How rich was Ireland really?

by on December 7, 2010 at 3:10 pm in Books, Current Affairs, Economics | Permalink

Not as rich as they thought.  I've been reading Fintan O'Toole's excellent Enough is Enough: How to Build a New Republic.  Mostly it is an expose of Ireland's crony capitalism and bad political institutions.  On economic issues, chapter five offers up the following:

1. During the boom years, property accounted for 72 percent of all assets.

2. For infrastructure, Ireland ranked 26 out of 28 OECD countries.

3. Ireland had a higher share of slow fixed internet connections than in any other comparable country.

4. In terms of R&D or patents, Ireland was well below the OECD average in per capita terms.

5. In the OECD "human and income poverty" rankings, Ireland was 23 out of 25 countries, sandwiched between the United States and Mexico.

6. The country's health care and educational systems are considered subpar.

The author asks: "Did anyone seriously believe the Irish were sixty percent richer than the Germans?"  Income is not wealth.

Unfortunately, the second half of the book collapses into polemics and generalities, but some of the earlier discussions are useful, important, and not available in most other sources.  Here is a review of the book.

Liam Delaney December 7, 2010 at 11:49 am

Tyler – Just one point, there is no document that I can think of that shows that Ireland's education system is below par. It has failings and there were some crazy decisions made during the boom that meant some easily fixable problems around educational disadvantage were not addressed but at nearly every level, the system stacks up reasonably well by OECD standards. Literacy, Numeracy and Science levels, as measured by PISA, seem to have gone down in ranking terms lately but are not "below par" in any reasonable sense of the phrase. Despite substantial failings in our health services, life expectancy increased markedly even during the late Celtic Tiger years. Having said that, the overall thrust that underdiversification was an acute failure of the Irish wealth model obviously stands as also does the point about the absolutely horrific consequences of lending and regulation practices particularly 2004-2008 and the political environment that made them possible. I know its fashionable to take every single negative comment about Ireland as being an essentially true part of some overall morality tale. But it would be good to isolate properly what went wrong without completely writing off the real gains in the country since the 1980s. Ireland is still fundamentally a good place to do business and FDI has not really been touched at all during this mess and exports have risen. If you could blow our banks into outer space along with their liabilities and replace them with a couple of good solid banks then even the scale of fiscal adjustment we are seeing now would likely not stop the country for very long.

figleaf December 7, 2010 at 12:12 pm

"5. In the OECD "human and income poverty" rankings, Ireland was 23 out of 25 countries, sandwiched between the United States and Mexico."

Yikes!

Thank goodness for Mexico then. I guess.

Actually, having grown up in a state adjacent to Alabama, which at the time had the worst education performance in the nation, it actually *wasn't* comforting when either administrators or legislators in my state would say "well, we're doing better than Alabama."

I'm aware that, unlike Alabama in the 1970s, there is far further to fall than either Ireland or Mexico. Nevertheless I'm just not comforted that the U.S. is one of the slices of human and income poverty with which Ireland could be sandwiched.

Does one imagine that borrowing another trillion dollars to finance tax cuts for (predominantly) members of the finance industry is the best way to shift the United States' numbers? In a positive direction I mean?

Because there are always other ways we could emulate Ireland. Five others just in the list above.

Yuk.

figleaf

Bill December 7, 2010 at 1:31 pm

Andy, You are the one making the argument that low taxes lead to sustainable economic development.

Defend your proposition, Celtic Tiger!

Your only defense thus far is that tax policy doesn't make a difference, by your reference to Spain.

So, go for it. I'm waiting to hear the new argument now.

Bernard Guerrero December 7, 2010 at 1:44 pm

Bill, it would appear to me that by citing a bunch of other countries in said monetary union that have high tax rates and yet have managed to suck just as badly, if not worse, he's already made as much argument as he needs to. The data points are there, it returns to you to prove the extra-ordinary claim that the other data-points with high tax regimes don't count because of X, Y or Z.

The part of your comment regarding regulatory regimes, OTOH, may be immune from this criticism. I don't know enough about Spanish or Greek regulations to say.

farmer December 7, 2010 at 2:19 pm

NB "ireland's education"

ireland is a odd bird in that it is a sovereign country that has citizens who can freely go to oxbridge/imperial college etc.

I understand that this might reference k-12 (or p1-6th form, if you will) but it bears repeating. No one faults wales (or for that matter, Greenland) for not having large universities

(having said that, neither trinity or UCD are slouches)

Bernard Guerrero December 7, 2010 at 3:43 pm

Bill, that's still a terrible argument. The fact is, other high tax states (i.e. Spain, Greece) have not "survived" any better then low tax Ireland. We may then conclude that the tax rate issue you raise is orthogonal to "survival". A red herring, if you will.

dave December 7, 2010 at 4:05 pm

Having low taxes but getting every other facet of governance wrong is worse then having high taxes and doing everything else right.

However, having low taxes and governing well is better then high taxes and governing well. Low taxes is one facet of good governance.

Ireland's low taxes did allow it to experience great levels of growth. That aspect of governance was good. What they should never have done was promote a property bubble or credit bubble in their banking system. They could have implemented policies to stop those bubbles while keeping low taxes, that would be the ideal solution. They also never should have joined the Euro since it is a poorly conceived currency. Those were their sins.

David December 7, 2010 at 4:35 pm

"In the OECD "human and income poverty" rankings, Ireland was 23 out of 25 countries, sandwiched between the United States and Mexico."

Any index of economic performance that suggests the USA and MEX are in close proximity deserves to be laughed out of the room.

I mean, really! :-/

David December 7, 2010 at 5:08 pm

Hi Tyler,
I would be interested to hear you compare and contrast Ireland and Iceland post 2008.

Scott Sumner December 7, 2010 at 6:02 pm

According to The Economist's forecast in their year end issue, Ireland's per capita GDP in 2011 will exceed Germany's by $9000, or $6000 in PPP terms. So after a horrendous collapse of their real estate industry, the Irish will still be far more productive than the Germans.

Or maybe the Economist's prediction will be wrong.

Bill December 7, 2010 at 6:54 pm

Scott,

Per capita GDP is different than per capita income, and per capita income is what is traditionally measured, not per capita GDP for purposes of comparison See, http://en.wikipedia.org/wiki/Per_capita_income You could have high per capita GDP simply from license payments going into US foreign subs in Ireland.

And, per capita anything does not measure disparity in income. So, high per capita income doesn't tell you what the gini coefficient for income is, for example, which would tell you how the income distribution is skewed.

mulp December 7, 2010 at 7:53 pm

Andy, there was a banking crisis in the Czech Republic around 1998, but it's simply not true that people couldn't get to their money for months. Maybe in a few small banks, but there was never any run; depositors were insured, all the major banks were bailed out by the state, cleaned up and sold to foreign banks. It is a matter of debate if it could have been done cheaper. Now the banks are conservative, stodgy and safe.

Ireland had low taxes and lax regulation to attract financial institutions and bank deposits. The low corporate tax rates of firms banking globally in Ireland, tax revenue made Ireland tax revenue rich.

When the financial crisis made these banks in Ireland, that provide all the tax revenues, insolvent, Ireland did same thing the Czech republic did: they bailed out the banks, but given the size of the bank liabilities which were from depositors all over the world and Ireland, taking over and "selling off" the banks wasn't really an option – Ireland would need to pay the buyer way too much money to take them.

And Ireland's low corporate tax rate is still generate rich tax revenues from the banks and the manufacturing firms based in Ireland just as they did in 2007.

The problem is with all the debt from bailing out the banks, bailouts that haven't ended. Taking over and liquidating or selling the banks would make the cost of bailout even worse immediately, and probably worse over the long term. If the banks operate and generate profit on operations, workout the defaulted debt, maybe have the economy and asset prices increase, the cost of the bailouts will fall.

This is the same as with the US banks – the Treasury, but mostly the Fed, has been propping them up so they can operate and use profits from operations, and Fed deposit spreads, to absorb the losses gradually. In reality, the Fed is injecting Fed money into the shadow bank money supply, so the Fed money expands as the shadow money shrinks.

The different between 1998 is the scale of the problem Czech Republic problems were the result the Russian problem which hit the US and Asia.

Joel December 7, 2010 at 9:47 pm

I'm not sure Greece really "had" high tax rates. Maybe ostensibly but it's doubtful they were paid. Italy, another potential trouble spot, likewise has high avoidance/corruption. I'm not sure as much about Spain, in any event it seems doubtful that high levels of regulation (regularly ignored) and high levels of taxation (unpaid) are any better than low tax/regulatory environments.

In the US, some of the best faring states had the strictest rules in place on the behavior of financial institutions, i.e. Texas (a product of S&L). It doesn't take a great deal of genius to see that strong and enforced regulation can dampen speculative excess and enhance macroeconomic stability. In general the countries that followed such proscriptions were far better off than those that did not. Obviously there will be exceptions but Germany & France empirically fared better than Iceland & Ireland for example.

Colman Reilly December 7, 2010 at 11:26 pm

And yet you couldn't move for the first half of the last decade without coming across a story talking about Ireland's wealth and how low taxes and lax regulation were the way to go. Not to mention labour flexibility, which wasn't even that high, despite the propaganda.

What this should teach us is that people who comment on economics are largely clueless – yet the same people are writing stories now that completely ignore what they wrote five years ago and all is well. For the record, I was shouting "Wealth is not income" repeatedly.

At the core of Irish problems is a government with wildly pro-cyclical policies that failed to make the necessary reforms when they had the money to do so – either increasing steady taxes (proper term for that escapes me right now, need coffee) to pay for current spending rather than relying on property transaction taxes or explaining to the electorate that they need to pick low taxes or crap public services, you can't have both – that was economically clueless and really believed that it was their brilliance that had caused the Irish economic miracle, not the culmination of decades of changes and external (largely EU) investment. Hubris did the rest. Even now, it seems to me that Cowen believes that only he can lead his people from the valley of darkness into the promised land.

Colman Reilly December 7, 2010 at 11:32 pm

Further to my comment above, another key part of the problem was an electorate who were desperate to believe that you could have both low taxes and excellent public services. The conventional wisdom did nothing to disabuse them of this notion, despite its absurdity.

AC December 8, 2010 at 1:08 am

1. During the boom years, property accounted for 72 percent of all assets.

How would this compare to other countries?

andy December 8, 2010 at 4:38 am

Bill, my point is that the banking bubbles are more or less orthogonal to the tax rate. They did have low taxes and they are quite well off – or are you implying that Ireland fared worse than Portugal, Greece etc? Yes, it wasn't so rosy as this article shows, however if you ever visited Greece, there is simply no comparison with Ireland. The low tax rate DID wonders.

I have never, ever, heard anyone say, that low taxes imply you won't have recessions or banking failures crisis etc. Can you quote some 'chicago' economist saying that?

You _may_ point out that if you kill enough of economic activity by high taxes, people will have enough trouble feeding themselves so they won't speculate. It's very unlikely to have a property bubble in North Korea…

I find the argument with low corporate taxes being a problem because the companies may exit very strange. It seems that the well-being of the state is the goal instead of well-being of the people. If the state wants to have low taxes, they must have low expenditures. Period. One might argue that some particular structure of taxes is not a good idea considering that the state will run out of money during the crisis (which may or may not be the case of Ireland) – but in this case in particular the problem seems to be that the state was simply ramping up expenditures during the crisis. If they simply kept expenditures flat, they wouldn't be in a crisis now and if you believe in "fiscal stimulus" (I don't), it would stimulate the economy.

As for the regulatory framework – of course the regulatory framework does matter (i.e. India). What I am skeptical of is that this information is of any use. You never know in advance, which regulation will work. Some will just kill economic atcivity; some will avoid problems; some will do both. "Let's have a good regulatory framework" is wishful thinking – it's as if a director of a company boasted: Let's have profit.

After-the-fact you will find that germany didn't have property bubble while other countries have; how many areas with almost no regulation did NOT have property bubble? Do you think in the areas that had property bubble you could have one in next 50 years? Very unlikely.

jc December 8, 2010 at 6:33 am

Also fwiw:

<img src="http://i52.tinypic.com/2qlwwh1.jpg&quot; border="0" alt="Image and video hosting by TinyPic">

Pavel Kohout December 8, 2010 at 1:12 pm

@ Andy, mulp

We had a currency crisis in May 1997 (the same time as Thailand), and a banking crisis subsequently.

The reasons:

1. Fixed rate of CZK to USD/DEM basket since 1992, thus current account decifit and overvalued currency. Rather slightly overvalued when compared to Asian countries at the same time, but still, we suffered a speculative attack and the central bank drastically raised interest rates.
2. Banking crisis followed as a result of the central bank actions to save the peg (it had to free float the CZK, eventually) and high volume of bad loans. Bad loans didn't go to property for the most part, but to transformed SOEs.

The aftermath: Czech banks were bailed out and sold. They're quite safe since then, mostly for bad memories of 1998 (and thus more cautious risk managemet), partly for high fees. Czechs love to hate their banks for high fees, but still, at least we didn't have to bailout them again recently.

Now, the ratio of nonfinancial credit to GDP is 50%, which is low by international standards. Ireland had credit/GDP at 60% in 1996, at the time when the label "Celtic Tiger" was adequate.

Czech tax collection to GDP stands at 37%, including income from state-owned property (Czech Power Company, for instance) it's roughly 40%.

Public debt/GDP may be close to 40% currently. We might teach Germans what austerity really is :-)

Bill December 8, 2010 at 4:32 pm

David, Not ignoring the comments, but was out working today.

Here is my reaction:

1. Low tax rate did wonders. My comments focused on low corporate tax rates attracting, not investment, but tax avoidance by incorporating subs in the country that are nothing more than shells which are used by MNCs to transfer profits out of the US and other countries. In what is know as transfer pricing, what companies do is find a low tax foreign jurisdiction, incorporate a sub, and transfer intellectual property and other intangible assets to it at a transfer price, and then accumulate royalities in the jurisdiction–there is basically no activity in Ireland, other than the post office box and 400 square foot office I referred to in my first post.

For the real world, yes, there has been corporate investment too which actually employs people. There is no disputing that. But, look at my first post which referred to the paper subs.

Second, if you lure for low taxes, and the country is put at risk, those very enterprises now threaten to leave. And that was the other point that I made above.

You might want to look up transfer pricing, taxation avoidance practices by MNCs. The irony is that today many US companies have lots of money abroad accumulated through these practices and can't repatriate it into the US without paying taxes.

2. JCZ's graphic is quite good. It shows that Ireland, before the crisis, was running a balanced budget. And I notice that claims of governmental profligacy have dropped recently as people realized that they were previously in balance.

3. Dave's comment that they should screw their creditors is not something I oppose–giving haircuts is fine with me. But, if you decide not to give haircuts, then I think it is foolish to take off the table raising corporate taxes.

4. Dave, as to ignoring the comments, please don't think I did; I just had to work to solve other peoples problems today.

Zetaclear December 16, 2010 at 12:58 am

yeah is the third part of the world where the people make alot of profit in the jobs industries but it isnt the richest one in the european union..

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