Term Paper on "GDP and Economic Growth in Ireland"

Term Paper 5 pages (2337 words) Sources: 5

[EXCERPT] . . . .

Ireland's Economy

Ireland's banking system which for over a decade was a financial global powerhouse, suffered an ignominious fate when Irish central bank regulators proposed "to nationalize its banking sector after its government uncovered a €24 billion ($33.9 billion) capital shortfall in the latest round of 'stress tests' of top banks" (Enrich. D. April 1, 2011). The nationalization of the banking sector reflects the troubles with the broader Irish economy after a decade marked by a meteoric rise in the strength and size of GDP and employment. As the Euro zone continues its nascent recovery from the global recession, Ireland's story will continue to play out on the front pages. "Last fall, the spiraling costs of repeatedly bailing out its banks pushed Ireland close to insolvency, forcing it to accept the €67.5 billion foreign bailout" (Enrich. D. April 1, 2011). Ireland from the early 1990's to 2007 grew at a furious pace however, this growth was in two distinct phases, a real growth marked by investment in manufacturing and technology, and an illusionary growth marked by a speculative property bubble. Ireland developed a formula of attracting foreign investment and talent through engendering a competitive economic landscape. What the future holds for the Irish economy remains to be seen however, how the country proceeds from this point will depend to a great extent on an understanding of their economy and policy decisions over the last ten years.

Overview

The Ireland economic growth story of the past decade was the culmination of structural reforms in both the private and public sector set in place in the late 1980's. Once one of the slowest growth economies of the European Union membership, "weighed down by slow growth, high inflation and unemployment, and increasing public debt" (European Commission. October 2008); Ireland transformed itself into a dynamic powerhouse through considerable direct foreign investment, and developments in education and infrastructure. Ireland is a small nation situated in the North Atlantic Ocean with a population of 4.6 million. An economy which for years was built on agriculture now has developed into an export, industry, and services economy with the two latter components representing 29 and 70% of the GDP respectively (CIA Factbook.March 22, 2011). The Irish economy of the 1980's saw "real GDP growth average only about 2.3% per year; total government expenditure well in excess of 50% of GDP; annual budget deficits exceeding 10% of GDP in some years; and public debt increased to 113% of GDP by 1987" (European Commission. October 2008). The turnaround in the economy began in earnest with significant changes to government policy which; "chopped taxes in half, sharply reduced import duties and embraced foreign investment -- a radical transformation that gave birth to the Celtic Tiger and perhaps the most open and vibrant economy in Europe" (Thomas, L. January 4, 2009). As the economy morphed into a European Union financial juggernaut in the 1990's, the foundations of the economic surge of the first decade of the new millennium began to take shape.

Economic Data and Explanations

The 2000- 2011 period saw the rapid increase in the developments of the construction and housing industries as "low interest rates, a wave of inward immigration and a bank lending spree drove housing's share of the economy to 14%, the highest in Europe, from 5%. (Thomas, L. January 4, 2009). The expansion of the housing and construction sectors also the banking and financial service sector explode upward. "Lending to the private sector as a percentage of national income rose from about parity in 1998 to nearly 300% in 2009, with mortgage lending rising seven-fold in the 1997-2008 period and lending to property development rising 11-fold" (O'Carroll, L.N.D.). One of the primary reasons for Ireland's profitable banking sector was government policy on tax rates which engendered a wave of business expansion. "Ireland has the lowest corporate tax rate in the Economic and Monetary Union (at 12.5%). The tax rate attracted banks from all over the world to expand their businesses on the island. As a consequence, Ireland's banking sector expanded substantially" (Bagus, P. November 13, 2010). The period of 1995-2007 saw GDP growth average 6%, inflation fall in a range of between 2 and 7%, and an unemployment rate which fell from 12% in 1995 to 3.70% in 2001 (Trading Economics. N.D.).

The euphoria in the economy which had built over fifteen years formed a significant real estate bubble

"fueled by a toxic combination; abundant cheap international liquidity coupled with a low interest rate (Ireland having joined the EMU) and a foolish pro-cyclical fiscal stance by the government which released a wave of cash which in turn nicely intersected with the Irish love of property. (O'Carroll, L.N.D)

The bubble though inevitably burst when in 2007-2008 "interest rates in Europe began to rise; banks that had steered more than 60% of their loans toward property stopped lending, and asset values plummeted" (Thomas, L. January 4, 2009). From the onset of the financial crisis Ireland has suffered in many ways more so than other European Union countries. "The recession started earlier and its bite has been deeper. Housing prices have fallen by as much as 50%, and bank shares have plummeted by more than 90%" (Thomas, L. January 4, 2009). The most recent economic data limn an economy that has fallen precipitously. "The unemployment rate in Ireland was last reported at 14.6% in February of 2011, real GDP has fallen for 12 consecutive quarters with the most recent decline of 1.60 for Q4 2010, and the inflation rate in Ireland was last reported at 2.2% in February of 2011" (Trading Economics. N.D.).

Sources and Patterns of Economic Growth

The Celtic Tiger's rise to "the fourth most-affluent country in the Organization for Economic Cooperation and Development" (Thomas, L. January 4, 2009) resulted from a similar pattern of growth experienced by the Asian Tigers. "Like South Korea and the Southeast Asian tiger economies, the Irish economy passed through two phases. In the first phase of export-oriented growth, Ireland experienced real growth, especially in manufacturing and services; the growth was foreign investment driven, particularly in high tech" (Bell, W. December 13, 2010). The foundations of Ireland's growth resulted from an influx of foreign direct investment predicated on government policy which made the country one of the most competitive places to conduct business. The second phase of growth however, ultimately caused the deleterious decline just as it had in the Asian economies. In both cases the Asian tigers and Ireland embraced liberalizing their financial sectors. Hot money came flooding in, for investment not in industry or in agriculture but in real estate and the stock market. Overinvestment in real estate led to a collapse in property prices, which led to dislocations in the rest of the economy. (Bell, W. December 13, 2010)

The reality of a bursting speculative bubble in real estate which has infected the entire Irish economy, and forced Ireland to accept a European Bailout demonstrates the ultimate "dangers of illusory growth associated with financial liberalization and property development" (Bell, W. December 13, 2010).

According to economists Paul Samuelson and William Nordhaus there are four wheels of economic growth for a country: the quantity and quality of its labor force, the abundance of its land and other natural resources, the stock of accumulated capital, and perhaps most important, the technological change and innovation that allow greater output to be produced with the same inputs (Samuelson, P. & Nordhaus, W.N.D.). For Ireland the growth cycle which propelled the nation to vibrant economic growth from the 1990's to 2007 constituted a concatenation of three of these forces. Ireland over the period saw the quantity and quality of its labor force rise dramatically with immigration inflows of talented finance and information technology professionals.

Ireland became the premier international location for U.S. investment in information technology, with Intel leading the pack with 5,000 employees, Dell with 4,300, IBM with 3,500, Hewlett Packard with 2,500, and Microsoft with 1,200. By the mid-2000's, tiny Ireland, whose population was no more than 4.5 million, had become the world's leading exporter of computer software and the source of a third of all personal computers sold in Europe. (Bell, W. December 13, 2010)

Concomitant with this influx, the technological change and innovation provided by these firms allowed for rapid growth of the private sector in areas such as finance, services, and construction. These two factors were the drivers of massive increases in productivity. "Productivity growth was the most important factor behind the stronger increase in GDP per capita" (European Commission. October 2008).

The final wheel for Ireland's growth, the stock of accumulated capital was instrumental in their upward trajectory. Direct foreign investment in areas of manufacturing, services, and technology paved the way for the real growth of the 1990's and early 2000's however, this capital infusion throughout the last decade was focused on speculative property development which actually decreased the availability of capital stock necessary to create sustainable growth.

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