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    Part A: Company Matters

    1.0 Introduction

    There were many interpretations about Celtic Tiger back then. However, all of them brought

    the same meaning. Celtic Tiger is a term used to describe the economy of Ireland during a

    period of rapid economic growth from 19952007, which underwent a dramatic reversal by

    2008. The term is a variation on "Asian Tiger", a reference to Asia's economic growth. Since

    2004, many economists have referred to Ireland's economy as Celtic Tiger 2 because of the

    country's resurgence on the world stage.

    Ireland was one of Europes poorest countries for more than twocenturies. Yet, during

    the 1990s, Ireland achieved a remarkable rate of economic growth. By the end of the decade,

    its GDP per capita stood at $25,500 (in terms of purchasing power parity), higher than both the

    United Kingdom at $22,300, and Germany at $23,500 (Economist Intelligence Unit [EIU] 2000:

    25). In 1987, Irelands GDP per capita was only 63 percent of the United Kingdoms (The

    Economist 1997). As Figure 1 shows, almost all of the catching up occurred in a little over a

    decade. From 1990 through 1995, Irelands GDP increased at an average rate of 5.14 percent

    per year, and from 1996 through 2000, GDP increased at an average rate of 9.66 percent

    (International Monetary Fund 2001). Most theories of economic growth can be dismissed as an

    explanation for the rapid growth of the Irish economy. Rather, a general tendency of many

    policies to increase economic freedom has caused Irelands economy to grow rapidly.

    This nickname given for Ireland during its uprising years of the late 1990s, when it

    enjoyed an average annual growth rate of over 6.5%. The first boom was in the late 1990swhen investors in which many of them were tech firms poured in, drawn by the country's

    favorable tax rates, some as much as 20-50% lower than the rest of Europe. It ended with the

    bursting of the internet bubble in 2001. The second boom in 2004 was largely the result of

    Ireland opening its doors to workers from new European member nations.

    Increased in house prices, continued investment by multinationals, growth in jobs and

    tourism, a resurgence of the information and technology industry and the United States

    economic recovery have all been cited as contributing factors for the revival. In just over a

    http://www.wikipedia.org/wiki/Republic_of_Irelandhttp://www.wikipedia.org/wiki/Economic_growthhttp://www.wikipedia.org/wiki/Economic_growthhttp://www.wikipedia.org/wiki/Republic_of_Ireland
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    generation, Ireland has evolved from one of the poorest countries in Western Europe to one of

    the most successful. It has reversed the persistent emigration of its best and brightest and

    achieved an enviable reputation as a thriving, knowledge-driven economy.

    As a result of sustained efforts over many years, the past of declining population, poor

    living standards, and economic stagnation has been left behind. Ireland now has the second

    highest gross domestic product (GDP) per capita within the European Union (after

    Luxembourg), one- third higher than the

    EU-25 average, and has achieved

    exceptional growth.

    One of the biggest successes of the Irish economy has been new job creation. From

    1990 to 2005, employment soared from 1.1 million to 1.9 million. Economic growth, more jobs,

    and rising living standards meant the resolution of the emigration problem, which had bedeviled

    Ireland for generations.

    The population increased by almost 15 percent from 1996 to 2005 in a striking reversal

    of previous trends. In one year alone (July 2004-June 2005), employment increased by 5

    percent. Ireland is now seen as the land of opportunity by many workers from the 10 newest

    EU member states. Its unemployment rate of 4.4 percent is less than half the EU average.

    Public budgets are in balance, and foreign investment was equivalent to 17 percent of GDP in2003.

    Figure 1: Chart of Employment by Sector and Unemployment

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    Ireland achieved this success through a combination of sensible policies and

    pragmatism. At the heart of these policies was a belief in economic openness to global markets,

    low tax rates, and investment in education. While economic success over the past 15 years can

    be ascribed to a range of domestic and international factors, it was not a fluke. Ireland has longhad, and intends to sustain, low tax rates to attract investment. Its current 12.5 percent

    corporate tax rate evolved from the zero rate on export sales in the 1950s and the 10 percent

    rate on manufacturing and some internationally traded services introduced in 1980.

    Ireland's transformation was national in scope, with individuals, businesses, institutions,

    and government sharing the same ambition. It involved parents deciding that their children

    would have choices that they did not have and would not be forced to leave their home

    communities because of economic necessity. Political decisions were driven and sustained bythe public will for success. There were some deviations from sensible policies at times, but

    through the many difficult years, the threads of consistent development can be seen.

    The Fall

    Unsolved, the underlying economic problems of the 1970s rolled over into the 1980s,

    producing disappointment. The causes were the return of high unemployment, emigration,steady worsening of the public finances, and the seeming inability of any government to

    manage the nation's affairs and find a solution to the worsening situation. The atmosphere of

    the 1980s was more redolent of the dark years of the 1950s than of the optimism that had

    permeated the two decades in between.

    The feeling of failure was exacerbated by the waves of emigration of young people, just

    as in a generation earlier. Whole classes of university graduates would frequently leave the

    country. There was a disheartening drain of human capital. A net 200,000 people left from

    1981 to 1990. In the worst years, more than 1 percent of the country's population fled. This

    was not what the policies of the previous 25 years had been designed to achieve. What had

    gone wrong?

    A number of internal and external factors were conspiring to slow down progress and

    undermine confidence. Global conditions were weaker after the oil shocks of the 1970s. The

    momentum from EEC entry had faded. Persistent inflation averaged close to 11 percent per

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    year between 1981 and 1986. Jobs created by new foreign investment, while substantial, were

    inadequate to employ the growing workforce and counter the failure rate of older businesses.

    Attempts at government intervention proved to be no better. Continued increases in

    public spending, tax increases, and deficit financing through borrowing soured the investment

    climate and failed to raise employment while increasing the drag on the underperforming

    economy.

    2.0 The Rise of Celtic Tiger

    The starting of the Celtic Tiger dated back to 1950's when Ireland appeared to be in terminal

    decline with an average of 50,000 emigrating each year.

    In 1950, the Industrial Development Authority was established as an independent State

    agency and in the interval, IDA Ireland has shown what State employees can achieve when

    freed of the cobwebs of civil service bureaucracy. In 1955, the Minister for Finance Gerard

    Sweetman appointed the 39-year old Thomas Kenneth Whitaker as Secretary of the

    Department of Finance.

    The 1956 budget that was introduced by Sweetman proposed a tax exemption on profits

    from exports. It had Whitaker's imprint and in the following year, that was marked by the

    creation of the European Economic Community, he began work on the seminal paper Economic

    Development. He was focused on preparing the Irish economy that had been so linked with the

    UK's, for eventual membership of the new six-country member European body.

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    Whitaker's paper was the blueprint for the move from protectionism to free trade and

    the modernisation of the economy through the incentivising of multinational companies via tax

    breaks and grants, to

    establish manufacturingoperations in Ireland.

    Sean Lemass, the Deputy Prime Minister and Minister for Industry and Commerce from

    mid-1957, was a strong supporter of Whitaker's blueprint despite opposition from business and

    trade union interests and it became the basis of the First Programme for Economic

    Development. In 1959, Lemass became the Prime Minister. In the same year, the Shannon

    Industrial Free Zone opened at Shannon Airport in south-west Ireland and American companies

    began opening assembly facilities in the zone. In 1961, Ireland applied for membership of the

    European Economic Community which proceeded without success. Two years later, the State

    visited by President John F. Kennedy, the great-grandson of Irish emigrants, set the seal on the

    new modernising Irish economy as prosperity began to reverse the tide of emigration.

    In January 1973, Ireland joined the then European Economic Community. In October of

    that year, unemployment fell to 63,000 and another Middle East War ushered in an oil embargo

    and a quadrupling of oil prices. Inflation shot up to double digit levels and governments lost

    Figure 2: Chart of Irelands economic growth since 1970 until 2004.

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    control of public spending, emigration resumed and negated the positive impact of the

    membership of the EEC.

    Between 1977 and 1981, the combination of tax cuts with huge spending increases (in

    the single year 1979, the public service pay bill was increased by 34%), resulted in a trebling of

    the National Debt.

    The continued success in building up the base of foreign companies, the opening of a

    financial services centre in Dublin in the late 1980's, eventual political courage and cross-party

    support to control public finances, large structural funds transfers from Europe and a favourable

    demographic factor with a young educated population, coincided with the take-off of the

    American economy from the mid-1990's and the Celtic Tiger was born.

    Dr. Garret FitzGerald has written in the Irish Times that during the brief Celtic Tiger

    period from 1993 to 2001, European living standards rose by one-half. But this was due to two

    special factors - both of which were essentially temporary in character.

    The first was the impact upon our national productivity of a quite exceptional inflow of

    new US investment. For a number of years Ireland, with only 1% of Europe's population,

    attracted up to 25 per cent of all US greenfield industrial investment in European continent. Thenew technology and skills that this inflow brought contributed to a 4% annual increase in

    output per worker at national level, with increased productivity.

    The second factor, which played an even larger role in boosting European living

    standards during that time was the huge increase in the total number of people at work, and

    the corresponding drop in the proportion of dependants in European population. Several factors

    contributed to this such as the exceptional inflows of young workers emerging from the

    educational system and of women transferring from home-duties to the labour force, and also

    the flow of unemployed people returning to work and of recent emigrants coming back to jobs

    here.

    Within a decade these inflows into European labour-force reduced from 230 to 115 the

    number of dependants that every 100 workers had to support, either directly within their

    families or indirectly through taxation.

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    FitzGerald wrote that the huge increase in the proportion of European population

    engaged in work, and the consequential drop in their dependency ratio, more rapid than had

    ever previously been seen anywhere in Europe in peacetime which accounted for more than

    half of the improvement in European living standards. However, that extraordinary combinationof productivity growth and reduced dependency, which distinguished the 1990s in Ireland from

    any other decade, was a temporary phenomenon.

    FitzGerald also wrote that in future, European standard of living is likely to rise much

    more slowly than they became accustomed to during the 1990s. However, he did not thought

    that with most people this particular penny has yet dropped. Since the end of 2003, output per

    worker in Ireland has been almost static. It seems to have risen by only 1% in 2004 and not at

    all in 2005. Even if the CSO was in due course to revise upwards its current estimates ofeconomic growth in those two years, which was quite possible, any such revision was unlikely

    to be on a scale that would show any appreciable rise in productivity. In the absence of

    improvements in output per worker, the current spending spree, financed by borrowing, could

    not continue indefinitely. On top of the uncertainty created by European huge growth in

    dwelling construction, this new factor introduced a further element of uncertainty into their

    economic prospects in the latter part of the current decade.

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    The rise of the Celtic Tiger much observed with these actions taken by the Irish in order

    to improve the Irelands economy.

    1922-1932 the first decade of independence with a continuation of existingpolicies. Independent Irish currency was established in 1927 which kept at a

    one-to-one parity with sterling.

    1932-1938 there was an economic war with the United Kindgom and anattempt to build infant industries behind high tariff walls. The Control of

    Manufacturers Acts were introduced prohibiting the ownership of Irish industry

    by foreigners.

    1939-1945World War II during which Ireland remained neutral. 1946-1957 the period of economic stagnation marked by heavy emigration

    which netted averaging over 40,000 during 1950s.

    1957the removal of the Control Manufacturers Acts. 1973Ireland joined the European Economic Community. 1977-1981 expansionary macroeconomic policy used in an attempt to provide

    full employment. This policy, which resulted in the Public Sector Borrowing

    Requirement (PSBR) constituting over 20% of GNP, failed, creating balance

    payments problems and pushed the public sector debted up to 120% of GNP.

    During this period of fiscal excess, Ireland joined the European Monetary System

    in 1978.

    1979 After joined ERM and EMS, the Irish pounds one-to-one parity withsterling was broken in March 1979.

    1981-1986 attempts at fiscal retrenchment largely aborted by conflictsamongst the partners of the Coalition governments of the period.

    1987 Fiscal rentrenchment introduced. The International Financail ServicesCentre launched.

    1988the first tax amnesty established. This helped reducing significantly thebudget deficit and the PSBR.

    1992Ireland signed up for the first phase of EMU at Maastricht. Abolition ofexchange control regulations.

    1992/ 1993 exchange rate crises. Devaluation of the Irish pound (Jan 1993)and moved to wider exchange rate bands (15% +/-).

    1999Ireland in the EMU.

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    3.0 Financial Innovation and Ideology

    At the heart of the concept of actually existing neoliberalism is the notion that proto -

    neoliberalism is an economic experiment which has become woven into localities in different

    ways as a consequence of their unique social, cultural, economic, political, and institutional

    histories. Brenner and Theodore (2002, page 351) note the path-dependent nature of

    neoliberal restructuring projects insofar as they have been produced within national, regional,

    and local contexts defined by the legacies of inherited institutional frameworks, policy regimes,

    regulatory practices and political struggles. In these divergent contexts they have identified

    key moments of what they call creative destruction, involving the dismantling of particularinstitutional forms and the construction of new (de)regulatory apparatus. Other strands of work

    have argued for understanding neoliberalism in terms of govern mentalities (Larner, 2000), and

    as a mobile technology (Ong, 2007). England and Ward (2007, page 8) suggest that there are

    important similarities, discursively and materially in the restructuring of markets for currency,

    energy, public services, transportation and so on, which highlight the shared characteristics of

    state neoliberalisation, but that the contingency of the project on place-specific market and

    regulatory structures means that it cannot be theorised as a coherent set of global processes.

    The propagation of the ideology of neoliberalism, of course, betrays a long and colourful

    history. For instance, and representing only one example, before crashing onto the shores of

    both the United Kingdom and the United States in the 1980s in the guise of Thatcherism and

    Reaganism, neoliberalism was long experimented with and refined and rejigged in the context

    of Structural Adjustment Programmes imposed by the IMF on bankrupt nations in the

    developing world. There is certainly a tradition of scholarship which has preserved an interest inthese multiple past and present laboratories. But it might also be argued that recent work

    within Anglo-American geography has tended to prioritise a limited number of case-study sites,

    both spatially and temporally. Firstly, Brenner and Theodores (2002) assertion that the urban

    scale now constitutes the most appropriate entry point for empirical explorations of the

    grounding of neoliberalism in concrete histories and geographies has generated a

    disproportionate drift in interest towards the (Western) city. Secondly, to date, the principal

    antecedent context has been the Fordist Keynesian welfare state. Neoliberalism has generated

    a period of creative destruction and has junked, metamorphosed, and recalibrated previous

    Fordist Keynesian institutions. And much recent work has sought to develop the New Urban

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    Politics literature to map a purported epochal transition in urban governance from urban

    managerialism to urban entrepreneurialism (Cox, 1993; Cox and Mair, 1989; Hall and Hubbard,

    1996; Harvey, 1989).

    Arguably, the development of the concept of actually existing neoliberalism has been

    animated, but also limited, by the selective field sites which Anglo-American geographers have

    chosen to work on. The Irish case endorses the need for a consideration of a wider range of

    scales of analyses and spaces and places and an appreciation of prior histories in the longue

    dure and a deeper reach into the past. Our proposition is that Irelands interlacing with

    neoliberal ideology has been mediated largely by institutions operating at the level of the

    nation-state and within a particular political culture and system inflected by the long history of

    Anglo Irish relations and the countrys emergence as an independent postcolonial state. In

    this sense the Irish case can be read as an exemplar of a much wider and richer historical

    geography of encounter between neoliberal ideology and the postcolonial legacy. We propose

    that Irelands neoliberal model has been shaped by at least four important historical factors.

    First, British colonisation of Ireland, and annexation through plantation, has created along history of conflict in Ireland over ownership and propriatorial control over land and

    property. Historically, various strands of Irish cultural and political nationalism and Irish

    Republicanism foregrounded land and property ownership and land reform as central to their

    mission. Irish cultural and political life is thus marked by a fierce and combative defence of the

    rights of the citizenry to exercise almost complete freedom and autonomy over land and

    property. Moreover, any such tendencies were compounded by the housing policies of

    successive governments after 1922, which, rather than adequately tackling social housing

    conditions, subsidised private-sector developers and mortgage lenders, therefore gradually

    pushing larger sections of the population into owner-occupation (see McCabe, 2011).

    Second, living under the yoke of British political control, the Irish political model

    developed in ways which privileged local social relations and, in particular, a clientalistic and

    patronage species of politics. The craft of votes for favour and graft were honed in the rural

    Irish village and through time became sedimented and naturalised. The result is that Irishpolitics is marked by a triumph of local politics over party and national politics (see Collins and

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    Cradden, 1997). This has been combined with a highly centralised bureaucracy inherited from

    the former British colonial administration (Breathnach, 2010, page 1186). Moreover, local

    politicians wield power in ways which have actively subordinated the Irish planning system. As

    a result, Irish planning has never achieved the same status as has planning in much of Europe,and has always been weakened and compromised by localism, cronyism, and corrupt political

    practices.

    Third, although Irish nationalism was infused with strains of Marxist and socialist

    politics, arguably Irelands revolution was one of the most conservative in modern history. Since

    Independence Irish political life has been dominated by the oscillating fortunes of two

    hegemonic, right-of-centre and conservative, nationalist parties: Fianna Fail and Fine Gael.

    These parties were formed out of the Irish Civil War and refl ect not left and right divisions in

    ideology but protreaty and antitreaty sentiments at the time of Independence. Irish political

    cleavages, then, for the most part do not pivot around ideological differences.

    Fourth, in the years immediately following Irish Independence, Irelands principal

    economic policy was one of import substitution. External capital was to be heavily regulated,limited, and policed, and domestic industries were to be nurtured and protected. By the late

    1950s it was becoming evident that this model had impoverished, and continued to impoverish,

    Ireland. From the 1960s on Ireland embraced a model of a liberal and open economy and

    aggressively sought to court export-oriented manufacturing, piloting and adopting policies

    which would later be labelled neoliberal.

    These four factors shaping the Irish political landscape have produced a certain species

    of neoliberalism in Ireland which is perhaps best characterised as ideologically concealed,

    piecemeal, serendipitous, pragmatic, and commonsensical. Indeed, successive Irish

    governments have never had an explicit neoliberal ideology (apart from a small number of infl

    uential ministers) (Kirby, 2010). Ideology thus remains largely hidden in the apparatus of Irish

    politics. Its presence is barely articulated and often invisible. And yet Ireland was characterised

    over the Celtic Tiger period by a range of practices which bear important similarities discursively

    and materially with key processes of neoliberalisation (Peck and Tickell, 2002). As opposed toan ideologically informed project, such as those implemented by Thatcher in the UK and

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    Reagan in the USA during the 1980s (see Harvey, 2007), Irish neoliberalism was produced

    through a set of short-term (intermittently reformed) deals brokered by the state with various

    companies, individuals, and representative bodies, which cumulatively restructured Ireland in

    unsustainable and geographically uneven ways.

    Breathnach (2010) argues that the tension between the overwhelming concentration of

    employment and population in the east of the country and the political, clientelistic motivation

    towards balanced regional development has resulted in an inability on the part of the state to

    make spatially selective decisions in order to plan strategically for economic growth. During the

    Fordist period, in which Ireland operated as a branch-plant manufacturing centre, this resulted

    in an extreme form of industrial decentralisationmanifested during the 1970s by the states

    construction of advance factories in 156 locationsbut was significantly exacerbated from the

    1980s onwards, once services became the main source of employment growth. Although

    intended as a way of addressing this imbalance, the National Spatial Strategy published in 2002

    was effectively disabled by these same political features. Moreover, when export-led growth

    slowed down, the entrenched system of local clientalism was not superseded by indigenous

    entrepreneurship which capitalised on Irelands new industrial composition but, rather, new

    wealth was invested in property. The Irish states moves towards neoliberalisation, then, couldbe seen to operate at two scales: the international level, whereby the state attempted to create

    a vibrant and open economy which would attract FDI due to the ease of conducting business

    and generating profi t, and the national/local level whereby the state pandered to political allies

    by cultivating the conditions for a property boom, which was equally characterised by a lack of

    spatial selectivity. As the property sector began to take precedence over FDI as the major

    generator of state revenue, and due to reliance on indirect taxes from this sector, an economic

    model which could only perform adequately in a situation of perpetual growth was created. This

    need for perpetual growth was ingrained both structurally, in the states taxation system, and

    discursively, in the Celtic Tiger myth itself.

    The Irish neoliberal model ostensibly takes elements of American neoliberalism (minimal

    state, privatisation of public services, public private partnerships, developer/speculator led

    planning, low corporate and individual taxation, light to no regulation, clientelism) and blends

    them with aspects of European social welfarism (developmental state, social partnership,welfare safetynet, high indirect tax, EU directives and obligations). Rather than being the result

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    of some well-conceived economic master plan, however, the Celtic Tiger was the outcome of a

    complex set of unfolding, interconnected, often serendipitous, processes held together by a

    strategy of seeking to attract and service FDI. Thus, Ireland exhibits a peculiar brand of

    emergent neoliberalisation. The model is perhaps better described as a series of disparatepolicies, deals, and actions which were rationalised after the fact, rather than constituting a

    coherent plan per se. As such, the claim that the Irish model sits politically somewhere between

    Boston and Berlin is not so much an indication of a country pioneering a new model of

    neoliberalism, as it is suggestive of the ways in which new policies and programmes were

    folded into the entrenched apparatus of a short-termist political culture shadowed by low-level

    clientelism, cronyism, and localism which works to the detriment of long-term, statewide

    planning.

    Much of the policy transformations of the Celtic Tiger era movements were, then, to an

    extent the outcome of a certain political pragmatismdoing what was necessary at the time to

    satisfy the needs of various sectors of the voting publicrather than being characterised by

    clearly delineated periods of roll back and roll out neoliberalism. The rolling out of neoliberal

    mechanisms, such as privatisation and public private partnerships, was rarely handled in any

    sort of ideologically informed or systematic manner, and the state often failed to achieve theappropriate balance between private sector risk and public sector reward in these projects.

    Despite the relatively small receipts yielded to the taxpayer by privatisation, the state has

    continued to roll out privatisation into diverse service areas such as school buses, refuse

    collection, motor-vehicle testing, and urban car parking and clamping, and to initiate public

    private partnerships with respect to public buildings, social housing, and road infrastructure.

    However, while the state rolled out neoliberal policy mechanisms in fragmented and piecemeal

    ways into different sectors, this was not accompanied by an equivalent rolling back of social

    welfarismunemployment and child support and other benefi ts remained relatively high

    although it should be noted that (a) the overall quality of services in many areas of the public

    sector (such as health, education, and public transport) failed to refl ect the magnitude of the

    dramatic transformations of the nations wealth during this same period (b) social disadvantage

    was not adequately addressed during this period and (c) the response to the current crisis has

    seen savage cuts in these same sectors. Moreover, rather than pitting the state against the

    trade unions, the period of Irish neoliberalisation was characterised by the dense networks of

    institutions of social partnership extending across all spheres of the political economy andintegrating local actors, state agencies, and European Union Programmes [that became] an

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    institutional mechanism of public governance through almost all spheres of public life. These

    agreements traded work-related and pay-related concessions for union docility, and were used

    by the state as a means of manufacturing labour stability. Additionally,

    Unlike most other countries in Europe, Ireland has consistently rejected the model of

    decentralised decision making even in policy areas, which many observers might suggest are

    most sensibly located and managed by the local or regional sub-national levels of government.

    Irelands system of local governance is traditionally poorly organised, in receipt of very limited

    funding, and responsible for a very limited range of policy.

    The neoliberalisation of Ireland has been flimsy and unsustainable and the Irish statefailed to recognise that market liberalisation requires a more robust and socially responsible

    state to achieve equality and stability. Similarly the Irish state has failed to embed FDI

    industries adequately over the boom period through investing in and growing indigenous

    companies. Indeed, Irelands dependence on foreign investment is starkly identifiable by the

    degree to which GDP exceeds GNP.

    What we need to take away from this discussion is that these particularities of the Irish

    states flirtations with neoliberalism are not anecdotal or an addendum to the technologies more

    representative of neoliberalisation globally. Rather, these particularities have been central to

    how actually existing neoliberalism has emerged in the Irish context. As such, we fi nd the

    concept of creative destruction, which sits at the heart of ideas such as path dependency and

    path trajectory, problematic and offer instead the concept of path amplification. The

    relentless focus on the paradigmatic case of neoliberalisms assault on and dismantling of

    Fordist Keynesian, and cultural, political, and historical infrastructures at the level of the city,has arguably effaced the recognition that in some cases neoliberalism actually fi nds itself in

    harmony with, rather than in opposition to, prior institutional histories. Path amplification

    points to the importance of forms of path trajectory in which history serves to amplify rather

    than slow down neoliberalisms ambitions. Although often seen as a burden, weight, and source

    of friction, in fact in some cases pasts can serve as catalysts, lubricants, and wellsprings for

    neoliberal reforms. In light of these arguments, the following section looks more closely at the

    Irish property boom as indicative of the actually existing ways in which these processes

    converge.

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    4.0 Financial Crisis and Asset Bubbles

    The suddenness and the severity of the economic fall from grace took many by surprises.

    Irelands banks were the first casualty of the international financial crisis. But the principal

    explanations for Irelands woes were not to do with the banks exposure to risky investment

    products: Ireland was relatively untouched by US sub-prime lending.

    The main source of the Irish banks problems was their over-exposure to property-based

    loans and the close personal as well as financial links between bankers, property developers,

    builders, and politicians, especially in the dominant Fianna Fail party. Between 1997 and

    2007,housing prices rose 175 percent in the United States, 180 percent in Spain, 210 percent

    in Britain and 240 percent in ireland.many commentators had warned that Ireland was in the

    grip of an asset price bubble-an enormous and clearly unsustainable construction boom and

    soaring house prices. The international crisis exacerbated but did not cause underlying banking

    crisis in Ireland.

    The contribution to Irelands crisis of ruinously bad lending practises, increasing reliance

    on short-term international lending and over-reliance on poorly monitored loan collateral, and

    poor regulation of the banking sector, is by now well established. Ireland experienced a plainvanilla banking crash due to over-reliance on loans to construction in an unsustainable bubble

    economy. Banking regulation was too light to make any appreciable impression on banks

    pursuit of profits through increasingly risky lending practices. For a time, this yielded large

    profits for banks and large bonuses for the bankers: the privatization of gains. The

    governments bank guarantee, on the other hand, resulted in the nationalization of losses.

    A Huge Deficit Opens Up

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    The collapse in construction activity, and the corresponding jump in unemployment, resulted in

    a large loss in income tax revenues and an increase in social welfare payments but if the fiscal

    consequences of the housing crash had been limited to these impacts, Ireland would have been

    positioned to cope well. However, Irelands tax base had been altered during the later periods

    of the boom to collect more and more tax revenue from construction activity.

    Figure 3 shows the share of total tax revenue due to income taxes (the black line on the

    left scale) and due to asset-based taxes such as stamp duties, capital gains tax and capital

    acquisition tax. Thanks to booming housing activity and surging house prices, the share of taxrevenue due to these asset-based taxesrose steadily during the 1990s and then rapidly during

    the period after 2002. At the same time, there was a corresponding reduction of a similar

    magnitude in the amount of revenue collected from income taxation. When construction activity

    collapsed, this substantial source of government revenue disappeared almost overnight.

    Figure 3: Composition of Tax Revenues

    By late 2008, the collapse in construction activity was apparent and the world economy

    was entering a severe recession. Irish real GDP declined by 3.5 percent in 2008 and by 7.6

    percentin 2009. Despite having had years of budget surpluses, Ireland was suddenly facing a

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    yawning fiscal gap. Indeed, it was apparent by early 2009 that, without fiscal adjustments,

    Ireland was heading for deficits of as large as 20 percent of GDP.

    The scale of these potential deficits meant that, despite the low starting level of debt,

    the Irish government realised there was no room for discretionary fiscal stimulus to ease the

    effects of the severe downturn. Instead, from late 2008 onwards, the Irish government has

    implemented a sequence of contractionary budgets featuring a cumulative total of tax increases

    and spending cuts worth 20.8 billion. These adjustments are the equivalent of 13 percent of

    2010s level of GDP or 4,600 per person and represent the largest budgetary adjustments

    seen anywhere in the advanced economic world in modern times.

    Despite these enormous adjustments, the decline in the size of the Irish economy has

    been so severenominal GDP has declined by almost 20 percentthat the European

    Commission are still projecting a budget deficit of 10.6% in 2011.

    The Banking Crisis

    The tale of the Irish fiscal crisis is gruesome enough if one focuses alone on the collapse of the

    construction sector and its effects on revenues and expenditures. However, the straw that

    broke the Irish camels back was the effect on the state finances of the governments attempts

    to deal with a banking crisis. The acceleration in housing activity after 2002 that is evident in

    Figure 7 was largely financed by the Irish banks. These banks significantly changed their

    business model during the later years of the boom. Prior to 2003, the Irish banks had operated

    in a traditional manner, with loans being roughly equal to deposits. After 2003, these banksincreased their property lending at rapid rates and financed much of this expansion with bonds

    issued to international investors. From less than 15 billion in 2003, international bond

    borrowings of the six main Irish banks rose to almost 100 billion (well over half of GDP) by

    2007. In addition to rapidly expanding their mortgage lending, the Irish banks also built up

    huge exposures to property developers, many of whom had made fortunes during the boom

    and were doubling down on property with ever more extravagant investments. Many of these

    development loans were used for investments that could only have paid off if property prices

    continued to rise. Leading the way was the now-notorious Anglo Irish Bank, which specialised

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    in property development. Anglo expanded its loan book at over 20 percent per year and is now

    known to have had a series of serious corporate governance problems.

    During 2008, as evidence built up of the scale of the Irish construction collapse,

    international investors became concerned about the exposure to property investment loans of

    the Irish banks. These banks found it increasingly difficult to raise funds on bond markets and

    by late September 2008, two weeks after the collapse of Lehman Brothers, the Irish bankers

    turned up at government buildings looking for help.

    The Irish governments decision on September 30, 2008 to give a near-blanket

    guarantee for a period of two years to the Irish banks has been, and will continue to be, hotly

    debated. The government appears to have taken seriously the assurances of the Irish Central

    Bank that the banks were fundamentally sound and were merely suffering from a short-term

    liquidity problem. Thus, the government appears to have believed that the guarantee would not

    have consequences for the state finances. However, there is also evidence that senior civil

    servants, as well as Merrill Lynch (who had been recruited as advisors in the weeks prior to the

    decision) warned against the dangers of a blanket guarantee.

    By spring of 2009, it became apparent that the losses at the Irish banks were extremely

    large, most notably at the dreaded Anglo Irish Bank. This paper will not focus on the various

    strategies the Irish government adopted from that point onwards to deal with the crisis.

    However, the fact that the liabilities of the banks were guaranteed by the government played a

    key role in limiting options to restructure insolvent banks in a way that would have seen losses

    shared with private creditors. Thus, in 2009, the government began using state funds to

    recapitalise the guaranteed banks.

    The Endgame

    By 2010, it was clear to international financial markets that in addition to a serious problemwith its budget deficit, Ireland was facing a large bill of uncertain size in relation to fixing its

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    banking sector. A National Asset Management Agency (NAMA) was set up to issue government

    bonds to the banks to purchase distressed property assets at a discount and as 2010 went on

    and NAMA acquired more properties, it became clear that the final bill for recapitalising the Irish

    banks would be enormous.

    In September 2010, the government provided a final estimate that Anglo Irish Bank

    would cost the state about 30 billion or almost 7000 per person living in Ireland today. The

    cost of these losses is being covered by a promissory note which will make cash payments

    over a number of years but which was fully counted against Irelands general government

    deficit in 2010, leading to what must be a world record official deficit of 32 percent of GDP.

    As the economy failed to show evidence of a strong recovery, international markets also

    became increasingly concerned with the future losses of the Irish banks due to mortgages and

    business loans. The banks had been able to issue bonds from late 2008 to early 2010 under the

    protection of the state guarantee. However, as concern about potential sovereign default began

    to rise, this guarantee ceased to be of much use. Many of the bonds that had been issued

    matured in September 2010, when the original guarantee ran out.

    When the banks failed to find new sources of market funding to roll maturing bonds or

    replace the corporate deposits that also began to leave the system at this point, they turned to

    the ECB for emergency funding. Borrowing from the ECB by the guaranteed banks, which had

    been negligible prior to the crisis, jumped from 36 billion in April 2010 to 50 billion in August

    to 74 billion in September. The banks also began to run out of eligible collateral to use to

    obtain loans from the ECB, at which point the ECB allowed the Central Bank of Ireland to begin

    making emergency liquidity assistance loans to the Irish banks.

    International markets, which had been reasonably confident throughout 2009 that

    Ireland would make it through without a sovereign default and which generally had a

    favourable view of the Irish governments fiscal adjustment programme, became increasingly

    concerned that the Irish banking sector was going to destroy the creditworthiness of the Irishsovereign. Bond yields on sovereign debt rose in September and October and then moved up

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    dramatically in November following the famous Deauville declaration of Mrs. Merkel and Mr.

    Sarkozy.

    5.0 Events

    Irelands financial crisis trajectory, July 2008 March 2009

    8 July 2008: After the Exchequer reports an expected shortfall in government revenue of 3

    billion, the new Taoiseach (and former Finance Minister), Brian Cowen, announces a number of

    new budgetary measures decided on by the government in response to the emerging financial

    pressures. The measures trigger their own crisis, with a backlash against proposed cuts to

    pensioners medical benefits.

    1920 September: The Irish Times reports that Minister for Finance, Brian Lenihan, is prepared

    to review the government system of guaranteeing 90 per cent of deposits up to a limit of20,000 amid calls for this limit to be raised. The next day, the Irish Government moves to

    secure the deposits in Irish banks to prevent a run on them. The 20,000 guarantee is

    increased to 100,000.

    25 September: Ireland is officially the first EU member state to slip into recession.

    30 September: Finance Minister Lenihan presents the Credit Institutions(Protection) Bill 2008 to

    the Dil (the Irish national parliament). The bill enables the government to take a stake in any

    financial institution that receives financial support. It also incorporates an insurance premium

    of 0.2 per cent of deposits over the two years it is in effect. This could amount to 1 billion in

    additional revenue to the government in return or a guarantee of more than 400 billion. The

    institutions being offered the protection of the guarantee are Allied Irish Bank, Bank of Ireland,

    Anglo Irish Bank, Irish Life & Permanent, Irish Nationwide Building Society and EducationalBuilding Society.

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    8 October: The CBFSA reduces the interest rate by 50 basis points.

    15 October: The budget is brought forward. Cowen outlines the measures to achieve savings,

    including additional government borrowing, reduction in public services and raising taxes.

    Cowen also incorporates an agenda of public service reform.

    26 November: The Taoiseach announces measures of reform within the public sector.

    5 December: The open, export and service-driven economy of Ireland has nosedived, pushing

    the governments five-year projected deficit up to about 12.5 billion. The Finance Minister,

    indicating the budget position is worse than expected, announces stimulus borrowings, further

    review of public sector spending and the establishment of the Special Group on Public Service

    Numbers and Expenditure Programmes. Much of this is overshadowed by a separate crisis

    related to an outbreak of foot and mouth disease in Irish swine, which occurred just before the

    Christmas season when hams were in high demand.

    18 December: The Taoiseach announces and releases Building Irelands Smart Economy: A

    framework for sustainable economic renewal. The announcement and release of the framework

    appear to be the result of a long process predating the global financial crisis. The framework is,

    however, absorbed into the governments reaction to the global financial crisis and linked to the

    future policy direction for development in Ireland.

    19 December: Sen FitzPatrick, chairman of the Anglo Irish Bank (AIB), resigns. He had been

    temporarily transferring 87 million in loans to another institution before the fiscal years end to

    avoid disclosure of their existence to shareholdersa practice that had been occurring for eight

    years. The other institution is believed to be the Irish Nationwide Building Society. The chief

    executive of AIB resigns several hours later. In response, Finance Minister Lenihan announces

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    plans to recapitalise AIB and the Bank of Ireland, take effective control of AIB and clear out the

    remaining board members.

    9 January 2009: Patrick Neary, chief executive of the Irish Financial Services Regulatory

    Authority, resigns after allegations that his staff first learned in January 2008 that FitzPatrick

    had been transferring loans.

    28 January: Cowen, speaking in the Dil, indicates the crisis in Ireland has developed further. A

    five-year shortfall of 15 billion has been identified. Cowen says measures, further to those

    already announced, will be necessary. A new policy is also announced: A Pact for Solidarity and

    Economic Renewal. This is intended to involve social partners (unions, employers) in the

    solutions and garner political support for future measures.

    3 February: The Taoiseach delivers a statement to the Dil detailing the fiscal and budgetary

    measures to be taken in 2009/10 to rein in borrowing and reduce expenditure. The unions

    (social partners) do not agree with the plan, but the government intends to go aheadregardless. The measures include cuts to child care, reduction in overseas aid, reduction in

    public service pay and delays in agreed pay rises

    .

    19 February: Finance Minister Lenihan presents the second stage reading of the Financial

    Emergency Measures in the Public Interest Bill 2009.

    10 March: CBFSA Governor Hurley, who has agreed to stay on in his role post-retirement age,

    claims in response to questions from the Committee on Economic Regulatory Affairs that the

    government had ignored his many warnings about the state of the Irish economy.

    24 March: The Minister for Finance meets with two government-appointed board members for

    the Irish Nationwide Building Society (INBS) over recent disclosures in relation to theremuneration of the CEO of INBS, which requires further investigation.

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    Between 1980 and 1986, total government expenditure grew from 54 percent to 62

    percent of GNP, and public debt increased from 87 percent to 120 percent of GNP while annual

    budget deficits exceeded 10 percent of GNP. Over one-third of all tax revenue (over 90 percent

    of income tax revenue) was being used to service this debt. Meanwhile, the economicdependency ratio rose to 2.3 persons per person employed in 1985, and unemployment stood

    at 15 percent.

    While the IDA continued to attract foreign investors (IBM, Lotus, Microsoft, and Bausch

    & Lomb, among many others) into the 1980s, some high-profile failures of recent investments

    raised questions about this strategy. In particular, a specially commissioned investigation by

    Telesis on behalf of the National Economic and Social Council (NESC) raised some troubling

    issues.

    Telesis found that the value of inward investments tended to be overstated-employment

    prospects were too often exaggerated at a time of high unemployment-and that promised

    linkages to the domestic economy were frequently weak. It also criticized what it saw as an

    excessive attention to overseas companies relative to indigenous businesses. While initially

    stung, the IDA responded well to the report and increased its attention to Irish-owned industry.

    The political parties were not successfully addressing the gathering gloom. Fianna Fail,the opposition party since 1982, won the general election in 1987. When in government in the

    late 1970s, Fianna Fail had been largely responsible for the excessive and misguided public

    spending. This time, however, the party tried a different path. On election to government in

    1987, they surprised many, including their own supporters, with a program of severe cuts in

    expenditure accompanied by some novel consensus-building and developmental measures.

    Within a few years, these steps began to show dividends, helped by a coincidence of other

    factors. In this study, the causes and events happened during the fall of Irelands Celtic Tiger

    will be explained further.

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    Part B: Issues for Discussion

    1.0 Celtic Tiger Economy Booster

    1. Tax PolicyThe tax policy of Ireland was one of the factor that boosted Celtic Tiger economy. In 1988, the

    first tax amnesty established. This helped reducing significantly the budget deficit and the

    PSBR. While the tax regime was positive for attracting foreign direct investment, indirect taxes,

    which were also dubbed stealth taxes, as a proportion of total taxes, were the highest among

    the industrialised countries.Electricity costs for consumers, are 46% above the average paid in

    the UK and thecost of a new car is 28% above the EU average. The Government collects an

    average of over30% of the cost of every housing unit built in the State, in taxes and levies. As

    the standard of the public health service is currently low, the majority of the workforce have to

    take out private health insurance. The premiums of the State health insurer VHI Healthcare, are

    expected to have risen more than 50% in the period 2001-2006, by the end of this year.

    Annual premiums for a typical household are at least 2,000 and the cost of visiting a doctor

    has risen by about 60% since 2002.

    A survey that was published by Europe's top bank UBS, shows that Dublin is the 8th

    most expensive of 71 global cities. A meal for two in a mid price-range restaurant, would cost

    at least 60, compared with about 40 off the Potsdamerplatz in central Berlin, which gets a

    26th place ranking in the survey.

    While tax policy can be viewed as positive from a macroeconomic viewpoint, as the

    spoils of the Celtic Tiger have been disproportionately spread, some who have gained fromhaving a job, are nevertheless struggling.

    Due to the extension of property related tax incentives during the boom, many wealthy

    earners were able to reduce their income tax to zero and in 2001, one beneficiary of a tax

    exemption scheme that was originally introduced for poor artists in the 1960's, earned 10

    million. More than 11 song writers or other writers earned more than 1 million tax free in

    2002. In the December 2005 Budget, a ceiling of 250,000 was put on the benefit and last

    week, it was reported that Irish rock star and his colleagues in U2 have moved their business

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    operations to the Netherlands to avoid paying tax on the income arising from creative work,

    that they would have paid for the first time.

    A low tax economy? The reportPrices and Earnings that was published by Europe's biggest

    bank UBS on August 9th, says that Ireland is the 8th most expensive of a sample of 71 cities

    worldwide.

    With the highest net wages, Zurich and Geneva, followed by Dublin, Los Angeles and

    Luxembourg, lead the pack in purchasing power.

    However, in Dublin, rents are low but house prices are very high. So net earnings after

    housing costs can vary widely depending on whether the worker is a renter or mortgage payer.

    In contrast with other European cities, where public health care standards are high, many

    Dublin workers have to buy private medical insurance from their net earnings after tax. There

    are other examples of hidden taxes such as the data from the EU last month that

    electricity prices for consumers from the State-owned monopoly, are 46% higher than in the

    UK.

    The Irish Government gets an average of 100,000 in various taxes and levies i.e. tax, from

    the cost of every housing unit built in the State. It amounts to more than 30% of the averagecost and is the Mother of all Stealth Taxes. In November 2004, the Minister for Finance Brian

    Cowen, said in the Dail that the percentage was 28%. The Construction Industry Federation

    says that its more than 30%.

    2. European Structural and Cohecion FundsBeyond designer humanitarians, separating out the costs of 38,000 additional workers on the

    public payroll since 2001,public service salaries have increased by 38%. The comparable rise in

    the average industrial wage was 19%. Salaries of members of the Oireachtas (Irish Parliament)

    have risen by 100% since 1997 and the base salary (excluding unvouchered expenses) of a

    member of Dil ireann is 96,650, more than three times that average industrial wage for a

    male worker. In addition, 900,000 workers in the private sector, have no occupational pension.

    A member of Dil ireann is entitled to a pension for life of half annual salary, after 20 years

    service.

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    The planned IPO (Initial Public Offering) of Irish State airline Aer Lingus, starkly

    illustrates the gulf between the Irish public sector and the private professional services sector

    on one side and the private traded goods sector, on the other.

    At the urging of the Government, Aer Lingus has conceded all major demands and the

    workforce will not have their current 14.9 per cent stake in the airline diluted. See: SIPTU

    celebrates Aer Lingus agreement to privatisation inducements. Average earnings are the

    highest in the State-owned electricity supplier ESB.

    The impact of the construction sector is evident in every other sector of the economy.

    Property related taxes and levies may amount to 9 billion this year - almost 19% of total

    Government spending in 2006. We are building a record number of new housing units andapproximately 1 in 8 people (12.6%) are employed in Ireland, in work in construction. This

    compares with an EU average of less than 8%.

    New house building units increased by23.6% in the seven months to July 2006 and the

    Central Bank announced that 80% of the 27.3% growth in Private Sector Credit in the year to

    June 2006,was property related.

    Of the 258,000 net increase in total persons at work between 2000 and 2005, over76,000 (or 30%) were in the construction sector. The new housing units are small and are

    among the lowest standard in the Developed World. We are4% urbanised but we're short of

    land!

    The Irish Central Bank says that the proportion of household borrowing in June 2006

    that is secured on housing in the the euro-area countries was highest in the Netherlands at

    89.5 per cent, followed by Ireland at 80.2 per cent. The Bank says that while both these

    countries have high personal debt to income ratios, they also have the highest proportion ofhousehold debt secured on housing. Both countries are well above the euro-area ratio of 70.3

    per cent.

    Property has made some Irish people very wealthy and Bank of Ireland Private Banking

    says that the Irish invested 30 billion (equity and borrowings) in local and overseas

    commercial property in the period 2001-2005.

    Ireland has overtaken the United States as the single largest cross-border investor intoUK commercial property,accounting for almost 22% of total overseas purchases in 2005.

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    In an extensive research report published last month, Bank of Ireland Private Banking

    shows that, in a survey of the top 8 leading OECD nations, Ireland is ranked the second

    wealthiest, behind Japan and ahead of the UK, US, Italy, France, Germany and Canada,

    showing an average wealth per head of nearly 150,000.

    In contrast, private rent support has cost the Government1.6 billion since 2000.At the

    end of 2000, there were 42,700 recipients. This had increased to 60,100 at the end of 2003

    and then settled at the higher level. Last week, the Department of Social and Family Affairs

    said that a record 79,000 people had requested assistance with the costs of sending their

    children back to school.

    National house prices have increased by 270% over the past ten years compared to atotal rise of just 30% in the consumer price index. The Sunday Business Post wrote in

    November 2000 that former Taoiseach (Prime Minister) Albert Reynolds' "home at 18 Ailesbury

    Road is now worth over 4.5 million. It is believed that he originally paid around 650,000

    (825,000) for the house," in the mid-1990s. Last month, The Sunday Independent reported

    that "estate agent Pat Gunne has emerged as the mystery buyer of number 17 Ailesbury Road,

    Dublin 4, paying a stunning 13m for the luxury house. The house, previously the property of

    Delphine Kelly, widow of former Fine Gael minister John Kelly, was sold quietly before the

    auction."

    `There is no tax payable by the vendor on the proceeds of a principal residence,

    whatever the value while Pat Gunne will pay 1.17 million in stamp duty.

    Farmers who rely on payments from the EU's Common Agricultural Policy and who have

    been able to sell land for development whether for house or road building, have raked in

    money from a crazy system that creates both a bonanza and fuels corruption.

    3. Trade within the European UnionBrian Maccaba, founder of FX technology company Cognotec, told that the company will have

    revenues of $100 million before contemplating an IPO. Maccaba welcomed the Government's

    July announcement that the State will invest up to 3.8 billion in R&D in the period to 2013.

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    "We've been unable to produce scalable tech companies because of the lack of depth in

    scientific research. A comparable country like Israel, has over 70 companies on Nadsaq," he

    said.

    Table 1: The revenue and profit of top Irish-owned tech companies

    Company 2005

    Revenue Profit

    Iona $66.8m -$0.8m

    Trintech $48.6m -$3.0m

    Datalex $28.5m $0.6m

    Norkom 18.1m 3.3mFineos 21.5m 1.9m

    Cognotec $28.1m $3.7m

    It will likely take Ireland up to 20 years rather than 7 to achieve the level of Israel in

    relation to the development of home-grown knowledge intensive firms.

    On Tuesday, July 25th, Hewlett-Packard announced its agreement to acquire Israeli

    software company Mercury Interactive, which has annual revenues of $800 million and wasfounded in 1989.

    Foreign firms were responsible for 87.6% of Irish exports in 2004 and it is expected that

    the current level of Foreign Direct Investment in the Irish economy will fall over the next two

    decades.

    Chipmaker Intel and top PC maker Dell, are Ireland's biggest manufacturing employers.

    4. Industrial policiesThe over-reliance on construction is now a key driver in the fact that unemployment is over

    400,000 (10.3%) and heading for half a million. Down from a peak of almost 90,000 new

    housing units in 2005, only about 20,000 will be built in Ireland in 2009. This has added at least

    100,000 people directly onto the dole queues.

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    The problem, however, was that many of these newly unemployed have a poor stock of

    education and training. In 2005, the National Economic and Social Council (NESC) showed that

    50% of the Irish working population did not have a third level qualification and 25% did not

    complete the Leaving Certificate. Tens of thousands now unemployed after the end of theconstruction boom have neither a trade nor a Leaving Certificate that would allow them to

    progress to third level automatically.

    The biggest issue was the nature of the training system. There simply arent enough

    training courses of sufficient duration and intensiveness to quickly retrain large numbers of

    people in Ireland. In addition, worker compensation for retraining was only the equivalent of

    the dole, and for many there was an almost inevitable descent into long-term unemployment

    and work in the black economy. The introduction by the government of a one per cent incomelevy on incomes of over 15,500 in the budget of April 2009 was added to the problem.

    In the budget, 25,000 new training places were introduced, most of which were of less

    than six weeks duration. This will be very ineffective. A sea change in government thinking on

    active retraining is needed. They must encourage workers, particularly men, to retrain. The

    current FS retraining allowance of 204 is not a sufficient incentive to most. Many who are

    discouraged in this way will join the black economy. This now stands at 8%, but could rise

    dramatically without retraining incentives. This will deprive the government of valuable tax

    revenue and further worsen the public finances.. This would be intensive retraining, which

    would result in employment and would be particularly favourable to career changes for those

    who already have a high level of technical competence.

    The government would do well the take on board the ICTU proposal on flexicurity. This

    is a system which operates in Denmark in particular, and in Germany to a lesser extent. In

    return for labour market flexibility in terms of being prepared to retrain, move jobs, and to

    some extent have less job security, workers are intensively retrained after becoming

    unemployed. This is done by giving what would be by Irish standards a generous retraining

    allowance.

    Newly trained workers could fill the many areas where there is still growth and labour-

    market demand. However, by directly financing new indigenous businesses, which would be

    suitably assessed for viability, the government can create sustainable and growing employment

    in areas such as information and communications technology; high standard food ingredients;biomedical device manufacturing; internationally traded health services; and more. The

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    sustainability would be provided by setting up globally competitive Irish companies in these

    areas. At the time of writing, President Obama is in the process of altering tax incentives that

    American companies receive to locate in Ireland, precisely for the same reason: to keep

    investment at home.

    In addition, jobs can be created in badly needed areas of public infrastructure: hundreds

    of schools and childcare facilities should be built; affordable housing should also be built, as

    53,000 are still on housing waiting lists; affordable childcare facilities should be built and

    staffed; there is a shortage of health and social care workers due to the embargo, which should

    be rescinded; and there are many other areas earmarked under the National Development Plan

    where matched state investment in capital spending and newly trained personnel would prove

    an excellent investment. Already, the American economy is showing, according to PresidentObama, fresh shoots of growth in response to the huge economic stimulus package that was

    introduced in the US in the past nine months and an expansion of the money supply there.

    All these options would inject a strong short-term stimulus into the economy, which

    would increase government tax receipts and contribute to growth and employment creation.

    Just as important, using this period to train and retrain personnel to fill areas of labour and

    skills shortages can eliminate structural unemployment and put the economy in good shape for

    an economic upturn.

    Newly trained personnel in key areas of skills shortage would also be valuable in attracting

    investment internationally and domestically in these areas. This does work in practice:

    Denmark, which had an unemployment rate of 12.5% in 1994, used this type of strategy to cut

    unemployment to 5% over ten years. The Danish system provides an efficient and effective

    system to allow the economy respond to economic shocks, skills shortages, and unemployment.

    This gives them the benefit of not over-relying on any single major area of the economy to

    create jobs.

    5. Geography and DemographicsWith the Exchequer awash with cash from the property boom and windfalls from past tax

    dodging, the most palatable option for politicians in power, is to sail with the wind. Ryanair,

    Ireland's most successful company of the past decade, has benefited from EU airline

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    deregulation and there would have been no serious competition for the State airline Aer Lingus

    if deregulation had depended on the decisions of an Irish Government.

    Taxi deregulation was introduced following a High Court decision but wealthy vested

    interests remain untouched. The Government provided taxi drivers with average compensation

    of 11,500 provided that they had "suffered extreme personal financial hardship and loss of

    income." It is in marked contrast to payments to beet farmers for up to seven years even

    though they have ceased growing beet on some of the best land in Ireland.

    The Progressive Democrats (PDs) has been the junior party in the Irish Government

    since 1997 and a decade ago, there was optimism that it would be more serious about reform

    but although small, it has morphed into a version of Ireland's two main parties Fianna Fil andFine Gael where there is little appetite for challenging vested interests.

    Twenty years after the introduction of the Internal Market in the European Union, the

    Irish pharmacists' trade body wishes to maintain the legal prohibition on foreign qualified

    pharmacists practising in Ireland. Pharmacists dispense drugs on the basis of prescriptions

    written by doctors; sell non-prescription drugs and cosmetics. Even where, a pharmacist is in a

    rare position of providing advice to a member of the public, they issue prescriptions every day

    that have been written by foreign-trained doctors. The Chairman of the PDs Senator JohnMinihane is a pharmacist and Minister of State Tim O'Malley is also a pharmacist.

    Chart 1: Price difference between Ireland and EU15, per cent

    (Source: OECD Economic Survey of Ireland 2006: Boosting growth through greater competition)

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    With a reformed land development system, a Government with vision could have

    already built a second Dublin Airport between Dublin and Portlaoise and centralised all

    Government Departments on the western rim of the city as an alternative to the December

    2003 back-of-the-envelope shambolic decentralisation project.

    In 2005, the two Government parties only finally decided to build a second terminal at

    Dublin's only airport, that has experienced a huge growth in traffic in the past decade.

    They spent years arguing about whether the second terminal should be run by the

    existing State airports management company or a private operation. A sod has not yet been

    turned andRyanair's additional routes announced on August 9th,will result in at least an extra

    900,000 people passing through the already congested airport.

    More than 18.4 million passengers travelled through the airport last year and the

    numbers next year are expected to exceed 24 million. It will be 2010 or 2011 before the chaos

    at peak hours abates. As the politicians argued, a temporary long wood extension was added to

    Pier A at the airport. The newsecond terminal will cost at least 395 million- 46% above the

    April 2005 cost forecast!!

    Last March, a low-cost airline terminal that can handle 10 million passengers annually,opened at Kuala Lumpur's impressive modern airport. It took less than a year to build at a cost

    of27 million. In the Budget speech of December 2003, the then Minister for Finance Charlie

    McCreevy announced that a programme of decentralisation of public services "will involve the

    relocation of 10,300 civil and public service jobs to 53 centres in 25 counties."

    It was a rabbit-out-of-a-hat announcement and the biggest planning aspect to it before

    the announcement was the division of the jobs to ministers' constituencies. With the local

    elections months away, it was perceived to be a master stroke that political opponents couldn'toppose. This biggest "reform" plan in what will be ten years of governing in 2007, was given to

    PD minister Tom Parlon to implement. In a clear sign in 2002 that a return to government was

    more important than principle, the PDs had recruited the former leader of the Irish Farmers'

    Association as a candidate for the Dil, in return for a promise that he would be made a Junior

    Minister if elected. Parlon was the most militant and sucessful trade/professional group leader

    at the time and months before had forced the Government to concede significantly improved

    terms for farmers forced to sell land for roadbuilding.

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    In 2001, the Irish State agency, the National Roads Authority (NRA), said in relation to a

    campaign for an increase in compensation for land acquired by Compulsory Purchase Order,

    that was led by Tom Parlon, then President of the Irish Farmers Association (IFA) that

    pronouncements by senior IFA officials, including Parlon, had claimed that:

    the State, through the actions of local authorities, has no right to appropriate farmland; the compulsory acquisition of farmland for the national roads building programme is

    unjust, inequitable and seriously damages the livelihood and viability of 8,000 farm

    families;

    CPO legislation is outdated and compensation paid to farmers is inadequate; compensation should be paid at development land prices given the intended use of land

    for road schemes and not at market value for agriculture land

    Parlon as a Minister of State has said that any tampering with the existing system of

    determining land prices for development, would be a form of Stalinism. It surely is a bizarre

    system of "free enterprise" that the PDs claim to support, where public funds paid primarily by

    German and Dutch taxpayers, provide Parlon and his farmer colleagues with most of their

    income and when they sell land, the average Irish taxpayer is also screwed.

    2.0 Impact of Economy Growth

    Over the last two decades, Ireland achieved a remarkable economic transformation from

    being one of the poorest to one of the richest Member States in the EU when measured by per

    capita income. It now faces a period of considerable economic uncertainty in common with

    many other European countries.

    During the early 1980s, Ireland was an economy in trouble, weighed down by slowgrowth, high inflation and unemployment, and increasing public debt. Ireland was an economic

    laggard, underperforming most other EU Member States. During the prolonged sluggish growth

    period from 1980 to 1986, real GDP1 growth averaged only about 2.3% per year; total

    government expenditure was well in excess of 50% of GDP; annual budget deficits exceeded

    10% of GDP in some years; and public debt increased to 113% of GDP by 1987. In addition,

    falling living standards and employment led to a high emigration rate. In net terms, 200 000

    people left the country between 1981 and 1990.

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    The economic and public sector reforms set in train in the late 1980s assisted by EU

    Structural Funds provided the basis for the turnaround that made the country the fastest

    growing economy in the EU during the 1990s. What is more, Irelands economy outperformed

    Greece, Spain and Portugal, three other beneficiaries of the EUs Cohesion Fund. During theCeltic Tiger period (1994-2000), Irish income per head reached and eventually exceeded EU-

    15 levels. Today, Ireland has the second highest level of income per head in the 27-Member

    State EU, behind Luxembourg.

    The Celtic Tiger is born

    According to those attending a recent seminar on Ireland, part of ECFINs regular series on the

    economies of Member States, the countrys massive catch-up benefited from a wide array of

    factors that left it poised to take advantage of the take-off of the global economy during the

    1990s.

    Ireland exhibited a number of classic ingredients for success

    including an outward orientation and well-functioning markets. The catch-up phase was marked

    by a sharp increase in investment especially foreign direct investment. A rapid growth in

    employment was fed by large labour inflows and higher participation rates. A period of

    sustained growth in productivity reflected greater investment in education and major structural

    changes within the economy.

    From 1986 to 1996, these factors helped boost Irelands real GDP to an average growth

    rate of 5.1% a year, compared to an OECD average of 2.4%. Total employment, which fell byan average of 0.8% per year between 1980 and 1986, rebounded over the next decade by

    growing at 2.1% per year, compared to an OECD average of 1% and the EU average of 0.3%.

    The growth in employment practically wiped out unemployment, while also absorbing an

    increase in the labor supply through an influx of immigrants attracted by the Irish economic

    boom.

    Irelands public finances were also transformed. The general government deficit as a

    percentage of GDP declined from 8.5% in 1987 to close to zero by 1996, with the result thatthe debt-to-GDP ratio fell to 72%.

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    Consensus on the need for a turnaround in Irelands economic fortunes was embodied

    in a series of social partnership agreements from 1987 onwards between employers, trade

    unions, farming interests and government. The partnership structures established by successive

    governments created a forum for centralized wage bargaining that helped break the spiral ofinflationary wage increases and ensured industrial peace.

    Transformation to an export-oriented economy

    The period was marked by a huge inflow of foreign direct investment (FDI), during which

    Ireland transformed itself into an export-oriented economy with a thriving manufacturing sector

    and, more recently, a growing service sector. Foreign companies, especially those based in the

    US, chose Ireland as their entry point into the EU and other European markets. The companies

    were attracted by Irelands proximity to a large European home market, a young, well-

    educated, English-speaking labor force, and a low corporate tax rate.

    In 1996, foreign firms accounted for 47% of the workforce employed in manufacturing

    and internationally traded services such as information and communications technologies

    (ICT), chemicals, pharmaceuticals, medical technologies and engineering.

    Changing structure of the economy, gross value added by sectors at current prices

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    In this context, companies such as Wyeth, GlaxoSmithKline, Pfizer, Merck Sharpe & Dohm, and

    others have turned Ireland into an export economy serving global markets.

    The decision in 1987 to establish an International Financial Services Centre in Dublin

    attracted major outside investment in such segments as banking, asset financing, fund

    management, and specialized insurance operationsand also boosted service exports.

    After the high-growth period of the 1990s, when real GDP growth reached 11.3% in

    1997 and 9.4% in 2000, Irelands economy settled down into a more steady growth phase of

    between 4 7% over the following years until 2007.During this period, Irelands services exports

    continued to grow rapidly, accounting for one-third of total exports, with exports of goods and

    services currently worth about 80% of the countrys GDP.

    Rebalancing of the economy under way

    But the nature of the Celtic Tiger changed somewhat in the new millennium, as the main

    engine of economic growth switched to the domestic construction sector and consumer

    spending. Demand for housing rose along with income levels. However, by 2006 the

    construction market began to fall back from its previously unsustainable high levels and a

    significant rebalancing of the economy is now under way.

    The effects of the shrinking construction sector and lacklustre productivity growth are

    taking their toll. While real GDP growth was 6% in 2007, the latest government forecasts

    suggest it will moderate in 2008 to about 0.5%, a rate not experienced since the late 1980s.

    This estimate primarily reflects lower housing construction, but also takes into account slowing

    consumer spending, investment and exports.

    While the short-term outlook is disappointing, many economists have pointed to theunderlying healthy position of the economy over the medium term. To capitalize on this

    Chart 2 :The chart shows the increased importance of construction and services, and the

    diminishing significance of agriculture and industry.Source: European Commission

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    position, Ireland must now re-examine the factors that will make it a more competitive place to

    do business. For example, through more and better infrastructure, further labor market reforms

    (especially within the public sector), and a rebalancing of the tax structure to counter falling

    government revenues.

    Focus on improving productivity

    Over the longer term, the loss of wage competitiveness in recent years has meant that Ireland

    must improve productivity. Productivity growth was the most important factor behind the

    stronger increase in GDP per capita over 1980-2000, Irish economist John FitzGerald said at the

    DG ECFIN seminar. Demographic factors and higher female participation in the workforce also

    played a role, he added.

    Marco Buti, DG ECFINs Acting Director-General, noted that despite the unique features

    that helped Ireland achieve high growth during the 1990s, some lessons could still apply to

    other economies. Irelands economic transformation showed that the key ingredients for

    success are good institutional and structural policies, coupled with an appropriate fiscal policy.

    Sticking to a sound macroeconomic policy mix and implementing a reform agenda would help

    ensure that Irelands economic transformation is sustained in the years ahead.

    3.0 The Banks and the Property Bubble

    Northern Ireland was the perfect place for this week's G8 summit. These meetings are

    supposed to promote peace and prosperity, and Northern Ireland, since the Good FridayAccords of 1998, has been a textbook case of how the two go hand-in-hand. Despite two global

    recessions, its post-Troubles economy has enjoyed resurgent investment, immigration, and

    tourism. If peace can develop into true harmony, growth should accelerate, as the 99 "peace

    walls" separating Catholic and Protestant neighborhoods in Belfast come down and resources in

    Northern Ireland can flow freely to their best use.

    In keeping with the spirit of the summit, British PM David Cameron dangled the

    prospect of financial assistance to Northern Ireland as its tears down those walls. Just 12 miles

    from the site of the summit, the Republic of Ireland offers economic lessons to Northern

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    Ireland, as well as the rest of the world, both in what to do and in what not to do. Northern

    Ireland, for all its progress, remains a relative backwater in the United Kingdom, ranking tenth

    among the UK's twelve territorial units in per capita income.

    Its sibling to the south, by contrast, is one of the richest nations in Europe, richer