1. Patrick Honohan, Trinity College Dublin, June 2008

2. Overview The dangers of misunderstanding the process that has occurred The delayed convergence hypothesis (Honohan- Walsh, 2002) suggests the rapid expansion is unlikely to be repeated, but that scale growth could continue… …after an inevitable adjustment. (This adjustment is potentially rather severe, given the excesses of the housing market.) NB: Cover painting: http://www.wendyfwalsh.com/pages/shop2.htm

3. The delayed convergence hypothesis asserts that Ireland’s convergence to the leading-edge of EU economic performance was delayed –by a 25-year long cycle caused largely by inappropriate fiscal policy beginning just after EU membership in 1973. emphasizes traditional virtues at three frequencies: –long term (institutions, structural policies, human and fixed capital formation); –medium-term (fiscal sustainability; helped ); –short term: (wage competitiveness and asset market stability).

4. The delayed convergence hypothesis (2) The fundamentals were in place… …when the recovery phase arrived, it was facilitated by: –the timeliness of the flow of structural funds, –competitiveness gains from exchange rate movements and (of course) –the famous wage restraint of the social partnership Celtic Tiger period was not just an artefact of inward FDI boom and the low company tax rate (or even the structural funds) –these helped smooth the way, and have shaped important features of the economy today, but convergence to frontier living standards is more like the norm for an EU country given the traditional virtues.

5. Stylized fact 1 The hare* has run its course (?) *Cf. Aesop’s Fables

6. The hare has run its course While many discussions focus on growth rates, the dynamics of unemployment are key to understanding what the Irish economy has done and can do. We note the long business cycle 1973-2000 using the internal and external balance map. The Celtic Tiger period coincides with a recovery phase: exaggerates the long-term sustainable trend growth. Since 2000 the economy has remained close to the balance zone (also experienced in the 1960s)—though emerging BOP deficit is noted. Now pessimism has set in (as evidenced from survey data). Is this warranted?

10. Stylized fact 2 No productivity miracles

11. There is no productivity miracle to explain Forget about double-digit growth. Unadjusted data flatters what was a very good performance. MNC profits are one element calling for adjustment, Terms of Trade changes another. Netting these shows a good but not miraculous productivity growth. (Nevertheless, income growth per head of population in the peak Celtic Tiger period years was excellent)

14. Stylized fact 3 Employment growth is still astonishing

15. The miracle (if there is one) is in employment growth Not only sweeping in the unemployed… …but catering to increasing participation… …and attracting large-scale immigration.

23. Stylized fact 4 Distribution is stable

24. Income distribution/poverty The benefits extend through most of the income distribution… …But, especially recently, incidence of acute poverty (“basic deprivation”) has not fallen

26. Nolan (2004), CSO (2007)

27. Stylized fact 5 Some financial vulnerability is evident

28. Financial vulnerability? Export-led growth was replaced after about the rune of the millennium by a housing boom with several causes (important at different times): EMU interest rates, increasing savings/wealth and confidence, housing demand boosted by migration, increased bank competition. Created a dangerous over-dependence on housing construction—and on foreign financing of this boom. But this period is now over: house prices are falling, demand and supply of credit have shrunk, construction is sharply down, employment in construction is down.

37. CSO Housing Completions, 1970-2007

38. Discussion 1 Competitiveness worries: Is the mechanism broken?

39. Competitiveness worries But this depends on old-fashioned wage competitiveness being maintained And there are indications that the social partner mechanism that delivered wage restraint since 1986 is no longer ensuring international competitiveness.

40. To March 2008 cpi-weighted

44. Discussion 2 Scale growth could resume

45. Scale growth could resume Tiger period will not return (growth in employment rate reached plateau) After a housing correction… …and with restored wage competitiveness… scale growth could continue

46. The steady state Convergence of employment ratio is at an end Wage competitiveness has to improve Housing prices: ST falls back to shoulder

50. The steady state Convergence of employment ratio is at an end Wage competitiveness has to improve (10–15%?) Housing prices: ST falls back to shoulder (25% real) But scale growth could continue – depending on wider “competitiveness” aspects… …partly a political issue

51. Scale growth could resume (2) Depending on wider competitiveness issues: including –Population/land density still low –Dependency ratios favourable for many years –Investment still insufficient