Revisiting Irish growth - Marginal REVOLUTION

David Archer, a loyal MR reader, writes to me:

From time to time, you solicit requests for blog topics, and here is my request: revisit the "Irish miracle," a topic you have written about in the past. …Ireland's G.D.P. will fall more than 10 percent from its peak. In August 2006, you speculated that in addition to favorable demographic factors, Ireland's growth could probably be explained by: FDI, education, and a favorable tax regime as bigger factors. What do we understand about Ireland's growth now that we may not have understood 12 or 36 months ago?

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.