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August 6, 2006
David Warsh, Proprietor

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The Most Happy Nation?

Of all the national economic transformations that began during the 1980s — China, Brazil, Russia, India, Mexico — one of the most successful is one of the least attended.  It was a poor little island at the beginning of the decade, riven by centuries of colonization and neglect. Twenty-five years later, a survey by the A.T. Kearney consulting firm would describe it as the most thoroughly globalized nation of all.  An Economist Intelligence Unit survey would pronounce it the world’s happiest nation, the single best place to live. (The United States came in thirteenth.)

I mean, of course, not Mauritius, but Ireland. For around 300 years, the average income of its citizens was barely half that of Britain. In 1500, the countries’ ratio of gross domestic product per capita was 0.74; in 1600, 0.63; in 1700, 0.57; in 1850, 0.51; and, in the years from 1870 until 1913, an average of 0.56, where it more or less remained until 1970. During the next 35 years, the GDP ratio shot up from 0.74 to 1.15.

What happened to turn Ireland around?  What are the lessons for other nations?

As it happens, a particularly good guide has come to hand in the form of Ireland and the Global Question, by Michael J. O’Sullivan, an economist educated at University College, Cork and Balliol College, Oxford.  He taught economics at Princeton, worked as a strategist at Goldman Sachs, UBS Warburg and Commerzbank before joining State Street Global Markets in 2003. His book has just been published in the United States by Syracuse University Press (and in Ireland by Cork University Press).

Globalization has been kind to Ireland so far, O’Sullivan writes; but now significantly more demanding times lie ahead. And while the experience of the “Celtic tiger” has been held out to others as a shining example of the awards that await successful adaptation to the changing world order, he says, in fact, Ireland enjoyed many advantages in its surge to modernity that other nations do not possess.

O’Sullivan’s title derives from that of a famous collection of essays and letters by Karl Marx and Frederich Engels. Not just Marx and Engels speculated on the causes of Ireland’s underdevelopment, he notes, but Adam Smith and Alexis de Tocqueville as well. O’Sullivan devotes a chapter to their views.

It was in 1779 that the British Board of Trade invited Smith to comment on trade restrictions imposed on Ireland.  (He blamed self-serving English merchants, and advised that their restrictions be abolished.) Tocqueville passed through in the summer of 1835, on his way to America.  “What a complexity of miseries five centuries of oppression, civil disorders and religious hostility have piled on this poor people,” he wrote to his father.  And in the wake of the Great Famine, Marx and Engels observed, “How often have the Irish set out to achieve something and each time been crushed, politically and industriallyÉ Ireland has been stunted in her development by the English invasion and thrown centuries back.” To break free, Marx counseled independence, an agricultural revolution, and protective tariffs against England.

A Malthusian crisis preoccupied Ireland for most of the nineteenth century. From barely a million persons in 1500, its population grew to 7.1 million in 1820 and peaked at 8.5 million in 1845, before abruptly declining to 6.3 million in 1852 and 5 million in 1870. More than a million people died during the Famine, but many more simply left, most of them for the United States.  This occurred, of course, during history’s first great wave of globalization, when economies as distant from one another as Russia, Argentina, Australia and the United States were linking up; O’Sullivan notes that Ireland’s participation was limited to contributing its great out-migration. By 1921, there were only 3 million people living in Ireland.

A political crisis dominated much of the twentieth century. Inflection points in the long history of Irish rebellion are many, but the Easter Rising of 1916, when a small band of nationalists in Dublin proclaimed Irish independence, only to be quickly suppressed, stands out. By 1919 the island was embroiled in an outright war of independence. A treaty with Great Britain in 1921 created the Irish Free State as an autonomous member of the Commonwealth, but six mainly Protestant counties in the northeastern corner of the island were permitted to opt out, Northern Ireland, preferring to continue to be ruled by Britain. A civil war started immediately.  It smoldered, on-and-off, for the next seventy-five years.

O’Sullivan skips over “The Troubles” to take up the underlying causes of Ireland’s rapid economic development after 1970; he mostly ignores the remarkable political compromises of the 1980s and 1990s among the government, employers and trade unions as well. Several domestic factors are now acknowledged to have favored late-stage industrialization, he writes: Ireland’s extensive system of universal education, the rapid expansion of credit, leadership of the Industrial Development Authority, entry into the European Community in 1973, and its flexible work force.

But a number of outside factors were working in Ireland’s favor during those years as well:  the globalization of capital markets, the liberalization of trade, declining interest rates after 1982, the diminution of political risk and the advent of new technologies, especially computers. (In the 1850s, secret societies formed in Ireland with a view to throwing off the yoke of British colonialism and joining the United States; in the 1990s, an avalanche of direct American investment, especially in hardware manufacturing and software, all but turned Ireland into a 51st state, economically speaking.)

This “stew of variables” is what makes Ireland a fascinating case, he writes. It also means that its lessons should be applied to other nations with utmost caution. Just because Ireland boomed doesn’t mean East Germany will move quickly from relative poverty to wealth. (English is not the working language in Leipzig!) Just because the cluster of policies known as “the Washington consensus” served Ireland admirably well in its moment of truth doesn’t mean the same recipe — free trade, fiscal discipline, tax reform, streamlined regulation and lean public spending — will work equally well for South American nations.  Times change; so do external circumstances.

The excitement in Ireland today is of a different sort.  Its property bubble is its most conspicuous feature.  Land and house prices have risen to dizzying heights.  When Ireland experiences the inevitable downside of its asset boom, the ill effects will be felt by those who are least prepared for it, says O’Sullivan — the last to buy and the poor who are heavily indebted. The role of the state in ameliorating the side effects of globalization, inequality and risk-shifting, is very important, especially in a small country. “Irish society has been turned upside down,” he writes, “rebuffing everything that made up pre-globalized Ireland (the Church and trust in institutions, to mention a couple) while embracing all that is new (consumerism, capitalism).”Large inequalities of income and wealth are rife; the social fabric is strained. Smith and Marx and Tocqueville alike observed that happiness had much to do with relative standing — well-being measured vis-a-vis parents, neighbors, children over time.

Watching how the government performs its role as a buffer against the forces of globalization in Ireland should prove instructive for other nations, he concludes. The continued happiness of the Celtic Tiger requires that its citizens share broadly in the benefits of its newfound good fortune.

There are worse problems than the prospect of asset disinflation and, say, three percent annual growth for a year or two, of course. (Real growth has been between 4.4 to 6.2 percent every year since 2000 to 2005, and the unemployment rate has hovered around 4 percent.) The story of Ireland’s economic miracle is that of a nation that suffered long and finally got what at least some of what it deserved. To his home audience, O’Sullivan quotes the writer Sean O’Faolain, who died in 1991: “The new Ireland is still learning the old lessons the hard way, like a brilliant but arrogant boy whose very brilliance acts as a dam against experience, so that he learns everything quickly — except experience.”

To the audience of other nations around the world, let the last word belong to Adam Smith.  More than 225 years ago, he told the Board of Trade, “Should the Industry of Ireland, in consequence of freedom and good Government, ever equal that of England, so much the better would it be, not only for the whole British Empire, but for the particular province of England. As the wealth and industry of Lancashire does not obstruct, but promote that of Yorkshire; so the wealth and industry of Ireland, would not obstruct, but promote that of England.”

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