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Virtuous and vicious cycles: boom and bust in Ireland Dr. Malcolm Brady DCU Business School Dublin City University Visiting Scholar to Wuhan University,

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Presentation on theme: "Virtuous and vicious cycles: boom and bust in Ireland Dr. Malcolm Brady DCU Business School Dublin City University Visiting Scholar to Wuhan University,"— Presentation transcript:

1 Virtuous and vicious cycles: boom and bust in Ireland Dr. Malcolm Brady DCU Business School Dublin City University Visiting Scholar to Wuhan University, Hubei Province, China 12 th – 13 th March 2012

2 Ireland before the 1990’s… A sleepy backwater Long legacy of emigration Poor infrastructure Small industrial base –drinks, clothing, agriculture (beef, foodstuffs) Strong rural links/ Church influence Buying votes, but high taxes and interest rates ‘living away beyond our means’, fiscal rectitude

3 but had resource advantages… Young, educated, low-cost workforce Only English speaking Euro-zone country Easy access to European markets Good educational system Pro-business government policies Agencies active in seeking investment –Especially in knowledge-based industry Low corporation tax at 12.5%

4 that attracted in investment… Technology firms –Intel, Dell… Pharmaceutical –Pfizer, Wyeth… Financial services firms –Insurance, re-insurance… Software… –Microsoft…

5 which led to amazing growth… Initially due to higher productivity –People worked harder, smarter and longer –Higher skill work Financial services/ software/ hi-tech manufacturing Second phase due to building boom –Houses/ apartments/ shopping centres –Dublin, then hinterland, then entire country –Not well-planned or integrated –Schools/ shops lag housing –Transport difficulties in outer suburbs, dormitory towns –Funded by borrowing

6 Source: CSO Ireland

7 increasing confidence, arrogance… First population growth since Great Famine Net immigration/ heterogeneous society Cultural impact on world –Riverdance/ U2 Diaspora buying up European property But politicians ignoring people No to Lisbon treaty –Annoyed European colleagues

8 and corruption… Tribunals of inquiry estimated cost €434m Mostly in fees to the legal profession Ongoing - Two took 12 years, one 7 years Ignominious end to a number of political careers Little outcome to date except national loss of innocence

9 Society changed… Pluri-cultural and pluri-lingual –Many non-Irish immigrants –New religions and customs New infrastructure –M50 ring motorway around Dublin –Significantly upgraded roads to the capital Thriving urban entertainment culture Conspicuous consumption –Temple Bar and Grafton Street

10 but growth caused strain… Infrastructure inadequate –Long commutes –Traffic congestion Health care system ‘third world’ Large class size in primary schools Services price inflation –Professionals/ craftsmen –Restaurants/ coffee shops/ bars/ hotels Increasingly stressful lifestyles –‘Breakfast roll man’/ ‘Yummy mummy’

11 and more serious problems… Cost of living 20% above European average –Siptu, 2009 Labour cost increase Beginning to lose national competitive advantage Senior private/public salaries dramatic increase Widening gap between haves and have-nots Binge drinking - young/ cocaine - middle class Development of hedonistic culture Drug-related gangland wars Development of urban underclass

12 and house price inflation… Average house price increased from €87,000 in 1996 to €300,000 in 2006 (CSO 2008:22) Banks – relaxed mortgage requirements –from 3 x salary to 8 x salary –from 20 years to 25/ 30 years –100% mortgages available Two incomes, plus parents Many sectors benefit from high prices –Developers, builders – windfall profits –Government – stamp duty –Estate agents, lawyers - fee % of price

13 Then worldwide shock… Ireland is a small open economy –Susceptible to benefit/ suffer from worldwide changes Interest rate increases –Increased cost of mortgages Credit crunch Recession in main trading partners UK/US

14 banks got into trouble… Bank of Ireland predicts €6b losses on property loans over next three years Government provides €3.5b to BoI & AIB demanding cap on executive earnings Anglo Irish Bank nationalised, scandals €7b customer deposit - switched with another bank CEO’s loans hidden from auditors €451m Golden Circle customers/ shareholders Source: Irish Times 12 Feb 2009

15 and bankers respond… BoI’s Goggin admits mistakes made, but declined to apologise “And I suppose that if I have a regret, my regret is that I didn’t see this coming and perhaps the lessons of economics were forgotten. Economics ultimately are cyclical …Irish people in general, rather than just the banks, “all got carried away on the euphoria” of that prosperity” AIB’s Sheehy less conciliatory “bank remuneration…got out of control to some degree where there was too much reward for short-term gain.” “That clearly has to be changed, not only in Ireland but everywhere...remuneration has to be linked to long-term risk and risk taking”

16 flagship companies in trouble… Waterford Wedgwood in receivership Independent Newspapers share price tumbles Ryanair letting go 200 staff in Dublin –Monthly airport passenger numbers down 9% –‘Idiotic’ departure tax “This Government must realise you can only promote tourism by welcoming visitors, not taxing them” - Michael O’Leary CEO Ryanair Source: Irish Times, 12 th Feb 2009

17 A changed economy… Credit crisis and bailout of the banks Consumer spending halted 266k houses vacant (15% of stock 2006 census, cso ) Job losses - unemployment rises to 9% Jan 2009 Government revenue down 6.3% in 2008 €20b budget deficit Cutbacks across entire public sector –Budget levy/ Pension levy (viewed as paycut) –Benefits reductions/ Remedial teaching… Increased taxes: departure tax/ income tax?

18 and frightening bust… Retail sales for 2008 down 4.5% January deflation first for 50 years Inflation forecast at -3% for 2009 Mortgages, retail prices down Wages and prices must drop 20% to restore competitiveness (Bloxham economist) Contraction in economy of 6% forecast for 2009 Living standards to drop 10% over next years ‘It’s a battle for financial survival. We have to keep working at it’ Brian Lenihan, Finance Minister Sources: Irish Times 12/13/25 Feb 2009 RTE 17 Feb 2009

19 Average New House Price - Ireland Source: CSO Ireland Source: real-estate-house-prices/I Permanent TSB/ ESRI Source: Yahoo Finance Source: Irish Stock Exchange Annual Statistical Review 2008

20 hostile public reaction… Breakup of the Partnership Agreement –Between government, employers and unions –Street protests by unions, students, Gardaí –Strikes by transport and public sector workers Senior bankers s tepping down »remuneration checked (AIB CEO 60% pay cut) Government debt rating under threat –bank guarantee scheme may backfire EU reaction –Ireland’s policymakers failed to maintain ‘prudent fiscal course’ during the boom –Government recovery plan: ‘lack of clarity’ –Trichet optimistic, but hard decisions to be made

21 followed by collapse… Government bonds failed in capital market Ireland downgraded by rating agencies Bailout in November 2011 by EU/IMF/ECB Leading to huge debt and tax burden EU seen to protect European banks at expense of Irish taxpayer Much emigration of young people to Australia, Canada, Britain

22 and slow recovery… Investment by social media companies –Google, Facebook, Paypal, eBay Small but positive growth in the economy Agricultural products sector growing Exports growing –Software, pharmaceuticals, IT products, financial services

23 A retrospective view… Small economy An absolute amount of investment provides big relative boost downturn hurts disproportionately Small society Senior decision makers know each other –executives, bankers, developers, politicians, civil servants… Fear that ‘Golden Circle’ still exists Many senior bankers and developers remain Public sector being scape-goated But, except for senior staff, gained little during boom Poor government blamed FF satisfaction rating at historic low and its vote collapsed

24 and some theory… Compound/ exponential growth cannot continue indefinitely Virtuous and vicious cycles spring from the same underlying system –Reinforcing feedback loops can lead to increase/ decrease –Change in parameter value changes system behaviour Delay/lag leads to oscillation

25 House priceHousing demand Housing stock House construction Interest rate factor Credit availability factor + + - - B B Population + +- Desired housing stock + + - Expected value + + R + Confidence + B

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