Draft

Late development and State developmentalism never the twain? Towards a political economy of post-Celtic tiger Ireland
Maura Adshead and Neil Robinson Department of Politics and Public Administration, University of Limerick, Limerick, Ireland. E-mail: maura.adshead@ul.ie Paper for Panel on: Post-Celtic Tiger studies? The state and public policy in the Republic of Ireland, 59th Political Studies Association (PSA) Annual Conference, University of Manchester, 7-9th April 2009

ABSTRACT This paper attempts to place the Irish experience of late development in comparative perspective. In doing this it seeks to isolate what legacies Irelands developmental path as a Celtic Tiger has for todays Ireland. We argue that the Celtic Tiger was not the result of the creation of a strong developmental state with a high capacity and willingness to channel the resources held by its population away from consumption in to investment. Decisions about the balance between consumption and investment remained in private hands and tipped towards consumption. In brief, we argue that the weakness of Ireland as a traditional developmental state was one of the reasons for the boom in the housing market and the expansion of the (predominantly) non-tradable services and construction sectors. The consequences of this, we argue, are that Ireland has remained dependent on direct foreign investment whilst locking both its current and future savings in to property, infrastructural development has lagged behind economic growth and is squeezed by welfare demands from a population that is geographically disbursed and high cost: the lack of a national developmental state has saddled Ireland with high welfare costs in the longer term. The overall conclusion is that Irelands past has a lot of potential to haunt its future.

INTRODUCTION The paper looks toward a political economy of the post-Celtic tiger by looking backwards at the Celtic tiger as an example of a late development. It does this first, by outlining very briefly some of the contours of and issues that face late developers. It then contrasts these to the case of the Irish state to argue that Ireland did not really develop and achieve a build-up of state capacity as per traditional assumptions about late development for most of its history. Late developers traditionally manage the tasks of catching up economically via increased state management of the economy to direct resources from consumption to investment, and by developing institutions to foster growth that elsewhere develop organically. Instead, when decisions were made to create institutional supports for development (the momentous decision to enter into social partnership in 1987) as luck would have it the Irish state was serendipitously supported by exogenous forces for development in the form of investment and policy decisions emanating from the EU structural fund reforms of 1988 and also from the beneficial growth and associated foreign direct investment in the US economy. The efficacious management of both of these sources of investment is not under dispute. Instead we suggest that it is perhaps because of this double windfall that more fundamental

1
Copyright PSA 2009

Draft state reforms were not considered by political actors. The economic boom of the 1990s, however, helped establish a Celtic Tiger mythology: one where the importance of the state was variously ascribed and credited with the economic boom. It perhaps fostered a view that what worked in the past will work in the future. It is, therefore, a matter of debate (or should be) as to whether the current configuration of the state is a: are capable of enabling tough decisions now that externalities have changed, and b. whether the experience of the celtic tiger sufficiently changed Irelands economic structure in the past to allow that sustainable economic growth, albeit more slowly, in the future.

THE POLITICAL ECONOMY OF LATE DEVELOPMENT What are we looking at when we look at late development and its political economy? In his study of late developers, Gerschenkron (1962: 56) identified the basic propensity of a backward country to concentrate on areas of most recent technological progress, and thus to utilise the specific advantages of backwardness. According to Jacobsen (1994: 8); Laden with the advantages of backwardness, new nations followed the attribute checklist necessary to hasten industrialization, which typically included: a bureaucracy working in Weberian efficiency a transport and communication infrastructure a foreign exchange surplus a light consumer-goods industrial base land reform undertaken to enhance agricultural productivity and to fill factories with as nation urbanises. In consequence, late development and state building frequently go hand in hand because state building is either needed as a precondition for economic growth or accompanies it and is undertaken to support it (cf. Chaudhry, 1993; Waldner, 1999). The number of cases for which this is true throughout the world is large and it is particularly (but not exclusively) the case for post-World War II post-colonial states that had to develop their systems of public administration and construct viable economies free of the systems of administration and economic ties that they inherited as post-imperial subjects. The key issue in this regard, is whether or not the state can launch economic development to overcome traditional obstacles to development (whether these be related to culture, class and/or elite power relations, traditional tax, land, property rights and issues etc.). The traditional way of conceptualizing these obstacles is the Gerschenkronian view of the state substituting for organic social action by a class of economic agents (the bourgeoisie), to create institutions that foster development. In this view, late developing nations play catch-up and when catching up they develop different organizational structures to their more advanced rivals. These differences are the result of institutional instruments for which there was little or no counterpart in an established industrial country (Gerschenkron, 1962, 7). Chief among these institutional arrangements is the relationship of the state to institutions that facilitate the financial intermediation creation of credit, investment vehicles etc necessary for growth. Through developing such institutions, the late developing state can insure through political control and/or policy that those investment resources that exist within a society (its old wealth as Gerschenkron, 1962, 13, called it) are deployed for the purpose of investment rather than for consumption. The impetus for policies and institutions that lead to or affect the channelling of resources away from consumption and in to investment are particular to a late developer as are the forms that the policies and institutions take. In short, late developers

2
Copyright PSA 2009

Draft create a different array of institutions because they are developing within an environment where other states and economies have organically solved certain developmental tasks without specific institutional innovation; late developers overcome these obstacles by design rather than by trial and error and the agent of design is the state. Gerschenkrons view of the states role as a co-ordinating actor for development captures two important and related aspects of successful late development, namely the organization by the state of financial intermediation, and the fact that no matter what the start point and the motive to act against late development a late developing nations state plays its central and guiding role as a substitute for social forces. This should not be too surprising given that all states have a role in economic development (Weiss and Hobson, 1995). Even in advanced, first wave industrial economies the social agents of industrialization, the bourgeoisie, developed as a social group and developed industrial might in a close relationship with the state (Gill, 2008). However in a late developing state the states role in shaping systems of financial intermediation requires that it has both the capacity and the autonomy necessary to challenge old wealth. It is possible that within a continuous polity the level of state autonomy and capacity necessary to generate the necessary conjunctural change [ref] may be generated by crisis. Sometimes, for example, the loss of a war creates incentives for state actors to act autonomously and introduce reform to generate a level of state capacity such that it can enact and follow through policies that redirect investment to development and curtail consumption in favour of growth. Certainly this was true of Gerschenkrons cases, which were exclusively classic European states with the full panoply of state characteristics and powers. Arguably, such policies are even easier to enact in a discontinuous polity where some crisis leads to the complete restructuring of the relations between state actors and economic agents so that old wealth cannot block the generation of new through institutional and policy change (cf. Olson, 1982). Most cases of late development (or at least most cases that are useful for our purposes) fall between these two poles, however.1 Most late developers display elements of both continuity and discontinuity. They are discontinuous in that they have to remake their polities and found their states thanks to post-colonial independence. However, they are also generally continuous societies, that is they do not experience social breakdown but begin the processes of state development and late economic development with their structures of old wealth intact. This means that they face the classic problem of a weak state facing off against a strong society (Migdal, 1988). Where this is the case developing a state with autonomy and capacity becomes a matter of political calculation. This is particularly so where the late developer is an emergent democracy. Economic development is a public good, albeit not a pure one: the basic aims of development (greater availability of goods and services, higher per capita GDP) are, if achieved, largely non-exclusive even if they are attained unequally. Consequently, there are collective action problems in achieving economic reform. A majority may have what Geddes (1994: 24) calls a latent interest in development in that they might gain from it, but they have low incentives to organize and agitate for reform; they will incur costs if they do organize and agitate for reform, but will gain from the public good of economic reform if they free-ride. The uncertainty of reforms needed to produce developmental success reinforces
1

There were late developers that were both discontinuous socially and politically. These usually succumbed to some sort of revolutionary developmental path and are therefore a subset of late developers that whilst interesting in their own right (and one author of this paper would say they are more interesting in all respects) do not exhibit the structures of political bargaining that inhibit or facilitate the emergence of a state capable of leading development. These states get around the politicians dilemma but only for a while a by using violence to overcome collective action problems and divisions over development policy.

3
Copyright PSA 2009

Draft free-rider problems. The immediate benefits of free riding are clear (the avoidance of the personal costs of political or market activity, the continued derivation of benefit from traditional economic activity and relationships) - but the benefits of reform and hence development are deferred. On the other hand, those who stand to lose from reforms have incentives to oppose reform since their losses (privileged access to goods and resources etc, undisturbed consumption) are born directly by them and outweigh the gains that they would derive from the public good of reform. To overcome these collective action problems requires the state to have autonomy and to resist opposition to reform: in other words, the state provides economic reform as a proxy for co-operative action. Not all states take action, of course, and some that do back down [refs]. The reason for this is that politicians interest in economic development through reform is also contingent. Politicians should want growth since growth is a sign of their success and therefore can be appealed to at election time. Voters also expect politicians to secure growth (its the economy stupid). However popular demand and political self-interest often do not come together. First, there are the collective action problems mentioned above, and second politicians have some degree of freedom in responding to popular demands (Geddes, 1994: 38-41). Information asymmetries (it is difficult for voters to determine whether a politician is responsible for providing the benefits of a public good) and influence asymmetries (politicians may service limited constituencies to accrue resources necessary to fight political campaigns rather than the larger constituency of voters with a latent interest in reform) mean that the delivery of public goods can be inconsistent. Politicians have a degree of choice about providing public goods and building the political structures that can help to deliver them. In short: they must choose whether to reform or not; to build state autonomy so as to facilitate the provision of public goods or to maximise their freedom to accumulate resources that they can use for their own ends; to consolidate state autonomy or compromise it in the interest of servicing some important group or groups. The choices that politicians make between these options will be shaped by the office that they hold, the basic institutional framework through which a political career is conducted. At a most basic level, politicians want to survive in office or gain it, either by averting moves to overthrow them or more usually by securing election, and to build up their power and influence. As a result, politicians calculations about state building and development turn on what Geddes (1994, 42) calls the politicians dilemma: politicians who might otherwise consider offering reforms as a strategy for attracting support will not be able to afford the cost in lost political resources as long as they compete with others able to use such resources in the struggle for votes. The extent of the dilemma depends on circumstance, on the degree to which there are divisions within political society over development and over other issues. These other issues politicize development policy by creating divisions over it to back up policy preferences in other areas. Where divisions over economic and other policies are great there is little chance of developing a classic and focussed developmental state as Gerschenkron defined it that can sustain development over the long term.

For the late developer what this boils down to is that the obstacles to launching development are great and the incentives to backtrack from development, by for example skewing the market to favour a particular group (domestic or international), or subverting the market when it proves too hard to manage, are numerous (see Chaudhry, 1993 for an analysis of how these practices have plagued late developers). Where this happens the state does not develop autonomy and capacity as a developmental state and the problems that this can cause may be

4
Copyright PSA 2009

Draft recurrent. They might be escaped for a time due to circumstance (such as a commodity price boom) so that growth ensues but unless this circumstance leads to a change in the state and the bedding in of these changes they will likely resurface as problems of economic and political management in the future.

LATE DEVELOPMENT AND STATE DEVELOPMENTALISM IN IRELAND Whilst there is agreement that Ireland is a late developer in accordance with where it started the process, consensus over whether or not this process is now concluded remains elusive. The absence of a uniform view about what constitutes development is the chief reason for this. Moreover, the lack of agreement about what the states developmental goals are, or should be, and whether or not the state has reached them, has further clouded our judgement about whether or not the state may be considered a developmental one (Kirby, 2002; Murphy and Kirby, 2008; Allen, 2000; OHearn, 2000). Ireland has, after all, been a leader in posting high rates of growth for some years and has been a consistent high scorer in such tables as the UNDPs Human Development Index, outgrowing other OECD countries to the point where by 2005 it outranked other EU states on overall development and GDP per capita (US$ ppp) (UNDP, 2007). Late development is, however, not an absolute, but a relative condition. Until the economic growth experienced in the early 1990s and now associated with the celtic tiger, Ireland was on most developmental indicators to do with economic output, such as GDP, industrial output, value added, structure of sectoral output etc on a per capita basis relatively backward in comparison to advanced industrial European states and to states such as Japan, the USA, and Canada One clear sign of this was continued outward migration: whilst the industrial economies of north-western Europe in the post-war era were faced with labour shortages caused by economic growth, Ireland, and the other developmental laggards of Europe (Portugal, Spain, Greece, and Italy) exported surplus labour (see Judt, 2007). Moreover, many of Irelands recent problems have been associated with managing the transition from agricultural economy to one dominated by industry and services so that, as an earlier study of Ireland as a developing economy put it, Ireland faces many of the major structural problems familiar in developing economies and Ireland is most interestingly thought of as a developing country (Tait and Bristow, 1972, vii). Indeed, Irelands surging growth over the last years and current position at the apex of aggregate measures of development is in many ways a reflection of its recent, relative economic backwardness. Backwardness, thanks to the benefits of imitation and because of low starting points, can (although not always) enable rapid catching up and the posting of high growth figures. Moreover, one might add, the fact that Ireland still scores poorly on some individual development indicators such as the % of the population living on below 50% of median income where Ireland is only above the more diverse USA in the OECD shows that Irelands development is not bedded in to the same extent as in some other state with longer records atop the economic tables. This, however, is not the main point of looking at Ireland in terms of late development from the point of view of political economy. The analysis of late development is not primarily concerned with economic data and positions in the world per se but with the particular affect that launching economic development late relative to other nations has on the institutional structures of the state and economic management more widely and hence on the way in which the response to late development in terms of institutional structures and policy shape post-developmental growth. The political economy of late development has always been concerned with institutional structures and their influence, and with the play between actors that establish these structures and their capacities to generate

5
Copyright PSA 2009

Draft change. Studying late development is thus a necessary step for a path dependent analysis of the state that is able to assess the extent to which the particular circumstances and conditions of prior development place constraints on policy over the longer term (when the initial bounce in economic growth that comes from catching up and utilizing previously poorly deployed human and physical capital ends).

TESTING IRISH STATE DEVELOPMENTALISM For many decades, Irelands economic output per capita ranked around 24th among the major nations, when suddenly, in the 1990s it began to move up from 22nd in 1993 to 18th in 1997 and an amazing 9th in 1999 (Honohan and Walsh, 2002: 2). The post hoc rationalization for this remarkable reversal of fortunes has been a central concern to many social scientists in Ireland and abroad (Sweeney, 1999; Nolan et al, 2000; Kirby, 2002, OToole, 2003; ORiain, 2004; Smith, 2005). So much so, that the recipe for Irish success is now quite well-rehearsed (though like all recipes, the secret is in the mix). A happy coincidence of good luck (making the most of its position mid-way between Boston and Berlin and experiencing a parallel growth trend with the US economy during the 1990s) and good judgement (developing multiannual strategic planning in a relatively stable macro-economic framework that is supported by European Monetary Union as well as a consensual approach to the management of the economy, spearheaded by social partnership), combined during a period when the Irish economy was also fortunate to benefit from significant investment (in terms of the EU Structural Funds and Cohesion Funds) and an unusually elastic labour supply (in the form of returning emigrants and new immigrants as well as demographic and structural changes to the labour force). Though some commentators have sought to identify or prioritise a single explanation, the more considered view tends to be that the Irish boom was a long time coming and in many ways reflected no overnight miracle, but the eventual and delayed structural transformation of a traditional agriculturally based economy into a more modern and productive one (Honohan and Walsh, 2002; Garvin, 2004). Viewed in this sense, the inevitable questions are: why did it not happen sooner? And, allowing for such serendipitous fortunes during the 1990s, how different is the state after the boom to what it was before. In order to answer these, we briefly explore the issues concerning late development and state developmentalism in the Irish context.

Challenging old wealth the political context of early state development Historically, the two major parties, Fianna Fail (Soldiers of Destiny) and Fine Gael (Tribe of the Gaels) are distinguished according to the side they took in the civil war following independence.2 The long shadow that the civil war cast over Irish public life constitutes, according to Lee (2008: 26), an inescapable formative experience of the Irish state. Although a consideration of the origins of the Irish state is beyond the purpose of this paper (see Lee, 1989; Kissane, 2004; Garvin, 1996), statist approaches (Skocpol et al, 1985) to the evolution the Irish state do identify definite trends in the patterning of politics that were established throughout the post-independence period (Adshead, 2008). These state traits
2

On 6th December 1921 the Anglo-Irish Treaty (more commonly known as the Treaty) was signed by representatives of the British and Dil governments. It included provision for an Irish Free State, with a large measure of independence and provisions for a boundary commission should Northern Ireland choose to opt out of Free State membership. The British retainined access to Treaty ports and were entitled to contributions to the British exchequer. The terms offered by the British were represented as the limit of possible concession though for a substantial portion of opinion in Ireland they represented a sell-out on nationalist aspirations.

6
Copyright PSA 2009

Draft include a strong bias towards both economic and political conservatism, which it is argued here, effectively circumscribed the states capacity to challenge old wealth and to a large extent set the conditions for subsequent state development. A brief consideration of the two dominant political forces in the post-independence period explains why this is so. Formally launched on 27 April 1923, Cumann na nGaedheal was formed from the pro-Treaty wing of Sinn Fein, which had been running the country since the split in the party. In consequence, the building of the new state and its institutions was in the hands of a group of people who supported the political and economic status quo either through conviction or out of political realism (Coakley, 2005: 21). They were a group of strong political figures of a broadly conservative disposition, which was reflected in the new close relationship with the Catholic Church. Moss (1933: 135-136) describes support base Cumann na nGael in the early 1930s as being the local business leaders, the priests and the prosperous farmers (see also: Garvin, 1974: 308; Manning, 1972: 18). It continued in power until 1932, when it was defeated by Fianna Fil. Following a further defeat in 1933, Cumann na nGaedheal merged with the Centre Party and the National Guard to form Fine Gael in September 1933. By 1933, the creation of Fine Gael marked out the primary distinction between the two major parties in the Republic for much of the post-independence period: The pro-Treaty party which stood for peace and ordered government won the support of the conservative, propertied class in the country: the large farmers, the leaders in industry and commerce, and the well-established professional men. The anti-Treaty party relied chiefly on the small farmers, the shop-keepers, and sections of the artisan and labourer classes. McCracken (1958:128) Gallagher (1985: 43) notes that in relation to social and economic policies, Fine Gael bore out OHiggins comment that we were probably the most conservative-minded revolutionaries ever to put through a revolution (White, 1948: 2). Their predecessors in the Dil showed ample evidence of this. In 1924, the Finance Minister, Ernest Blythe cut the old age pension from ten to nine shillings a week (Fanning, 1978: 110-1) and in the same year, the Minister for Industry and Commerce, Patrick Quilligan, went so far as to suggest that people might have to die of starvation as a consequence of government expenditure cuts (Dil Debates, 30 October 1924, 9: 561-2).

Established in 1926, following de Valeras withdrawal from Sinn Fein, the Fianna Fil party gained in political strength because of its disproportionate attraction to the poorer, less anglicized, and peripheral sections of the nation (Garvin, 1978: 333). For many Fianna Fil voters, the Sinn Fein war had represented a battle against the whole existing order and its multitude of abuses (Moss, 1933: 135) and it could be argued that initially a good proportion of support for Fianna Fil was not simply because they were against the Treaty, but because they stood in opposition to Fine Gael (who were for the Treaty). In essence, Fianna Fil appealed precisely to those groups who, up to then, had refused to identify with Free State politics (Prager, 1986: 196). In their analysis of economic growth in the post-independence period, Neary and OGrada (1991: 255) argue that Fianna Fil managed to maintain significant support from the urban working class as a consequence of increasing prosperity in the towns, which led to cheap

7
Copyright PSA 2009

Draft food and better job prospects for many despite the continuing agricultural war that was adversely affecting the farmers. In this regard, however, the association of Fine Gael with larger farmers and the more prosperous ensured that Fianna Fil could maintain the support of the smaller (and poorer) farmers, the small shopkeepers, the urban and rural petit bourgeoisie and even, in some measure, the urban working class (Bew and Patterson, 1982:3). The ability of Fianna Fil to compete for office in a state that it largely professed to reject was certainly a winning electoral ruse: once the electoral competition was focused on the national question, the other parties were clearly outclassed by this masterful stroke of political manoeuvring. Fianna Fil was able to most effectively argue that it was the national party, leaving the other parties to explain why they were somehow less nationally minded. Fianna Fil thus presented itself as a populist, republican and catch-all party, cultivating a view of itself as the party most able to deliver an enduring societal vision for postindependent Ireland. Of course that vision, encapsulated by de Valeras historic dream broadcast printed in the Irish Press 18 March 1943 is now the stuff of legend.3 As well as being evidence, for some, of de Valeras truly profound ignorance of economics (Lee, 1989: 333), it reflects the creation of a state that was, from its beginning, ostentatiously Catholic (Adshead et al, 2008: 7), and where the older traditions and conservative attitudes that prevailed among the rural Irish became strongly associated with the identification of the nation with the peasantry (Chubb, 1992: 14). Without doubt, the preservation and maintenance of conservative values and attitudes in Ireland can be attributed to the predominance of rural culture in Ireland. The outlook on life of the farming community, dubbed by Commins (1986:52) as rural fundamentalism, nourished conservative and authoritarian values in Ireland. Deference - to males and the elderly, to the Church and the school system - is a marked feature of Irish society (Chubb, 1992:17).4 Cut off from continental influence, the industrial revolution and the plight of the urban working classes were entirely foreign to Irish society. Scant interest was shown in the efforts of continental social reformers, and in Ireland even the phrase social question meant for most people the rural problem and not the urban problem as it did elsewhere (MacMahon, 1981:264). Whereas prior to independence, the six northern counties comprised the industrial heartland of the country (OConnor, 1992), after partition as few as 5% of the population in the rest of Ireland was engaged in manufacturing (McLaughlin, 1993: 208). As a consequence, it was the economic interests of the conservative farming classes that initially took precedence in the new state and the labour movement failed to achieve a leading role. It is perhaps in this context that one of the benchmark economic explanations for Irish development in the 1990s really takes purchase. According to Honohan and Walsh (2002: 22):
[the] Ireland that we dreamed of would be a land whose countryside would be bright with cosy homesteads, whose fields and villages would be joyous with the sounds of industry, with the romping of sturdy children, the contests of athletic youths, the laughter of comely maidens, whose firesides would be the forums for the wisdom of serene old age (Irish Press 18 March 1943). 4 Even now, despite increasing urbanisation, it is still a misnomer to assume that the values and attitudes of town people are very different to those from the country. At least half of the population of Dublin have moved from the country (many still travel home at the weekends) and with the continuous movement from the countryside to the town, there are many urban dwellers who are but slowly becoming town people. In some senses, to try and divide Irish people between urban and rural cultures, is to miss the significance of the great number of those Irish people who are somewhere in between (Chubb, 1992:3-13).
3

8
Copyright PSA 2009

Draft [the] outstanding performance of the Irish economy in the past decade or so should be interpreted mainly as a delayed structural transformation as the proportion of the population at work outside agriculture and their productivity at last spurted towards the levels long achieved in other industrialized countries, and the productivity of the labour force remaining in agriculture rose. So much for the impediments to development: the question remains, to what extent were they overcome? And, to what degree was this the consequence of endogenous state developmentalism or benign exogenous forces for growth?

Shifting the pattern of Irish politics and gearing up for growth? Throughout the 1950s and 1960s, Ireland missed out on the post-war period of economic prosperity experienced by west European societies (Kennedy, Giblin and McHugh, 1988; Kennedy, 1989) and the depth of the economic crisis was such that between 1956 and 1961, 43,000 people emigrated every year (McLaughlin, 1993:212). This led to a radical rethink of the states involvement in the economy. Between 1959 and 1972, national economic policy was reoriented: in 1958, economic planning was adopted as part of a modernisation strategy and protectionism was abandoned; in 1965, the Anglo-Irish free trade agreement was signed; in 1967, Ireland joined the GATT; and in 1973, membership of the EC was finally achieved. By the early 1970s, Ireland was experiencing net in-migration and both major political parties had committed themselves to full employment (McLaughlin, 1993:213). Against this backdrop, Irish political parties shared a general consensus that was in favour of higher public spending, whilst at the same time supported the mixed economy and reliance on private capital as the main motor of economic development (Coughlan, 1984:42). Although it is possible to discern some policy traits that distinguish the mainstream parties according to more usual socio-economic cleavages, in fact as the significance of civil war politics has receded both parties have moved closer to the middle ground a trend that is further facilitated by the Irish electoral system. Irelands Single Transferable Vote (STV) method of proportional representation (PR), which allows voters to mark as many preferences as there are candidates in multiple seat constituencies, not only obliges candidates of the same party to compete against each other, but also offers the opportunity for voters to switch between parties, according to their preferences. The result is a highly personalised and localised electoral competition, where issues of national policy often take second place (or may be considered equally important) to issues of local concern. This has two important consequences for the contemporary system of Irish governance. First, from the politicians point of view, the prevalence of both inter and intra party competition at local level makes it perfectly rational for politicians seeking to maximise their votes to develop a consensus relating to macro policy issues (in order to avail of vote transfers from candidates from a variety of parties), whilst differentiating themselves in relation to local issues. This trend was further encouraged by a number of developments within the party system throughout the late 1980s including: first, as Labour and Fine Gael moved closer together, so as to present a viable alternative government to Fianna Fail (Mitchell, 2003b: 130); later in Fine Gaels agreement to support the economic reforms proposed by minority government Fianna Fail (Tallaght Strategy); and finally, by Fianna Fails decision to ditch the principle of never entering a coalition, by going into government with the Progressive Democrats (Mitchell, 2000:131). Second, from the voters point of view, as coalition politics

9
Copyright PSA 2009

Draft has become the contemporary norm in Irish politics, it is clear that Irish voters do not elect governments: they elect local representatives from national parties who engage in negotiations for government. The inability of Irish politicians to resist constituent demands has constrained the developmental capacity of the state, by circumscribing the policy choices available to governments that need to maintain popular support for re-election.

RESOLVING THE POLITICIANS DILEMMA In this section we examine the extent to which Irish governments have been able to set the conditions considered necessary for economic development, by examining those areas of macro-economic policy management that are fundamental to securing the conditions for economic growth: the financial system; the tax system; and the governments ability to direct investment. We find the states financial system to be generally weak, extremely globalised and significantly vulnerable to the ebb and flow of the global financial system. In relation to the tax system, whilst it is already well-known that the Irish taxation regime is somewhat regressive, in this section we point to two further dimensions that are anti-developmental the particular structuring of Irish tax regime, which is dangerously dependent on consumption taxes as a revenue source, and the long-standing biases in the Irish tax regime that acted to stifle investment. The failure to promote investment in productive growth is dealt with in greater detail in the third section, which examines government capacities to promote investment over consumption.

Developing institutions for financial intermediation The literature on economic growth identifies financial sector development as a strong and significant causal factor for long-term economic growth (Levine, 2005), though typically there is scant consideration of this in explanations of Irish growth. One notable exception to this trend is Honohans (2006) analysis, which raises a number of issues key to the Irish case. First, it finds that financial depth in terms of private savings to GDP ratios fall well short of explaining Irelands exceptional (celtic tiger) growth and that an examination of the credit depth-GDP relationship 1971-1998 finds causality from GDP to finance (Hosford, 2002 in Honohan, 2006: 60). This points to the incredible significance of global financial system in providing financial services to the Irish state (Honohan, 2006: 61). For example, a key measure of financial globalisation is the sum of assets and liabilities as a percentage of GDP (Lane and Milesi Ferretti, 2006). The average of this indicator for industrial countries is around 330 per cent, whereas for Ireland, it is 1,700 per cent of GDP (Honohan, 2006: 64). The existence of the International Financial Services Centre (IFSC) is largely responsible for this, but even after its impact is excluded the Irish (onshore) figure is still relatively high at 380 percent (ibid). By 2005 the net import of funds Irish financial institutions lent to Irish residents amounted to 41 per cent of GDP, illustrating the extent to which it is global finance, and not solely the Irish financial system, that is providing finance to Irish borrowers (Honohan, 2006: 71) Second, he notes that of the fundamental functions of the finance system (including effecting payments, mobilising funds, pooling and re-distributing risk), appraising credit-worthiness and monitoring the use of funds are most crucial to the growth link and that in this regard, it is not the amount of savings that the financial system mobilises that counts as much as its effectiveness of ensuring that the funds are well spent (2006: 61). In the Irish case, the

10
Copyright PSA 2009

Draft property boom was financed by credit (Honohan, 2006: 69). Though there is no clear evidence as to whether the growth in credit itself was responsible for pushing up house prices, or whether this only facilitated demand pressures elsewhere in the system, what is clear is that government policy has, for the most part, served only to further push up housing demand. Property has long been a particularly favoured area for tax breaks, allowing investors to build up tax-subsidised property portfolios. As Fitzgerald (2008) notes: After an interlude where tax relief on buying houses to rent was suspended following the Bacon Reports, landlords can once again get tax relief for buying homes to let. Landlords and other homeowners qualify for four times as much tax relief on buying a house as tenants get on their rent. Arguably in times of dangerous fiscal excess, the role of the financial system should be to introduce a corrective into the system directly through interest rate changes to tackle inflation; or indirectly in its regulatory and monitoring procedures governing the issue of credit. In both these cases, it seems that the Irish financial system is handicapped: EMU membership precludes the former; and a lax attitude to the regulatory efficiency of the Irish banking system has left the Irish financial system severely compromised. Whilst commonwealth countries such as Australia, Canada and South Africa retained tight regulatory frameworks bequeathed by the British system of banking regulation, the Irish banking system developed an institutional fragility as a consequence of an institutional culture of non-compliance and relaxed attitude to regulation, which together led to a very lax system of regulation (see Elaines evidence of banking crises). Throughout the 1980s and 1990s, a series of tribunals revealed the widespread collusion of banks, accountants and other professionals in a series of corrupt payments to politicians, incidences of money laundering through offshore accounts and tax evasion (Moriarty, ). In December 2008, it emerged that the chairman of Anglo-Irish Bank, Sean FitzPatrick, had been hiding loans totalling 87 million at the bank over an eight year period, regularly removing them from Anglo-Irish books (to other Irish financial institutions) each September to keep them from the auditors. Anglo-Irish, whose brash style of banking epitomized the entrepreneurial and risk-adverse nature of the Celtic Tiger, had been so gravely weakened that it had to crawl under the wing of the State (Irish Times, 2 January 2009). Irretrievably bound up in the global financial system, the effects of global recession and the knock-on effects of the decline in the construction sector focused attention on the consequences to the banking system (Honohan, 26 July 2008). In June 2008, the Minister for Finance, Brian Lenihan, announced that the booming housing market had come to a shuddering halt and by the end of the month, the four public Irish banks had lost 39 billion of their value, since their peak value at 50 million in early 2007 (Irish Times, January 2 2009). The knock-on effects Throughout July and August 2008, as Ireland moved towards recession, fears grew that the banks would be badly damaged, especially from losses on loans to property and construction sectors, to which 110 billion was outstanding. Realising the dramatic economic decline, the AIB bank said losses on loans would peak at just over 1billion, or 0.8% of loans in 2009: a worst case scenario was set where the bank would lose up to 1.3 billion every year from 2009-2011 (Irish Times, 2 January 2009). By the end of September, the government was guaranteeing all deposits, including money owing to corporate and inter-bank customers at the six Irish-owned banks and building societies. The extraordinary state insurance policy protected 440 billion in bank liabilities for a two year period a figure amounting to almost ten times the national debt and more than twice the value of the economys GDP (Irish Times, January 2 2009; Honohan and Lane, 28 February

11
Copyright PSA 2009

Draft 2009). By early 2009, the worst-case scenarios, which Irish banks had continually thought unlikely to ever occur, looked increasingly real. AIB said that it would be writing off 7.8% of its 10.7 billion loans to Irish property developers over two years, while the Bank of Ireland said it would write off 12.5% of its book, totalling 3.8 billion, over three years (Irish Times, 2 January 2009). Fears linger that the States injection of 5.5billion into the three main banks with a further 2 billion in public money and possibly more promised will not be enough to cover up to 20billion and maybe even as high as 30billion in bad debts that the Irish banks will have to write off over the coming years (Irish Times, 2 January 2009). The source of this bail out money the national pensions fund. Tax system The tax marches in 1979 and 1980 mark the pinnacle of dissatisfaction with the Irish tax system. Throughout the towns and cities in Ireland, as many as 700,000 marched in protest against the unfair tax burden on the PAYE sector (Irish times, XX). At the time, whilst the self-employed and farmers paid little and companies were able to avoid and evade tax, PAYE workers were estimated to be paying around 87% of Irish income tax (Sweeney, 2008a). For most of the 1980s, macroeconomic debate in Ireland focussed on the question of the state and the sustainability of the public finances (Madden, 2000: 113). Excessively expansionary budgets in the late 1970s and early 1980s, coupled with the effects of international recession led to a situation in the mid-1980s where the national debt had reached an absolutely critical level (ibid). Still, however, as Sweeny (2008a) notes; most of the change in the shift in sources of taxes and in the level of taxes occurred in the past 13 years, not in the 23 years since the Tax Marches and reflect the Celtic Tiger growth phase of the Irish economy. That this is the case belies that fact that many of the structural impediments of the Irish tax system, recognised in the 1980s (Commission on Taxation, 1982, 1984, 1985) were not comprehensively tackled: instead, the celtic tiger growth rates, enabled governments to overlook them. Although Irish governments ran annual budget surpluses until 2006, an increasing share of the revenue that supported these surpluses was coming from taxes whose yield is sensitive to high and increasing asset prices and asset transactions (capital gains tax, capital acquisition tax and stamp duties) and on corporation profits taxes much of it coming from multinationals (Honohan and Lane, February 2009). With the global downturn, however, the revenue from these taxes plummeted, exposing a structural deficit which was exacerbated by a strong upturn in public expenditure in the last few years (Honohan and Lane, February 2009). The influence of taxation on the volume and especially the allocation of savings has long been recognized as a topic of special importance in the Irish context (Honohan, 1995: 5) and was consequently the focus of detailed recommendations by the Commission on Taxation established in 1980 (Hederman OBrien, 1984). Thoms (1988) study of distortions created by the Irish tax regime paid special attention to the fiscal privileging of different assets. Most favoured were investments in Business Expansion Schemes, followed by Housing, Pensions and Assurance. Relatively penalized were Shares, Government Securities (held to maturity) and deposits (Thom, 1988 in Honohan, 1995). For high tax payers, the difference in degree of fiscal privilege was enormous at around 313 per cent for housing (Honohan, 1995: 6). This means that holding a house on mortgage could shelter other income from tax and convey tax benefits several times the size of real interest payments. By contrast, the fiscal privilege for bank deposits was estimated at minus 252 per cent. In other words, the tax paid was a multiple of real earnings (Honohan, 1995: 6).

12
Copyright PSA 2009

Draft

Certainly much of the popular concern expressed during this period was in relation to the regressive nature of the tax system, insofar as many fiscal privileges were available only at higher income categories. But just as important, though less popularly discussed, was the effect of the tax regime on the allocation of resources to investment. Certainly, during the 1970s, the system contributed to an over-investment in up-scale housing, and in the late 1980s, the impact of the BES on investment patterns was considerable: more generally, the income tax system was biased in favour of consumption over saving (Honohan, 1995: 6-7). Though the worst of these distortions were remedied by a partial implementation of the recommendations of the (first) Commission on Taxation, comprehensive tax reform has not occurred, and in February 2008, the government was once again announcing the (re-) establishment of a Commission on Taxation.5 Though it is certainly clear that the structure of our electoral system and party competition does not facilitate the prioritising of tax reform, Honohan (1995: 8) argues that a further reason may be procedural, in that we may not have adequate institutional arrangements for improving tax and expenditure policies. In short, Commissions on Taxation may set the policy agenda and point towards the direction of reform, but they are likely unable to secure policy implementation. In the absence of comprehensive reform, changes in the tax regime have been ad hoc and suboptimal.6 Spending taxes, which are high in Ireland (VAT rate is 21 per cent compared to 17 per cent in Britain) have contributed much the same proportion of government income from taxation around 46 per cent as in the 1980s (Sweeney, 2008a), whereas in 2000, income tax contributed 30.8 per cent of tax revenue (NESC, 2003: 293), compared to 44 per cent in 1980 (Sweeney, 2008a). The reduction in rates of income tax since the 1980s has been significant and largely due to National Programmes for Government executed since the late 1980s. During the period 1987-2001, for example, whilst workers real earnings increased by 25%, their take-home pay increased much more dramatically as much as 60% for a single industrial worker and 54% for a married worker (NESC, 2003: 61). The tax take as a proportion of GDP declined dramatically to one of the lowest levels in the OECD. Whilst, however, the level of taxation in relation to the size of the economy has fallen since the late 1980s, this reduction has been substantially less than the corresponding reduction in the expenditure share (NESC, 2003: 291). Elsewhere among the EU 15, tax takes to GDP ratios have remained stable, or, as is the case with other periphery states, continued to rise. Irelands decline is a notable exception. Whilst the average tax take as a percentage proportion of GDP changed by only -0.1 per cent across the EU 15 for the period 1995-2002; in Ireland it declined by -4.8 per cent (NESC, 2005: 14). This is of course significant, since it means that tax revenue for the Irish state is unusually dependent on economic buoyancy and consumption. Moreover, it presents the Irish state with a puzzling developmental paradox, since evidence suggests that public spending is a risk reducing instrument on which there is greater reliance in more open economies (NESC, 2005: 16). Pushing expenditure from consumption to investment The inability of Irish politicians to resist constituent demands has meant that Irish budgetary behaviour has had features associated with budgets in developing countries. Most specifically
5

Department of Finance Press release - Tanaiste announces the establishment of Commission on Taxation, available at: http://finance.gov.ie/Viewtxt.asp?DocID=5184&CatID=1&m=&StartDate=01+January+2008 6 Commenting on the Minister for Finances announcement in 1992 that the budget he had introduced could be considered as a discussion document, Honohan (1992) argued that we have steadily been moving to a negotiated tax regime with all the hallmarks of the soft incentive structure. By 2008, the Irish Revenue Commission admitted to 33 tax breaks, where they had no idea of the cost to the taxpayer (see Fitzgerald, 2008).

13
Copyright PSA 2009

Draft government spending was not counter-cyclical; it did not fall and rise according the behaviour of economic fundamentals (Lane, 1998). In essence, what this means is that government spending did not work to ameliorate changes in economic circumstance and create conditions to facilitate growth but was a response to other social pressures and political priorities. This appears to be true both before and after the birth of the Tiger (the following draws on Hunt, 2005). At least until the mid-2000s discretionary budgetary spending that is the money that the government is committed to spending by statute was acyclical and the greater the discretion of politicians the less related spending was to economic fundamentals. Discretionary spending on consumption (including inter alia welfare) was not cyclical (i.e. it did not vary at all with business cycles) and on investment was pro-cyclical. In other words discretionary government spending on consumption does not appear to have been undertaken with any particular policy goal of growth in mind, whilst discretionary investment expenditure from the late 1960s and through the main part of the boom did not work to stimulate the economy in periods of downturn and prevent overheating in periods of upturn but was a case of slash or spend depending on what was in the coffers at the time. As Hunt (2005, 317) observes, this pattern of spending imposes clear short-term restraints on the effective management of the economic cycle and could, through a stop-start approach to government-funded capital formation, reduce the economys sustainable growth potential. One sign that government did not enact policies to help convert domestic savings or income in to investment in value added, tradable sectors was the growth of the housing bubble, and the fact that the growth of the Irish economy over the 1990s and early 2000s did not develop the Irish small and medium enterprise (SME) sector (outside of the construction sector) to levels comparable with other developed EU economies. There were many factors that drove the price of housing up, not least the relative shortage of housing stock in comparison to the size of the population. However poor planning in the housing sector plus traditional inclination to private home ownership and rising incomes led to a greater transfer of incomes and savings in to housing in Ireland in the 1990s and 2000s. Investment in housing as a proportion of gross fixed capital formation was at a median value of 23% in Ireland in the 1980s, but nearly doubled to 43% by 2003, the highest level in the EU-15 by over 10% (Somerville, 2007, 128).7 General economic growth thus led to a large proportion of savings (and future savings in the form of mortgage repayments) being tied up in property: by 2008 property-related lending made up more than half of bank lending (60% in mid-2006) and with deposits falling off the funding gap between deposits and credit had become the largest within the EU (OECD, 2008, 13, 57, 52). The proportionately high level of financing for property has meant less financing has been available for industrial SMEs (most of which are Irish owned). These depend on local commercial banks since they lack access to capital markets. This increases Irish dependence and prosperity - on direct foreign investment. Ireland had the highest levels of gross value added (GVA) per employee in the EU-27 by 2005, but this was because of the exceptionally high value added created by large enterprises, which was double that elsewhere in Europe. GVA for Irish SMEs was still high, but it ranked fifth and sixth in the EU. The gap between large (mostly foreign owned) and small (95% Irish owned) GVA was very large in comparison to other European states by a factor of 5; in Germany the GVA difference between large and small enterprise GVA was only x2, in Denmark it was x1.5, and in the Netherlands (which had the second highest large enterprise GVA per employee) the difference was x2.6. On average in the EU-27 SMEs accounted for 19% of industrial
7

Of the other EU-15 only Germany broke the 30% level and that was because of reconstruction in the East.

14
Copyright PSA 2009

Draft turnover; in Ireland, they accounted for 6% (all data from CSO, 2008, 72-72). Policies that facilitated (or actually encouraged) consumption rather than harder political option of forcing the conversion of a larger proportion of income into savings and investment have therefore contributed to relatively lop-sided development in which sustainable growth is dependent on exogenous economic factors to a far greater extent than elsewhere.

INSTITUTIONAL LEGACIES OF NON-DEVELOPMENTALISM Bibs from here. A path dependent analysis of late development suggests, first, that there are a number of key policy areas that must be tackled to encourage economic growth and, second, that in doing so late developing states must often negotiate with a variety of constituencies of interest that typically offer their political support at an economic cost. Making the tough choices that establish the foundations for sustainable economic growth is never easy. The economic costs of various political choices may be relatively hidden during periods of high growth when most (though never all) boats are lifted by the generation of revenue. If and when this revenue declines, however, if the problems of late development have not been effectively resolved, they may re-emerge. In such cases, the state runs the risk of being left with increased political demands and decreased economic resources8. As Waldner (1999: 2, passim) has argued, where there is a high degree of conflict and elites within political society are divided they will seek to co-opt actors from wider society to stabilize their hold or access to office. This might entail some development but it will also encourage distribution to inefficient sectors and equalize the claims of consumption and investment. In short, politicians will service existing interests - no matter that they may be economically inefficient and a barrier to growth in order to gain political support. The concept of precocious Keynesianism (Waldner, 1999) refers to Keynesian style macroeconomic management before there is a developed industrial economy to manage. This entails a high degree of state interference in the economy but the state does not fine tune the economy through expanding and contracting spending to manage the balance between inflation and unemployment as in a developed economy in which the foundations of innovation and the nature of comparative advantage are well established. Instead it pours its revenue into the economy haphazardly and without distinction between sectors that can grow and have a comparative advantage, and those that do not. It may therefore have some Keynesian affects in that the state can promote employment or work against inflation to some extent but more importantly the broad base of politics created by elite division and competition constrains development and its sustainability since its policies which may include setting tariff barriers, making welfare payments and schemes, as well as poor fiscal planning and policy deter or skew investment and capital formation. In this section we point to three areas of development in the Irish, which best exemplify some of these nondevelopmental legacies. Industrialization and the state Whereas prior to independence, the six northern counties comprised the industrial heartland of the country (OConnor, 1992), after partition as few as 5% of the population in the rest of Ireland was engaged in manufacturing (McLaughlin, 1993: 208). As a consequence, it was the economic interests of the conservative farming classes that initially took precedence in the new state and the labour movement failed to achieve a leading role (ref ads and tonge). In
8

See for example, Roses notion of government overload, or Wallaces ideas about state inadequacy

15
Copyright PSA 2009

Draft fact, it was not until 1958, with the publication of the now renowned government paper on Economic Development (Government of Ireland, 1958) or Whitaker Report (so called after the Secretary of Finance charged with its composition) that the state achieved a 180 degree reorientation of economic policy, away from the insular and ultimately self-defeating attempts at economic isolation and towards full integration with the international economy through industrialisation by invitation (Adshead, 2008). Arguing for trade liberalisation, attracting foreign investment, and state intervention in capital-intensive, exportoriented production, the report advocated a highly interventionist approach and marked the beginning of Irelands move towards export-oriented growth (Smith, 2006: 105). Ireland was one of the first late developing states to adopt this approach (OMalley, 1989, 1992), which it is argued helped lay the foundations for improved economic performance in the 1990s (Smith, 2006: 64-69). In the 1990s, almost half of the manufacturing labour force, and more than 70 per cent of manufacturing production came from foreign-owned firms the highest proportions for any OECD state (Honohan, 1992). The indigenous sector, by contrast, was comparatively weak, with only a handful employing more than 500 workers (Honohan, 1992). The rapid growth in the celtic tiger period occurred despite these structural weaknesses, which had long been a source of contention in Irish industrial policy. In 1982, the Telesis Report emphasised the inadequacies of an industrial strategy based on foreign investments. Arguing for substantial reductions to grants to foreign firms and increased aid for indigenous firms with export potential, it also recommended that the government play a more active role in industrial policy. In 1992, the Culliton Report gave much the same advice. Following the literature on competitive advantage, the report recommended the promotion of industrial clusters (closely related to the Telesis concern with the lack of linkages between foreign firms and local economies), as well as making a series of broader recommendations in relation to taxation, infrastructure, education and science (Culliton report ref. 1992). The state responded with a re-structuring of the IDA into two agencies, so that it was left dealing with foreign business, whilst the creation of Enterprise Ireland was designed to support indigenous industry. Whilst some critics of the Culliton Report argued that its proposals were incapable of delivering the necessary number of jobs (Sweeney, 1992), others argued that the real problem was the opportunity cost of grant expenditure on foreign firms. According to OHearn: The state overspent on the attraction of the TNCs and had too little left to implement policies that might induce local innovation. It thus incapacitated itself by overspending on foreign firms that were obviously outside the realm of state autonomy (OHearn, 111) Other criticisms come from a quite different perspective, suggesting that the existence of a wide range of state grants and soft budget constraints (where government might extend a bank loan or tolerate payments arrears) helped to foster a grant mentality (which had already been identified in the Culliton Report), which itself was damaging to the creation of productive and profitable business (Honohan, 1992)9.
This substantive point had already been made earlier by Meenans (1970: 390) consideration of Irish development, when he suggested that: Public resources have been spent to encourage production. There has been comparatively little insistence on efficiency: the resources have been placed impartially at the disposal of the efficient and the inefficient, particularly in agriculture. It would be unjust to call it an inefficient economy [b]ut it is an economy in which inefficiency carries very light penalties: indeed it is difficult to imagine an economy in which the feckless use of land or unenterprising management in business has been so immune to
9

16
Copyright PSA 2009

Draft

These critiques are important because they point to widespread misgivings about Irish industrial policy, from both the left and the right, yet recent accounts of the success of the celtic tiger are keen to point to state activity in this capacity as evidence of state developmentalism (ORiain, 2000, 2004). Generally speaking, the creation of the IDA and other state agencies are credited with playing a foundational role in Irish economic growth (OToole; refs). To undermine these arguments, is to suggest that a large part of the celtic tiger growth has more to do with the exogenous growth trends of foreign multi-nationals, than it has with the endogenous growth of developmental potential (FN US state growth rates). Up until now, the mainstream tendency has been to assume that state industrial policy was effective, but not broadly spread. Here, we query the effectiveness of those interventions and even suggest that in some instances they may have been anti-developmental. Urbanization and the state Whilst there has been urbanization in Ireland the pattern of urbanization does not reflect a concerted effort to plan population dispersal to facilitate economic growth and has left a population and urban structure that we can hypothesize impose significant and ongoing economic costs. In comparison to Western Europe Ireland has a highly dispersed population with on average 58 people per square kilometre in Ireland compared to 168 in Western Europe. This population dispersal is, however, structured like that of a developing nation (Walsh, 2000). This form of population dispersal arises from a lack of state capacity and political will to control urban planning and the structure of a states economic geography. There is one crowded urban centre, Dublin, that far outstrips all other urban centres in size and economic importance, and an even more highly dispersed population over the rest of the state than the average suggests. This pattern of development is the result of poor development and creates economic strains and political problems. Welfare and infrastructure demands are uniform across the state even though the population concentrations to support welfare and infrastructural development are not. The result is sub-optimal for all: welfare and infrastructural demands for sparsely populated areas require transfers from economically productive areas but these are then left with sub-optimal services and their infrastructural development lags behind economic need and population growth. Resolving these problems requires either planning economic development to facilitate population dispersal or increasing tax takes. Neither of these is politically easy. When there is no increased taxation or improved planning, or where they happen erratically, the result is detrimental to economic development. Urban development does not keep place with the economic growth of the major urban centre. This leads to peri-urbanization and sprawl, which are also fuelled by land speculation, as the urban-rural divide is eroded at the edge of an economic hub (UNFPA, 2007, chapter 4). In Ireland this peri-urbanization has occurred with the outward spread of the commuter belt around Dublin without a full and concomitant development of transport and welfare infrastructures. There is obviously great potential for vicious circles to develop; periurbanization increases demands for new high cost government investment stretching budgets even further, whilst at the same time it creates high costs for workers (particularly transportation services) that are passed on in wage demands to employers and pressure for tax breaks to politicians. The developmental welfare state? In an examination of the five main realms of social protection in the Republic, reveals Ireland to be a poor comparator. In 1992, the Republic of Ireland was spending 23% of its GNP per
disaster. This may make for a leisured and pleasant society; but the inversion of values is surely a dangerous one for one that aspires to economic development.

17
Copyright PSA 2009

Draft capita on social protection per capita, a figure that fell to 19% in 2001 (NESC, 2005: 105). Despite a 46% increase in social spending per capita in real terms (due to the phenomenal growth in the economy), still when we compare the absolute levels of social spending per capita across the EU in terms of a common purchasing power standard (PPS), Ireland was estimated to be spending 3,875 PPS units per person on social expenditure whereas the average for the EU as a whole was 6,405 units (NESC, 2005: 106). Put another way, social spending per capita in Ireland in 2001 was 60.5% of the EU 15 average (NESC, 2005: 107). Using data for 1998, the OECD (2002: 24-5) observes that Ireland, along with the USA, Japan and Korea, spends significantly less than might be expected, given its level of wealth. A further distinction to be made in comparative evaluation of social expenditure is the difference between private and public social spending. Some private spending (on mandatory social insurance schemes, for example) provides a significant component to overall expenditure. This is noteworthy since there are very different distributional consequences attached to private versus public social expenditure. For example, higher private social spending (often by privileged groups of workers in sectoral social insurance schemes), may completely bypass the most vulnerable groups in society who are outside the workforce (elderly, children, unemployed, disabled etc). Even when compared with the so-called Anglo-Saxon countries, characterised by liberal welfare regimes, Ireland was estimated to have the lowest level of private social spending a position which is not changed when (generous) tax breaks for pensions are included (NESC, 2005: 112). This, combined with the relatively low expenditure on public social protection, has led the OECD to conclude that Ireland is a particularly low spender on social protection by EU and OECD standards (NESC, 2005: 113). Out of 18 countries studied by the OECD (using 1997 data), only Korea, Japan and New Zealand spend a smaller proportion of their GDP on net social expenditure than Ireland (Adema, 2001). Moreover, despite the inevitable time-lag in cross-national data collection and analysis, NESC (2005: 110) notes that even though this conclusion is drawn in relation to 1997 data, the relatively stable structures of alternative state taxation systems mean that even when newer data appears, the patterns revealed are unlikely to change.

CONCLUSIONS The literature on late development suggests that late developers can manage the tasks of catch up through good husbandry of the states resources for economic growth. In the Irish state, the small size of the Irish economy, plus the geographic dispersal of its population make Ireland a high cost economy for business investment in the domestic market and work against development. In consequence, development requires hard choices about the allocation (and rationalisation) of state resources and effective planning: substantial growth is only possible with international economic liberalisation and export-led growth. The serendipity to be a western European late developer (ahead of other later eastern European states experiencing economic transition) meant that Irelands path to prosperity deviated from the typical pattern of late development. In the Irish case, the role of traditional developmental state was displaced on to the European Union, which channelled investment into infrastructural projects without the need for the Irish state to curtail consumption to finance developments to underpin general economic growth. International economic liberalization enabled the Irish state to free ride on the benefits of globalisation (in the form of access to global financial markets and foreign direct investment), which enabled the Irish state to avoid having to take action to divert resources from consumption to investment. This helped to generate the property boom on the one hand and at same time meant that the states role as a provider of welfare could remain relatively static as it did not increase its general level of welfare

18
Copyright PSA 2009

Draft spending (amount increased, proportion GNP decreased). As Honohan and Walsh (2002) note; the Irish transformation seems to have occurred by means of social partnership but without the concomitant rise in social welfare expenditure that has been part of the settlement between social partner in other countries. This has had several affects. First, Ireland has remained dependent on foreign direct investment since it has not developed a national savings base having locked its wealth, and a large part of future savings, into property. Second, investment in property and the unplanned nature of development free of infrastructural development (roads, public transport systems) have made Ireland dependent on private transport and saddled it with high housing costs to make it a high cost economy. Third, Ireland is squeezed between getting on with delayed infrastructural developments (which are demanded by large and diverse constituencies) or dealing with the legacies of under investment in welfare that have created a large recurrent cost of financing a social strata that has remained detached from national prosperity. In short, the Irish state has not managed to overcome the politicians dilemma and in consequence its developmental capacity has been constrained. economic development will create new problems at least as quickly as it solves the old. Many changes can be provided for in advance; but there is little chance of that happening if it is generally felt that no change is to be expected from growth but change for the better. (Meenan, 1970, 390-391)

References
Adshead, M., Kirby, P. and Millar, M., eds. (2008) Contesting the State: lessons from the Irish case, Manchester: Manchester University Press. Allen, K. (2000) The Celtic Tiger. The myth of Social Partnership in Ireland, Manchester Manchester University Press. Bew, P. and Patterson, H. (1982) Sean Lemass and the making of modern Ireland, Dublin: Gill and Macmillan. Central Bank of Ireland (2008) Compendium of Economic Statistics, Dublin: Central Bank of Ireland Chaudhry, K.A. (1993) The myth of the market and the common history of late developers, Politics & Society, 21 (3), 245-74 Chubb, B. (1992 3rd edn) The Government and Politics of Ireland, London: Longman. Coakley, J. (2005 4th edn) 'The foundations of Statehood' in Coakley, J. and Gallagher, M., eds., Politics in the Republic of Ireland, Abingdon: Routledge, 3-35. Commins, P. (1986) 'Rural Irish society' in Clancy, P., Drudy, S., Lynch, K. and O'Dowd, L., eds., Ireland: a sociological profile, Dublin: IPA, 47-69. Commission on Taxation (1982) Direct taxation: first report of the Commission on Taxation, July 1982, Dublin Stationery Office: Commission on Taxation Commission on Taxation (1984) Direct Taxation: The Role of Incentives : Second Report of the Commission on Taxation, March 1984, Dublin Stationery Office: Commission on Taxation Commission on Taxation (1985) Report of the Commission on Taxation, May 1985, Dublin Stationery Office: Commission on Taxation Coughlan, A. (1984) 'Irelands welfare state in time of crisis', Administration, 32(1), 37-54 CSO (2008) Small Business in Ireland, Dublin: Stationery Office Dil Debates, 30 October 1924, 9: 561-2. Fitzgerald (2008) Gallagher, M. (1985) Political parties in the Republic of Ireland, Manchester; Manchester University Press. Garvin, T. (1974) 'Political cleavages, party politics and urbanisation in Ireland: the case of the periphery-dominated centre', European Journal of Political Research, 2(4), 307-327.

19
Copyright PSA 2009

Draft
Garvin, T. (1978) 'The destiny of the soldiers: tradition and modernity in the politics of de Valeras Ireland', Political Studies, 26(3), 328-347. Garvin, Tom (1996) The Birth of Irish democracy, Dublin: Gill and Macmillan Garvin, Tom (2004) Preventing the future. Why was Ireland so poor for so long?, Dublin: Gill and Macmillan Geddes, B. (1994) Politicians dilemma. Building state capacity in Latin America, Berkeley: University of California Press Gerschenkron, A. (1962) Economic Backwardness in Historical Perspective. A Book of Essays, Cambridge, MA: The Belknap Press of Harvard University Press Gill, G. (2008) Bourgeoisie, State, and Democracy. Russia, Britain, France, Germany, and the USA, Oxford: Oxford University Press Hederman OBrien, Miriam (1984) Tax reform in Ireland, Fiscal Studies, 5/4: 30-43 Honohan, Patrick (1992) The Irish economy in the 1990s: resolving some paradoxes, paper read to the Trilateral Commission, Dublin Castle, October 1992 Honohan, Patrick (1995) Assisting the process of tax reform: ten years of the FFS, paper presented to the Foundation for Fiscal Studies, June 1995 Honohan, 26 July 2008 Honohan, P. and Walsh, B. (2002) Catching up with the leaders: the Irish Hare, paper presented to the Brookings Panel on Economic Activity, Washington DC, 4-5th April 2002 Honohan, Patrick (1995) Assisting the process of tax reform: ten years of the FFS, paper presented to the Foundation for Fiscal Studies (FFS), July 1995 Honohans (2006) Honohan, Patrick and Lane, Philip (2009) Ireland in crisis available at: http://www.voxeu.org/index.php?q=node/3162 Hosford, Fraser (2002) A time series analysis of finance and growth in Ireland, Explorations in economic history, 35: 347-380 Hunt, C. (2005) Discretion and cyclicality in Irish budgetary management 1969-2003, The Economic and Social Review, 36 (3): 295-321 Jacobsen, J. K. (1994) Chasing progress in the Irish Republic, Cambridge: Cambridge University Press. Judt, T. (2007) Postwar. A History of Europe since 1945. London: Pimlico Kennedy, 1989) Kennedy, Giblin and McHugh, 1988; Kirby, P. (2002) The Celtic Tiger in Distress. Growth with Inequality in Ireland, Basingstoke: Palgrave. Kissane, B. (2004) Explaining Irish Democracy, Dublin: UCD Press. Lane and Milesi Ferretti, 2006). Lane, P. (1998) On the cyclicality of Irish fiscal policy, The Economic and Social Review, 29 (1): 116 Lee (2008: Lee, J. J. (1989) Ireland 1912-1985: Politics and Society, Cambridge: Cambridge University Press. Levine, 2005), MacMahon, J. A. (1981) 'Catholic clergy and the social question in Ireland, 1891-1916', Studies, 70(280), 263-88. Madden, David (2000) Taxes, debt and public finances in, J.W. OHagan (Ed.) The Economy of Ireland. Policy and performance of a European region, Dublin: Gill and Macmillan, pp. 98122 Manning, M. (1972) Irish political parties, an introduction, Dublin: Gill and Macmillan. McCracken, J. L. (1958) Representative government in Ireland: a study of Dail ireann 1919-1948, Oxford: Oxford University Press. McLaughlin, Eugene (1993) Ireland: Catholic Corporatism in, A. Cochrane and J. Clarke (eds) Comparing welfare states: Britain in international context, London: Sage Meenan, J. (1970) The Irish Economy since 1922, Liverpool: Liverpool University Press

20
Copyright PSA 2009

Draft
Migdal, J.S. (1988) Strong Societies and Weak States. State-Society Relations and State Capabilities in the Third World, Princeton: Princeton University Press Mitchell, P. (2000) 'Ireland: from single party to coalition rule' in Wolfgang, C., Muller, C. and Strm, K., eds., Coalition governments in western Europe, Oxford: Oxford University Press, 127-157 Mitchell, P. (2003b) 'Government formation in 2002: You can have any kind of government as long as its Fianna Fail ' in Gallagher, M., Marsh, M. and Mitchell, P., eds., How Ireland voted 2002, Basingstoke: Palgrave Macmillan, 214-29. Moriarty, Moss, W. (1933) Political parties in the Irish Free State, New York: Columbia University Press. Murphy and Kirby, 2008; Neary and OGrada (1991: NESC (National Economic and Social Committee)(2005) The Developmental Welfare State, NESC Report No. 113, Dublin: NESC NESC (National Economic and Social Committee)(2003): Nolan, B., OConnell, P. and Whelan, C. T., eds. (2000) Bust to Boom: the Irish Experience of Growth and Inequality, Dublin: Institute for Public Administration. OConnor, E. (1992) A labour history of Ireland, 1824-1960, Dublin: Gill and MacMillan ODonnell, R., Adshead, M. and Thomas, D. (2007) The emergence and evolution of social pacts: Ireland; country report for EU Framework 7 integrated project, New modes of Governance, Project no. CIT1-CT-2004-506392 ODonnell, Rory (2008) The partnership state: building the ship at sea in, M. Adshead, P. Kirby and M. Millar (eds) Contesting the state: lessons from the Irish case, Manchester: Manchester University Press, pp. 73-99 OHearn, Denis (2000) Riin, S. (2000) 'The flexible developmental state: globalization, information technology and the Celtic Tiger', Politics and Society, 28(2), 157-93. Riin, S. (2004) The politics of high-tech growth: developmental network states in the global economy, Cambridge: Cambridge University Press OToole, F. (2003) After the ball, Dublin: Tasc: New Island Books. OECD (2008) OECD Economic Surveys: Ireland, Paris: Organization for Economic Co-Operation and Development Olson, M. (1982) The Rise and Decline of Nations. Economic Growth, Inflation, and Social Rigidities, New Haven: Yale University Press Prager, J. (1986) Building democracy in Ireland. Political order and cultural integration in a newly independent nation, Cambridge: Cambridge University Press. Sharp, Paul (1989) External challenges and domestic legitimacy: Irelands foreign policy, 19831987, Irish Political Studies, 4: pp.? Smith, N. (2006) Showcasing Globalisation, Manchester: Manchester University Press. Somerville, R.A. (2007) Housing tenure in Ireland, Economic and Social Review, 38 (1): 107-34 Sweeney, P. (1999 2nd edn) The Celtic Tiger. Irelands continuing economic miracle, Dublin: Oak Tree Press. Sweeney, Paul (2008a) Has anything changed since the Tax Marches?, Slant, Occasional commentary on economics, Dublin: TASC available at: www.tascnet.ie Tait, A.A. and J.A. Bristow (1972) Preface, in A.A. Tait and J.A. Bristow (eds) Ireland. Some Problems of a Developing Economy, Dublin, Gill and Macmillan, vii-ix Thom, Rodney (1988) The revenue implications of Irish tax harmonization, Report prepared for the European League for Economic Co-operation, UCD: Department of Economics, available at: http://hdl.handle.net/10197/702 UNDP (United Nations Development Programme) (2007) Human Development Report. http://hdr.undp.org/en/statistics/. Accessed 1 September 2008. UNFPA (2007) State of the Worlds Population 2007, New York: UN Population Fund Waldner, D. (1999) State Building and Late Development, Ithaca: Cornell University Press.

21
Copyright PSA 2009

Draft
Walsh, B.M. (2000) Urbanization and the regional distribution of population in post-famine Ireland, The Journal of Economic History, 29 (1): 109-130 Weiss, L. and J.M. Hobson (1995) States and Economic Development. A Comparative Historical Analysis, Cambridge: Polity White, T. d. V. (1948) Kevin OHiggins, London: Methuen

22
Copyright PSA 2009