How the tiny island country managed to stage a meteoric economic rise only to fall in a similarly spectacular fashion.
It wasn’t long ago that U.S. multinational corporations entering European markets would almost always make tiny Ireland their first stop.
The draw of what used to be called the “Celtic Tiger” or the “Celtic Miracle” was obvious: Relatively low taxes and regulations, combined with a fairly young, smart, and English-speaking workforce. And because the island state is a member of the European Union, this meant that selling goods and services to other European countries was relatively cheaper and easier.
But Ireland wasn’t always so market friendly. And, on Sunday, as leaders dealing with the country’s huge banking crisis were offered an $113 billion bailout from European nations to keep its economy afloat, it’s worth reflecting on the country’s long history of peaked ups and downs.
For most of the 20th century and even well into the late 1980s, Ireland’s economy was pretty dismal, marked by high unemployment and huge government debts. It was viewed as a backwater economy, at least by European standards. The poor and hungry fled to America and other parts of the world, while much of its workforce worked jobs in agriculture. Unemployment in 1987 was at about 18%, while debt relative to GDP rose to 120%. There was even some talk of a possible default.
Ireland knew it needed to change. Around the late 1980s, the country pushed through dramatic economic reforms helped by the support of then Prime Minister Charles Haughey. Reforms essentially helped open the economy to the rest of Europe and lure a remarkable level of foreign investors, from Intel (INTC) to Microsoft (MSFT), by way of lower corporate taxes and regulations.
The country saw tremendous economic growth in the 1990s and well into the late 2000s, driven largely by a surge in exports of everything from pharmaceuticals (some of the world’s most popular drugs are made in Ireland, including Pfizer’s (PFE) Viagra and Lipitor) to high-tech goods and services. It benefited from a relatively well-educated workforce and it enjoyed easy access to other economies as a member of the European Union.
What goes up…
Indeed, virtually all economies rise, fall and then rise again. But Ireland’s ups and downs are arguably unique in that this relatively small and unsuspecting economy rose suddenly into global stardom, and almost just as suddenly, has fallen into turmoil.
For its size, it seems as though Ireland’s rampant rise came almost out of nowhere. The success story starting in the 1990s carries a certain mystique, and in a way, it could be argued that its economic appeal was almost accidental.
Whereas the annual growth rate of income per capita had historically been around 3.5%, it surged in the 1990s to about 6%. Indeed, part of what explains the giant leap is that Ireland started at such a low base, but even by historical standards – such as the United States industrial revolution during the 19th Century – the growth spurt was largely unique for a developed economy, says Fordham University finance professor Jim Lothian. At one point, Ireland’s GDP growth reached 10%.
But now, the luck of the Irish is running thin. And perhaps what’s more unique about its rapid rise is the similar abruptness of its fall. Over the years, as the costs of everything from labor to materials rose, the economy shifted from a boom mostly in foreign investments and exports to a boom driven by home purchases and residential construction. Ireland’s new wealth essentially contributed to huge demands for new housing amid a period of cheap borrowing. Banks lent recklessly during the housing boom, and in 2009, losses from bad loans began piling up, prompting today’s huge bailouts.
An economy that once drew some of the best and brightest business talent is now seeing people flock elsewhere for work. Real GDP growth has slowed dramatically — with expectations that it would grow only by an average of 2.75% in the years from 2011 to 2014. Meanwhile, unemployment hovers around 13.5% and government debt is expected to peak at 102% of GDP in 2013.
Ireland’s debacle underscores a host of economic policy issues, including limits of the euro as the main tender for 16 of the 27 members of the European Union. Recently, officials unveiled a massive four-year spending plan that aims to tackle the country’s monstrous debt. But it’s not clear what Ireland’s balance sheet will look like years from now or if it will ever regain the title of Celtic Tiger as the debt crisis spreads across Europe.
Also on Fortune.com:
What happens to Bank of Ireland’s U.S. leveraged finance biz?
On Ireland and taxes: Let’s try this again