Ireland’s turbocharged economic history

Patrick Honohan, Governor of the Central Bank of Ireland gives a superb speech on Ireland’s woes. He gives a nice historical perspective and shows how Ireland suffered from crisis before. This 2007 has been most severe but it has had previous moments of turbocharging moments turning into a disaster.

There were three turbocharged situation for Ireland:

  • 1970s — which became a crisis after Volcker raised rates in 1979-80
  • 1990s — which slowed down/derailed in late 1990s due to both domestic and foreign shocks
  • 2000s — again picked up sharply post EMU joining. The interest rates became lower on joining EMU leading to a huge bubble in housing prices. And then the crash

In each of the three the common theme was Ireland was a highly open economy and relied on foreign demand and credit for its growth.

In trade, migration and finance, Ireland had of course been an exceptionally open economy  for a very long time. The large migration flows, especially to the UK and the New World, and  the currency and banking links go back to the early 19th Century at least, with scarcely any overall interruption. Irish banks parked their excess resources in the London money market  right up to the 1960s – a pattern familiar to many African countries today.

Nor is the current crisis the first (O Grada, 2011) – indeed the potentially turbocharged nature  of the globalized economy is well-illustrated by the rapid recovery from the previous severe crisis of less than a generation ago, whose onset coincided with the decoupling – for the first time since just after the Napoleonic Wars – of Ireland’s currency from sterling. The earlier of the two macroeconomic cycles we look at happened at a point where global capital markets were still just beginning to move into the high gear that we see today. We may think of this as Turbocharger Mark 1. It allowed the Irish Government to access foreign  capital to some extent without much by way of credit risk premium..

Then its association with Europe pretty early on also led to Ireland being perceived as a  stable economy:

Ireland’s increasing globalization in the 1980s and 1990s both helped lift the economy from  decades of under-performance and demonstrated its new ability to generate full employment  and compete effectively at the production frontier. One aspect of this was the intimate  engagement with the European Union since membership in 1973 had helped enrich  administrative and political capacity as well as resulting in a vital flow of development funding  through the structural funds especially from the late-1980s to the end of the millennium.

He says open economy managers need to be alert all the time. Globalization works both ways

In this lecture, I will suggest that policymakers in small open economies need to be  especially alert to the fact that globalization can act to accentuate, accelerate and prolong  macroeconomic trends both in the upswing and the downturn. It’s as if  globalization acts as a  turbocharger for the small open economy. 

Just when things seem to be going very well in many dimensions, you can get into trouble  very quickly and at a time when some of the conventional warning indicators are not flashing.  Rapid and quite protracted growth spurts are possible, based not only on expanding exports  to the vast global market for goods and services, but also on the availability from neighboring countries or further afield of additional factors of production, whether material inputs, labour  or capital.

Globalization is a powerful transmitter of economic conditions and know-how, facilitating convergence of living standards. It can also act as a buffer against specific national shocks. But, amplified by globalization, the danger  of the anonymous market overshooting is considerable. National governments can be powerless against consequences of such overshooting. Greater explicit mechanisms of external discipline and co-insurance at the supranational level can help cope with these risks. For Ireland, the European Union already goes some distance in this direction, but more is needed.

Nice stuff. Get good preview on Ireland’s history and its association with the crises. They keep repeating the same mistakes over and over again. It is frustrating how little we learn from history…

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