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Thinking Deep

John Bradley

The Rise and Fall of Ireland’s Celtic Tiger – Liberalism, Boom and Bust, by Seán Ó Riain, Cambridge University Press, 312 pp, £19.99, ISBN: 978-52127905

Professor Ó Riain, I suspect, may not have chosen the title for his latest book. The term Celtic Tiger is overused, much abused and so vague and imprecise as to be almost meaningless. But for a UK-based publisher it retains an exotic flavour that perhaps makes the doings of a small and relatively insignificant European economy internationally saleable. And for many locals, it’s a handy shorthand with the great advantage that it can mean anything that you want it to mean. But in Professor Ó Riain’s hands it takes on a sharp, searching, analytical edge that uncovers the full extent of the flawed processes that produced alternating boom and bust as Ireland strove to become more like the stable, successful small economies of northern Europe than the externally dependent post-colonial economy of its early years of independence.

Towards the beginning of his book, Ó Riain captures very precisely the underlying problem of policy-making and governance in Ireland:

At the end of the Celtic Tiger boom of the late 1990s, Irish society had resources available to it that were hitherto unimaginable, including economic, institutional and cultural resources. Yet, it also faced major challenges and contradictions in its model of development. A significant debate seemed certain to ensue, possibly shaping the future direction of Irish development ... As it turned out, this discussion barely occurred.

For a nation whose citizens are so addicted to talking about their own affairs, this is something of a paradox. The rise, yet further rise, fall and post-fall experience of the Irish economy have generated a vast literature. But it is only when you read Ó Riain’s deep and penetrating analysis that you begin to understand why previous studies appear to have produced so little by way of self-knowledge, understanding and purposeful societal action on the part of the policymakers charged with designing and implementing development strategy and the people who voted these policy-makers into office.

Previous discussions of Ireland’s rollercoaster economy tend to fall into three distinct categories. First, we have mainstream economic interpretations. Here, the economy is treated as a kind of machine that has its own internal, market-based logic and rules and which is separable from many other aspects of society. A rather extreme, and perhaps unintentional, illustration of this was perpetrated by the ESRI in its medium-term reviews, when the economy was compared to a clockwork mouse that performs well when initially wound up, but later inevitably winds down. Another analogy was that of Icarus, who flew too near to the sun in defiance of warnings, and crashed back to earth. The more technical examples of this genre focus mainly on what happened rather than why it happened, at least in any deep causal sense. Instability, like “the poor”, will always be with us, and for much the same reasons. The implicit assumption appears to be that when the mainly economic policy errors that cause a crash are addressed and corrected, the economy will gradually recover and normal business will resume. Until the next crash, of course! But to paraphrase Oscar Wilde: “To crash once may be regarded as a misfortune; to crash twice looks like carelessness.”

Second, there are what one might call radical interpretations of the demise of Celtic Tigerdom which assert that the whole social and economic system is not fit for purpose, or may even be rotten, and a fundamental root and branch redesign of all aspects of Irish society is needed. There is often something wildly liberating in this approach. Out with the old! In with the new! And to hell with the possible consequences. The implied model is that of the abolition of the French monarchy in 1792 when the National Convention declared a new beginning at Year 1 and all culture and traditions were erased and replaced by new, revolutionary culture. Things could only get better! This must have cheered up Robespierre as the guillotine beckoned.

Third, there is a genre that focuses on the human and institutional drama of boom and bust. In these accounts the nefarious actions of greedy and unscrupulous wrongdoers are dramatically exposed, the guilty men (and they are mostly men) are named ‑ at least within the limits of our strict libel laws ‑ but the resulting schadenfreude at their bankruptcy is poor compensation for the wreckage they have left in their wake. These fly-on-the-wall accounts are by far the most widely read, but they are popular mainly because the good guys wear white, the bad guys black, and the exciting narrative poses no searching or troubling questions about the political, administrative and social contexts that promote and sustain reckless and socially undesirable commercial behaviour. Mistakes are always made by others and “we the people” never bear any responsibility. However, the recent judgement in the trial of senior managers of the Anglo-Irish Bank, a bank that was at the very heart of what Ó Riain terms the unthinking and ultimately disastrous “financialisation” of the Irish economy, was a dramatic acknowledgement of the extraordinary weakness of our Irish public institutions as well as of civil society in protecting the economy from destabilising actions and our unwillingness to face up to the reality that the path taken was inevitably destined to end very badly.

Ó Riain’s book is the first to tackle systematically the deep societal factors that help explain the kinds of dramatic economic collapses that have occurred in the past three generations, namely in the mid-1950s, the 1980s and the mid-2000s. Although a sociologist by profession, he has a sure command of economic theory, economic history and economic policy. His opening chapter (Liberalism in Crisis) sets out a challenging framework for the rest of the book and contains the kind of thoughtful reflections on economics and political economy that ought to be required reading for all students of the subject but alas never are. Until recently, economics was a robust, confident, colonising study that laid claim to other disciplines as merely special cases of its own core methodology. The late Garry Becker is perhaps the archetype of the economist as coloniser, asserting that many different types of human behaviour (discrimination, crime, families, human capital, etc) are best studied and interpreted within a narrow rational and utility-maximising framework. However, as a result of massive policy failures associated with the recent global recession, the discipline has come under attack both from within (behavioural economics) and without (what Ó Riain calls economic sociology).

Unlike the often simplistic radical critics who abandon the concept of “liberalism”, a concept which sits at the core of conventional economics, Ó Riain sets out to explore and interpret it. In a subtle critique of conventional economics, reversing the conventional economic stance, he states that:

We should not simply postulate an ideal economy and then critique most of the historical, social and political deviations from it – many such “deviations” are inevitable.

Of course, the reason why economics became focused on idealised economic systems is that this approach permitted the development of mathematical models of great technical sophistication and complexity which required many key assumptions to hold, such as: full information among market actors, clear and well-ordered preferences, and a relative equality of bargaining power within market relations. The negative consequences and legacy of this distorted approach to teaching economics were recently summarised as follows:

Employers complain that recent economics graduates, while being technically proficient, know very little about the real world. Lacking knowledge about historical backgrounds, institutional details and political idioms of real-world economies, they end up being idiot savants – they can manipulate most complicated mathematical models but cannot translate their insights into business strategies and economic policies in the real world. (Ha-Joon Chang and Jonathan Aldred, The Observer, May 11th, 2014).

The messy real world, where such conditions almost never hold, was not so amenable to stylised modelling and until recently, reality was largely out of favour in university economics departments and research institutes. But the revival of interest in the work of (say) Karl Polanyi is a measure of how focus is shifting away from the stylised models of neo-classical economics to Polanyi’s central argument that economic life is “always embedded” within social relations and social structures. Polanyi’s concept of embeddedness allows sociological scholars of the economy an entry point into understanding how economic action is shaped by social relations. Ó Riain’s book provides a detailed application of these ideas to the Irish economy, with a focus on the deep societal origins of the recent economic crisis, but set in a wider historical and international context.

This challenging book is structured into six chapters that build up to a compelling explanation of how Irish society has been prey to successive economic and social crises in the post WWII period and in particular why the most serious crisis of recent years followed directly after the greatest success. Chapter 1, as mentioned above, sets out the main theoretical frameworks that are used to shed light on a searching examination of Irish economic performance. Ó Riain draws on the work of Polanyi and others not so much to reject neoclassical economic thinking out of hand (as the radical approach does) but rather to deepen our understanding of the kinds of institutions that are required in order to regulate and sustain markets in a way that produces sustainable growth and development.

Chapter 2 reviews Irish economic performance during the post-WWII period. The susceptibility to boom and bust is familiar, but it is important to recognise and understand the vulnerability of the economy to what were, to a great extent, self-inflicted wounds. In no case were the various Irish crises purely determined by external events, even if external events sometimes exacerbated an already bad, domestically created, situation. The crisis in the mid-1950s occurred in a Europe that was recovering rapidly from the devastation of WWII, but where Ireland continued to isolate itself behind high tariff and other stultifying trade barriers. The crisis of the early 1980s was caused by a wildly extravagant misapplication of Keynesian fiscal expansions, leaving the economy vulnerable to the onset of the second OPEC-inspired global recession. The crisis of the 2000s was caused by a complex mixture of bad fiscal governance and failure to regulate the local banking system, leading inexorably to an unsustainable property bubble and precipitating first a banking collapse and, shortly after, a loss of fiscal sovereignty.

Having described these policy failures, Ó Riain explores why they occurred. His answers take one deep into the manner in which Irish governance is organised and the nature of our political and socio-economic institutions. Specifically, he zeros in on the much vaunted and dramatic catch-up of Irish income levels during the 1990s, which served to overemphasise the role of liberalisation in promoting growth but ignored its limitations in generating sustainable development. In a perverse sense, the seminal study by Lars Mjøset (Irish Economy in a Comparative Institutional Perspective), which had been commissioned by the NESC in 1992, came at exactly the wrong time. Whatever hopes there might have been that Professor Mjøset’s exposure of Ireland’s institutional weaknesses within a comparative European context would be listened to were carelessly swept away in the froth of the double-digit Celtic Tiger growth juggernaut. Hubris drove out reflection.

A central difference between Ireland and other European states was a failure to develop a system of innovation, that is a set of institutions and policies that could support a dynamic indigenous enterprise sector. As Ó Riain comments:

While Ireland was successful in attracting foreign investment, it proved exceptionally difficult until the 1990s to build a broad-based development strategy around “industrialisation by invitation”.

Eventually, the very success of FDI-led growth spilled over to the largely non-traded service sectors. Institutional underdevelopment, as well as failures within existing institutions, led inexorably to the destruction of many of the very real gains of the 1990s. Ó Riain’s summation is succinct and damning:

... the question of where Ireland’s crisis came from is best seen as a question of how the economy of the 1990s, which needed significant additional developmental supports, was instead sidelined by the growth machine bubble of the 2000s.

Chapter 3 focuses on the local dynamics of the crisis of the mid-2000s, with the international aspects taken up in the following chapter. The basic domestic facts are well known, but not always fully understood. The close ties between domestic banks and a small group of property developers resulted in a massive misallocation of capital away from competitive, export-oriented activities towards domestic property. As Ó Riain points out, the fact that Irish banks played almost no role in financing development in Ireland in earlier decades should have sounded warning signals when these same banks obtained virtually unlimited access to foreign capital in the 2000s. Finance for Irish development had been driven by a combination of foreign direct investment and domestic and EU-funded public investment, leaving Irish banks weak and inexperienced. This situation, combined with a light touch system of regulation produced a toxic outcome that brought the entire economy down.

Two factors combined to conceal the emerging risks of the connections between banks and developers and had their origins in a dominant, but soon to be found flawed, economic orthodoxy. First, an overarching concept of “market fundamentals” encouraged the discounting or even complete neglect of specific or localised risks. Perversely, the fact that the economy was currently growing strongly was taken as a sign that there were no risks. This also distorted the signals that emerged from the monitoring of competitiveness by the National Competitiveness Council, where measures of competitiveness became detached from the underlying structural operation of the economy at sectoral and regional levels and were distorted by a growth process that was inherently unsustainable. Second, there was excessive faith in the self-correcting properties of markets. In other words, it was imagined that market behaviour already incorporated all necessary information and that market actors – such as the banks and property developers – had strong and self-interested incentives to behave prudently. Nothing could have been further from the horrible reality.

Here, the actions of the international credit rating agencies – Moody’s, S&P, Fitch – served to confirm and reinforce the flawed insights that flowed from market behaviour. One of the more extraordinary tables presented by Ó Riain is that of Moody’s credit rating changes and summary comments regarding Anglo-Irish Bank over the period from 1998 to its eventual demise in 2008. Even as it tottered on the brink of collapse in 2008, it was rated as A1. As Ó Riain comments:

Rather than monitoring the market, the rating agencies were firmly embedded within the rationalities of the property credit bubble – in the process reproducing and deepening it. ... Many of the conditions that made the local crisis possible were intrinsic elements of market liberalism – the limiting of public regulation and the rejection of political guidance of the economy, the weaknesses of private regulation in securing the common good, and the structural importance and discursive privileging of markets and particularly finance.

Although much of the recent crisis was caused by an unholy combination of domestic action and inaction, a wider European context is necessary in order to see the complete picture. Ó Riain’s coverage of these complex issues in Chapter 4 is both comprehensive and insightful and a brief summary would not do it justice. Rather, I want to zero in on a single statement of the contradiction that lay at the core of the first ten years of operation of a deeply flawed European Monetary System and which fuelled the flames of the Irish crisis.

We might expect the core economies to be the Keynesian anchors in an economic union while the hungry peripheral economies pursued catch-up through Schumpeterian competitiveness strategies. In practice, Europe was characterised by the opposite – a disastrous combination of a Schumpeterian core and a Keynesian periphery, facilitated by financialisation and core banks.

Professor Ó Riain clearly expects his audience to pay attention and keep up; but perhaps this extraordinarily succinct and accurate synthesis of the complexity of the flawed operation of the euro zone deserves some elaboration.

If we shift our perspective away from one of an Ireland looking out at the external world, to that of the EU as a whole, looking inwards at the member states, some troubling questions about the adequacy and completeness of euro zone economic governance procedures arise. The fact that the monetary union was originally established in the absence of a complete fiscal union (a situation that persists today), meant that while the euro zone could operate a unified monetary policy in response to external shocks, it was unable to operate a unified fiscal policy. To the extent that one can talk of EU fiscal policy at all, it only exists as the summation of all the disparate policies operating in the separate member states.

Here, the difference between fiscal policy operating at the level of the euro zone as a whole and fiscal policy at the level of a small economy like Ireland is crucial. Compared with Ireland, the EU economy is relatively closed. At the level of the EU as a whole the leakages out of any fiscal (that is Keynesian) stimulus would be far less than, say, the leakages out of a purely Irish fiscal stimulus. Unfortunately, as the recent crisis deepened, and as the interest rates set by the ECB drifted down effectively to zero while the euro zone economy continued to stagnate, there were no easy ways of engineering any EU-wide fiscal stimulus. Furthermore, the dominant economy, Germany, as well as other northern European member states, were extremely reluctant to act unilaterally as national locomotives of demand-side stimulus of wider EU growth. The German interpretation of the crisis within the euro zone was primarily one of national budgetary policy failures of individual countries (Ireland, Greece, Spain, Portugal), and not one of deficient demand within the wider EU.

The German view is of particular importance, since the German economy now plays a dominant role within the euro zone. Chancellor Merkel’s statement at the June 2012 European Council was uncompromising in this respect:

It is not the aim of these governments to establish a fiscal union, but rather a “stability union”, with a view to establishing central budgetary control, including the right to intervene in national budgets.

Writing on this issue in December 2013 for the Friedrich Ebert Stiftung (a foundation associated with the German social democrats), Björn Hacker has summarised as follows:

Angela Merkel ... has never accepted the establishment of a fiscal capacity to absorb imbalances in the euro zone and is ready at most to give her assent to a low-threshold – in other words, limited in terms of extent and duration – solidarity mechanism in exchange for clearly defined structural reforms. Incomparably more important in Germany is to make existing recommendations in the European Semester more binding to increase competitiveness.

What are the likely implications for Irish economic policy? If the binding elements of the new, post-crisis, economic governance procedures operate successfully and prevent future within-country policy errors of the kind that led to the recent crisis, the looser economic policy coordination guidelines still leave local policy-makers with a considerable degree of discretion. In such a world, Irish interests and objectives converge with the interests and objectives of other advanced, export-oriented EU member states and in particular Germany. The German emphasis on the need for greater efficiency in labour and product markets and greater external competitiveness in a context of a social market economy (what Ó Riain terms a Schumpeterian view) sits well with Irish long-term policy aims and objectives. Ireland’s role in the continuing discussions on the future governance of the euro zone could be enhanced if it built on these kinds of commonalities between its own self-interest and the self-interest of other advanced member states.

Coming as they do in the immediate aftermath of the recent “austerity” process, the opportunities provided by having to accept external constraints on future Irish fiscal imbalances may seem unpalatable. But whatever about the political implications and acceptability of facing such constraints, in narrow and strictly economic terms these constraints do not represent any additional significant loss of economic sovereignty. Indeed, they may offer a more stable platform for longer-term economic development planning. Embracing these constraints with enthusiasm may represent the best means to put the Irish economy in a strong position to benefit from whatever movements may be made in the future towards a deeper fiscal and monetary union. Would it be better perhaps if, in the long run, we were all Schumpeterians?

Any outsider reading the extensive Irish enterprise strategy documentation would be left with the belief that the state was all-knowing and regarded its main task as “pushing” advice out to a fairly passive private sector. The very strength of the two main Irish development agencies – IDA Ireland and Enterprise Ireland – has made it difficult for non-government organisations, such as IBEC and ICTU, to research and promote much by way of independent work on longer-term enterprise strategy. Unlike the situation in Germany, where the equivalent organisations are heavily engaged in independent work on maintaining the competitiveness and strength of German enterprises, employers’ organisations and trades unions in Ireland over the past few decades have operated to a considerable extent within a social partnership, but usually in terms of defending the distributional interests of their constituencies. The IBEC website currently has only one publication listed for 2013 under the heading “Research and Survey Reports” (the table of contents of Management and Executives Salaries Report 2013). Besides short-term economic monitoring material, other publications are mainly in the human resources and health and safety areas. The ICTU website is more vigorously engaged in debate on economic policy, but mainly in terms of attacks on the neoliberal policies that it sees as being at the root cause of Ireland’s economic crisis. German employer organisations and trade unions also lobby strongly for their members’ interests, but there is considerable societal cooperation that goes far beyond narrow group interests.

But the question remains as to whether such strategic discipline would be possible in Ireland within a European Union which, as Ó Riain points out,

... consisted not only of diverse places within European markets but also of deeply institutionalised and very different social compacts which were never well integrated within the European project and its institutions.

In his fifth chapter, Ó Riain turns his attention to the domestic policymaking and institutional context whose gaps and flaws facilitated the drift to disaster. He dismisses the facile and cynical “stupidity and corruption” thesis and explores three main strands of policymaking: clientelism (a tradition in the Irish political system that has deep roots); liberal politics (associated with an increasingly adversarial political-economic structure); and corporatist politics (as embodied in formal agreements between the social partners). His analysis suggests strongly that the economic failures of the Irish economy, and specifically the most recent catastrophic failure, were rooted in an inability to design and implement economic coordination. The financial system, the structure of the macro economy and the foundation of the public finances all suffered failures of balancing institutions and sustainability. This chapter contains a fascinating table which displays the diverse and internally inconsistent characteristics of what are termed the four “projects” in the Irish economy which covered the years from the mid-1990s to the onset of the 2008 crash. With seemingly effortless and unthinking ease, policymakers segued from one policy framework to another with little or no understanding of the longer-term consequences. The infamous “Boston or Berlin” mantra of 2000 functioned more as a substitute for thought than as a vehicle for it. With an impressive understatement that would be amusing if it were not so tragic, Ó Riain concluded that:

With fragmented production regimes, weakening structures of network governance, speculative private finance and a welfare regime that favoured cash rewards over social services, the underlying political and economic conditions for managing Ireland’s boom were not particularly promising.

Perhaps the least successful chapter in this book is the final one. It is a somewhat uneasy mixture of a description of the actual course of the economic crisis as the outgoing Fianna Fáil-led coalition and the subsequent Fine Gael-Labour coalition struggled to address the challenges of national insolvency combined with a summary of the previous material. Unlike so many other economists and policy commentators, Professor Ó Riain displays an understandable reluctance to prescribe for a redesigned Irish political and socio-economic system. It would be wonderful if we could design a counterfactual Ireland where institutions were fit for purpose and policymakers always took wise decisions. But I welcome an account of the complex set of interacting circumstances that explained the manner in which our institutions failed, or were simply never in place, and how unwise decisions drove out wiser alternatives in a kind of toxic version of Gresham’s Law. That, at least, is a good starting point. First there needs to be understanding. Then there needs to be reform and change.
3/6/2014

John Bradley was for many years a research professor at the ESRI and now works as an international consultant in the area of economic and industrial strategy. He regularly advises the European Commission, the World Bank and other international organisations and governments on policy issues related to promoting long-term economic growth and development.

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