ECONOMICS: With the Irish economy now well into its third year of low single-digit GNP growth, most people seem to accept, at an intellectual level at any rate, that the Celtic Tiger has well and truly had its day, writes Jim O'Leary.
Still, there is plenty of disagreement about what is likely to happen next.
One school of thought has it that the economy is just having a bit of a breather, and that before much more time has elapsed, it will gravitate towards its potential growth rate, commonly estimated at around 5 per cent. According to this view of the world, the Tiger will be reincarnated as the Celtic Cat, a less impressive species perhaps, but still sleek, agile and enviable.
Another school of thought sees a rather darker set of prospects: a period of sluggish growth stretching ahead for several more years, with the economy possibly flirting with recession and unemployment levels drifting steadily upwards albeit from historically low levels.
Where one stands on the question of the economy's medium-term prospects depends very much on how one interprets the Celtic Tiger period. Those who are sanguine about the future tend to be those who attribute Ireland's outstanding economic performance of the 1990s largely to events, processes and patterns of behaviour that are essentially domestic in origin: the plentiful supply of labour; the superior quality of our educational system; the institution of social partnership; and the pursuit of conservative fiscal policies.
The core argument of the optimists is that nothing much has changed. Our young people are as well educated, as skilled and as flexible as ever, even if not in quite as plentiful supply as in the 1990s. Our policy-makers are as committed to the pursuit of sound fiscal policies. Our social partners are as committed to partnership. In other words, Ireland's fundamental attractions as a business location are pretty much intact and likely to remain so. Indeed, we are the stronger for having achieved what we achieved during the 1990s, or so the story goes.
For one thing, our young people have become more confident, more attuned to success and less tolerant of failure. In these circumstances, there is nothing to fear (except perhaps the corrosive influence of those who are less optimistic): the slow growth currently being experienced is just an aberration.
There is a good deal of hubris in the optimists' analysis, but there is a good deal that rings true too. Plentiful labour supply, a relatively skilled and flexible work force, and the pursuit of responsible fiscal policies all played a part in shaping the extraordinary economic performance of the 1990s. However, that extraordinary performance would not have been achieved without an exceptionally favourable combination of external events, including the events leading up to and immediately following on from the launch of the euro.
Those events radically altered the exchange rate and interest rate environment in a way that imparted a powerful boost to pretty well the full gamut of Irish economic activity. Ireland moved from having a regime of high and volatile interest rates to a regime of very low and comparatively stable interest rates. At the same time the economy experienced an enormous currency depreciation.
The problem is that the interest rate element of this boost was once-off in nature, while the exchange rate element was reversible. The once-off nature of the interest rate boost may not be fully acknowledged as such because the boost was delivered over an extended period of time. The reversibility of the exchange rate is more obvious, painfully so to those firms whose competitiveness is sensitive to movements in the sterling exchange rate.
There is of course another dimension of the international environment that played a big part in shaping Ireland's economic performance during the 1990s, namely the buoyancy of the US economy. That buoyancy, especially the dynamism of the so-called 'high-tech' sectors, was communicated to Ireland through foreign direct investment (FDI) inflows, and was manifested here most visibly in the tens of thousands of jobs created by US multinationals in sectors like electronics and software development and in upstream sub-supply industries.
But it would be mistaken to think that FDI was the only way in which US economic buoyancy affected Ireland during the 1990s. There were several other channels. The rampant US consumer meant bigger markets for Irish exporters. The bubble-driven US equity market drove equity markets elsewhere, including the Irish market, which must have boosted consumption elsewhere, including Ireland. The thirst for US assets led to a big appreciation of the dollar, which boosted the competitiveness of Irish producers.
The implication of all of this is not that the Irish economy is condemned to moving in lockstep with the US, but that the achievement of the optimists' much-vaunted 5 per cent medium-term growth rate for the Irish economy, a demanding enough target in the light of other considerations, will be rendered all the more difficult in the absence of a US recovery. It will become well-nigh impossible if the pessimists on the US - those who think that there are yet more bubbles to be burst there and that the economy is headed for a protracted period of deflation - are correct.
Jim O'Leary is currently lecturing in economics at NUI-Maynooth. He can be contacted at jim.oleary@may.ie
