A Private Sector Perspective on the Celtic Tiger Experience

Pat Mc Ardle, Chief Economist

4 Oct 2005

2

SummaryPeriod GNP growth rates Events of the period

1961-1972 4.2% Open trade, developingmanufacturing sector, boominggrowth

1973-1978 3.6% EEC membership, oil crises,rising unemployment

1979-1986 0.7% Recession, growing nationaldebt, increasing taxes, EMSmembership.

1987-1993 4.0% Fiscal rectitude, turnaround,national pay agreements

1994-2000 8.3% Celtic Tiger era

2001-2004 3.4% Economic slowdown,convergence complete

3

GDP & GNP at Constant 1995 Prices

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

1961 1966 1971 1976 1981 1986 1991 1996 2001

€ m

illio

n

GDPGNP

4

Employment & Unemployment

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

1,800

1,900

2,000

1961 1966 1971 1976 1981 1986 1991 1996 20010

2

4

6

8

10

12

14

16

18

Employment LHSUnemployment Rate RHS

(000)

5

GNP Volume Growth

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

1961 1966 1971 1976 1981 1986 1991 1996 2001

6

Irish per capita income % EU15

60

70

80

90

100

110

120

130

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

GDP GNI

7

Output per worker

0%

1%

2%

3%

4%

5%

6%

7%

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

8

Non-Agricultural employment as share of total population

20%

25%

30%

35%

40%

45%

1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003

9

Contribution to per capita GNP growth 1993-00

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0%

Productivity Employment Rate LF Participation ratio

10

Distribution of population 1961-2001

0

1,000

2,000

3,000

4,000

1961 1971 1986 2001

mill

ion

Non-ag employmentAg employmentUnemployedInactiveOver 64Under 15

11

Population change by economic status

-20

-10

0

10

20

30

40

50

60

70

61-71 71-86 86-91 91-01

Ann

ual a

vera

ges

(000

)

Under 15Over 64non-activenon-ag employmentunemployedag. employment

12

Employment Changes(000) 1994 2001 Change % ChangeAgriculture 148 120 -20 -19%Industry 252 317 65 +26%Construction 92 180 88 +96%Retail & W/Sale Trade 169 248 79 +47%Hotels & Restaurants 68 105 37 +54%Transport & Comms 56 110 54 +96%Finance & Business 114 218 104 +91%Government 248 325 77 +31%Total 1,221 1,717 496 +41%

13

Our interpretationO No productivity miracle

z GNP/Pop gap at 1973 already due only to low share of population at work (outside traditional agriculture)

O Convergence postponed from 1973z By policy errors after 1973 z Fiscal crisis withdrew demand; increased taxation,

costs; lowered confidenceO Convergence resumed after 1986

z Removal of obstacles -- return to traditional, sound policies allowing wage restraint

O No single magic policy ingredient (pace others)

14

Productivity in UK and Ireland, 1973

£0

£500

£1,000

£1,500

£2,000

£2,500

£3,000

Agriculture Rest of economy

UKIreland

15

Non-agricultural employment as % of population,1973

0

5

10

15

20

25

30

35

40

45

50

UK Ireland

%

16

Unemployment rate: Ireland and UK

0

2

4

6

8

10

12

14

16

18

55 60 65 70 75 80 85 90 95 00

UKIreland - ILO basis

17

Government Balances

-20%

-15%

-10%

-5%

0%

5%

10%

1970 1975 1980 1985 1990 1995 2000

% G

NP

Current Budget Total Borrowing

18

Government Debt

0

20

40

60

80

100

120

140

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

% GNP

19

Taxes & Current Expenditure

20

25

30

35

40

45

50

55

1970 1975 1980 1985 1990 1995 2000

% G

NP

Current ExpenditureTax Revenue

20

Interest Rates

-10

-5

0

5

10

15

20

1970 1975 1980 1985 1990 1995 2000

% G

NP

Mortgage RateReal Interest Rate

21

Interest & Transfers

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1970 1975 1980 1985 1990 1995 2000

% G

NP

Debt InterestTransfers

22

Wages & Capital Spending

0%

5%

10%

15%

20%

25%

1970 1975 1980 1985 1990 1995 2000

% G

NP

WagesCapital Spending

23

The ingredients: SimmeringO Education

z Relatively late effortO Falling burden of age-dependency

z Belated drop in birth rate after 1980O Promotion of Ireland as an industrial location

z Grants / Low corporation taxO Good governance!

z e.g. ability to raise 40% of GDP in taxesO Cultural factors?

24

Dependency

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Ireland EU

25

Catalysts for the turnaroundO EU funds (3% of GDP)O Devaluations (1993 and especially 1986)O Improved industrial incentives (IFSC)?O Tourist boom ?But mainly: O Improved wage competitiveness,

z lower taxation z realistic wage-setting - corporatismz improved fiscal environment

26

Corp Taxes as % GDP, 20020 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5

IRL-GNP

FIN

NZ

Neths

Spain

Italy

Korea

UK

France

Dk

Switz

Hungary

Poland

US

Ger

27

Top Rate of Income Tax & Social Security

40%

45%

50%

55%

60%

65%

70%

75%

80%

1975 1980 1985 1990 1995 2000 2005

28

Union Density (non-ag)

38

40

42

44

46

48

50

60 65 70 75 80 85 90 95

29

Number of days lost through industrial disputes, Ireland and UK

(rates per 1000 employees)

-250

250

750

1,250

1,750

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

UK

IRL

30

Replacement rates

0255075

100125150

1961 1971 1981 1991 1997

relative to OECD averageIRL UK US

31

Private Sector Credit Growth

0

5

10

15

20

25

30

35

40

Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04

unadjadj PSC

%

A Private Sector Perspective on the Celtic Tiger Experience

Pat Mc Ardle, Chief Economist

4 Oct 2005