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What's Really at the End of the Rainbow

by TGeraghty Tue Jul 5th, 2005 at 06:01:49 AM EST

Promoted from the diaries and horribly butchered by Colman.

As Colman's "Way of the Leprechaun" demonstrates, Tom Friedman's analysis ("The End of the Rainbow, "and "Follow the Leapin' Leprechaun") of Irish economic success is extremely misleading about both the nature of that success and the implications of that success story for countries like France and Germany.

There are good discussions of the factors behind the Irish economic miracle here and here (the comment, not necessarily the post to which it was attached). To summarize the main points:

  • Increased labor supply
  • Foreign Investment and EU Single Market
  • Deregulation and Competition Policy
  • Budget Policy
  • The Social Partnership
  • Education investments
  • EU Structural and Cohesion Funds

  • Increased labor supply - via a late baby boom, modest immigration into Ireland during the 1990's, and rising labor force participation rates, particularly for women

  • Foreign Investment and EU Single Market - key to Ireland's ability to attract foreign direct investment

  • Deregulation and Competition Policy - introduction of competition policy was a major stimulant in the services sector; trade liberalization, such that In 1999 the Organization for Economic Co-operation and Development (OECD) rated Ireland in the top three countries in terms of economic openness.

  • Budget Policy - especially low corporate tax, fiscal consolidation and other fundamental economic reforms;

  • The Social Partnership - largely based in the social consensus model of the Nordic countries and Austria; trade unions made a commitment to wage moderation in return for a government's commitment to the welfare state.

  • Education investments - Ireland invested important financial and human resources in education since the 1960s with the introduction of free secondary education and grants for third level education. By the 1990s the Irish workforce was amongst the best educated in Europe. And they all could communicate efficiently in English. Not only had Ireland a supply of well qualified entrants to the labor market, many of those who emigrated in the 1980s were to return back to Ireland during the boom.

  • EU Structural and Cohesion Funds - The EU Structural Funds have been vital to Ireland's development through investment in transport infrastructures, education, training and industry.
So Friedman is not entirely wrong, but he downplays or outright ignores two key non-neoliberal factors that don't fit into his worldview - the "social partnership" that Henry Farrell talks about, and the EU structural funds.

Also, some of what Friedman says is just flatly wrong. This pretty much sums up his argument:

There is a huge debate roiling in Europe today over which economic model to follow: the Franco-German shorter-workweek-six-weeks'-vacation-never-fire-anyone-but-high unemployment social model or the less protected but more innovative, high-employment Anglo-Saxon model preferred by Britain, Ireland and Eastern Europe.

. . . the only question is when Germany and France will face reality: either they become Ireland or they become museums.

. . . the German and French political systems will experience real shocks in the coming years as both nations are asked to work harder . . .

There is so much wrong with this that it is hard to know even where to begin.

First, there is no monolithic "Anglo-Irish" economic model. Important aspects of Irish economic success (social partnership, regional development funds) have roots in the Scandinavian and Continental models, as Brad DeLong has suggested.

Friedman, in his earlier piece, actually does pay Scandinavia a backhanded complement:

[In] Europe today[,] all the innovation is happening on the periphery by those countries embracing globalization in their own ways - Ireland, Britain, Scandinavia and Eastern Europe - while those following the French-German social model are suffering high unemployment and low growth.

I wonder when Friedman is going to write columns explicating the success of the Nordic countries? I'm not holding my breath.

Second, there are other ways in which Ireland's economy does not differ as much from France or Germany as Friedman's analysis would have you believe.

Take fiscal policy, for instance. Friedman (and many conservatives and business types) seem to believe that Ireland is an American-style low-tax, low government spending type of economy. While it is true that Ireland does have the lowest corporate tax rates in Europe, the Irish government in 2003 spent 44% of national income, compared to 49% for Germany, 54% for France (and 35% for the US). The Irish have a national health service and "basically free" college education, too.

Can it really be that extra 5% of national income devoted to public spending that is killing the German economy? Seems unlikely.

There is also the issue of working hours. Friedman suggests that the Irish work harder than the lazy Germans or Frenchmen, committed to their 35-hour work weeks come hell or high water. Friedman would thus probably be surprised to find out the following:

Annual hours worked per person in Ireland have actually fallen by about 15% since 1990 (from 1,925 to 1,675). So the Irish now work fewer hours than do American workers (1,820 hours per year), but still more than do the French (1,550 hour per year) or Germans (1,450). It's pretty clear in which direction the trend is going, however. How soon before Friedman starts writing columns berating those lazy Irish? Probably as soon as the next economic downturn.

Then there's the issue of human capital investment. Friedman writes as if Ireland invented the idea, but the following charts show that France and Germany stack up pretty well, too:

Education Spending

Ireland (5.7% of national income) spends more than Germany (5.3%), but less than France (6.1%).

Participation in Secondary Education

France and Germany lead the way here.

University Education Attainment

Ireland (32% of students with university degree) again trails France (35%), but leads Germany (22%). Remember, though, that fewer German students attend university because of the apprenticeship programs that provide industrial workers with skills training:

The point here is obviously not to belittle the real economic progress that Ireland has made in the last two decades. But the idea that Ireland has discovered some new "economic model" that is completely at odds with what France and Germany are already doing is ludicrous.

Excellent post, very informative, thank you!!

(I recommend this for the front page!)

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia

by whataboutbob on Tue Jul 5th, 2005 at 06:22:16 AM EST
Good show, Colman!! (you front paged it before I finished my comment)

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Tue Jul 5th, 2005 at 06:24:24 AM EST
[ Parent ]
Got there before you! It's at your cost though: I was going to promote your Work Ethic diary, but this one is too good to miss!

We're still trying to work out how many stories we can do a day without swamping the front page completely.

by Colman (colman at eurotrib.com) on Tue Jul 5th, 2005 at 06:25:36 AM EST
[ Parent ]
This is an awesome article, so you have no argument from me!!

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Tue Jul 5th, 2005 at 08:04:58 AM EST
[ Parent ]
Where was the diary butchered? Everything that I wrote is in the extended entry, and thanks for streamlining the preview part!
by TGeraghty on Tue Jul 5th, 2005 at 06:29:12 AM EST
Seriously, thanks very much for that. I've wanted to put that story together, but I simply don't have the time to do it.
by Colman (colman at eurotrib.com) on Tue Jul 5th, 2005 at 06:33:46 AM EST
[ Parent ]
I'm not sure I agree about increased labor supply and deregulation; but definitely on the rest.

BTW, what's up with the two Ireland columns in the graphs? If I decrypted it correctly, it's a GNP/GDP thing - I don't have the stomach now to read the FlatMan, but does he even make a notice of this circumstance?

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Tue Jul 5th, 2005 at 06:35:13 AM EST
They definitely both happened. I'm from just before the peak in births, and there has been both significant immigration and returning emigrants.

Deregulation and promotion of competition has also taken place, and there has been a big clamp down on company and tax law, which is also important. You can afford to reduce taxes if everyone is paying their share.

by Colman (colman at eurotrib.com) on Tue Jul 5th, 2005 at 06:39:45 AM EST
[ Parent ]
I didn't mean they didn't happen, I meant to express scepticism that they really were factors.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Tue Jul 5th, 2005 at 07:13:25 AM EST
[ Parent ]
Essentially, GDP is the value of all the final goods and services produced in Ireland, while GNP is the portion of income that those who live in Ireland get to keep.

For most countries, there is little difference between the two, but for small open economies like Ireland, in which a substantial fraction of the production capacity is foreign-owned, some of the income that that capacity generates leaves the country, and so there can be a larger difference between GNP and GDP.

In Ireland's case, I believe GDP is something like 10% to 15% higher than GNP.

by TGeraghty on Tue Jul 5th, 2005 at 02:13:25 PM EST
[ Parent ]
What's the effect (not mentioned here or on Colman's earlier post, but mentioned by a commenter on Henry Farrell's post at Crooked Timber) of the property boom?

Is it what FriedPotatoes' "Anglo-Irish" model boils down to? (Sorry for that fried and boiled, but having actually read FriedBollocks, my metaphors are screwed for the week).

A shared bubble?

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Jul 5th, 2005 at 07:27:56 AM EST
Well, I'd argue that a good portion of the property boom here is demand driven. 60,000 or so people left school every year between (very roughly) 1985 and 1995. They all want houses, and they now have the money to buy them. Houses aren't being built fast enough and old people aren't dying fast enough, so the price rises rapidly.

Prices will level out, and maybe drop a bit, when supply catches up with demand.

by Colman (colman at eurotrib.com) on Tue Jul 5th, 2005 at 07:38:06 AM EST
[ Parent ]
OK, but what effect does the property boom have on the overall economy?
by afew (afew(a in a circle)eurotrib_dot_com) on Tue Jul 5th, 2005 at 07:50:41 AM EST
[ Parent ]
Contributes lots of economic activity: building, selling, lending, furnishing etc.

There is some leveraging of equity, but I don't get the impression that its reaching very dangerous levels. Personal indebtedness is rather lower here than in the UK or US as far as I recall.

by Colman (colman at eurotrib.com) on Tue Jul 5th, 2005 at 08:07:35 AM EST
[ Parent ]
I think this is an interesting question, because if you remember, about 5 years ago everybody was talking about the "Dutch Miracle" and its challenge to the moribund economies of France and Germany.

Like the Irish story, the Dutch story was partly a combination of market-friendly reforms (of the labor market mostly) and social partnership to moderate wage demands.

But the Dutch boom, as Jerome has indicated elsewhere, was also driven by a property bubble, which has now burst, leading to an economic downturn, and people don't talk about the "Dutch miracle" so much anymore.

I wonder if something similar may be happening in Ireland. As the table indicates, its property market has been pretty frothy over the last decade or so:

by TGeraghty on Tue Jul 5th, 2005 at 02:20:09 PM EST
[ Parent ]
I find myself feeling increasingly pissed off at what I see is an attack on the European way of life, by the likes of Fried-man and his American hitman cohorts. Europe has absolutely nothing to be defensive about, and everything to be proud about, in what I see as a very interesting and important economic and social laboratory, where each country here is trying out new ways to have a healthy balance between good business and a good social climate. I can't help but see any American complaints about the European system as just another attempt at their trying to dominate the world with their system. Screw that...you don't want their problems.

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Tue Jul 5th, 2005 at 08:03:47 AM EST
I agree that this was a valuable post, and I also agree with most of the comments. Being of (very) Irish descent I am very happy to see this success story after centuries in which Ireland's chief export was it's poor and their cheap labor. I am also wondering if the role of the Church has declined over the last few decades, and if so whether or not this is also a factor in the recent economic dynamism. (Of course, such a decline would be an expected side effect of increased education, even if attachment to Catholicism remained a national trait.) Another factor that has been little mentioned is Ireland's traditional neutrality which ought, I suppose, to minimize the amount of money wasted on the military extravagances. One has the feeling that Ireland shows what can be reasonably expected if a country adopts reasonably good policies and exploits external aid without vicious levels of corruption. But on this latter point I'm sure the "real Irish" are far better able to comment.

Hannah K. O'Luthon
by Hannah K OLuthon on Tue Jul 5th, 2005 at 09:01:41 AM EST
There's about a dozen front-page stories in that lot!

The role of the Church has been massively reduced. Neutrality does help, though I note that the US cost us about 10M last year in landing fees at Shannon, and the vicious levels of corruption have been greatly reduced.

by Colman (colman at eurotrib.com) on Tue Jul 5th, 2005 at 09:49:57 AM EST
[ Parent ]

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