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Revisiting Irish growth
David Archer, a loyal MR reader, writes to me:
That is a very good question; here are a few points:
1. A small country, especially one with a lot of FDI, can rise or fall more quickly than our usual economic intuitions otherwise might indicate.
2. The U.S. is a big (and growing, relative to the UK) part of Irish FDI. New York-based financial institutions (and don't forget Deutsche Bank and Credit Suisse do a lot of their business in New York) are more central to the Irish economy, or for that matter to the Canadian economy, than is often realized.
3. The key cause of the crisis was creeping overconfidence and complacency (I was pleased to hear Paul Krugman use refer to complacency in a recent talk of his on the crisis) and this was nearly global, Ireland included. Irish investors assumed that things were very likely to keep on getting better. Read Keynes's chapter 12!
4. Scott Sumner's to-the-point analysis blames the many manifestations of banking crises, internationally, on falling AD curves. My version of this story is less AD centered, and more about the revision of expectations (see for instance commentary from Bryan Caplan), and the revelation that past plans were overconfident and based on false complacency, but Sumner nonetheless makes some good points.
Addendum: Here is a good article on the spread of the downturn to India.
Posted by Tyler Cowen on May 5, 2009 at 07:29 AM in Economics | Permalink
Comments
There was an enormous house price bubble here.
I think that's something that folks should keep in mind.
Posted by: Current at May 5, 2009 7:40:21 AM
Also, i think the (relative) peace added to undue "irrational exuberance". For years, the Irish and their fans said "If they'd only sort the North out, we'd boom". It was an unexamined cultural mantra. The last 10 years have seen the North "sorted" and so people acted as if their prayers had been answered and the boom was owed them. No less than the AIB promoted this mantra.
Also, alot of the short term growth was regulatory arbitrage between the North and the South. Northerners (or approx 20% of the island's population), had cheaper new cars but far more expensive used cars than the RoE. Many, many things were this way, making it lucrative to buy big-ticket goods across the border. As growth flattens, or even goes negative, expect alot less cross border trade.
Posted by: farmer at May 5, 2009 8:13:33 AM
Ireland also had severe cronyism. The political class, the bankers and the property speculators were hand in hadn. The
So the Irish taxpayer is now guaranteeing the liabilities of the Irish banks, and has nationalized 2.
The government also bought off the trade unions, in effect.
What would have been needed, when the Irish housing boom got going, was a dramatic tightening of taxation. Which wasn't going to happen, and, to be fair, wouldn't happen in most countries.
Posted by: valuethinker at May 5, 2009 9:16:43 AM
Best description of the Irish economy the last 10 years I have heard (on Radio 4):
'until 2001, we made money exporting to other people. After that we made money buying and selling each other houses'
Posted by: valuethinker at May 5, 2009 9:17:52 AM
Posted by: ck at May 5, 2009 11:22:33 PM
Once upon a time about one and a half years ago, free market conservatives were touting Ireland's economic growth as a result of a business friendly tax structure. The same with Iceland. Now that we've seen these countries fall into economic collapse, shouldn't these same arguments cut the other way? That their economic ruination is caused by their pro-business tax codes? That is the only logical course, right?
Of course I've yet to see a good analysis document growth of GDP, population growth, agricultural output, imports, exports, energy costs, etc. More banalities and superficialities from the punditry.
Posted by: James at May 6, 2009 12:22:54 AM
James, you're right that Ireland became "The New Hong Kong" for a while. But the only article I remember touting the greatness of Iceland was this from the Guardian.
Posted by: TGGP at May 6, 2009 12:44:56 AM
Ireland has very low corporate tax rate, this has caused many international businesses to locate here. That's why I live here, I'm English. That did indeed create a lot of growth.
However, the boom in house prices had a different drive - low interest rates. I could not believe how cheap borrowing was here. For many years the ECB kept interest rates low to stimulate the North European economies. At that time Ireland needed no stimulation at all. A mortgage for ~90-100% of a houses value could be had for <4% interest at times.
Farmer: There was a lot of arbitrage between north and south. That though is increasing not decreasing. Currently many people close to the north go shopping there because prices are much cheaper there.
Posted by: Current at May 6, 2009 5:25:40 AM
Current
Given the Bank of Ireland could not control interest rates, it could have increased margin requirements: ie the downpayment on a flat as a % of purchase price, or other forms of credit control (strict lending to income ratio of 3 times etc.). It does have the power of financial regulation over its banks. This is one of the problems with allowing deregulation of finance, but for example in the UK the FSA can regulate at the point of contact with the consumer.
The Central Bank and the financial regulator have a lot of powers which are not strictly about interest rates.
However none of the above, nor increases in direct taxation to reduce the consumer bubble, would have been politically acceptable or possible.
This is where we get into the political economy of all this, or, in other words, crony capitalism. See the contributions by the sub prime industry to US politicians, detailed in today's FT.
The bitter reality is that much of the Irish economic growth of the last 4-5 years turns out to have been apparent rather than real. The bubble fueling itself.
Posted by: valuethinker at May 6, 2009 9:18:52 AM
I have to admit there was a bit of schadenfreude from the failure of the schadenfreude of the "de-coupling" of US theorists out there.
Posted by: jd at May 9, 2009 3:37:30 PM
Of course I've yet to see a good analysis document growth of GDP, population growth, agricultural output, imports, exports, energy costs, etc. More banalities and superficialities from the punditry.
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Of course I've yet to see a good analysis document growth of GDP, population growth, agricultural output, imports, exports, energy costs, etc. More banalities and superficialities from the punditry.
Posted by: COMPAQ Tablet laptop battery at May 18, 2009 8:17:06 AM
Of course I've yet to see a good analysis document growth of GDP, population growth, agricultural output, imports, exports, energy costs, etc. More banalities and superficialities from the punditry.
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