Ireland is a paradigmatic case of liberal market globalisation. This was a development project driven by the state rather than private entrepreneurs in the market. The public policy regime includes a commitment to foreign direct investment, low taxes and a flexible labour market. To understand this process of capitalist development we must examine the underlying social forces underpinning Ireland’s political economy. Central to this is a populist commitment to a low tax economic growth machine.
Imports and exports in Ireland remain one of the highest in the globalised world. Financial transactions that speed through the Irish Financial Services Center (IFSC) are only matched by London and Wall street. Employment and social protection legislation are one the weakest in the European Union. Social inequality is high but it is lower than the USA and UK. Wages are significantly higher than the USA, UK, Portugal, Italy and Spain. Furthermore, social welfare payments are relatively high. Ireland does not have the workfare schemes associated with the liberal market economies of the USA, New Zealand, Australia and the UK. This complicates a straight forward neoliberal interpretation of the Irish case.
How then should we explain the historical evolution of capitalist development in Ireland?
The current economic narrative in Ireland argues that the 1990s (the Celtic Tiger period) was driven by liberal market policies, foreign investment, wage restraint and austere fiscal policies. This was a success. After Ireland’s entry into the EMU, government expenditure increased, crony capitalism kicked in and everything fell apart. Hence, if we bring down government spending, wages and increase foreign direct investment (FDI) everything will be fine. This narrative suits the economists and it is wrong. It is the unconditional commitment to a low tax economic growth machine that has Ireland in a mess.
But one must look further back into history to establish the ebb and flow of Irelands political economy. When examined over a longer time period, Ireland’s political economy is characterized by periods of extreme boom-bust cycles (these extremes are remarkably similar to the Irish personality stereotype: outrageous, witty, argumentative and intense).
The 1990’s were not a simple case of free market globalisation. This period was driven by state developmental policies aimed at industrial upgrading. During this very brief period, the hidden developmental policies of the state were central to patterning capitalist development. The 2000’s, contrary to what the economists would argue, was much closer to the de-regulated free market policies that supposedly made the Celtic Tiger a success.
During the 2000s there was what Sean O’Rian (2008) calls a hyper-commodification of money. State developmental policies amounted to nothing more than low taxes and active support for financialisation of the economy.
Lets unpack this a little bit further.
The idea of neoliberalism would have us believe that economic success comes from free market contractual relations. But the political practice would show that markets are always institutionally embedded and constructed around historically specific social forces. It is these political forces that enable us to explain variation in the process of capitalist development in Ireland and Europe.
For example, in the liberal market theory, an increase in the market allocation of resources should lead to the efficient allocation of market resources in an economy. In Ireland, we can see that this has not been the case. The de-regulation of markets actually increased clientalism and cronyism. This can be seen in the relationship between the state and Shell in west Mayo or between Anglo-Irish bank and Fianna Fáil. Increased market relations leads to an increase in corporate political power.
The state is central to shaping all market activities. In the early Celtic Tiger period, venture capital investment and research & development in Ireland was almost entirely funded from public agencies. This was central to the high-tech boom and a core factor in explaining the success of Dublin’s ‘creative industry’. During this success period Ireland retained a 48 percent rate of income tax and maintained capital gains taxes at 40 percent. Low taxes did not create the Celtic Tiger.
In this period of economic growth Ireland had the opportunity to refocus its political economy toward using revenue for public investment goods. We didn’t. We shifted to a low tax growth machine. People were given back their taxes and encouraged to buy private health, pensions and education. The outcome was a two tier welfare state. The middle class could opt of the public service and increasingly look down upon it.
Irelands growth machine from 2002 turned into a financial money machine. This was primarily driven by domestic neoliberal tax policies of the populist Fianna Fáil/Progressive Democrat coalition. The ideology of market driven growth replaced the political practice of state developmentalism. Low taxes, we were soon told, created the Celtic Tiger period not public investment.
From 1997-2007 income taxes and capital taxes were slashed. This led to a speculative lending and real estate bubble. The market driven growth model, premised on low taxes and private banking, continues to be celebrated by many sections of the Irish media and the political elite. But the private market did not create development it created a speculative bubble. Public spending increased in this period but it was nothing compared to the revolution in Irelands low tax regime. This is a central cause of the fiscal crisis of the state.
Increased marketisation did not lead to less of a role for the state in the economy. It led to an increase. There was an explosion in regulatory agencies aimed at coordinating market contractual relations. This had the impact of increasing state activity but decreasing public accountability. This semi-privatization of the state would contribute to the tension between the ‘public and private’ in Irelands political economy – a conflict that is hard to find in other small open economies of Europe.
To complicate matters even further, all of this was managed through a labour inclusive process of social partnership. This was a central strategy of the state to manage the constraints of a liberal globalised economy. The nature of the bargain was aimed at increasing private disposable income not collective investment in public goods. It was a conduit to rather than constraint upon an increasingly liberalised economy.
How then should we characterise capitalist development in Ireland? Was it a straightforward case of neoliberalism?
Not really. It was a state led political strategy that fostered trade liberalisation and integration into a globalised economy. This ideological commitment to market led growth masked the developmental role of the state. Therefore, the Irish political economy is not as ‘liberal’ as many assume. It created a perverse liberal capitalism after 2002. This led to the collapse of the Irish economy and can be traced to a growth machine premised on low taxes and financialisation. Neither of these have been questioned in the crisis.