distorted.
Convergence of per capita GDP
20
40
60
80
100
120
1970 1975 1980 1985 1990 1995 2000
Per
cent
of U
S (P
PP
s)ARG
AUS
AUT
BEL
CAN
DNK
FIN
FRA
GER
HKG
ISL
IRL
ISR
ITA
JPN
NLD
NZL
NOR
SGP
ESP
SWE
CHE
GBR
USA
IRL-GNP
IRL-GNP
Aggregate productivity growth
0
1
2
3
4
5
75/70 80/75 85/80 90/85 95/90 00/95 05/00
GDP/Empl GDP less MNC profits/Empl
0
1
2
3
70 75 80 85 90 950
2
4
6
Assets (lhs) FDI stock (rhs)
Ireland’s share in the stock of US Manufacturing FDI in the EU
5. Construction: the EMU interest rate shock
• As convergence achieved, the economy’s motor switched from exports to construction…
…boosted by the EMU-related fall in interest rates…and by immigration
• After 2004, a credit-fuelled second wave of property price increases and construction activity
• All models of underlying housing demand underpredict current housing prices– Residential property prices are now falling slightly
EMU
Real interest rates 1983-2007 deflated by 4-quarter future inflation
-5
0
5
10
15
20
83 85 87 89 91 93 95 97 99 01 03 05 07
Irish Real New House Prices 1970-2006
0.5
11.5
22.5
33.5
4
1970 1975 1980 1985 1990 1995 2000 2005
Inde
x, 1
970=
1
Real domestic credit & house pricesrolling 3-month growth rate 1997-2007
-4
-2
0
2
4
6
8
10
12
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
credithouse prices
Net position of credit institutions in Irelandvis-a-vis Irish residents
05
101520253035404550
1999 2000 2001 2002 2003 2004 2005 2006
% o
f GD
P
Employment in building as % of total employment, 1990-2006
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
90 95 00 05