Ireland’s Failings

For obvious reasons, Ireland has been a prominent feature of the Marginal Revolution blog, one of the best and most widely-read economics websites in the world. Tyler Cowen offers the following summary of Chapter 5 of Fintan O’Toole’s new book.

From Marginal Revolution:

“How Rich Was Ireland Really?

Not as rich as they thought. I’ve been reading Fintan O’Toole’s excellent Enough is Enough: How to Build a New Republic. Mostly it is an expose of Ireland’s crony capitalism and bad political institutions. On economic issues, chapter five offers up the following:

1. During the boom years, property accounted for 72 percent of all assets.

2. For infrastructure, Ireland ranked 26 out of 28 OECD countries.

3. Ireland had a higher share of slow fixed internet connections than in any other comparable country.

4. In terms of R&D or patents, Ireland was well below the OECD average in per capita terms.

5. In the OECD “human and income poverty” rankings, Ireland was 23 out of 25 countries, sandwiched between the United States and Mexico.

6. The country’s health care and educational systems are considered subpar.”

The overreliance on property is now something even the government takes as given but it is worth debating whether our health and education systems are really subpar in the sense mentioned and, in general, whether the whole Celtic Tiger was an illusion or not. There are plenty of things wrong with our education system in Ireland but is it really “subpar” in the sense of being worse than comparable countries? In terms of the health system, I will let commentors weigh in with opinions.

It is worth keeping in mind the substantial gains in life expectancy that occurred even during the late Celtic Tiger period. Life expectancy for people over 65 was the same in 1986 as it was at the foundation of the state and increased dramatically through the 90s and 2000s. We do not have precise evidence on what exactly drove these increases but it would be wrong, in my opinion, to say that we did not make health gains during this time. And this is not to excuse political decisions that saw vital vaccines and treatment of people with cystic fibrosis given lower prominence than the breeding of race horses. But it is worth having an open debate about where the country stands from a developmental perspective as well as a fiscal/monetary perspective. I released a paper recently called “From Angela’s Ashes to the Celtic Tiger: Early Life Conditions and Adult Health in Ireland“. Everytime I have presented it, someone says something like “it should be the other way around” or “you should add “and back again””. I find it hard to think of the broad progress in human development in Ireland in the last 50 years and not have some sense of belief in the potential of the country and some degree of pride of where it has come, even in the face of the current mess. If you look at the health of Irish migrants to the UK over the last 50 years you see huge improvements there also with recent migrants performing as well as or, to a large extent, outperforming natives compared to the 1950s and 1960s migrants who, as an average, are in far worse physical and mental health. It is worth beginning to ask whether what we are facing is a large fiscal and monetary blip with a forseeable exit point or a genuine developmental structural break where the real and profound gains in human welfare seen in Ireland are in danger of being reversed.

Budget Documents

The budget documents are now online. The server is clearly busy but I just downloaded all the documents.

Überfordert in der Ecke

As I argued in Sunday’s Business Post, the best solutions to Ireland’s problems are Europe-wide. On the other hand, Wolfgang Münchau believes that Europe’s political class are simply not up to the job. A growing number of commentators are arguing for a ‘big bang’ solution to the Eurozone crisis; and yet last night’s Eurogroup meeting had nothing new to announce.

It is not surprising that Europe’s finance ministers are finding it difficult to agree on a way out of the Eurozone crisis. They have boxed themselves into a corner in which this is almost inevitable.

The Eurozone is suffering from several major problems right now. The first is the lack of nominal exchange rate flexibility, but let’s leave that aside for now. A second major problem is that the solvency of its banking system is currently guaranteed by a series of stress tests that Ken Rogoff described yesterday as ‘pathetic’.

Let us assume that less pathetic stress tests were to reveal that there were holes in the European banking system that needed to be filled. The question then would be how to fill these holes. Assume that private investors will not fill the holes on their own until they are confident that the underlying problems of the banking system have been solved. That leaves three options. The holes could be filled by the ECB. The holes could be filled by existing bondholders, with their claims on the banks being converted into equity. Or the holes could be filled by European taxpayers. My guess is that the optimal solution would be an interior one, involving a little bit of each. But Europe’s politicians are determined to force us into a corner solution, one senses out of timidity as much as anything else.

If we rule out the ECB option on political and legal grounds, that leaves bondholders and taxpayers. If Europe’s political class rules out the bondholder option, then taxpayers will be stuck with the entire bill.

In such a situation, the only relevant political question is: whose taxpayers should pay, either explicitly, or implicitly via some sort of Eurobond arrangement? This is an inherently divisive question, and it is hardly surprising that Europe’s finance ministers are finding it difficult to achieve consensus in such circumstances. The prospect of the major cleavage in European politics in the years ahead being one between furious core taxpayers, and equally furious periphery taxpayers, is a good reason to be pessimistic about the future survival of the Eurozone.

If bondholders were brought back into the picture, the politics would be less poisonous: European taxpayer interests on one side, bondholders on the other. Exclude that option and you are setting up a slow-burning confrontation with potentially disastrous consequences.

History is littered with examples of international economic institutions that were intended by their architects to last forever, but which failed. This is typically because while the economics of the situation demand particular solutions, political constraints rule these out. By unnecessarily ruling out the bondholder option, Europe’s politicians are making it more likely that the Euro will one day be added to the list of failed institutions.

On the upside, we would then regain our exchange rate flexibility, which would be a very good thing. But it’s a gain that would come at a pretty steep cost.

Update: I just saw this article in the FT, on the growing political gap between Northern and Southern Eurozone countries. Expect to see more of the same…

Budget Thread

Off we go.

Gormley Update: Guarantee Decision Not Taken Over Weekend

After claiming on RTE radio last weekend that the guarantee decision was taken “on the day before. It was a Sunday. We had a Cabinet meeting. We’d gone through it in quite a bit of detail” John Gormley is now stating that this was not, in fact, the case. Today’s Irish Times reports:

Mr Gormley said in a statement that a meeting of the Government was held on Sunday, September 28th, to discuss the budget for 2009.

“At the end of this meeting, the Minister for Finance briefed colleagues on problems experienced by Irish banks in context of international developments; that contingency arrangements were being prepared; that the situation was being closely monitored, and that the focus was on banking system stability.

“While no formal decision was taken, arising from the briefing there was a clear understanding some Government action would have to be taken if the situation deteriorated,” Mr Gormley said.

So, we’ve gone from “you couldn’t just make a decision on the spur of the moment. You’d have to discuss it for days in advance. Of course, not. No, you just can’t do it like that.”  to “some action had to be taken” with the specific action that was taken being done as follows:

The further deterioration in the situation on that Monday led on to the discussions and decision on the night of Monday and Tuesday, September 29th and September 30th, 2008.

i.e. they took the decision when Gormley was in bed.

Personally, I think Gormley would be better off sticking with “Wasn’t my idea, I was in bed” as a political strategy. More seriously, for the circumstances of such a momentous decision to be so murky more than two years afterwards is highly unsatisfactory.