Ireland: the Power of Finance

The Celtic Tiger still exist?

The crisis we are facing these days in the world, is a crisis that started in teh financial sector. We are seeing again the importance of this sector and its strength: a crisis that started in the financial sector is afecting all the economy with many consequences in the persons, the companies and in the Governments. But the objective of this message it's not talk about this consequences.
I will talk about a country where the financial sector had one of the biggest growths and penetrations in the economy and in the country.
In 1960 Ireland was one of the poorest economies in the Western Europe. And until the beggining of the 90's the evolution was too small, as we can see in this graph:

Based on the book: "O crash de 2010" from Santiago Becerra

The irish economy presented a deficit, was poor and based in immigration until de 90's when it suffered a big transformation. In the beginning of the 90's it was more than obvious that the current economic model wasn't viable anymore.
And as we can see in this graphic, the new economic brought good consequences for the irish economic performance.

Based on the book: "O crash de 2010" from Santiago Becerra

The stunning growth of the irish economy was an unique case all over the Europe in this period. From a goner until the beginning of the 90's, Ireland achieved the second higher average GDP pc in the European Union, just behind Luxembourg. How was possible to an economy like Ireland to have such great sucess. The big changes started in 1987. The new-elected government started a new politics based on 3 big principles:
- the public expenses were drastically cut;
- the competence was promoted and encouraged in many subsectors;
- with the EU permission, the irish government reduced the tax for the companie's benefits;

And the consequences were just like how the government predicted:

• The country attracted a lot of foreign investment, specially from the USA, using the advantage of being in a geographic position between North-America and the continental Europe. From 1997 to 2006, Ireland received about 88 000 millions of dollars of foreign investment - something incredible for such small country - . The investment was mostly based to the production of products and services for exportation.
• The low level of the public expenses;
• The efficient use of the european funds;

All these conditions led to a decrease in the unemployment rate and the entry of many immigrants specially from Poland, Russia and the Baltic countries. We maybe be surprised for such great sucess and we are led to think that, specially after the year 2000, the way of life should be so great all over the country. But the country was suffering from a big problem: the illusion created by the statistical average.
The enormous agregated GDP in a small country, produces a high GDPpc but hides the extrem realities, some of them very dramatic. Like many other examples in the History, the statistical data was hiding many economic and social problems. Outside the big centersm the scenario was very different from what we immagine in a country with such high GDP: the bad infra-struture quality, the shortage of many essential goods and services. Of course this reflects how the government was spending the public income - the level of public expenditure was much lower comparing to the GDPpc level - . So, if the most part of the population don't have a level of life according to the level of GDPpc, this means only one thing: this level of income doesn't arrive to the populations' day life.
How is it possible? Thanks to the way how this income level in obtained: witth a decrease in taxes and low public expenses, together with the concentration of the activities and application of GDP almost all near to Dublin.
But, despite the unbalanced distribution of the income, the average income of the irish population increased, together with the growing indebtedness.
During this period, the population bought more and biggest houses, and sold those they had.
This mecanism was working well until 2006. The activity in the housing market started the slowndown and arrived the stagnation in the Summer of 2007.
The irish families began experiencing serious financial problems, due to the mortgage debt and the increase of the interest rates.
And across the country it's possible to see the wrong projects, where the money was applied.
Now, we can see why the Celtic Tiger is more a myth than a reality.
The irish government decreased the taxes, and together with the european funds, increased the GDP. However the population didn't take advantage of this good situation.
The popualtion's income increased because it was in a bad situation comparing with the rest of the Western Europe, and because of the households' endibtness.
The celtic tiger is more speculation than reality: the hiper consume, the excessive debt and the increase in the investment and importance of the tertiary sector, sooner brought strong structural problems for the irish economy.
In the beginning of the current crisis, Ireland was suffering the consequences of the "financial engineerings" made all these years, and of the extrem external indebtedness.
The predictness for the irish economy are not  very encouraging.