The Real Ireland Question

I like Michael Lewis. I’m envious of his writing and reporting skills–and I really learned a lot from The Big Short.

But I have to say that I was disappointed in his latest Vanity Fair piece “When Irish Eyes Are Crying” on Ireland’s financial collapse.  A well-written and engrossing piece, for sure, but he managed not to fully address one of the greatest puzzles about Ireland’s economy–how did it ever get such a high per capita income *before* the construction boom started? Here’s what Lewis wrote:

At the bottom of the success of the Irish there remains, even now, some mystery. “It appeared like a miraculous beast materializing in a forest clearing,” writes the pre-eminent Irish historian R. F. Foster, “and economists are still not entirely sure why.” Not knowing why they were so suddenly so successful, the Irish can perhaps be forgiven for not knowing exactly how successful they were meant to be. They had gone from being abnormally poor to being abnormally rich, without pausing to experience normality.

Lewis accepts that Ireland went from poor to rich, and then proceeded to fumble it away. But what if Ireland was never really as rich as it seemed? What if the statistics that said “rich” were wrong? Maybe the real problem came earlier.

Let’s start by looking at the numbers. Remember that Ireland was called the “Celtic Tiger’ because it grew so fast in the 1990s.  The chart below has three lines– per capita real GDP in Ireland,  per capita real GNP in Ireland, and per capita real GDP in Germany (a certifiably real economy that makes things).  Per capita real GNP  subtracts out the net income flow of profits out of Ireland–that makes a big difference  because of Ireland’s role as a pharma and electronics production hub by multinationals.

The salient fact is that according to the official stats, Ireland’s real per capita income appeared to reach Germany’s level around 2000, before the construction boom started.  (Construction was important to the economy in 2000, but not dominant like it was later in the decade. Home completions in Ireland totalled around 50,000 in 2000, compared to 93,000 in 2006). That’s really an astonishing run-up. In 1995, Ireland’s per capita income was 25% less than Germany’s. By 2000 Ireland had made up the gap. Truly a Celtic Tiger not to be trifled with.

Now, let’s stop here.  As regular readers of this blog know, I’m very concerned that the conventional economic statistics are systematically mismeasuring national output, because of problems handling trade. Ireland happens to be one of the most open economies in the developed world.  In fact, exports in magnitude are almost as large as GDP, with imports not far behind. (I don’t know who has a more open economy…but it isn’t China).

With exports and imports so large, it only makes sense that changes in exports and imports actually drive growth in Ireland. In fact, everything else–including capital invesment in things like homes–is really a secondary source of growth. 

So I used the data from the Central Statistics Office in Ireland to calculate the contribution of exports and imports to growth. First I started with the supposed period of strong growth, 1995-2000.  You can see that the positive contribution of exports and the negative contribution of imports is enormous.


Here is a similar chart for the 2000-2005 boom period.  Note that exports and imports are still relatively huge, even during the construction boom.

The implication–and you knew I’d get to the implication someday–is that in Ireland, in particular, relative small mismeasurement errors in real exports and/or imports can have outsized effects.

So this Celtic Tiger may have been a Celtic Kitten instead. And the shift from real boom to fake boom may not have been as abrupt as it seemed.

Comments

  1. Stephen McCracken says:

    “…who has a more open economy [than Ireland]” — Hong Kong! I don’t know if they have any special practices for economic statistics, though.

  2. Employment levels, in absolute terms and relative to the actual population increased massively. Ireland had a backup supply of labour at home and abroad which alllowed Ireland to continue growing up to the early 2000’s.

  3. Goldilockisableachblonde says:

    I’d agree that import/export and thus GDP data may be suspect – just like the U.S.

    However , assuming they’re correct , I think the private sector debt runup that started ramping in the early ’90s may be a sizable contributor. After all , consumption contributed about the same amount to GDP as net exports in the ’95–’00 period. See the bottom chart here for a picture of the private debt/gdp curve:

    http://www.finfacts.ie/irishfinancenews/article_1018849.shtml

    You get more GDP bang for the debt buck early in the debt cycle , then the effect peters out as you approach unsustainable levels. The same process occurred in the U.S. , but was more gradual , starting around 1980 , then climaxing with the crash.

    The absolute debt level increase looks like it’s of the magnitude that would contribute significantly to growth. Virtually all growth spurts like that are propelled by rapid credit expansion. See Steve Keen’s blog for loads of detail on the process.

    BTW , real nice blog. I may have passed thru before , but I don’t recall ever posting.

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