Economic Freedom and Growth: The Case of the Celtic Tiger

Ireland was one of Europe's poorest countries for more than two centuries. Yet, during the 1990s, Ireland achieved a remarkable rate of economic growth. By the end of the decade, its GDP per capita stood at $25,500 (in terms of purchasing power parity), higher than both the United Kingdom at $22,300, and Germany at $23,500 (Economist Intelligence Unit [EIU] 2000: 25). In 1987, Ireland's GDP per capita was only 63 percent of the United Kingdom's (The Economist 1997). As Figure 1 shows, almost all of the catching up occurred in a little over a decade. From 1990 through 1995, Ireland's GDP increased at an average rate of 5.14 percent per year, and from 1996 through 2000, GDP increased at an average rate of 9.66 percent (International Monetary Fund 2001). [FIGURE 1 OMITTED] Most theories of economic growth can be dismissed as an explanation for the rapid growth of the Irish economy. The thesis of this paper is that no one particular policy is responsible for Ireland's dramatic economic growth. Rather, a general tendency of many policies to increase economic freedom has caused Ireland's economy to grow rapidly. The first section of this paper looks at general policies and economic growth in Ireland from 1950 to 1973. The second section examines Ireland's experience with Keynesian policies and a fiscal crisis in the 1973-87 period. The third section considers the policies used to correct the fiscal crisis and achieve the dynamic growth that occurred from 1987 through 2000. The policies in the above periods are explained more broadly in the context of economic freedom and its relationship to economic growth in the fourth section. Other possible explanations of Irish economic growth are briefly explored. The paper ends with conclusions that can be drawn from Ireland's experience. Early Prospects for Growth, 1950-73 The Irish Republic had a dismal record of economic growth before 1960. At the dawn of the 20th century Ireland had a relatively high GDP per capita, but it declined markedly vis-a-vis the rest of northwestern Europe up until 1960. During the 1950s, the policy stance of successive governments was that of protectionism. Exports as a proportion of GDP were only 39. percent, with more than 75 percent of those exports going to the United Kingdom (Considine and O'Leary 1999: 117). The high level of government interference in trade and the other parts of the economy caused dismal economic performance. In the 1950s, average growth rates were only 2 percent, far below the postwar European average (EIU 2000: 5). That dismal performance was reflected in massive emigration that reduced Ireland's population by one-seventh in the 1950s (Jacobsen 1994: 68). The Irish government slowly shifted away from highly protectionist policies in the 1960s and began to pursue a strategy of export-led growth (Considine and O'Leary 1999: 117). Unilateral tariff cuts in 1964 and again in 1965, as well as the Anglo-Irish Trade Agreement in 1965 that swapped duty-free access of Irish manufactures to Britain for progressive annual 10 percent reductions in Irish tariffs, were particularly beneficial policies that helped make Ireland more attractive to foreign investors (Jacobsen 1994: 81). Trade liberalization during the 1960s fueled Ireland's economic growth. Output expanded at an average annual rate of 4.2 percent, nearly double that achieved in the 1950s (EIU 2000: 5). Still, there was a great deal of state intervention in the economy during this time, and while the growth was much higher than the 1950s, it is not nearly as remarkable as the growth Ireland has experienced since 1990. During the decade of the 1960s, the rest of Europe was also experiencing about 4 percent GDP growth. Ireland's freer trade policies merely allowed it to cash in on the generally good growth rates the rest of Europe was experiencing. Ireland made no progress converging to the rest of Europe's standard of living; in fact, it actually fell slightly, from 66 percent of the EU 12 average in 1960 to 64 percent in 1973 (Considine and O'Leary 1999: 117). …