Evidence in other countries may suggest that large and efficient financial systems are key contributors to growth, but few commentators have suggested that the Celtic Tiger had any special financial fuel in its tank, according to World Bank economist Patrick Honohan.
"Despite the striking achievements of the International Financial Services Centre (IFSC), there is little evidence that Irish finance made the leading contribution to the 20-year growth success of the economy," said Dr Honohan in a special article in the Economic and Social Research Institute's (ESRI) Quarterly Economic Commentary, entitled To What Extent Has Finance Been A Driver of Ireland's Economic Success?.
While IFSC employment at the end of 2005 amounted to 20,000 - or almost 40 per cent of employment in financial services - this still amounted to barely 1 per cent of total employment in the economy, he said. Tax yield was less than 2 per cent of total tax revenue.
But he said this should not cast doubt on the importance of putting in place the underlying policies and legal, informational and regulatory structures that help make finance effective. "Arguably, Ireland has fostered many of these underlying strengths," he said.
The export of financial services from the IFSC has been a notable success and Ireland has been relatively free of the bank insolvency problems which have plagued many other countries in recent decades, he said.
But the data does not show Ireland's financial sector as standing out in terms of scale or efficiency, Dr Honohan said.
Nevertheless, the business sector and, indirectly, Irish mortgage borrowers have had access to global finance. There has been a rapid recent growth in foreign borrowing by banks to finance their mortgage lending. In the past few years, banks borrowing from abroad to lend to Irish residents has soared from 10 per cent to 41 per cent of gross domestic product (GDP), according to Dr Honohan's paper.
In the past, financial markets served a watchdog role and penalised over-borrowing with high interest rates. But now that the Republic is in the euro zone, Dr Honohan notes that the watchdog is muzzled and even high rates of borrowing can proceed without any warning from the markets.
