Clare Boland Christian Charnaux Margot Greenman Eoin Ó hÓgáin Chris Staudt
Microeconomics of Competitiveness May 5, 2006
INTRODUCTION From economic crisis in the mid 1980s, Ireland became a case study for export-led success in the 1990s. Taking advantage of fundamental reforms and large FDI inflows, Ireland is now amature, wealthy nation and faces new challenges if it is to maintain the performance its citizens have come to expect.
Ireland Summary Independence GDP per capita, PPP GDP Population Median age Land area Unemployment Current Taoiseach (prime minister) Ruling coalition 1922 $36,140 $130 billion 4.0 million 33.7 27,000 sq. miles 4.30% Bertie Ahern Fianna Fáil (center) / Progressive Democrats (right)ECONOMIC PERFORMANCE Irish PPP adjusted GDP per capita growth - from $13,082 in 1990 to $36,140 in 2005 - outperformed all comparable countries, making Ireland one of the wealthiest countries in the EU, if not the world (EIU, 2005). With an average annual growth rate of 7.2% from 1990-2004, the ‘Celtic Tiger’ far outstripped the EU25 average of 4.2% and the US annual growth of 4.0% (EIU, 2005).Exhibit 1: GDP/Capita in 2005 US Dollars for Ireland and Western Europe
Source: The Conference Board and Groningen Growth and Development Centre, Total Economy Database, Jan 2006.
However, increasing convergence of Ireland’s growth rates to the European average, as illustrated in Exhibit 2, raises concerns about future growth
Exhibit 2: Annual Real GDP Growth Rates for SelectEconomies (1992-2004)
Exhibit 2: Real GDP Growth Rates (%) 1992 - 2004
Source: Economist Intelligence Unit (EIU), 2005
Much of Ireland’s economic growth has been driven by Foreign Direct Investment (FDI), with over 40% of Gross Fixed Investment between 1992 and 2004 coming from abroad (EIU, 2005). Due to repatriation of profits by these investors, Ireland has a Gross National Product (GNP) of83% of GDP, significantly less than the EU25 average of 99.5% (CSO, 2003). Nevertheless, FDI has focused on high-value-added manufacturing, generating significant labor and total factor productivity (TFP) improvements. Concurrent heavy investment in the country’s capital stock suggests that the increase in TFP is not simply the effect of higher capacity utilization, but actually an increase in theoverall capacity of the country’s workforce. Exhibits 3 and 4 illustrate the growth in TFP and Gross Fixed Investment and highlight Ireland’s significantly higher growth rates relative to its peers.
Exhibit 3: Average Annual Growth in Total Factor Productivity
Exhibit 4: Average Growth in Real Gross Fixed Investment
Source: EIU 2005
An analysis by the Irish Central StatisticsOffice suggests that productivity improvements accounted for more than half of Ireland’s per capita GNP growth between 1994 and 2004 (Exhibit 5). Increased employment and labor force participation rates, as well as favorable demographic shifts, accounted for the remainder (CSO, 2005). Exhibit 5: –Contribution to Per Capita GNP Growth, 1994-2004
Source: Central Statistics Office of IrelandProductivity gains have been concentrated in several dominant clusters such as chemicals, IT and life sciences. Exhibit 6 highlights the significance of these clusters in the Irish economy.
Exhibit 6: Ireland’s Export Performance in Goods by Cluster 1997 - 2003
Source: International Cluster Competitiveness Project
THE NATIONAL DIAMOND Factor Conditions Given Ireland’s low domesticdemand, inclusion in the EU has been a key factor condition for Ireland since 1973. Access to the large regional Europe market has been critical to attracting major companies, primarily from the United States, seeking bases from which to export to EU member states. Supporting EU market access is a young and highly educated English speaking workforce. In 2004, 60% of college graduates earned a degree...