Virtuous and vicious cycles:
boom and bust in Ireland
Dr. Malcolm Brady
DCU Business School
Dublin City University
Visiting Scholar to
Wuhan University, Hubei Province, China
12th – 13th March 2012
malcolm.brady@dcu.ie
http://webpages.dcu.ie/~bradym
Ireland before the 1990’s…
•
•
•
•
A sleepy backwater
Long legacy of emigration
Poor infrastructure
Small industrial base
– drinks, clothing, agriculture (beef, foodstuffs)
• Strong rural links/ Church influence
• Buying votes, but high taxes and interest rates
• ‘living away beyond our means’, fiscal rectitude
but had resource advantages…
•
•
•
•
•
•
Young, educated, low-cost workforce
Only English speaking Euro-zone country
Easy access to European markets
Good educational system
Pro-business government policies
Agencies active in seeking investment
– Especially in knowledge-based industry
• Low corporation tax at 12.5%
that attracted in investment…
• Technology firms
– Intel, Dell…
• Pharmaceutical
– Pfizer, Wyeth…
• Financial services firms
– Insurance, re-insurance…
• Software…
– Microsoft…
which led to amazing growth…
• Initially due to higher productivity
– People worked harder, smarter and longer
– Higher skill work
• Financial services/ software/ hi-tech manufacturing
• Second phase due to building boom
– Houses/ apartments/ shopping centres
– Dublin, then hinterland, then entire country
– Not well-planned or integrated
– Schools/ shops lag housing
– Transport difficulties in outer suburbs, dormitory towns
– Funded by borrowing
Population - Republic of Ireland
4,500,000
4,000,000
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
1950
Employment - Republic of Ireland
2,500.00
2,000.00
1,500.00
1,000.00
500.00
0.00
1960
1970
1980
1990
2000
2010
House Completions - Republic of
Ireland
2002
2004
2006
50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
100,000
80,000
60,000
40,000
20,000
2003 2004 2005 2006 2007 2008
0
1990
2000
1995
2000
2005
2010
Source: CSO Ireland
2008
2010
GDP - per
capita
GNP - per
capita
increasing confidence, arrogance…
• First population growth since Great Famine
• Net immigration/ heterogeneous society
• Cultural impact on world
– Riverdance/ U2
• Diaspora buying up European property
• But politicians ignoring people
• No to Lisbon treaty
– Annoyed European colleagues
and corruption…
•
•
•
•
Tribunals of inquiry estimated cost €434m
Mostly in fees to the legal profession
Ongoing - Two took 12 years, one 7 years
Ignominious end to a number of political
careers
• Little outcome to date except national loss
of innocence
Society changed…
• Pluri-cultural and pluri-lingual
– Many non-Irish immigrants
– New religions and customs
• New infrastructure
– M50 ring motorway around Dublin
– Significantly upgraded roads to the capital
• Thriving urban entertainment culture
• Conspicuous consumption
– Temple Bar and Grafton Street
but growth caused strain…
• Infrastructure inadequate
– Long commutes
– Traffic congestion
• Health care system ‘third world’
• Large class size in primary schools
• Services price inflation
– Professionals/ craftsmen
– Restaurants/ coffee shops/ bars/ hotels
• Increasingly stressful lifestyles
– ‘Breakfast roll man’/ ‘Yummy mummy’
and more serious problems…
• Cost of living 20% above European average
– Siptu, 2009
• Labour cost increase
• Beginning to lose national competitive advantage
• Senior private/public salaries dramatic increase
• Widening gap between haves and have-nots
• Binge drinking - young/ cocaine - middle class
• Development of hedonistic culture
• Drug-related gangland wars
• Development of urban underclass
and house price inflation…
• Average house price increased from €87,000 in
1996 to €300,000 in 2006 (CSO 2008:22)
• Banks – relaxed mortgage requirements
– from 3 x salary to 8 x salary
– from 20 years to 25/ 30 years
– 100% mortgages available
• Two incomes, plus parents
• Many sectors benefit from high prices
– Developers, builders – windfall profits
– Government – stamp duty
– Estate agents, lawyers - fee % of price
Then worldwide shock…
• Ireland is a small open economy
– Susceptible to benefit/ suffer from worldwide
changes
• Interest rate increases
– Increased cost of mortgages
• Credit crunch
• Recession in main trading partners UK/US
banks got into trouble…
• Bank of Ireland predicts €6b losses on
property loans over next three years
• Government provides €3.5b to BoI & AIB
• demanding cap on executive earnings
• Anglo Irish Bank nationalised, scandals
• €7b customer deposit - switched with another bank
• CEO’s loans hidden from auditors
• €451m Golden Circle customers/ shareholders
Source: Irish Times 12 Feb 2009
and bankers respond…
• BoI’s Goggin admits mistakes made, but
• declined to apologise
• “And I suppose that if I have a regret, my regret is that I didn’t
see this coming and perhaps the lessons of economics were
forgotten. Economics ultimately are cyclical
• …Irish people in general, rather than just the banks, “all got
carried away on the euphoria” of that prosperity”
• AIB’s Sheehy less conciliatory
• “bank remuneration…got out of control to some degree
where there was too much reward for short-term gain.”
“That clearly has to be changed, not only in Ireland but
everywhere. . .remuneration has to be linked to long-term risk
and risk taking”
flagship companies in trouble…
• Waterford Wedgwood in receivership
• Independent Newspapers share price
tumbles
• Ryanair letting go 200 staff in Dublin
– Monthly airport passenger numbers down 9%
– ‘Idiotic’ departure tax
• “This Government must realise you can only
promote tourism by welcoming visitors, not taxing
them” - Michael O’Leary CEO Ryanair
Source: Irish Times, 12th Feb 2009
A changed economy…
•
•
•
•
•
Credit crisis and bailout of the banks
Consumer spending halted
266k houses vacant (15% of stock 2006 census, cso)
Job losses - unemployment rises to 9% Jan 2009
Government revenue down 6.3% in 2008
• €20b budget deficit
• Cutbacks across entire public sector
– Budget levy/ Pension levy (viewed as paycut)
– Benefits reductions/ Remedial teaching…
• Increased taxes: departure tax/ income tax?
and frightening bust…
• Retail sales for 2008 down 4.5%
• January deflation first for 50 years
• Inflation forecast at -3% for 2009
• Mortgages, retail prices down
• Wages and prices must drop 20% to restore
competitiveness (Bloxham economist)
• Contraction in economy of 6% forecast for 2009
• Living standards to drop 10% over next years
• ‘It’s a battle for financial survival. We have to
keep working at it’
•
Brian Lenihan, Finance Minister
Sources: Irish Times 12/13/25 Feb 2009 RTE 17 Feb 2009
Average New House Price - Ireland
Consumer Price Index - Republic of
Ireland
120
115
110
105
100
95
2000
2002
2004
2006
2008
Source: CSO Ireland
Source:http://www.globalpropertyguide.com/
real-estate-house-prices/I
Permanent TSB/ ESRI
ISEQ Total Return Equity Indices
2008
Bank of Ireland Share Price
20
5
0
9/1/2002 1/14/200 5/28/200 10/10/20 2/22/200 7/6/2009
4
5
06
8
Source: Yahoo Finance
07
29
/2
/2
00
8
30
/4
/2
00
8
30
/6
/2
00
8
31
/8
/2
00
8
31
/1
0/
20
08
31
/1
2/
20
08
10
31
/1
2/
20
15
14000
12000
10000
8000
6000
4000
2000
0
Source: Irish Stock Exchange
Annual Statistical Review 2008
hostile public reaction…
• Breakup of the Partnership Agreement
– Between government, employers and unions
– Street protests by unions, students, Gardaí
– Strikes by transport and public sector workers
• Senior bankers stepping down
» remuneration checked (AIB CEO 60% pay cut)
• Government debt rating under threat
– bank guarantee scheme may backfire
• EU reaction
– Ireland’s policymakers failed to maintain ‘prudent fiscal
course’ during the boom
– Government recovery plan: ‘lack of clarity’
– Trichet optimistic, but hard decisions to be made
followed by collapse…
•
•
•
•
•
Government bonds failed in capital market
Ireland downgraded by rating agencies
Bailout in November 2011 by EU/IMF/ECB
Leading to huge debt and tax burden
EU seen to protect European banks at
expense of Irish taxpayer
• Much emigration of young people to
Australia, Canada, Britain
and slow recovery…
• Investment by social media companies
– Google, Facebook, Paypal, eBay
• Small but positive growth in the economy
• Agricultural products sector growing
• Exports growing
– Software, pharmaceuticals, IT products,
financial services
A retrospective view…
• Small economy
• An absolute amount of investment provides big relative boost
• downturn hurts disproportionately
• Small society
• Senior decision makers know each other
– executives, bankers, developers, politicians, civil servants…
• Fear that ‘Golden Circle’ still exists
• Many senior bankers and developers remain
• Public sector being scape-goated
• But, except for senior staff, gained little during boom
• Poor government blamed
• FF satisfaction rating at historic low and its vote collapsed
and some theory…
• Compound/ exponential growth cannot
continue indefinitely
• Virtuous and vicious cycles spring from the
same underlying system
– Reinforcing feedback loops can lead to
increase/ decrease
– Change in parameter value changes system
behaviour
• Delay/lag leads to oscillation
Interest rate factor
Confidence
Credit availability factor
+
Expected value
R +
-
+
+
Housing demand
+
B
House price
+
-
B
Housing stock
+
Population
B
+
House construction
+
Desired housing stock
+