Though their economies are strikingly similar, Ireland weathered thestorm of 2001 and 2002 better than Singapore. Dan O'Brien examines the reasons why

How has Ireland really fared since the global downturn took hold in the second half of 2000?

To measure the economy's performance against other transatlantic economies is to compare apples and pears both because Ireland's exposure to developments beyond its shores is almost unique and because its growth potential is higher (2002 marked the Republic's tenth consecutive year as the EU's fastest growing economy).

For like-with-like comparison, one must look to where the tiger economy species originated: East Asia.

The economies of Singapore and Ireland are uncannily similar. Both are small islands of four million people with per capita GDP of $30,000 (€25,450.7). Neither has much in the way of natural resources other than people. Both are highly dependent on international trade and investment. Both their industrial bases are largely foreign-owned and focused on electronics and chemicals.

And both have, until recently, been known for their eye-widening rates of growth. Comparison is made still more apposite because both economies went into the global downturn expanding at near identical growth rates of around 10 per cent.

So when the reckoning came, how did each fare? While both were hit when world trade stagnated, previously gushing foreign direct investment flows went into reverse and the powerhouse of the global economy - the US - ran out of steam, Ireland has rolled better with the punches.

In 2001, seemingly invulnerable to foreign woes, Ireland grew strongly. Singapore, in stark contrast, plunged into recession, suffering its biggest contraction in output in living memory. By 2002, things were more equal. Singapore got its head back above water, growing by just over 2 per cent. In GDP terms - relevant when the wealth-creating potential of the entire economy is being measured - Ireland still grew three times faster.

So why did Ireland weather the 2001-02 storm better than its identical tiger twin? There are three identifiable reasons: its exports were stronger; its investment higher; and, closely related to the first two, its consumers more resilient.

Start with exports. According to the World Trade Organisation, Ireland and Singapore are the two largest per capita exporters in the world. But their performances have been markedly different over the past two years. Appearing to defy the laws of economic gravity, Irish exports continued to boom in 2001.

It was only in 2002 that the effects of weak global demand took hold, causing exports to stagnate. Not so for Singapore. Its exports in 2002 were still well below 2000 levels.

Why did Ireland do better? First, demand in Singapore's markets in Asia weakened far more than Ireland's in Europe and America. Second, while Singapore's real effective exchange rate hardly budged over the period, Irish exports were assisted by an under-valued exchange rate until recently (euro parity with the dollar was reached only in December last year).

Finally, despite justified concerns about competitiveness, still-strong productivity growth in Ireland and generally moderate wage demands have, until now at any rate, prevented wages from overshooting (unit labour costs relative to other euro area economies were broadly steady in the 2001-02 period, according to the Central Bank).

Though Singapore also controlled its wage costs, Ireland's achievement is arguably greater given that workers were not facing the shock of a deep recession.

Like exports, investment in Ireland has also been stronger than in Singapore. Irish spending on capital goods was roughly the same in 2002 as it was in 2000.

Not so in Singapore where investment expenditure collapsed to 1995 levels. What gave Ireland the edge? As both countries suffering falling spending on plant and machinery, the continued boom in Ireland's home-building was the main reason.

More positively for both, inflows of foreign direct investment (FDI) have held up well all things considered. Though the correlation between FDI and overall capital expenditure is usually highly erratic, it is closer for both these tiger economies because of the unusually large amount of high-additionality Greenfield FDI they attract (mergers and takeovers, which dominate most rich countries FDI flows, nearly always add less to the recipient economy).

The third pillar supporting economic growth has been individual spending. Irish consumers have retrenched compared to the partying late 1990s, but they have not panicked, ensuring that the most important source of employment - the non-traded services sector - was sustained. Singaporean spenders have had a worse time of it. Joblessness, though still below 5 per cent, has risen more sharply than in Ireland and incomes growth has been anaemic. As a result, private spending has been feeble, adding almost nothing to overall growth.

So Ireland has performed well not only compared to other economies in Europe, but also when measured against a similarly globalised economy. This softest of landings, however, does not mean it is time to heave sighs of relief. The conditions for the Irish economy's perfect storm are out there. Export markets look more fragile by the day. The euro's rise seems unstoppable. Non-wage costs are growing fast. Margins are being squeezed. Unemployment is rising. The worst may be yet to come.

Dan O'Brien is a senior editor at the Economist Intelligence Unit. He also writes the unit's reports on Ireland.