virtuous and vicious cycles: boom and bust in ireland dr. malcolm brady dcu business school dublin...
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Virtuous and vicious cycles: boom and bust in Ireland
Dr. Malcolm BradyDCU Business SchoolDublin City University
Visiting Scholar to Wuhan University, Hubei Province, China
12th – 13th March 2012
[email protected]://webpages.dcu.ie/~bradym
Ireland before the 1990’s…
• A sleepy backwater• Long legacy of emigration• Poor infrastructure• Small industrial base
– drinks, clothing, agriculture (beef, foodstuffs)• Strong rural links/ Church influence• Buying votes, but high taxes and interest rates• ‘living away beyond our means’, fiscal rectitude
but had resource advantages…
• Young, educated, low-cost workforce• Only English speaking Euro-zone country• Easy access to European markets• Good educational system• Pro-business government policies• Agencies active in seeking investment
– Especially in knowledge-based industry
• Low corporation tax at 12.5%
that attracted in investment…
• Technology firms– Intel, Dell…
• Pharmaceutical– Pfizer, Wyeth…
• Financial services firms– Insurance, re-insurance…
• Software…– Microsoft…
which led to amazing growth…
• Initially due to higher productivity– People worked harder, smarter and longer– Higher skill work
• Financial services/ software/ hi-tech manufacturing
• Second phase due to building boom– Houses/ apartments/ shopping centres– Dublin, then hinterland, then entire country– Not well-planned or integrated
– Schools/ shops lag housing– Transport difficulties in outer suburbs, dormitory towns
– Funded by borrowing
Population - Republic of Ireland
0500,000
1,000,0001,500,0002,000,0002,500,0003,000,0003,500,0004,000,0004,500,000
1950 1960 1970 1980 1990 2000 2010
House Completions - Republic of Ireland
0
20,000
40,000
60,000
80,000
100,000
1990 1995 2000 2005 2010
Source: CSO Ireland
Employment - Republic of Ireland
0.00
500.00
1,000.00
1,500.00
2,000.00
2,500.00
2000 2002 2004 2006 2008 2010
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
2003 2004 2005 2006 2007 2008
GDP - percapita
GNP - percapita
increasing confidence, arrogance…
• First population growth since Great Famine• Net immigration/ heterogeneous society• Cultural impact on world
– Riverdance/ U2
• Diaspora buying up European property• But politicians ignoring people• No to Lisbon treaty
– Annoyed European colleagues
and corruption…
• Tribunals of inquiry estimated cost €434m
• Mostly in fees to the legal profession
• Ongoing - Two took 12 years, one 7 years
• Ignominious end to a number of political careers
• Little outcome to date except national loss of innocence
Society changed…
• Pluri-cultural and pluri-lingual– Many non-Irish immigrants– New religions and customs
• New infrastructure– M50 ring motorway around Dublin– Significantly upgraded roads to the capital
• Thriving urban entertainment culture• Conspicuous consumption
– Temple Bar and Grafton Street
but growth caused strain…
• Infrastructure inadequate– Long commutes– Traffic congestion
• Health care system ‘third world’• Large class size in primary schools• Services price inflation
– Professionals/ craftsmen– Restaurants/ coffee shops/ bars/ hotels
• Increasingly stressful lifestyles– ‘Breakfast roll man’/ ‘Yummy mummy’
and more serious problems…
• Cost of living 20% above European average – Siptu, 2009
• Labour cost increase• Beginning to lose national competitive advantage
• Senior private/public salaries dramatic increase • Widening gap between haves and have-nots
• Binge drinking - young/ cocaine - middle class• Development of hedonistic culture
• Drug-related gangland wars• Development of urban underclass
and house price inflation…
• Average house price increased from €87,000 in 1996 to €300,000 in 2006 (CSO 2008:22)
• Banks – relaxed mortgage requirements– from 3 x salary to 8 x salary– from 20 years to 25/ 30 years– 100% mortgages available
• Two incomes, plus parents• Many sectors benefit from high prices
– Developers, builders – windfall profits– Government – stamp duty– Estate agents, lawyers - fee % of price
Then worldwide shock…
• Ireland is a small open economy– Susceptible to benefit/ suffer from worldwide
changes
• Interest rate increases– Increased cost of mortgages
• Credit crunch
• Recession in main trading partners UK/US
banks got into trouble…
• Bank of Ireland predicts €6b losses on property loans over next three years
• Government provides €3.5b to BoI & AIB• demanding cap on executive earnings
• Anglo Irish Bank nationalised, scandals• €7b customer deposit - switched with another bank• CEO’s loans hidden from auditors• €451m Golden Circle customers/ shareholders
Source: Irish Times 12 Feb 2009
and bankers respond…
• BoI’s Goggin admits mistakes made, but• declined to apologise• “And I suppose that if I have a regret, my regret is that I didn’t
see this coming and perhaps the lessons of economics were forgotten. Economics ultimately are cyclical
• …Irish people in general, rather than just the banks, “all got carried away on the euphoria” of that prosperity”
• AIB’s Sheehy less conciliatory• “bank remuneration…got out of control to some degree
where there was too much reward for short-term gain.” “That clearly has to be changed, not only in Ireland but everywhere. . .remuneration has to be linked to long-term risk and risk taking”
flagship companies in trouble…
• Waterford Wedgwood in receivership
• Independent Newspapers share price tumbles
• Ryanair letting go 200 staff in Dublin– Monthly airport passenger numbers down 9%– ‘Idiotic’ departure tax
• “This Government must realise you can only promote tourism by welcoming visitors, not taxing them” - Michael O’Leary CEO Ryanair
Source: Irish Times, 12th Feb 2009
A changed economy…
• Credit crisis and bailout of the banks• Consumer spending halted• 266k houses vacant (15% of stock 2006 census, cso)• Job losses - unemployment rises to 9% Jan 2009
• Government revenue down 6.3% in 2008• €20b budget deficit• Cutbacks across entire public sector
– Budget levy/ Pension levy (viewed as paycut)– Benefits reductions/ Remedial teaching…
• Increased taxes: departure tax/ income tax?
and frightening bust…
• Retail sales for 2008 down 4.5%• January deflation first for 50 years
• Inflation forecast at -3% for 2009• Mortgages, retail prices down• Wages and prices must drop 20% to restore
competitiveness (Bloxham economist)
• Contraction in economy of 6% forecast for 2009• Living standards to drop 10% over next years • ‘It’s a battle for financial survival. We have to
keep working at it’ • Brian Lenihan, Finance Minister
Sources: Irish Times 12/13/25 Feb 2009 RTE 17 Feb 2009
Consumer Price Index - Republic of Ireland
95
100
105
110
115
120
2000 2002 2004 2006 2008
Average New House Price - Ireland
Source: CSO Ireland
Source:http://www.globalpropertyguide.com/real-estate-house-prices/IPermanent TSB/ ESRI
Bank of Ireland Share Price
0
5
10
15
20
9/1/2002 1/14/2004
5/28/2005
10/10/2006
2/22/2008
7/6/2009
Source: Yahoo Finance
ISEQ Total Return Equity Indices 2008
02000400060008000
100001200014000
31/1
2/20
07
29/2
/200
8
30/4
/200
8
30/6
/200
8
31/8
/200
8
31/1
0/20
08
31/1
2/20
08
Source: Irish Stock Exchange Annual Statistical Review 2008
hostile public reaction…
• Breakup of the Partnership Agreement– Between government, employers and unions– Street protests by unions, students, Gardaí– Strikes by transport and public sector workers
• Senior bankers stepping down» remuneration checked (AIB CEO 60% pay cut)
• Government debt rating under threat– bank guarantee scheme may backfire
• EU reaction– Ireland’s policymakers failed to maintain ‘prudent fiscal
course’ during the boom– Government recovery plan: ‘lack of clarity’– Trichet optimistic, but hard decisions to be made
followed by collapse…
• Government bonds failed in capital market
• Ireland downgraded by rating agencies
• Bailout in November 2011 by EU/IMF/ECB
• Leading to huge debt and tax burden
• EU seen to protect European banks at expense of Irish taxpayer
• Much emigration of young people to Australia, Canada, Britain
and slow recovery…
• Investment by social media companies– Google, Facebook, Paypal, eBay
• Small but positive growth in the economy
• Agricultural products sector growing
• Exports growing– Software, pharmaceuticals, IT products,
financial services
A retrospective view…
• Small economy• An absolute amount of investment provides big relative boost• downturn hurts disproportionately
• Small society• Senior decision makers know each other
– executives, bankers, developers, politicians, civil servants…
• Fear that ‘Golden Circle’ still exists• Many senior bankers and developers remain
• Public sector being scape-goated• But, except for senior staff, gained little during boom
• Poor government blamed• FF satisfaction rating at historic low and its vote collapsed
and some theory…
• Compound/ exponential growth cannot continue indefinitely
• Virtuous and vicious cycles spring from the same underlying system– Reinforcing feedback loops can lead to
increase/ decrease– Change in parameter value changes system
behaviour
• Delay/lag leads to oscillation
House priceHousing demand
Housing stock House construction
Interest rate factor
Credit availability factor
+
+
-
-B
B
Population
+
+-
Desired housing stock+
+
-
Expected value
++
R
+
Confidence
+
B