Bertie Ahern: The Man Who Blew the Boom: Power & Money (39 page)

Lee also pointed out that the marginal propensity to import was exceptionally high in Ireland because of its incorporation in the English sphere of influence. Irish agriculture provided only a small market for Irish industry. It did little to increase output in the century after 1850, and it relied on the export of raw rather than processed product. Irish business failed to develop an interest in exports and was unable adequately to defend its home market, leading to the shift in official policy towards attracting foreign direct investment in the hope that the foreign firms would in time assist in the fostering of native enterprise and industry. But while the
IDA
had success in persuading foreign firms to come to Ireland to establish low-skilled manufacturing operations, the growth in such employment during the 1970s ran alongside huge job losses elsewhere. The foreign firms supported by the
IDA
had few linkages with Irish business and conducted very little by way of research and development.

In 1980 the National Economic and Social Council commissioned the Telesis report. It was highly critical of economic policy and the emphasis on foreign investment. It made it clear that the much-trumpeted success of the
IDA
was not quite what the public had been led to believe. No country had ever succeeded in achieving sustained economic growth except on the basis of domestic industry, the report said, and it set out recommendations for how Ireland might foster indigenous success. Official dislike of the report’s conclusions led to its publication being delayed for more than a year. The official response to it took three-and-a-half years. The
IDA
and official Ireland did not like the Telesis report but did not dispute its view that Ireland was failing to produce a native cadre of high-quality entrepreneurial business figures. Likewise, when the Labour Party proposed in the mid-1980s that a National Development Corporation be established to foster industrial activity, the idea was met with hostility, not least because of the widely held view that state companies had failed in the past, had tended to become captive to public-sector trade unions and were inherently inefficient. By the mid-1980s the public finances were in dire straits, emigration was the only option available for a large number of school-leavers and graduates, and faith in both the public and private sectors was as scarce as entrepreneurial zeal.

This is the background in which the political career of Bertie Ahern must be viewed, and in particular his management of the economic boom.

Chapter
12  

OPPORTUNITY KNOCKS

B
y 1996 Ireland’s economic circumstances had turned around in a way that J. J. Lee could not have envisaged seven years earlier. The economy was growing at more than 5 per cent per year. The term ‘Celtic Tiger’ had been coined and had taken hold, and studies of precisely how the great economic turnaround had occurred—and of what was continuing to drive it—were being conducted at both the national and the international level. One can only speculate that Bertie Ahern looked at this development from the opposition benches and wondered if he would ever get back into power.

At the most simplistic level the change in the economy occurred because a number of factors that had been holding back the economy had been dealt with or had dissipated, and it was now catching up with its European peers. Ireland was experiencing a corrective bounce.

The period of economic growth had begun in 1987 and continued through the first half of the 1990s but without an obvious impact on the lives of many. Ireland experienced an above-average level of economic growth while maintaining low inflation and an excellent balance of payments position and overseeing a huge improvement in its public finances. However, unemployment remained stubbornly high, with more than 20 per cent of the work force on the live register of unemployed. These were the years of so-called ‘jobless growth’.

The reasons for the ‘invisible’ growth were outlined in a medium-term review (1994–2000) published in 1994 by the
ESRI
. (The establishment of the institute was part of the change in economic policy introduced by the former Taoiseach Seán Lemass, which Lee said was an attempt to foster performance over possession. One of the glaring failures to emerge after the collapse of the boom was the paucity of professional analysis to which Irish society and Government policy are subjected.) The
ESRI
review included a chapter by John FitzGerald and Patrick Honohan entitled ‘Where did all the growth go?’ which examined the phenomenon of jobless growth. A principal reason for the lack of employment growth was that the greater economic resources being produced were being invested on slowing, and then turning around, Ireland’s foreign debt. As the authors put it, in the early 1980s Ireland had lived far beyond its means and had almost bankrupted itself. By the early 1990s it was doing the opposite: its means had increased, but the money was being used to pay off its debts and wean its way off its borrowing habits. Consequently the average worker was not experiencing any great leap in personal income, and unemployment was remaining at a record level.

Spearheading Ireland’s recovery from the late 1980s had been the growth in manufacturing exports. While some Irish firms had been involved, the size of the contribution from foreign-owned exporters was unique in Europe. The effect on Ireland of the foreign-owned firms was less than it would have been if they were indigenous or more embedded in their host economy. Meanwhile, Irish business had suffered intensely from the contraction in the economy in the early 1980s. Honohan and FitzGerald in part explained this by showing that Irish wage levels had risen
vis-à-vis
those in Britain in the twenty years previously, weakening the competitive capacity of domestic business so that when conditions became strained, many businesses quickly collapsed. However, in the period since the mid-1980s the competitive position of Ireland relative to its nearest neighbour had improved, and the competitive edge had been maintained. Agriculture, despite continuing to contribute to economic growth, was still witnessing a falling off in farm employment. On the other hand, a series of mergers and acquisitions had seen the emergence of a number of large agri-business firms that were using their size to invest in product development and the process of selling their products on international markets. However, labour-saving technologies had dampened the sector’s effect on employment numbers. There had been a marked increase in employment in services, reflecting international trends in outsourcing and developments in technology, though the increase in Ireland had not quite tracked the international trend. The number of jobs in the Republic in 1994 was still less than in 1980.

Wage restraint, transfers from Europe and relatively low interest rates, and their effect on Irish debt payments, all played their part in the improvement in circumstances during the early 1990s. Irish interest rates were by the late 1980s already tracking Germany’s, and the increase in German rates, brought about by its reunification, caused a delay in the recovery of Ireland’s fiscal position (by increasing the cost of servicing Ireland’s debt) and contributed to a general economic slump in Europe. The higher debt-servicing burden for Ireland, which meant that more money had to be raised in taxes, affected the country’s ability to achieve wage restraint so as to boost Irish competitiveness. German reunification delayed the arrival of the Celtic Tiger. The effect of developments in Germany on Ireland’s employment and emigration performance is an example of how Ireland exists and must manage its affairs in a European context. Arguably it was the failure to focus on the European context in which Ireland operates that was the biggest mistake made in economic management during the Ahern years.

The 1994
ESRI
publication pointed out that as the Irish national debt fell, the pressure on the economy from servicing the debt would ease and there would be greater scope for increasing economic growth to lead to job creation and affect the material well-being of people generally. There were other factors feeding into the positive economic background. Demographic change meant that Ireland was about to experience a period where there would be a lower percentage of older people dependent on the working population to support them. With a greater proportion of the population in the work force, there would be higher per capita income on this basis alone and a reduced requirement for public services. An increased level of educational attainment would also provide a boost to the economy. For these and other reasons the review opted for a bullish forecast for the coming six years. While the figures were to prove incorrect, notably in the predictions for getting rid of unemployment (it eased more quickly than predicted), the trend was spot on. Europe was about to experience a recovery, and Ireland a boom. If it wanted to spread the benefits among all the population, wage restraint would have to continue so as to boost employment, and resources would have to be targeted at those in danger of leaving the educational system too early, so as to reduce the number of people entering long-term unemployment. Upskilling and training would have to be provided to those already unemployed. There would be an opportunity for reform of the tax system. As a set of challenges set out for those charged with the management of the state, they were not difficult to understand.

Three years after the review the economy had prospered at a rate that had taken everyone by surprise. Net emigration had ended, and former emigrants were returning. Confidence in Ireland and its prospects was commonplace. The institute came out with a new review in the same year that Ahern had become Taoiseach for the first time. ‘Who put the tiger in the tank?’ was one of the questions asked, and, as the authors made clear, no single factor could explain the extraordinary developments then occurring in the economy.

According to the review a number of mutually reinforcing domestic forces with widely divergent time-scales had come together to provide the Republic with an unprecedented push into the first division of European wealth levels. Sustained public policy over a period of four decades had built up educational and training levels (human capital) and had proved successful in attracting foreign direct investment. The crises of the 1980s, which had almost led to a loss of economic sovereignty, had provoked a much-needed shake-up of institutional attitudes, not least in political, public service and trade union circles, and had forced the Government to remedy the public finances. Pay restraint and social partnership had restored Ireland’s international competitiveness. A better level of education was driving the increase in female participation in the labour force, affecting migration and the marriage and birth rates and, through increasing earning power and productivity, boosting economic growth. There had been a sharp change in the dependence ratio, or the ratio of those outside the work force to those inside it, and Ireland was rapidly moving from having the highest dependence ratio in the
EU
to having the lowest. A demographic dividend would give the country an opportunity of about twenty years during which it could consolidate its position and prepare for a more difficult future.

International factors were also at play. The American and British economies were growing at a satisfactory pace, and the Continental European economies appeared to be recovering from recession. European monetary union was due to take place in 1999 and would ensure the continuation of relatively low interest rates.

The 1997 review, in making its forecasts for the coming six years, presumed fiscal responsibility, moderate wage demands, modest reductions in direct taxation and increased investment in infrastructure. The circumstances in which Ireland found itself were a ‘historical opportunity for Irish society. It should not be wasted.’ This was the context in which the 1997 general election, and indeed Ahern’s career as Taoiseach, took place.

The
ESRI
envisaged that the ‘current exceptional rate of growth in the economy is likely to continue into the next decade.’ Maintenance of Ireland’s competitive position would see the economy create jobs at a rate that would be exceptional in Ireland’s history and in relation to the
EU
norms of the time. Furthermore, and unlike previous spurts in employment, the growth in jobs would see a sustained falling off in the unemployment rate.

In the introduction to their review the authors referred to Lee’s book and to the question it had posed as to the cause of the Republic’s lack of economic success. ‘Now the question posed by outsiders looking in is why it is such a success. To those of us living through the experience there is a certain sense of bemusement at this rapid reversal of fortunes.’ The review put an emphasis on the changes to educational provision in the 1960s—twenty years later than most western European countries. Increased access to education was a key factor in explaining the transformation of the Irish performance, the authors said. Increased educational attainment explained many of the demographic changes that were now producing positive economic benefits as well as directly providing for increased productivity. Ireland had been a laggard at introducing educational reform after the Second World War, and its ‘baby boom’ was also taking place decades after that of most other Western societies.