Taming Ireland's Celtic Tiger

Ireland's economic tiger is the envy of Europe. But it may be impossible to clone - or to sustain.

By Christopher Redman, Fortune contributor

(Fortune Magazine) -- Tiger Woods wasn't the only feline on display at the recent Ryder Cup in Ireland. The country's roaring economy - nicknamed the Celtic Tiger - put on a good show too. Like the prestigious K Club that hosted golf's premier tournament, once a crumbling country mansion badly in need of repair, Ireland has become a shining example of what new wealth can do.

Other countries look enviously at an Ireland that has transformed itself in one generation from a threadbare country on Europe's periphery to the second-richest (on a GDP-per-capita basis) in the European Union. Scarcely a week goes by without a national delegation visiting Dublin to learn how the Celtic Tiger was conceived and, more important, whether it can be cloned.

ireland_mapflag.03.jpg
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ABOUT IRELAND
GDP GROWTH 5.8% (2006 est.)
GDP PER CAPITA $40,610 (purchasing power parity, 2005)
UNEMPLOYMENT RATE 4.3%
BIRTHRATE 14.5 births per 1,000
FERTILITY RATE 1.86 children
LIFE EXPECTANCY 77.7 years

The Irish are as keen as their visitors to answer that question because they'd like to know what caused their boom - the better to sustain it. The bad news: Although Ireland has done many things worth copying, its success probably can't be duplicated and will be difficult to sustain. That's because it owes much of its roar to the power of demographics, a force that may already be working to mute the beast.

There is no consensus about the ingredients of Ireland's success. The more fanciful view is that it was the product of a shift in the nation's zeitgeist brought about by the visit of Pope John Paul II in 1979, or even the boost in national self-confidence engendered by the success of homegrown rock bands like U2.

The more prosaic argument is that, after decades of performing below its long-term potential, Ireland has simply enjoyed a telescoped process of catch-up - "belated convergence," as economists call it.

"There are many components to Ireland's success story," says John Fitzgerald, a professor at Ireland's Economic and Social Research Institute. The usual suspects, he and others point out, include development funds from the EU; low corporate taxes; the success of the Irish Development Authority in persuading multinationals to take advantage of those low rates; and the ability of the Irish education system to provide the skilled workforce needed for a modern, knowledge-based economy. It didn't hurt, either, that Ireland's catch-up came at a time of strong global expansion.

Yet on closer inspection none of the usual suspects - individually or collectively - provides a convincing explanation for the economic miracle. If money from Brussels was behind the boom, how come it didn't happen until the 1990s, two decades after Ireland joined the EU and started receiving handouts? And if EU money buys success, why is it that Italy's Mezzogiorno is still a basket case despite receiving far more EU aid than Ireland?

Low corporate taxes? Charles Haughey's Fianna Fáil party cut spending and borrowing and slashed corporate tax rates to 12.5 percent in the 1990s, but corporate taxes for most exporters stood at zero back in the 1960s, when Ireland was about to enter a lengthy period of stagnation.

Foreign investment? Since 1990, Ireland's workforce has expanded by 500,000 - not bad for a country of only four million - but multinationals have accounted for only 10 percent of the increase.

Education? The decision in 1967 to provide free secondary education boosted the number of university graduates, but as late as 1989 some 40,000 men and women emigrated in search of jobs the Irish economy didn't have.

So was it simply the luck of the Irish? Possibly, for luck is often about timing - and it is the timing of the Irish boom that offers a clue to how a sleepy economic tabby cat morphed into a roaring tiger.

A demographic shift

Blame it on contraceptives, whose sale became legal in Ireland in 1979. That was no watershed in itself, for legislation simply caught up with practice: Despite the opposition of the Roman Catholic Church, contraceptives had become widely available in Ireland in the 1970s.

But as Harvard University demographers David Bloom and David Canning pointed out in a 2003 article, legalization codified societal norms and was connected to a rapid fall in fertility rates starting in the 1980s, when the birth rate fell from about 22 births per 1,000 to just 13 in 1994.

The fall in fertility was important because of its impact on the ratio of workers to those they support, especially pensioners and children - the so-called economic dependency ratio. As late as 1985, Ireland's ratio of 2.3 dependents per employed person was significantly higher than the EU average of 1.5, placing a burden on an already underperforming economy.

But starting in the late 1980s, plummeting fertility rates caused Ireland's dependency ratio to fall dramatically, and by 2000 it had pulled level with the EU average. That seismic demographic shift provided a huge economic boost: From 1960 to 1990 the annual growth rate of income per capita in Ireland was approximately 3.5 percent; in the 1990s it jumped to 5.8 percent - well in excess of any other EU country.

Eileen and Charlie McGrory are part of the generation that witnessed, and helped bring about, the Irish turnaround. Jobs were scarce when they graduated in the 1980s, and like many of their contemporaries, the McGrorys found work overseas. "We had been educated for export," recalls Eileen.

But as Ireland's economy took off in the 1990s, the McGrorys returned home from Silicon Valley to good jobs in Ireland's booming tech sector. Not only did they bring their hard-won skills with them, but they also helped reduce the economic dependency ratio. And unlike their parents, who supported a total of 12 children, the McGrorys, with just two sons, were in line with Ireland's new demographics.

Canning and Bloom point out that demographic forces are not the entire story. "Age distribution changes merely create potential for economic growth," they argue. "Whether or not this potential is captured depends on the policy environment."

Fortunately, Ireland had the policies in place to make the most of the demographic dividend. Nevertheless, the Harvard researchers estimate that one-third of Ireland's economic miracle can be attributed to the demographic dividend.

How long will it last?

The Irish now wonder how long their tiger can survive. Conor Doyle, whose family has run a stevedore business in Cork harbor for more than a century, confesses to having been marked by the ups and downs of the Irish economy. "I'm still conscious we must prepare for surprises," he says, pointing out that Irish labor costs, which back in the mid-1990s were among the lowest in the EU, are now among the highest.

Wage inflation could jeopardize Ireland's ability to attract and keep multinationals, which account for 87 percent of Irish exports (computer company Dell (Charts) alone is responsible for 5.5 percent of Irish exports and 2 percent of its GDP).

Other pressure points include a property bubble sucking up almost half of the country's capital investment. And the international rating agency Fitch recently put Ireland on watch, along with countries such as Russia and Azerbaijan, citing its record level of private-sector debt as the Irish borrow to buy.

But while the pundits ponder the tiger's vital economic signs, they shouldn't lose sight of demographics, because the same force that reduced Ireland's dependency ratio will ineluctably raise it.

Ireland still has a young population relative to most of its EU partners, with the 25-44 age cohort accounting for nearly a third of the population. But the time will come when Ireland, like most of its EU partners, will find that not enough people are entering the workforce to compensate for greater numbers retiring.

Ireland's most recent population and labor force projections show that as of this year, old-age dependency began creeping up for the first time since the 1920s - fast enough to offset a continuing fall in youth dependency. High levels of immigration will boost the workforce and postpone the full impact of an aging population. But history may record that Ireland was hitting the downward demographic slopes even as Tiger Woods was hitting balls at the K Club.

Some observers, like Fitzgerald the economist, insist that Ireland has a window of opportunity to prepare for the time when the demographic drivers start having a negative impact on the economy.

Depending on assumptions about fertility, mortality, immigration and workforce participation, that window could stay open until 2025 - time to put in place the policies needed to sustain growth without the help of demographics and to pay for all those pensions. If not, the Celtic Tiger may be destined to cease its roar.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.