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Hard Landing

John Sweeney
Ireland’s economy changed from being the EU’s “basket case” in the mid-1980s into its “shining light” by the end of the 1990s. Confirming its new status, it continued to grow at double the rate of other EU15 economies up to 2007. Since the middle of 2008 however, its light has been severely dimmed. Few economies are being hit as hard by the global financial and economic crisis and the collapse of a domestic housing boom.

The benign take on the particularly straitened circumstances of the Irish economy is that an otherwise impressively managed and deeply transformed economy is being tested, as never before, by a “perfect economic storm”. The less kind interpretation is that risks which were evident for some time, and warned about, have materialised together and exposed significant flaws in the structure of Ireland’s economy and the policies that have been followed. This essay will steer a middle course between invoking misfortune and flagellation. On the one hand, it will point to areas where a significant degree of domestic policy failure is evident but conclude that domestic responsibility for “the most challenging fiscal and economic position in a generation” (Minister for Finance, Budget speech, October 2008) should not be exaggerated. On the other, it will point to a set of factors where significant domestic policy successes should be acknowledged but conclude that new circumstances are raising the bar for success and that there is, simply, no room for complacency.

The policy areas where an element of culpability is strongest include the handling of Ireland’s housing boom, the management of the country’s largest financial institutions, the conduct of fiscal policy and the pace of reform in the public sector. The policy areas where particularly solid transformation has been achieved include the upgrading of the manufacturing sector, the development of a large traded services sector, the steady improvement in human capital and in labour market policy generally and the emergence of new bases to competitiveness in Dublin and other regions.

But first, at a time when new figures for how bad things are - and may yet become - for the Irish economy keep appearing (making this essay a particularly perilous undertaking), the most recent versions of two flagship publications, the OECD Economic Outlook (Volume 2008, Issue 2, 300 pp) and the European Commission’s Economic Forecast: Autumn 2008 (European Economy 7/2008, 180 pp) allow us to view Ireland’s economic downturn in a comparative context.

With the exception of Iceland, the OECD records that the downturn in the Irish economy over the two years 2007 and 2008 has been the most severe of any experienced by its member states. Ireland’s GDP swung from growth of 6 per cent in 2007 to -1.8 per cent in 2008, a drop of almost eight percentage points in just two years. The European Commission reckons that Ireland’s economic downturn in 2008 and 2009 will be equalled only by that of Estonia and Latvia in the EU27. Domestically, forecasts for 2009 have deteriorated markedly as the year drew closer. They currently range from -0.8 per cent (the government’s estimate in October) to -3.2 per cent (the estimate of Davy Research in December).

The reasons for Ireland’s particularly severe downturn are not hard to find. A precipitous drop in residential house construction has coincided with a rapid slowing of export growth. House-building in Ireland assumed a scale in the economy unparalleled elsewhere in the EU or OECD. By 2007, house-building and improvements alone accounted for 16 per cent of GNP, up from 9 per cent in the year 2000.(1) The European Commission study anticipates that investment in construction in Ireland will plummet from these dizzy heights, by -18.6 per cent in 2008 and -22.3 per cent in 2009, declines that are multiples of what the next two countries worst hit by housing contractions are to experience (Spain and Estonia).

If it weren’t for housing, how bad would things be? Alan Barrett and others estimate that GDP would be higher by 1.8 per cent in 2008 and 1.4 per cent in 2009 in the absence of the contracting construction sector.(2) While this would be a distinct improvement on the negative growth actually being experienced, it is still far behind what Ireland’s economy has recently achieved and insufficient even to maintain employment levels. The principal reason the rest of the economy is slowing is that exporting is getting more difficult. As a small, open economy, Ireland relies hugely on exporting. A significant proportion of its exports go to the USA and UK (37 per cent of goods exports and 32 per cent of services exports in 2007), two markets where the demand for imports is falling particularly sharply as their businesses and consumers retrench and, in the case of the UK, made even more difficult by sterling’s devaluation against the euro.

Two studies of a quite different type – assessing the performance and prospects of Ireland’s economy in the medium to long term – throw further light on the sensitivity of Ireland’s small open economy to global economic conditions. John FitzGerald and others (2008) find that the responsiveness of the Irish economy to global conditions has markedly increased as its export sector has restructured.(3) For example, they estimate that a one per cent increase in global economic activity in 1990 “pulled up” Irish GDP by 0.85 percentage points four years later. By 2006, however, such an increase was estimated to pull the economy up a full 1.32 percentage points four years later (op cit, 17). In other words, the sensitivity of Ireland’s economy to international conditions has increased by more than 50 per cent. In a complementary fashion, the National Economic and Social Council (NESC, 2008) highlights how changes in global economic activity have greater absolute employment effects on Ireland’s large, diverse and labour-intensive non-traded sector than in the traded sector itself.(4) For example, a swing from strong to weak growth in the world economy would see 14,500 jobs lost in high-tech manufacturing but 26,000 lost in health and social work alone (op cit, 137). In plainer terms, the gist of these two studies would have us expect that, should the world economy sneeze, Ireland’s traded sector will catch a cold and its non-traded sector a flu.

This major exposure to the world economy is additional to the collapse in house-building in Ireland. As a consequence, the OECD reckons the cumulative drop in domestic demand in Ireland in 2008 and 2009 will be more than six times greater than in Spain, the country with the next worst contraction (-10.2 percentage points in Ireland as against -1.6 in Spain). This brings us to the final and most acute manifestation of the Irish economy’s straitened circumstances at the current time, the government’s fiscal position.

Ireland’s public finances are predicted to record the euro area’s highest deficits in 2008, 2009 and 2010, of -5.5, -6.8 and -7.2 per cent of GDP respectively. This steady deterioration is based on the assumption that, after the Budget introduced for 2009, policy is left unchanged. In turn, Ireland’s debt/GDP ratio is predicted to jump twenty-one percentage points, from under 25 per cent in 2007 to over 46 per cent in 2010. While this level will still be below the 60 per cent Maastricht reference line and give Ireland a mid-ranking among the sixteen euro area countries in 2010, the speed of the rise is exceptional. Spain is predicted to record the second largest rise in its debt/GDP ratio, but of eight percentage points.

Data like this confirm that Ireland’s economy, now and for the next two years at least, has lost any status it had as a role model. It is being exceptionally squeezed by a hard landing to its construction boom, the international credit crunch and the decline in global economic activity. The speed of the turnaround is exceptional; no other EU economy appears to be as susceptible to swing from bust to boom, and back again. It appears to strengthen the case for viewing the strong performance of the Irish economy since the early 1990s as not just a country “catching up” with best practice elsewhere (the perspective of convergence theory), but as a region exhibiting the high degree of mobility of people and capital that typically comes from its insertion in a larger economic setting. Certainly, the Irish economy has shown a quite remarkable capacity to draw in (or send out) people and capital when the conditions are right. And the conditions were particularly good from the mid-1990s until about 2007. But of course the reverse side of such a remarkable capacity to expand is that contraction may be similarly rapid.

As already stated, house-building assumed a huge weight in the Irish economy, in particular from 2000 onwards. Regret now that a hard rather than soft landing has occurred should not obscure from view that fundamental demographic and economic factors drove much of the demand and justified a surge in house-building. The supply response was quite phenomenal – by 2006, the housing stock was 50 per cent bigger than in 1996 – and even a source of some envy in the UK, where the supply response was notably more sluggish. Early concerns focused largely on the extent to which the price charged for land was driving house prices higher than necessary and on the sustainability of the commuting patterns attending much of the new housing built far from people’s places of work and without public transport (NESC, 2004.(5) (Sadly, the energy rating of the new housing was not focused on sufficiently soon for a major opportunity to develop a highly energy-efficient housing stock to be seized.) As the decade wore on, however, and levels of house-building and prices both continued to rise, it became more of a concern that low real interest rates, aggressive lending practices by financial institutions and rising property values as a one-way investors’ bet were putting a speculative demand for housing into the driving seat.

The scale of borrowing by Irish financial institutions on international money markets in order to relend the same money to property developers and house-buyers in Ireland became huge. For example, by the end of 2005, Patrick Honohan calculated that the net import of funds by these institutions for such purposes amounted to 41 per cent of GDP, a rise from 10 per cent just two years earlier. But he concluded that the jury was “still out on whether this credit growth is an autonomous driver of house prices or the response of a globalised credit supply to demand from house buyers [in Ireland]” (Honohan, 2006)(6). An IMF team in August 2006 was more sanguine. It accepted that the quality of much lending by Ireland’s financial institutions would deteriorate in the “extremely unlikely” event of a significant slowdown in growth but considered that the financial system overall “seems well placed to absorb the impact of [such] a downturn” (IMF, 2006)(7). Into 2008, however, it became clear that expectations of continuing house price increases had run ahead of reality and that a serious adjustment was inevitable (eg Malzubris, 2008).(8)

The adjustment, when it came, was sharp. There was no gentle descent to the lower but still respectable level of house-building justified by the fundamentals and estimated by the ESRI team to be equivalent to 10 per cent of GNP or in excess of 50,000 completed units a year. Completed housing units have plunged from nearly 90,000 in 2006 to an expected 25,000 in 2009 (DKM, 2008)(9). Government’s ability to redeploy a significant part of the construction capacity no longer needed to infrastructural projects has been weakened by the sheer scale of the housing decline and the associated collapse in the public finances. The number of workers being released from construction is estimated to be 85,000 between 2006 and 2009, the equivalent of total employment in Ireland’s high-tech manufacturing sectors in 2006. The direct and indirect consequences for government revenues of this collapse are huge. By October 2008, the Department of Finance had to reckon with the fact that property-related tax receipts alone were running so far below their expectations the previous January that eleven per cent of the State’s running costs were no longer covered (a gap of some €6.5bn, which has since risen to €8bn).

With the benefit of hindsight, Irish policy-makers now know they underestimated the long-term implications of the revenue windfall associated with the surge in house-building. Ireland was not the only EU country to do so. A major study from the European Commission reflects on a more generalised failure of EU governments to identify in time that asset booms are taking place and to adopt counter-cyclical tax strategies for assets (Commission, 2008)(10). However, Ireland drove faster in this particular fog. A paper by the ECB analyses how well euro area governments have forecasted trends in their revenue and expenditure over the ten years since the euro was adopted (something they are required to do for the three-year period ahead in their annual stability programmes). It identifies Ireland as the country which has most consistently underestimated its revenue growth (ECB, 2008)(11). The last income tax cut in Ireland was as recent as Budget 2007.The same ECB analysis establishes that Ireland even more consistently underestimated its expenditure growth. This, nevertheless, was compatible with Ireland only once in ten years (in 2001 when the Stability and Growth Pact had less flexibility than today) attracting Commission attention for what was considered an inappropriately large Budget deficit (it reached -1.7 in 2002) and never breaching the -3 per cent level that triggers the Maastricht Treaty’s excessive deficit procedure. Typically, throughout the 1999-2007 period, Ireland levied more tax revenue than it needed for current spending and invested the surplus in capital investment. Hindsight now underscores the extent to which these budget surpluses were, in fact, the beneficiaries of a long Irish business cycle.

These current account surpluses and low public expenditure/GDP and public debt/GDP ratios were vigorously invoked by spending lobbies and contributed to strengthening the “electoral cycle” in public spending. Absolute levels of spending – including in per capita terms – rose rapidly and a lively debate developed (and continues) about the value for money secured from Ireland’s public system in return for the major increases in resources channelled through it. A major review of Ireland’s public service (OECD, 2008)(12) confirms that it is not oversized in comparison with other countries but that notable improvements are possible in several of its characteristic ways of doing business. For example, it needs to move from an input-control to a more output- and outcome-oriented system, to develop governance structures and personnel policies that build on the unity of the public sector, and to foster a greater responsiveness to the needs of an increasingly heterogeneous public.

By way of conclusion on the contribution of domestic policy to making a bad situation worse for the Irish economy, the wide collusion in both Ireland’s property boom and the surge in public spending it enabled deserves special emphasis. Recalling it can help to temper a search for scapegoats that seems to be under way, with its attendant risk of fracturing the national solidarity that is essential if the country is to pull through.

It is nearly universally popular to blame the banks for procuring huge funds on international money markets and pushing them at developers and mortgage applicants. The scale of the banks’ reliance on international money markets left them vulnerable when those markets seized up and, on the night of September 29th, 2008, they were saved from meltdown only by the government moving swiftly to underwrite their borrowings on the money markets. These banking practices, however, were not of the opaque, off-balance-sheet sort that brought disaster and shame to the US financial system, nor were they concentrated on the sub-prime market. Good, old-fashioned speculation on rising asset values did for the Irish banks. In other words, it was not a surfeit of Nick Leesons and Jerome Kerviels(13) that brought Irish banking to its knees but of bank managers, property developers, planning authorities and individuals sensing profit in cheap credit and rising house prices.

Quite traditional regulatory tools should have been sufficient to prevent the Irish banks from getting into deep trouble if they had been vigorously and rigorously used. But they were not. The will to do so was, undoubtedly, also weakened by the traditionally influential role of the construction sector in Ireland’s political culture. In addition, the subsequent solidarity with an economy in crisis shown by the six institutions saved by the Irish government guarantee has been anything but impressive – insufficient reining in of their chief executives’ bloated remuneration, no generous policy initiatives towards mortgage-holders in arrears and no imaginative packages for ensuring credit remains available to good businesses. One has a sense that the government is having to pull teeth. At the time of writing, though significant proportions of the loans backed by unsold homes and undeveloped land have been written off by Irish banks, large equity investors are still unconvinced that the full extent of bad loans has been made clear.

Next in popularity to blaming the banks appears to be the charge that the government “squandered” the tax receipts from the property boom. Surging tax receipts from property-related taxes certainly allowed the government to fund higher levels of capital and current spending without having to raise taxes or introduce new ones. They even allowed tax rates to be cut as public spending increased. If the “waste” is evident it should now be correspondingly easy to cut it and balance out in this way the lost tax receipts. But is it?

In capital spending, reference is made to poor project appraisal not backed by cost-benefit analysis. Ireland’s practices in this, however, are generally considered to have improved substantially, to the point of being worth being emulated by the new accession states. The onus, therefore, is on critics to be quite specific about, for example, just which motorway they believe should be reduced to dual carriage way status, why a spur rail line to Dublin airport rather than metro North would be sufficient, which prison should not be rebuilt, and so on.

The stronger argument is, probably, that property tax receipts have been squandered on current spending. This could be in several ways. Levels of public support or types of public service may have been introduced that, in these less heady times, it is now clear Irish society does not want to be a charge to the taxpayer. For the brave government which identifies what these are, the solution is simple – axe them. But the improved public supports and services may, in fact, be fully in keeping with the needs of Irish society and our aspirations for it; if that is the case the solution is to adjust the tax base and tax rates accordingly so that these supports and services are funded on a secure basis. Finally, higher current spending may have resulted in too little improvement in the level or quality of public services because management and workforces in the agencies and institutions involved were unable or unwilling to use the higher level of resources channelled through them to do so. This is, currently, the most popular version of how “government squandered the boom”, lending itself, for example, to sometimes facile distinctions between “frontline” and “non-essential” workers in the public sector. The appropriate response here of course is to identify and undertake the reforms that will enable more and improved services to be provided with the current levels of resources. This is, certainly, an agenda whose hour has come, but it is a pity (and probably less effective) when it is focused in a way that depicts public sector workers as more the problem than the solution.

In what is sometimes termed “the real economy”, Ireland's performance – and the contribution to that of the state’s “development agencies” – is closely examined in the NESC and ESRI studies already mentioned. Generally, Ireland’s manufacturing sector is exceptionally concentrated in high-tech subsectors experiencing fast rates of growth thanks to the successful attraction to the country of leading companies by IDA Ireland. Double-digit annual growth rates in the output of high-tech manufacturing (almost all of it exported) were abruptly ended as the dotcom bubble burst in 2001 but, after a period of consolidation, modest though not spectacular growth resumed from 2005 onwards. A more silent transformation of indigenous industry (including of the large food-processing subsector) has continued apace, confirmed by productivity levels that are now significantly above prevailing levels in the EU25 in several subsectors.

However, the most telling story in Ireland’s recent economic development is the rapid emergence of internationally traded services – “a transformation of the Irish economy’s presence in international trade which is hard to exaggerate” (NESC, 2008: 146). By 2005, Ireland was the world’s ninth largest exporter of services overall and the world’s largest in two subsectors, “computer and information services” and “insurance services”. The ESRI and NESC point to the principal factors accounting for this development. These include previous telecommunications investments that ensured the island’s major connectedness, the adroit adaptation to internationally traded services of policies that had been successful in attracting inward investment in manufacturing (Dublin’s International Financial Services Centre, for example, was only a concept in 1987), the availability of graduates, including the willingness of those abroad (former emigrants and foreign nationals) to work and live in Ireland, the natural advantage of the English language, Ireland’s business-friendly policy environment and low rate of corporation tax.

A flow of sectoral studies from the Expert Group on Future Skills Needs (since 2006 on digital media, financial services, ICT and medical appliances) exemplifies the NESC and ESRI analyses that these new sources of comparative advantage need to be fostered and that this means addressing specific challenges they pose to innovation policy, education and training, broadband investment and the implementation of the National Spatial Strategy. (See also Catching the Wave: A Services Strategy for Ireland. Forfás, 2008). The two studies stress sometimes similar, sometimes different beneficial consequences of Ireland’s growing specialisation in services exports. The ESRI team, for example, underlines its significance for reversing the secular decline in the terms of trade that has accompanied the specialisation in manufacturing exports, while the NESC study anticipates the potential for a wide range of indigenous organisations and companies to join multinationals in exporting services from Ireland (in illustration of this, note that higher education institutions were prominent in Ireland’s large trade delegation to China in October 2008).

The greatest single need, acknowledged in both studies, is that Ireland continue to improve the skills, competences and deployment of its people, in short, that it invest adequately and effectively in boosting human capital. The contribution of an educated population and its work ethic to the country’s economic transformation has, justifiably, received major attention. It includes the complementary roles played by schools and institutes of higher education, the growing participation rate of women, the steady reduction in taxes on low earnings and significant expenditure over the years on combating unemployment. But the NESC study in particular dispels any complacency that Ireland’s educational and training systems, as currently configured, are adequate to the challenges of further developing services and boosting productivity across the economy. A long chapter on “Supporting People in an Open Economy” reviews Ireland's childcare and early education system (patchy), the effectiveness of programmes tackling educational disadvantage (poor), the acquisition of foreign languages (low), investment levels in higher education (debatable), participation rates of adults in further education and training (low), the mobility of migrants in the workforce (unknown) and the integration of social welfare receipt with access to services (work in progress). It is clear that retaining Ireland’s hard-won reputation for having an educated and adaptable workforce will take hard and coordinated work on multiple fronts.

“Events” keep happening, of course, that are capable of severely complicating the implementation of comprehensive strategies to strengthen the comparative advantage of the Irish economy. The global credit crunch and dramatic deterioration in the world economy affect all countries, albeit not equally, but two recent developments pose specific threats to Ireland’s economy, namely, Irish voters’ rejection of the Lisbon Treaty in June 2008 and growing challenges from outside the country to its low corporate tax regime.

In so far as Irish voters’ rejection of the Lisbon Treaty raises the prospect of Ireland becoming a grudging member of the EU, it is a blow to the business models that manufacturing and service companies have been developing from Ireland and which public policy and the development agencies are committed to supporting them develop.

Studies of the benefit of EU membership to the Irish economy have noted the significance of the Structural and Cohesion Funds and the major importance of CAP to Irish agriculture but the energising impact of the Internal Market on companies based in Ireland takes pride of place. The economy’s traditionally strong links with the US economy, for example, were not diluted by its deeper integration into Europe but strengthened as US corporations were among the first to grasp that English-speaking, culturally close and business-friendly Ireland effectively offered the entire EU to them as its home market. The entitlement of their operations based in Ireland to tender for public contracts throughout the EU alone constituted a compelling case for considering Ireland as a business location. The Irish state’s development agencies were not slow to bring home the point. For example, Microsoft “didn't really make a decision to come to Ireland; [it] made a decision to come to Europe … The Irish government and its agencies made a compelling case as to why Europe equalled Ireland” (former CEO of Microsoft Ireland)(13).

Indigenous companies have become pan-European operators more slowly, the number doing so increasing as their scale and the sophistication of their Irish operations increased in line with Ireland’s more affluent home market and under the impact of growing immigration. An illustrative example is the extent to which more service-providers, from insurers to retailers, are appreciating that being good enough to hold their market share in Ireland means they are good enough to win some in other EU member states. A further stimulus to the Europeanisation of Irish business has been the emergence of capacity constraints and increased cost pressures associated with keeping all business functions in Ireland. Much of the overseas direct investment (ODI) by indigenous companies is going elsewhere in the EU as they seek lower cost alternatives to expanding exclusively in Ireland to serve new markets in the EU.

The scale and quality of foreign direct investment (FDI) in Ireland is high by international standards. The stock of FDI per capita increased almost tenfold during the 1990s (Barry, 2004)(14) and, since 2000, the inflow per capita remains one of the highest in the world, comparable only to Singapore and Hong Kong (Varney, 2007)(15). Its quality has been leveraged up as well as its quantity increased, due – in significant measure – to the strategies of the state’s development agencies. IDA Ireland, in particular, has consistently and successfully mediated between the requirements of high-quality FDI, on the one hand, and government policy, the civil service, local authorities, the education sector and other actors, on the other. “State agencies are an ever-present part of the daily life of high-technology industry in Ireland.” (Ó Riain, 2004: 233)(16)

Low corporation tax is an integral part of what makes Ireland highly attractive to FDI (Honohan, 2001; Barry, 2004). The current average headline rate of corporation tax in the EU15 is 28 per cent (KPMG, 2008), as against 12.5 per cent in Ireland; in the US, the combined average federal and state rate is 39.3 per cent. As well as its low relative rate, the consistency with which a low corporate tax regime has been maintained in Ireland over time is of major importance. Established foreign companies - and the IDA - credibly inform potential new investors that the parameters of Ireland’s corporate tax code do not lightly shift. To a significant extent, however, Ireland’s low corporation tax rate has been as powerful as it is because it is an ingredient, among others, in a long-term, comprehensive strategy targeting inward investment.

Some larger EU member states and the US authorities have become increasingly concerned that good jobs and parts of their tax bases are leaving their shores as companies “shop” for the most advantageous tax regime. The European Commission is developing the case for a “common consolidated corporate tax base” (CCCTB). It is proposed that a significant criterion for determining how the tax liability of a company with multiple EU operations should be shared across the states where they are based is the destination of their sales. Independently, the incoming Obama administration in the US is interested in exploring how US tax rules can further incentivise US corporations to expand their US operations rather than invest overseas. Such proposals undoubtedly pose a significant threat to Ireland’s current strategies. How they can be countered deserves some attention.

At the EU level, if a trial of strength were to occur between Ireland’s adherence to low corporate tax and the interest of some larger member states in creating a higher common EU rate, it is hard to see how Ireland would lose under the current rules of the game (the national veto on tax directives). However, invoking the veto is, typically, not a sound strategy for a small member state to play; strongly rebuffing other states makes future allies on other important issues more difficult to find. Ireland may instead be better served by seeking to win the case for diversity in corporation tax across the EU on intellectual and political grounds. For example, public authorities in the core regions of the EU (such as southeastern England and the Paris region) may simply sacrifice revenue if they reduce their corporation rates from levels which their highly developed infrastructures, labour markets and services enable companies to pay (Barry, 2004). Similarly, US authorities need to be confronted with more evidence that the Irish operations of US corporations strengthen their domestic functions (as the first studies of outward direct investment by Irish companies illustrate for Ireland – reviewed in NESC, 2008: 106-108).

In the second place, agreeing that disaster would follow the enforced ending of Ireland’s low corporate tax regime in fact contributes to the view that changes in its economy have been only skin deep. In choosing countries at Ireland’s level of development to develop their operations, multinationals look to much more than tax: “it is often asserted that business will go to the place where the tax rate is lowest. The academic evidence is that skills, rule of law, industrial relations, the potential for innovation and the quality of infrastructure are more important in determining the ‘business fit’ of potential investment”(Varney, 2007: 1). As Ireland has ceased to be a low-cost country and services come to account for more of its international trade, relatively novel factors, additional to the tax breaks, grants, training, and road/port infrastructures that were typically strongly valued by the first waves of inward investors in manufacturing, have grown in importance. These include the number and linguistic diversity of graduates that can be sourced locally, a quality of life attractive to mobile skilled workers, the responsiveness of immigration policy and evidence for the successful integration of migrants, opportunities and supports for applied research and design, the quality of air connections and of broadband infrastructures etc. During the recent months of relentlessly bad economic news it is notable that inward investment (through “the IDA pipeline”) has continued. In instances of traded services, the availability of an educated, young and linguistically diverse workforce is, typically, cited as a compelling factor (Marriott International, Goa Interactive Games, CSN Stores). If graduates from across the EU find Irish regions are good places to live and work, more inward investors will find the same locations good bases for their operations.

The policy challenges of retaining inward investment by increasing the sophistication and value-added of its Irish operations, therefore, are being focused. Differences as well as similarities in attracting investment in knowledge-intensive services as distinct from high-tech manufacturing are coming into more prominence. At the same time, the greater sophistication of indigenous manufacturing and services firms, with more of them undertaking ODI while upgrading their Irish operations, is slowly weaning the Irish economy off the extent of its reliance for dynamism and growth on fresh inward investment.

The conclusion of this essay is that Ireland's exceptional economic difficulties at present are not particularly due to the quality of domestic policy-making or to singular flaws in the structure of its economy. It is clear that both policies and structures have their weaknesses. In the short term, a pro-cyclical bias in fiscal policy, the proportion of tax receipts derived from house-building and insufficiently regulated banking practices helped to kill off the prospects of a soft landing to the housing boom. In the medium to long term, significant supply-side and distributional issues will have to be addressed more effectively if the economy is to continue a transformation that was gathering momentum since the last slowdown in 2001-2002 and will need fresh legs if it is to benefit fully when the current crisis conditions in the world economy have passed. The issues, as the NESC study makes clear, include significantly improving educational and training outcomes, increasing the returns on R&D spending, speeding up public sector reform, guaranteeing access to affordable, high-quality childcare for all in the workforce, advancing more rapidly to high capacity broadband speeds, vigorously implementing the National Spatial Strategy to enhance the quality of growth of the national gateways and the Greater Dublin Area and integrating social welfare receipt more effectively with access to services. The pearl of great price would be if political leadership could seize the potential for solidarity and new departures which profound crisis creates to mobilise additional resources and reprioritise their deployment in a way that inspired confidence and wide support.

1. Department of Finance (2008), “Housing Taxation Policy”, Tax Strategy Group 07/08.

2. Barrett, A, I Kearney, J Goggin and M O’Brien (2008), Quarterly Economic Commentary. Autumn 2008. The Economic and Social Research Institute.

3. FitzGerald, J et al (2008), Medium-Term Review 2008-2015. Number 11. Dublin: the Economic and Social Research Institute. 176 pp.

4. NESC (2008), The Irish Economy in the Early 21st Century. Report No 117. Dublin: National Economic and Social Council. 294 pp.

5. NESC (2004), Housing in Ireland: Performance and Policy. Report No. 112.

6. Honohan, P (2006), “To what extent has finance been a driver of Ireland’s economic success?” Quarterly Economic Review, Economic and Social Research Institute. Winter, pp 59-72.

7. IMF (2006), “Ireland: Financial System Stability Assessment Update”, IMF Country Report No. 06/292.

8. Malzubris, J (2008), “Ireland's housing market: bubble trouble” ECFIN Country Focus, Volume 5, Issue 9. Economic and Financial Affairs DG, European Commission.

9. DKM Economic Consultants (2008), Review of the Construction Industry 2007 and Outlook 2008-2010. www.dkm.ie.

10. European Commission (2008), [email protected] Successes and challenges after ten years of EMU. European Economy 2/2008. Economic and Financial Affairs DG.

11. ECB (2008), “Ten Years of the Stability and Growth Pact”. ECB Monthly Bulletin. October.

12. OECD (2008), Ireland: Towards an Integrated Public Service. OECD Public Management Reviews. Paris: OECD.

13. The young traders who sank Britain’s Barings Bank and endangered France's Societé General respectively.

14. In Sweeney, P [2008], Ireland’s Economic Success. New Island.

15. Barry, F (2004), “Export-platform foreign direct investment: the Irish experience”. EIB Papers. Volume 9, No 2.

16. Varney, D (2007), Review of Tax Policy in Northern Ireland. London: HMSO.

John Sweeney is an economist. He lives in Dublin.