An Analysis of the Major Causes of the Celtic Tiger Era

Lachlan Davis

4.30.2015

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INTRODUCTION:

Ireland’s economic boom from the years 1990 to 2005 have seen the small island nation

projected it into one of the world’s wealthiest. During this period, it was Europe’s most

successful economy, attracting workers from all over the world to feed the fire of the booming

Celtic tiger (Grant Thornton, 2014). The Irish population is under five million and therefore the

massive increase and growth with respect to its economy created vast amounts of wealth for even

the average Irish citizen. It was a time of increased foreign direct investment, low personal taxes,

fiscal/monetary consolidation, investment (by the Irish government) into education, European

structural funds, increased labor input and the introduction of the Euro (Grant Thornton, 2014).

Ireland was the home to economic development and growth determinants. All of these were

causal factors to the Irish economic boom and the advancement of Irish integration with the

European Union. However, the four major causal factors that began and stayed to fuel the boom

were the increases in FDI, European structural funds, increased labor force and the introduction

of the Euro/single market. These four factors were the most significant factors to the Irish

economic boom. Even though the Irish economy has since been through one of its worst

recessions, because of the boom, the Irish standard of living (SOL) has finally overtaken the

British level and the European average. Irish citizens are making more than their average

European counterparts and this type of rapid economic expansion is envied by other new and

prospective EU member states. They can aim for the causal factors of the boom in hopes that t

will generate the same outcomes; however there must be local alterations especially for central

and eastern European countries. The following paper will discuss the reasoning behind each of

the casual factors with respect to this period of economic growth. Then the paper will offer

policy implications with regard to new and future EU member states.

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INCREASES IN FOREIGN DIRECT INVESTMENT:

Increases in foreign direct investment have led to increased levels of economic

development in many cases around the world. Some examples include the Australian economic

boom as a result of increased FDI from Chinese mining companies and the investments made by

high tech companies in Singapore and in Japan. These types of investments help an economy to

not only boom, but to continue booming as long as those corporations and businesses are present.

They offer constant sources of income through increased exports, increased taxation and

increased employment opportunities. There are a few ways in which a country can gain more

foreign direct investment, either naturally or unnaturally (Fortin, 2000). Natural foreign direct

investment refers to the natural competitive edge a company will gain from opening up

operations in another country. Reasons for this type of investment include geography, amount of

available resources and low wages. Unnatural causes of foreign direct investment require the

government to intentionally alter something to give that specific county an edge over another. In

the case of Ireland, they had both of these types of FDI (Fortin, 2000). Geography was one of the

reasons cited that aided in the massive increase of FDI in Ireland. If foreign companies could set

up in Ireland this would mean that they would get a very early start to the next day-all the while

people in the US sleep (Whelan, 2014), those doing operations form Ireland will naturally have a

competitive edge at the start of every day. Ireland has access too many natural rivers natural

resources and during the time of the boom a large labor force.

However the main reason for the drastic increase in foreign direct investment was the

extremely low corporate tax laws. During the period from 1995-2000 Irish corporate tax levels

hovered somewhere between 10%-13% (Barry, 2003) making them some of the lowest in the

world. During this same time corporate tax levels in the US were around 40%, and as a result,

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many companies located to Ireland to evade hefty taxes in the United States. Companies such as

Chiquita, Global Indemnity, Alkermes Inc., Jazz Pharmaceutical and Endo Health Solutions all

decided to move their headquarters of operations to avoid other high corporate taxes. What we

can see is that because of the relatively low corporate taxes in Ireland and the relatively high

revenues, pharmaceutical companies were in the majority to relocate to Ireland. This way a lot of

their revenues cannot be claimed by the US government. Ireland during its booming period

gladly undercut the US government in order to tax these companies for them (Barry, 2002).

This enables the Irish government to experience tremendous amounts of profits due to the

marginal corporate taxes they were offering. This tax haven eventually enabled thousands of

foreign companies to locate into Ireland. Previously unprofitable relationship between business

and Ireland had been turned around and had proven to be greatly beneficial to both parties.

Beginning in the 1970’s and continuing during the economic boom, Ireland began

pursuing policies of free trade and trade liberalization with regard to industry. This change in

idea towards business created an extremely welcoming attitude towards foreign investment.

“Greater administrative efficiency to respond to the queries and needs of multinational

corporations, a generous system of capital grants, various tax-related incentives, the end of

restrictions on multinational corporations to remit profits abroad, the relaxation of incentives to

locate in peripheral regions, improvements in international transport and communications

infrastructures, and general reliance on stable and transparent legal and administrative rules”

(Fortin, 2000). All of these alterations in Irish attitude towards foreign investment, along with the

strong linguistic and cultural ties all aided the country in attracting investors.

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Another way in which this increase in FDI was able to help create a period of economic

success for Ireland was that the increase in foreign companies meant that there would be more

opportunity to find employment. Ireland was experiencing some of the lowest unemployment

rates in Europe thanks influx of businesses. What made Ireland special was that it didn’t have a

particularly low wage rate for labor so companies would be paying the same or even higher

wages than if they had stayed in the US. However, companies were not worried about the

relatively high prices for labor because they were saving (in many cases) many billions of dollars

in taxation. The Irish tax haven was one of the major driving forces behind the Irish economic

miracle boom during 1995-2000 (Whelan, 2014)

Few other countries had such a liberal approach towards foreign direct investment and

international trade liberalization (Barry, 2003). This in turn allowed Ireland to somewhat

monopolize on the opportunity for foreign investments. As some countries in Europe pursued

policies of protectionism (policies of subsidization, quotas and price floors) Ireland went in the

opposite direction, putting more emphasis on creating a haven for foreign companies (Barry,

2003). Ireland understood early on that the only way for its small and very open economy to

expand and prosper was to get an access to external markets and to make its domestic economy

competitive by exposing it to import competition. Instead of intentionally fostering inefficiencies

by pursuing policies of protectionism, efficiency and increased competitiveness was created

within the domestic business sector-strengthening the economy and making it more impervious

to competition.

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The above graph perfectly illustrates the great levels of growth with respect to GDP as compared

to the rest of the European Union and the United States. The two graphs on the right are

displayed during the Irish economic boom. From this, it is easy to see and understand just how

rapidly the Irish economy grew during its ‘Celtic Tiger’ years.

EU STRUCTURAL FUNDS:

The EU’s regional policy through its structural funds program has been one of the major

driving forces behind the Irish economic boom. One of the major cited reasons why the structural

funds provided by the EU brought about a boom period in Ireland was that in brought the

standards of living up to the European standards during the late 1990’s. Since Ireland’s inclusion

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in the European Union (1973), it has received close to 18 billion Euros (Irish Regions Office,

2010) in the form of structural funds. These funds act as yet another net capital inflow for the

country. Structural funds given out by the EU, act in a similar fashion to FDI inflows. In essence,

the country will have more “income” to spend in areas such as human development,

infrastructure, education and regional development.

Structural financing is different, however from foreign direct investment because there

must be conversations and debates about where the money is going. The EU has a vested interest

in every single member state-any weak economy or any major issue in any country is a liability

for the European Union. A good example of how every member state must uphold European

standards is the case of Greece and its inability to produce enough income for its citizens. As a

result, states such as Germany have been forced to bail Greece out in order to stabilize the

Eurozone. In this sense it is extremely important to uphold foreign impressions of European

stability and leadership when it comes to integral economic issues. So, naturally, the EU will

have to engage in talks with Ireland about where the billions of structural funds will go.

The structural funds indeed went to areas such as regional development, infrastructure

and human development. Again, this helped to raise the standard of living in Ireland to that of

the EU. Overall these structural adjustments are aimed at bringing new member states (or states

with specific integration challenges) up to the European Union’s standard, which, as previously

states is very important to achieve. The structural funds were successful in promoting national

development and converging living standards, however it didn’t ‘develop’ the nation equally. In

fact there were portions of the country that benefited more from structural funds and the overall

economic boom. In 1994, the EU and the Irish government decided to establish eight regional

authorities. As a result, the nation was simply too split up and even began to diverge. The north,

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west and the middle of the country were less developed than the industrialized south and east

(Irish Regions office, 2010). The regional split up was not as successful as both parties had

envisioned it to be. What came about after this observation was a revision of the regional

boundaries into two separate regions that were aimed at supporting national development. By

decreasing the number of regions with separate development trajectories and strategies, Ireland is

able to develop more uniformly. Overall the structural funding provided by the EU and

collaborated with the Irish government allowed the Irish economy and the standard of living for

its people to be brought up to the European standard.

The above graph illustrates the unemployment rate in Ireland beginning with the latter half of the

20th century. The unemployment significantly during the early 1990’s and up until 2005 which is

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positively correlated to the increase in FDI inflows and the accomplishments set forth by the

EU’s structural funding programs.

INCREASED LABOR INPUT:

Ireland’s economic boom during the 1990’s and into the early 2000’s created a haven for

not only corporate business operations, but for people from all over the world to live. By the year

2000, more people were moving to Ireland than people leaving (McAleese, 1999). What was

even more impressive about this mass migration to Ireland was that many of those immigrating

were under thirty-thus making them perfect for filling up employment positions and thus

boosting and growing the Irish economy. “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” (Dorgan, 2006). Ireland was once regarded as one of the

poorest countries in Western Europe, but good economic policy making had reversed the trend of

the best and the brightest Irish leaving to find opportunities elsewhere. During this boom period,

many young, educated Irish returned back to their home and began work where they made even

higher wages than their relative European and American counterparts.

At the same time as this massive immigration, Irish policymakers were fixated on the

creation of jobs, which, the structural adjustment funds and FDI inflows provided.

Unemployment dropped and stayed around 4%-5% (Fortin, 2000), which is considered Ireland’s

natural rate of unemployment. As a result of more people working in Ireland, economic growth

was ensured. Basic economic principle states that the larger a labor force is, the higher the GDP

of a certain country will be. With more and more people making money in Ireland in the late

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1990’s, more of it became disposable and thus there were more people spending money and

pumping billions of dollars into the newly strengthened Irish economy.

INTRODUCTION OF THE EURO/EURO INTEGRATION:

The introduction of the single European market in 1992, created economic expansions for

most of the member EU states. The economic power is much greater as a unified market rather

than a collection of many different economies. As a single economic unit, Europe was more able

to compete with countries such as the United States, Russia and the rising economies of both

India and China. Having a single open market entity enabled countries to cut tariffs and other

complications to intra-European trade. The single European Act created common domestic and

foreign policies that better enables each individual European country to prosper internationally

more so than it previously could have. It did so by permitting the free movement of goods,

capital, labor, and services among and between member states. Before the implementation of the

Single European Act’s provisions, there had been some success toward the creation of a single

market, but there were still many barriers (such as the differential rates of a value-added tax), and

border crossings still involved much red tape, which complicated the shipment of goods.

Later in the 1990’s and surely felt more in the early 2000’s were the benefits from

switching over from the Irish pound to the Euro. One of the major benefits of switching over to

the Euro and a factor that fueled the Irish boom was the creation of an optimal currency area. An

optimal currency area is when there is a set geographical region in the world that would be

greatly better off if there were a single currency which would maximize economic efficiency and

potential. Overall having each of the member states on a single currency increases the efficiency

and thus the likelihood of states trading with one another. And this is exactly what did happen

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after the introduction of both the electronic and hard copies of the Euro. Specifically for Ireland,

the common currency it shared with the rest of Europe increased the amount of trade deals it

completed with domestic partners.

The single currency also eliminated most transaction costs. It costs money to exchange

currencies and when trades are done in billions of dollars, a good percentage of that can be lost

due to the fact that governments and corporations alike must pay to exchange what was once

foreign currency. For this reason, many businesses couldn’t trade or do business because the cost

of exchanging foreign currency made the trade deals unprofitable. However, now that there is a

single currency and no businesses (within Europe) have to exchange their earnings, the threshold

for unprofitability is much higher. As a result there has been increased domestic trade since the

introduction of the Euro. This is particularly true with Ireland as during the European financial

integration the country was seeing rapid economic expansion-this only increased the volume of

trade even more so than before.

IMPLICATIONS FOR FUTURE MEMBER STATES:

The goal for new member states considering EU membership should be to emulate the

determinants that caused the boom in Ireland when it was going through its rigorous integration

process. Many central and Eastern European countries will look to emulate what happened with

the Irish miracle boom-in hopes that they someday will experience a similar boom whilst on a

trajectory of EU integration. Many of these states will have to be able to increase their labor

force participation rate as it may not be likely that many foreigners will be immigration,

especially in the beginning stages of integration. Because if this many Eastern European states

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will have to increases their female participation in the labor force. This could be one policy area

the EU and a new member state will have to work out together.

One of the major causes of the Irish economic boom they should look to emulate is the

drastic increase in foreign direct investment. In many cases Central and Eastern European

countries have lower wage rates so this may help to attract labor-heavy industries such as

manufacturing companies. Low wages, however, will not be enough to attract multi-billion

dollar corporations such as Ireland did in the mid 1990’s. For this, new member states should

look to create tax havens, just like Ireland did. Low corporate taxes and possible grants could

lure in large corporations looking to jump on a new economically booming country.

However, Central and Eastern European countries do have significantly more challenges

than Ireland had. The demographic make-up of many of these countries can be varied (certainly

much more than the Republic of Ireland) which may make policy decision

making/implementation difficult. With regard to this, using the EU’s structural funds will not be

as efficient and may not have the same results as Ireland had experienced.

One constant will all new member states integrating into the EU will be that when they

switch over to the Euro, they should experience stable economic growth. As a result of this trade

will naturally increase and the business of trading will become relatively cheaper. This in itself

will encourage new businesses to begin to operate. Overall it is important to remember that the

possible new member states are unique, and can not necessarily be applied to the Irish model of

economic growth.

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CONCLUSION:

In conclusion, the main causal factors that both determined the economic success and

remained to fuel that fire were the increases in FDI, the EU structural funding, increases in the

labor force and the integration/introduction to the Euro. All of these factors have played an

extraordinary role in lifting Ireland out of being one of the poorest Western European nations to

one of the wealthiest. Ireland is home to some of the largest corporations in the world that

includes some of the most influential pharmaceutical companies. This is possible due to the tax

haven climate set forth by Irish policymakers. At times during the 1990’s, Irish corporate tax

levels were 30% lower than those imposed by the US government. The structural funding given

to Ireland so that it can meet European standards propelled Ireland to the modern, westernized

nation it is today. Because Irish and EU policymakers placed significant importance on regional

development, Ireland grew as a unit and not just around Dublin and the industrialized south. The

significant immigration not only by foreigners, but also by returning young, skilled Irish citizens

meant that the jobs created by liberalized policy making could be filled. In essence Ireland

during its booming period was operating close to its maximum capacity (with only a 4%

unemployment rate during this time). Last, the introduction of the Euro in non-physical form

and in hard coins and notes created a natural, healthy economic climate as it integrated with the

rest of the EU. The creation of an optimal currency area, reduced barriers to trade and low

interest rates made for an even more attractive climate for businesses to begin to operate. Overall

these four major factors were the driving force behind the Celtic tiger era for Ireland.

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BIBLIOGRAPHY

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Whelan, Karl. “Ireland’s Economic Crisis The Good, the Bad and the Ugly”. University College Dublin. June 8, 2014.

Fortin, Pierre. “The Irish Economic Boom: Facts, Causes and Lessons”, Canadian Institute for Advanced Research. December 2000.

Irish Regions Office Correspondents. “Impact of the Structural Funds in Ireland (1989-2006)”, The Irish Regions Office. January 2010.

The Economist Correspondents. “Tiger, tiger, burning bright: An Economic Miracle with Many Causes”, The Economist, Special Report: Ireland.

McAleese, Dermot, Prof. “Irelands Economic Boom: The True Causes A reply to the OECD Economic Survey on Ireland)” OECD Observer. Summer 1999.

Barry, Frank. “Tax Policy, FDI and the Irish Economic Boom of the 1990s”, Economic Analysis and Policy. Volume 33, Issue 2. September 2003.

Whelan T. Christopher & Layte Richard. “Economic boom and social mobility: The Irish experience”, Research in Social Stratification and Mobility. Volume 24, Issue 2. 2nd Quarter 2006.

Barry, Frank. “The Celtic Tiger Era: Delayed Convergence or Regional Boom?” University College Dublin. 2002.

Barry, Frank. “Irish Economic Development Over Three Decades of EU Membership” University College Dublin. August 2003.

Dorgan, Sean. “How Ireland Became the Celtic Tiger”, The Heritage Foundation. June 23, 2006.

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