Space to Think, a new book celebrating ten years of the Dublin Review of Books More Information 

Must Do Better

Michael Casey

Countries adopt different ways of growing their economies. Some are blessed with natural resources, while others have a flair for manufacturing, design, research and development, financial services and so on. All economies must decide on how much to invest, work, save or consume, and how much government intervention there should be. One of the most important choices can be work-life balance. In America, for example, workers have about two weeks’ holiday a year; in Ireland four to five weeks would be more the norm. As a society we tend to put more emphasis on leisure, sport, the arts and socialising. Until recently we had the best of both worlds. We had a very high growth rate and managed to combine this with a relatively relaxed quality of life. There were few tough choices, for in a sense our economic growth was rather easily won.

The most successful political parties after the recent general election do not question in any way the fundamental weakness of our particular version of the growth process. The prospect of radical change being driven by government is, therefore, slim.

Over many years we benefited from agricultural subsidies, which grew in the last decade to a staggering 70 per cent of all income arising in the agricultural sector. The frequency of cheques from Brussels was such that, as the joke went, the most serious risk to agriculture was a postal strike. Britain adopted a quite different model, trying to protect its consumers with a cheap food policy. As we shall see later, consumers never had much clout in Ireland, political or otherwise, while farmers did. Consequently, in Ireland we followed a dear food policy. In addition Irish farmers were scarcely taxed and there were, and are, subsidies for not working the land. In general, we have been net beneficiaries of the EU budget for most of the period since 1973.

As well as agricultural subsidies there were structural and cohesion funds. The latter were designed to help countries prepare for the single currency and were very substantial in Ireland’s case, helping us complete some major infrastructural projects. In the nineties, whenever we spoke proudly at European forums about the growth of the economy we were usually deflated by being told that Ireland was “just a cohesion country”. Most EU officials regarded Ireland as an easygoing place not all that serious about economic growth, though interested in subsidies from Europe. (I recall one senior Dutch official who felt that Ireland could not survive in a hard currency regime because of our liking for alcohol. He recanted a little when told the Irish view of the Dutch personality.)

When, in the mid-nineties, the Celtic Tiger made its appearance, many of our European colleagues were at first confused but then grudgingly admitted that it seemed Ireland had at last got its act together. This view was backed up by the myth that we had evolved a flexible market-driven economy which the more corporatist continental countries could not do. We became the poster boy of Europe. At meetings of the European Central Bank in Frankfurt, we were often deferred to as the expert on free markets. It was heady stuff and we were delighted not to be called “a cohesion country” any more. But of course the Europeans did not understand the true nature of our growth or the structural fragilities that lay beneath the surface.

Some European colleagues did remain sceptical however, retaining a sense that Ireland was still not a fully mature economy capable of taking tough decisions. In the early years of EU membership Irish delegates had usually advocated fiscal expansion by the large countries of Europe. This was known as the “locomotive approach”, the idea being that if Germany and France were to allow fiscal deficits to expand their own economies then other countries like Ireland would be pulled along without any cost to themselves. The Germans in particular, who had a horror of inflation and the path of easy virtue, thought the Irish were mad ‑ and irresponsible.

Even when we joined the Exchange Rate Mechanism in 1979, the Irish government thought it could extract some financial favours from Germany. The rationalisation was that we needed some form of compensation for joining a hard, DM-dominated, currency regime. At one meeting the Irish delegate was asked by the German chairman what compensation Ireland had ever received from the UK by virtue of its link with sterling. It was a good question, but answer came there none. Germany eventually offered Ireland a soft loan on condition that it be used to buy German goods. That, in essence, is how we got the DART (Dublin Area Rapid Transit train system).

To the embarrassment of many Irish people, our politicians tended to use the EU as a device for getting free money in a way that was analogous to how local politicians within Ireland try to get funds for their own constituencies. That approach to Europe was unstatesmanlike and pragmatic to a fault. Combined with advocacy of the “locomotive” strategy, it did little for our reputation.

After the first oil crisis in 1975 we started on the slippery slope of fiscal easing and massive borrowing. It was easy to borrow abroad. In those days the international markets were flush with petrodollars and keen to lend to virtually any government. There was also a belief that governments and countries could not go bankrupt. No rating agency worried about sovereign risk. Ireland made the most of this and ran up debt at a rate equivalent to that obtaining today. We did not need IMF money. Nevertheless, the IMF became very concerned about Ireland; there were “confidential” discussions in Washington but the word began to leak out. The Irish government did its best to plug the leaks and presumably would have continued borrowing if it had been successful. It will fall to historians to judge the extent to which the IMF’s concern led to fiscal consolidation in Ireland in the late eighties. The essential point is that borrowing is a soft option. It means that the government of the day can curry favour with voters by increasing expenditure and lowering taxes. The poisoned chalice of debt repayment is deftly passed on to the next generation. The present generation gets another free ride.

It is probably true to say that over the last fifty years something like half our annual growth rate has been generated by foreign industry (which now contributes a massive 70 per cent of our exports.) Foreign direct investment (FDI) is the quintessential easy option since it obviates the need for Irish entrepreneurs to undertake research and development, carry out marketing, assess financial risks, develop business models and export goods themselves: all these difficult and costly tasks are already done by the multinational companies. Superb, well-established, prestigious firms arrive on our doorstep fully formed. Despite the low rate of tax on profits, the yields can actually be quite high. So the national exchequer benefits too; it is a dream come true.

FDI increased enormously when Ireland joined the euro. American multinationals (MNCs) were attracted not just by the low tax rate but also by the fact that Ireland was the only English-speaking country in the eurozone. Many American MNCs made Ireland their platform for exporting into Europe. At the same time, joining EMU meant a collapse of interest rates in Ireland, way below their equilibrium level. This was a substantial windfall to borrowers and it contributed to growth, but also to overinvestment, especially in the housing and commercial property markets. The obsession with owning bricks and mortar may well derive from our colonial past. It also seems to be part of what Joe Lee has called “our preference for possessing than performing”. It goes without saying that the normal sequence ‑ followed by most economies ‑ is to perform first and then possess the results of that performance.

We had also started the nineties with a devaluation ‑ another easy option. Later, when we joined the euro in 1999 we had another devaluation so as “to have the wind at our backs”. It was like an alcoholic having a stiff drink just before he goes on the wagon. In fact, Germany had to persuade the Irish government to halve the devaluation it initially had in mind. The property boom was another example of the path of easy virtue. Builders, property speculators, estate agents, architects, engineers and building workers all did well. No one worried about the enormous price people had to pay to get on the housing ladder. In any case parents could realise equity in their homes and pass on the rewards to their children to give them a leg up. Thus the price bubble fed on itself ‑ proof that it was a pyramid scheme. But no one was going to remove the punch bowl in the middle of the party. If it all went wrong future generations could pay.

What made this worse was the existence of the International Financial Services Centre (IFSC), another soft option idea. The presence of the centre meant that any form of financial regulation had to be of the light touch variety, otherwise potential entrants would be frightened away. (The IFSC was not the brainchild of Mr Haughey; it had been mooted by the IDA twenty years earlier but discouraged by various government agencies on the grounds of reputational risk.)

The property boom and the dynamic multinational sector meant high and rising revenue for the government during the good years. Everyone knew that the tax base was still too narrow but nothing was done about it. Again the can was kicked down the road and the line of least resistance taken. The ease with which revenue could be raised via taxes on property transactions ‑ few really minded paying these stamp duties because the amounts involved were covered by long-term mortgages ‑ created another problem. It allowed the social partners to keep income tax low and wages high. Needless to say this generosity was based on the false assumption that indigenous industry was just as productive as foreign industry. Its productivity was actually five times lower, but who cared? Paying ourselves so much in excess of productivity led to the complete loss of competitiveness. But perhaps more seriously it created a climate of unrealistic expectations, a climate in which we could pay ourselves for work we didn’t actually do. Remember when the teachers demanded pay increases on the grounds that they had trained the Celtic Tiger cubs? Remember the ATM known as benchmarking?

If excessive pay resulted in higher prices in the sheltered sector of the economy, so what? Irish consumers who had to pay these prices were never organised and never represented a political lobby group. The quangos set up to look after consumer interests were fragmented and inefficient. Foreign observers often wondered why income tax was so low in Ireland and indirect tax, such as VAT, so high. (Vehicle Registration Tax was probably illegal.) The answer is very simple. Government and the social partners wanted it that way. Consumers, as a definable group, were never invited into the tent of social partnership. They did not make donations to political parties. They had no voice, and neither did taxpayers. That is why taxpayers and consumers are now paying the price for the collapse of the banks and the economy. They are amorphous, fragmented, unorganised groups with no political clout. They were an easy touch during the dear food policy era and they are still an easy touch.


Note that one of the slogans of the financial regulator has now disappeared. The slogan was “It’s your money”. We now know to our cost that it was never our money. The money of ordinary people is being used to bail out the banks (and foreign bondholders). This raises an interesting question: when does legitimate taxation turn into illegal confiscation? Under the Irish constitution we are entitled to own private property, including, presumably, “our money”. Now it seems that no such entitlement exists when the banks through their own greed and stupidity, facilitated by government incompetence, get into serious difficulty. It would be interesting to see how the courts would rule on the question of constitutionality, if someone were brave enough to bring a case against the Minister for Finance. Without in any way prejudging the issue, it ought to be borne in mind that government, banks and the legal system are all part of the establishment.

It is worth noting that when in Ireland attention was paid to developing our own indigenous industry rather than increasing further our dependency on foreign multinationals (The Telesis Report of 1980) this led to the creation of the Goodman International Meat Company ‑ hardly the glittering success story we wished for. Indigenous entrepreneurship at that time was characterised by strokes and stunts, short-term tricks that tend to backfire over time. This of course was yet another example of our innate urge to find a quick and easy way, to possess without having to perform too diligently.

Even now, when the chickens are coming home to roost and the IMF and EU have taken over the running of this economy, we are still fatally attracted to the easy option. In the last couple of years we have embarked on a scheme to tap into the Irish diaspora ( Farmleigh 2009), to attract Islamic banking into the IFSC, to brand and sell our cultural artefacts ‑ the actor Gabriel Byrne was given a roving diplomatic brief, presumably to the chagrin of a host of well-paid existing ambassadors. As we speak, two of the major political parties are promising to renegotiate the IMF/EU deal so as to make it easier to bear. All major political parties want to negotiate a lower interest rate. A senior political figure has already paid a visit to Angela Merkel for help. “And Spanish wine shall give you hope, My Dark Rosaleen ...”

One of the most effective soft options over the years has been emigration. The more people are driven out of the country the lower will the unemployment rate appear. The government can also save a lot on welfare payments. Domestic wages remain higher than they would be if unemployed people did not emigrate. Emigrants cannot vote so politicians do not have to worry about their inability to create enough jobs domestically. Politicians do not worry unduly about the loss of skills and the effect on families. Another political bonus is the reduction of tensions and the lessening of the probability of demonstrations and strikes.

Our banks were cosseted over the years by light touch regulation accompanied by virtually no protection of the consumer. They made supernormal profits and knew that if they ever got into trouble the taxpayer would bail them out. This was a wonderfully easy way of making big money. There were hardly any risks involved as far as bank executives were concerned. Fraud may technically be a crime in this country but it is impossible to prove. It is like the modern theology of hell: it exists as a concept but no one actually goes there. Indeed, the law is sometimes written so as to protect executives who sail close to the wind. This state of affairs goes back to the Irish Hospitals Sweepstakes, and probably even before that. Moral hazard is a way of life in this country.


Because of all the soft options it was as if the economy had never really grown up. Whether the state or the republic did is a wider question, but the economy remained in a condition of arrested adolescence. When Lemass and Whitaker introduced the policy of attracting foreign multinationals it is doubtful if they ever thought it would, faute de mieux, continue without any serious amendment for the next half-century. Their thinking was that Irish entrepreneurs would learn from multinationals on their own doorstep and would in time develop their own businesses. This did indeed happen to some degree but not on anything like the scale required for autonomous, organic, self-perpetuating growth. Instead, dependency on foreign multinationals grew. It is doubtful if Lemass or Whitaker foresaw the day when many of our retailers would sell out to foreign companies like Boots, Marks & Spencer, Debenhams, Argos and Dixons. It is one thing to have a temporary dependence on hi-tech foreign industry, such as Intel and Google. That we would become dependent on foreign companies to run shops would have been a source of bewilderment to the economic strategists of the mid-twentieth century.

Much the same argument had underpinned the earlier policy of protectionism. Irish firms had to be protected for a while until they found their feet, until the “infant industries” grew up. In many cases the industries in question proved unable to face the stiff wind of international competition. Perhaps they should have been weaned earlier. Another device for developing native industry was the creation of semi-state bodies. This was a reasonably successful approach for many years. Lumpy investment was undertaken by the state and these businesses (food, sugar, butter, shipping, electricity, air travel, public transport etc) were run by public officials. Many of them are gone now ‑ privatised or defunct ‑ and it is not clear that a private entrepreneurial class has emerged to fill the gap. Most of our privatisations have been disastrous and indeed most of the public private partnerships have been less than ideal. It will be interesting to see if any Irish entrepreneurs emerge to buy the failed banks or whether they will go the way of all flesh ‑ into foreign ownership.

Some commentators argue that the private sector in Ireland is mainly concerned with rent-seeking, that is extracting profit from easy situations where there is little risk and little or no output. One of the classic forms of rent-seeking during the property boom was the emergence of property management companies, which charged high fees but provided very poor services. Rent-seekers can only thrive in situations where the forces of competition do not really operate. Unfortunately, in Ireland there are many such situations. Many of the professions ‑ law, medicine, finance ‑ would fall into this unproductive category. It is nice, easy work if you can get it, but it adds little to the nation’s wealth or income.

There is often a wide gap between theory and practice. Partly because of the populist nature of politics in this country, the soft option and the stroke have become embedded in our culture. Even at the level of individuals it was far better to be known as “cute” than as diligent and hard-working. Unfortunately, neither the EU nor the IMF is overly impressed by rogues, however lovable. Nor are the international markets. Rating agencies do not hand out A-pluses for charisma. There is no doubt that populism and people-pleasing have contributed to our present difficulties. One aspect of this deserves special mention. The appointment of political cronies to various boards and quangos has been a disaster. This practice destroys morale and efficiency in organisations across the country. Directors float around from one board meeting to another, having excellent lunches, not quite sure which organisation they happen to be in at any given time. They contribute little to meetings but do tend to report back to their political masters who are then in a position to pull the strings by proxy. This is decision-making by stealth. It is unhealthy and it perpetuates an undemanding form of amateurism which the country can ill afford.

In the last couple of years the government tried to regain some popularity by boasting that it had taken hard decisions. It had done no such thing. The fiscal adjustments that were made were dictated by Brussels and the monetary ones, including the bank bail-out, by Frankfurt. Irish governments do not do hard decisions. During the boom years, with revenue flowing in, they didn’t have to. It was all so easy, based on generous windfalls. There were no awkward trade-offs to be made, no losers to be consoled. Everything was what management gurus call win-win situations. The trouble about virtuous circles is that they bring out the worst and most populist features of government. They also have a habit of turning into vicious circles. And populist governments often can’t, or don’t want to, see this. That is why so many political figures railed against commentators who tried to draw attention to underlying structural weaknesses.

Are we seriously expected to believe that the boards of the Central Bank and Financial Regulator ‑ consisting of political appointees ‑ did not inform their political masters of the true state of affairs in the banks? That defies belief. Since no action was taken we can only assume that senior politicians informed their appointed directors not to take any action. This is the easiest way of making decisions, by stealth. Nobody has to be accountable.

There are no more soft options available to us to solve our present difficulties. Some political leaders have argued recently that we need not take too seriously the view of M Trichet, the president of the ECB, as he is only a civil servant. The assumption seems to be that if we plead our case at the political level we will be able to put him in his place and charm our way to a better deal. This is the triumph of hope over experience.

It is possible that a better deal may be on offer at some stage in the future. It is also possible that the quid pro quo will be an end to Ireland’s preferential corporate tax regime, which would of course hit the economy very hard. This could be the ultimate trade-off ‑ and nightmare ‑ for any Irish government.

The Celtic Tiger period was our moment in the sun, when some of our European colleagues began to believe in us. Our subsequent failures made them revise their opinions and revert to an older and less flattering stereotype. The main question that arises in all of this is: why aren’t Irish people more enterprising? Because this question has so rarely been asked there are few explanations. Our history of colonisation clearly plays a part. Colonisation has produced many adverse psychological effects; it is not simply a matter of the exploitation of the physical resources of the country in question. In some cases the physical infrastructure of the colonised country can be substantially improved, but colonisation has a draining effect on a national psyche which undermines confidence, risk-taking and decision-making ‑ all vital attributes for entrepreneurship.

In Ireland’s case this legacy was made worse by the Great Famine, massive emigration (and loss of talent), the strictures of the church and the mistreatment of children in care. To this long and terrible list may be added the civil war, which tore the soul of the country apart. On a more mundane level, there was no industrial revolution in Ireland and consequently no tradition of creating and organising businesses. If one takes the view that most countries have a given stock of talent and energy, then it follows that those countries which have had to fight for independence will have lost much of their substance in the struggle for freedom. This thesis seems especially true of Ireland, where so many brave men and women sacrificed their lives for an ideal. They were irreplaceable. Certainly the politicians who followed had nothing like the dynamism and integrity of the heroes who preceded them. In many ways those who succeeded were little more than opportunists. As one senior politician admitted: “Independence really meant it was our turn to get our snouts in the trough.” So much for the ideals of Pearse and Connolly.

At the time of writing, political parties are promising reform and renewal, even those parties that have been in power for many years.(In the political sphere it is hard to avoid the impression that words are more important than deeds. Hence the importance we attach to speeches and how well a politician “performs” on television.) It is extremely doubtful if politicians have any idea how radical the change is that the country now requires. It involves an end to the easy way, a determination to start out on the road to a true self-sustaining economy and an admission that we still have not got beyond the take-off phase. The choice we have to make as a nation is between continuing with an easy, relaxed lifestyle and embarking on the hard road of real organic economic growth. No politician seems to be aware of this critical choice. Because of this, the major political change that occurred at the recent general election is unlikely to improve matters. For example, no political party has ever said that we should lessen our dependence on foreign direct investment and formulate an alternative, or even a modified, policy.

The banking meltdown is by no means the first instance of having to depend on the kindness of strangers. This attitude is par for the course and over the years we have been very fortunate. But it does appear as if kind strangers are becoming rather thin on the ground. The EU and President Obama are keen to standardise corporate taxes and to stop transfer-pricing and other practices beloved of multinationals. Capital markets have already given us the thumbs down as borrowers and rating agencies are giving us poor marks. The ECB has stopped lending to maimed Irish banks. The EU and IMF are charging a high (unkind) interest rate. There will be no more net subsidies from the EU budget. Maybe this is the best thing that could happen, since we may at last begin to learn how to stand on our own two feet. The economy of the first Irish republic has not prospered, and it is time to build a better, more autonomous one.

Michael Casey is former Chief Economist at the Central Bank of Ireland and member of the Executive Board of the IMF in Washington DC. His recent book, ‘Ireland’s Malaise: The Troubled Personality of the Irish Economy’ was published by the Liffey Press last October.