The Political Crises of Capitalist Development in Ireland

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.

3 responses to “The Political Crises of Capitalist Development in Ireland

  1. Howya Aidan,

    If the state drove ‘policies’ that led to the economic crisis what does it tell us about the ruling class, and its interests, in Ireland? Were the changes in the economic charachter of ireland not more in line with the changes in the charachter of the capitalist system and less a policy choice? As in if the system now can be charachtarised as highly monopolised, with increasing internationalisation of production, with financial products providing the investment avenue for excess capital (after tax and reinvestment, etc). Does Ireland not fit easily into the global system as a periphery economy within the context of contemporary monopoly capitalism subject to the capital flows from the core that manipulate the irish economy to suit their needs and extract and suck welath out of ireland?

    Just some thoughts. Im not convinced by a focus on policies as if there were bad policy choices made i think it is more systemic than that.

    Anyway, great blog and keep up the research and writing, its needed brother.

    • What it shows is that there is close nexus of power centre around corporate and political elites. This varies across countries. In Ireland it manifested itself clearly ‘amongst the golden circle’. TASC have an excellent paper on this.

      I think it is far too simplistic to reduce everything to the ‘system’. This can only be done if you operate according to fixed categories. I am not a Marxist so I dont do this. What I am interested in is explaining variation across different political economic regimes i.e. what explains the different between Ireland production regime when compared to other small open economies. Capitalist development varies over time and space. Global capitalism is obviously connected into a ‘system’, most obviously in finance. But this tells us nothing empirically.

      Domestic policy choices, interests and instiutions do matter. Both Marxist and Neoclassical economists ignore this insittutional variation. But, the point you make about analysing Ireland as part of a wider system is important. But it is not a linear relationship. Domestic policy choices shape international/European outcomes and vice-versa. As I show in the article, things change over time and politics matters.

      • Gareth Murphy

        While certainly there are local variations that can be explained by, amongst other things, the strength of class consciosuness within the trade union movement and population more generally that can influnce such things like tax regimes but i would suggest that these limited areas of control are in the overall context of the global monopoly capitalist system and the defining charachter of that system today is the degree of its monopolisation and concentration of wealth and power in fewer and fewer hands. The contradictions this system creates, drive to increase profit versus need to increase consumption and find new avenues for investment, cannot be overcome by policy choice and there is a tendancy on the ‘left’ to avoid systemic analysis and reduce the local affacts of a global systemic crisis to the policy choices of the governments.

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