by Pierre Fortin, Université du Québec à Montréal and Canadian Institute for Advanced Research, May 2002
Abstract
Over the past decade, Ireland's real domestic product per head has doubled, and its national unemployment rate has declined from 16 percent to less than 5 percent. This has made the Irish Republic one of the ten richest countries in the world. This economic miracle is the joint outcome of a long-term productivity boom dating back to the 1950s and 1960s, and a sudden short-term output and employment boom that has seen Ireland's job performance recover, since 1993, all the ground lost during the previous twenty years.
It turns out that, for several decades, Ireland has been remarkably supportive of long-term productivity growth through its openness to free international trade and investment, its business-friendly industrial and tax policies, and its free secondary and low-cost higher education.
The short-term aggregate demand push experienced since 1993 has been fuelled by the solid economic recovery in Europe and the United States, continued improvement in Ireland's international cost competitiveness, streamlined public finances, and low (net-of-inflation) interest rates. The aggregate supply response to this expansion in demand has included a sharp increase in women's labour force participation rate, a large flow of new and return immigrants, and massive foreign direct investment, particularly from U.S. multinational corporations. In combination, these developments in labour and capital markets have kept the boom going with no increase in inflation until late 1999. The extended noninflationary response also owes much to Irish fiscal discipline, consensus-based wage moderation, and participation in the Single European Market and the European Monetary Union.
Ireland's long-term productivity-enhancing policies can be widely imitated or emulated by other countries, including Canada. Policies to promote high employment must take into account country-specific wage-setting institutions and monetary regimes. In general, countries will achieve the lowest sustainable national unemployment rate if they avoid premature monetary tightening and if they adopt supply-friendly tax, expenditure and regulatory policies that keep unit labour costs low and foster high rates of saving and investment.