Adele Bergin of the ESRI and I made a presentation to a mini-symposium on Austerity: the Irish Experience at UCD last week. Our analysis points out how wrongheaded it is to suggest, as some have done over the last few days, that if only the Greeks would take their medicine the way we did they might be able to expect an equivalent recovery. This ignores the huge structural differences between the two economies.
Faced with evaporation of the tax base, jittery markets and a need for concessionary funding, our current government and the previous one did what was required on the fiscal side. In the language of economics textbooks however, consolidation was necessary but not sufficient for the timing and pace of the recovery.
The first structural difference is the vastly greater openness of the Irish economy. This cushions the domestic economy to an extent, since imports bear some of the brunt of consolidation.
Irish exports, though they took a hit in the early days of the international crisis, nevertheless propped up the economy in a way that the Greek export sector cannot do, because of the share of exports in the Irish economy, the sectoral pattern of our exports and our portfolio of export destinations.
The fact that Ireland was hugely specialised in goods and services for which international demand remained buoyant massively bolstered the economy. Pharmaceuticals dominate Irish merchandise exports: pharma increased as a share of total US, UK and eurozone imports from 2000 to date (as shown by Stephen Byrne and Martin O’Brien in the Central Bank of Ireland Quarterly Bulletin, 02, April 2015). Computer and information services dominate Irish services exports: these increased as a share of total US, UK and eurozone imports from 2000 to date. Agriculture and food dominate indigenous exports: these increased as a share of total US, UK and eurozone imports from 2000 to date.
Services comprise an unusually high share of Irish exports. Since transmission is almost costless, these are less geographically constrained and substantially less dependent on EU and North American markets than is the case for merchandise exports. In the case of the latter, the MNCs can shift export destinations much more easily than indigenous enterprises can, as reflected in an increased US share as the US recovered earlier from the global crisis. And Ireland of course benefitted much more than other eurozone economies from the weakening of the euro against the dollar and sterling over recent years.
Jobs in export production began to recover rapidly from 2009, driven by labour-intensive indigenous manufacturing exports and by the growth of both indigenous and foreign-affiliate services exports. Ireland’s export-led recovery then fed into domestic demand.
It would be impossible for Greece to replicate this pattern.
And by way of footnote: Even though it’s true that most Irish exports are produced by the foreign-owned multinational (MNC) sector, and that any €1 million of these exports creates less domestic value-added than €1 million of indigenous exports, a different perspective emerges when you look at backward linkages per job. These are particularly impressive in the case of the rapidly growing MNC-services sector.