- Todd Hirsch, Senior Economist, ATB Financial
For the better part of this decade, Ireland has been held up as the shining example of how to harness the forces of globalization. It was dubbed the Celtic Tiger, rising from little more than a sad potato farm to a fiercely competitive centre for software, pharmaceuticals, and high-tech research.
Now, thanks to the current global financial meltdown, the Celtic Tiger has been sedated, chained up, and thrown in a cage. Its once hot real estate sector has turned ice cold, and exports have plummeted. Ireland’s government now forecasts the economy will shrink by more than 1.5% this year and by another 1.0% next year, while the unemployment rate will rise from around 4% in 2007 to 7.3% in 2009.
Western Canada can learn from both Ireland’s spectacular rise over the past 20 years and its subsequent fall over the past six months.
First of all, the West can take some tips from Ireland’s economic turnaround. Back in the early 1980s, it was the backwater of the EU, plagued with high unemployment and a steady outflow of migration. But with a few key policy initiatives and a lot of political will, it was able to mount a stunning comeback. By the early 2000s, it was an economic powerhouse.
Cutting taxes in the late 1980s is credited with much of the reversal of fortune; yet it would be a mistake to suggest that low taxes was the only – or even the most important – factor. Massive investments in public education in the 1960s, a strategy of targeting winning sectors, and aggressive pursuit of foreign direct investment did most of the heavy lifting in Ireland. On top of it all, Ireland emphasized the important role that creativity and imagination play in generating wealth.
Western Canada can learn from these actions, particularly the emphasis that Ireland placed on fostering a bright, well-educated and creative workforce. Of course, it makes no sense to replicate exactly what Ireland did. The winning sectors that worked for Ireland won’t be the same winning sectors that work for the West.
The biggest lesson of all, however, is that it is possible to completely re-invent an economy. Ireland didn’t grow into the Celtic Tiger by growing bigger potatoes, or by implementing a better agricultural policy to keep more people at home on the farms. It went a totally different direction, getting into the globalization game and proving it could win.
But now, in an almost cruel twist of irony, Ireland’s economy has the distinction of being the very first European country likely to enter recession. What happened to the Celtic Miracle?
Part of it was a classic real estate bubble. Housing and commercial real estate prices had been on fire for the better part of a decade, especially in Dublin where apartment rents and house prices were excluding many from the market altogether. With the whiff of the global market downturn, housing prices dropped steeply.
Another part of the problem for Ireland is that exports have stalled. Having hitched their wagon so tightly to the US for foreign direct investment, Ireland is now suffering more than other EU countries from the American malaise.
A third element has to do with the government’s fiscal position. Tax revenues in Ireland are drying up quickly. After having kept taxes so low for so long, Ireland has very little fiscal room in which to maneuver. In a crisis-management style budget unveiled earlier in October, the Irish government is now raising income taxes and slashing spending – actions that are certain to exacerbate the economic slowdown.
The lesson for western Canada? Low taxes are great, but there will invariably come a time when the economy is sputtering, and a dose of tax cuts will be just what the doctor orders. If a government is busy cutting taxes during the good economic times, there won’t be room to cut taxes during the bad economic times.
Ireland’s economic fall from grace will be temporary. Along with the rest of the global economy, it will be back. It may take a year or two, but the investments it has made in education, attracting investment, and fostering a creative economy will once again prove to be wise.
Western Canada needs to pay attention to Ireland’s experiences. Investments in education will always pay dividends. Strategic targeting of foreign investment holds great potential. But when it comes to cutting taxes as a means of spurring economic growth, it is all in the timing.
Todd Hirsch is Senior Economist with ATB Financial. His paper “More Than Just Lucky Shamrocks: The Re-Invention of Ireland and Lessons for Western Canada” will be released by the Canada West Foundation on November 6, 2008.
