towards a political economy of “post-celtic tiger” ireland

8/2/2019 Towards a political economy of post-Celtic tiger Ireland

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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: [email protected] for Panel on: Post-Celtic Tiger studies? The state and public policy in the Republic ofIreland, 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 comparativeperspective. In doing this it seeks to isolate what legacies Irelands developmental path as aCeltic Tiger has for todays Ireland. We argue that the Celtic Tiger was not the result of thecreation of a strong developmental state with a high capacity and willingness to channel theresources held by its population away from consumption in to investment. Decisions about thebalance between consumption and investment remained in private hands and tipped towardsconsumption. In brief, we argue that the weakness of Ireland as a traditional developmentalstate 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, weargue, are that Ireland has remained dependent on direct foreign investment whilst lockingboth 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 isgeographically disbursed and high cost: the lack of a national developmental state has saddledIreland with high welfare costs in the longer term. The overall conclusion is that Irelands pasthas a lot of potential to haunt its future.

INTRODUCTION

The paper looks toward a political economy of the post-Celtic tiger by looking backwards atthe Celtic tiger as an example of a late development. It does this first, by outlining verybriefly 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 ofstate 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 statemanagement of the economy to direct resources from consumption to investment, and bydeveloping institutions to foster growth that elsewhere develop organically.

Instead, when decisions were made to create institutional supports for development (themomentous decision to enter into social partnership in 1987) as luck would have it the Irishstate was serendipitously supported by exogenous forces for development in the form ofinvestment and policy decisions emanating from the EU structural fund reforms of 1988 andalso 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

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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 statewas variously ascribed and credited with the economic boom. It perhaps fostered a view thatwhat worked in the past will work in the future. It is, therefore, a matter of debate (or shouldbe) 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 celtictiger sufficiently changed Irelands economic structure in the past to allow that sustainableeconomic 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 hisstudy of late developers, Gerschenkron (1962: 56) identified the basic propensity of abackward country to concentrate on areas of most recent technological progress, and thus toutilise the specific advantages of backwardness. According to Jacobsen (1994: 8); Laden

with the advantages of backwardness, new nations followed the attribute checklistnecessary 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 isundertaken to support it (cf. Chaudhry, 1993; Waldner, 1999). The number of cases for whichthis is true throughout the world is large and it is particularly (but not exclusively) the case forpost-World War II post-colonial states that had to develop their systems of publicadministration and construct viable economies free of the systems of administration andeconomic ties that they inherited as post-imperial subjects. The key issue in this regard, iswhether or not the state can launch economic development to overcome traditional obstaclesto 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), tocreate institutions that foster development. In this view, late developing nations play catch-upand when catching up they develop different organizational structures to their more advancedrivals. These differences are the result of institutional instruments for which there was littleor no counterpart in an established industrial country (Gerschenkron, 1962, 7). Chief amongthese institutional arrangements is the relationship of the state to institutions that facilitate thefinancial intermediation creation of credit, investment vehicles etc necessary for growth.Through developing such institutions, the late developing state can insure through politicalcontrol and/or policy that those investment resources that exist within a society (its oldwealth as Gerschenkron, 1962, 13, called it) are deployed for the purpose of investmentrather 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 latedeveloper as are the forms that the policies and institutions take. In short, late developers

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create a different array of institutions because they are developing within an environmentwhere other states and economies have organically solved certain developmental taskswithout specific institutional innovation; late developers overcome these obstacles by designrather 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 twoimportant and related aspects of successful late development, namely the organization by thestate of financial intermediation, and the fact that no matter what the start point and themotive to act against late development a late developing nations state plays its central andguiding role as a substitute for social forces. This should not be too surprising given that allstates 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 thestate (Gill, 2008). However in a late developing state the states role in shaping systems offinancial intermediation requires that it has both the capacity and the autonomy necessary tochallenge 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] maybe generated by crisis. Sometimes, for example, the loss of a war creates incentives for stateactors to act autonomously and introduce reform to generate a level of state capacity such thatit can enact and follow through policies that redirect investment to development and curtailconsumption in favour of growth. Certainly this was true of Gerschenkrons cases, whichwere exclusively classic European states with the full panoply of state characteristics andpowers. Arguably, such policies are even easier to enact in a discontinuous polity where somecrisis leads to the complete restructuring of the relations between state actors and economicagents so that old wealth cannot block the generation of new through institutional and policychange (cf. Olson, 1982).

Most cases of late development (or at least most cases that are useful for our purposes) fallbetween these two poles, however.1 Most late developers display elements of both continuityand discontinuity. They are discontinuous in that they have to remake their polities and foundtheir states thanks to post-colonial independence. However, they are also generally continuoussocieties, that is they do not experience social breakdown but begin the processes of statedevelopment and late economic development with their structures of old wealth intact. Thismeans 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 capacitybecomes a matter of political calculation. This is particularly so where the late developer is anemergent 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, ifachieved, largely non-exclusive even if they are attained unequally. Consequently, there arecollective 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 theyhave low incentives to organize and agitate for reform; they will incur costs if they doorganize and agitate for reform, but will gain from the public good of economic reform if theyfree-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 tosome sort of revolutionary developmental path and are therefore a subset of late developers that whilstinteresting 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 ofleading development. These states get around the politicians dilemma but only for a while a by usingviolence to overcome collective action problems and divisions over development policy.

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free-rider problems. The immediate benefits of free riding are clear (the avoidance of thepersonal costs of political or market activity, the continued derivation of benefit fromtraditional economic activity and relationships) - but the benefits of reform and hencedevelopment are deferred. On the other hand, those who stand to lose from reforms haveincentives 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 wouldderive from the public good of reform. To overcome these collective action problems requiresthe state to have autonomy and to resist opposition to reform: in other words, the stateprovides 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 isthat 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 beappealed to at election time. Voters also expect politicians to secure growth (its theeconomy stupid). However popular demand and political self-interest often do not cometogether. 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 isresponsible for providing the benefits of a public good) and influence asymmetries(politicians may service limited constituencies to accrue resources necessary to fight politicalcampaigns rather than the larger constituency of voters with a latent interest in reform) meanthat the delivery of public goods can be inconsistent. Politicians have a degree of choice aboutproviding public goods and building the political structures that can help to deliver them. Inshort: they must choose whether to reform or not; to build state autonomy so as to facilitatethe provision of public goods or to maximise their freedom to accumulate resources that theycan use for their own ends; to consolidate state autonomy or compromise it in the interest ofservicing some important group or groups.

The choices that politicians make between these options will be shaped by the office that theyhold, the basic institutional framework through which a political career is conducted. At amost basic level, politicians want to survive in office or gain it, either by averting moves tooverthrow them or more usually by securing election, and to build up their power andinfluence. As a result, politicians calculations about state building and development turn onwhat Geddes (1994, 42) calls the politicians dilemma: politicians who might otherwiseconsider offering reforms as a strategy for attracting support will not be able to afford the costin lost political resources as long as they compete with others able to use such resources in thestruggle 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 uppolicy preferences in other areas. Where divisions over economic and other policies are greatthere is little chance of developing a classic and focussed developmental state asGerschenkron 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 developmentare great and the incentives to backtrack from development, by for example skewing themarket to favour a particular group (domestic or international), or subverting the market whenit 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 developautonomy and capacity as a developmental state and the problems that this can cause may be

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recurrent. They might be escaped for a time due to circumstance (such as a commodity priceboom) so that growth ensues but unless this circumstance leads to a change in the state andthe bedding in of these changes they will likely resurface as problems of economic andpolitical 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 startedthe 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 forthis. Moreover, the lack of agreement about what the states developmental goals are, orshould be, and whether or not the state has reached them, has further clouded our judgementabout whether or not the state may be considered a developmental one (Kirby, 2002; Murphyand Kirby, 2008; Allen, 2000; OHearn, 2000). Ireland has, after all, been a leader in postinghigh 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 whereby 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. Untilthe economic growth experienced in the early 1990s and now associated with the celtictiger, Ireland was on most developmental indicators to do with economic output, such asGDP, industrial output, value added, structure of sectoral output etc on a per capita basisrelatively backward in comparison to advanced industrial European states and to states suchas 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 withlabour shortages caused by economic growth, Ireland, and the other developmental laggardsof Europe (Portugal, Spain, Greece, and Italy) exported surplus labour (see Judt, 2007).

Moreover, many of Irelands recent problems have been associated with managing thetransition from agricultural economy to one dominated by industry and services so that, as anearlier study of Ireland as a developing economy put it, Ireland faces many of the majorstructural problems familiar in developing economies and Ireland is most interestinglythought of as a developing country (Tait and Bristow, 1972, vii). Indeed, Irelands surginggrowth over the last years and current position at the apex of aggregate measures ofdevelopment 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 individualdevelopment indicators such as the % of the population living on below 50% of medianincome where Ireland is only above the more diverse USA in the OECD shows thatIrelands development is not bedded in to the same extent as in some other state with longerrecords atop the economic tables. This, however, is not the main point of looking at Ireland interms of late development from the point of view of political economy. The analysis of latedevelopment is not primarily concerned with economic data and positions in the world per sebut with the particular affect that launching economic development late relative to othernations has on the institutional structures of the state and economic management more widelyand hence on the way in which the response to late development in terms of institutionalstructures and policy shape post-developmental growth. The political economy of late

development has always been concerned with institutional structures and their influence, andwith the play between actors that establish these structures and their capacities to generate

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

TESTING IRISH STATE DEVELOPMENTALISM

For many decades, Irelands economic output per capita ranked around 24 th among the majornations, when suddenly, in the 1990s it began to move up from 22nd in 1993 to 18th in 1997and an amazing 9th in 1999 (Honohan and Walsh, 2002: 2). The post hoc rationalization forthis remarkable reversal of fortunes has been a central concern to many social scientists inIreland 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 parallelgrowth trend with the US economy during the 1990s) and good judgement (developing multi-annual strategic planning in a relatively stable macro-economic framework that is supportedby European Monetary Union as well as a consensual approach to the management of theeconomy, spearheaded by social partnership), combined during a period when the Irisheconomy was also fortunate to benefit from significant investment (in terms of the EUStructural Funds and Cohesion Funds) and an unusually elastic labour supply (in the form ofreturning emigrants and new immigrants as well as demographic and structural changes to thelabour force). Though some commentators have sought to identify or prioritise a singleexplanation, the more considered view tends to be that the Irish boom was a long time comingand in many ways reflected no overnight miracle, but the eventual and delayed structuraltransformation of a traditional agriculturally based economy into a more modern andproductive one (Honohan and Walsh, 2002; Garvin, 2004). Viewed in this sense, theinevitable questions are: why did it not happen sooner? And, allowing for such serendipitousfortunes during the 1990s, how different is the state afterthe boom to what it was before. Inorder to answer these, we briefly explore the issues concerning late development and statedevelopmentalism 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 followingindependence.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 theevolution the Irish state do identify definite trends in the patterning of politics that wereestablished 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 byrepresentatives of the British and Dil governments. It included provision for an Irish Free State, with a largemeasure 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 tothe 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.

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include a strong bias towards both economic and political conservatism, which it is arguedhere, effectively circumscribed the states capacity to challenge old wealth and to a largeextent set the conditions for subsequent state development. A brief consideration of the twodominant 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-Treatywing of Sinn Fein, which had been running the country since the split in the party. Inconsequence, the building of the new state and its institutions was in the hands of a group ofpeople who supported the political and economic status quo either through conviction or outof political realism (Coakley, 2005: 21). They were a group of strong political figures of abroadly conservative disposition, which was reflected in the new close relationship with theCatholic Church. Moss (1933: 135-136) describes support base Cumann na nGael in the early1930s 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 wasdefeated by Fianna Fil. Following a further defeat in 1933, Cumann na nGaedheal mergedwith the Centre Party and the National Guard to form Fine Gael in September 1933.

By 1933, the creation ofFine Gael marked out the primary distinction between the two majorparties in the Republic for much of the post-independence period:

The pro-Treaty party which stood for peace and ordered government won the supportof the conservative, propertied class in the country: the large farmers, the leaders inindustry and commerce, and the well-established professional men. The anti-Treatyparty relied chiefly on the small farmers, the shop-keepers, and sections of the artisanand labourer classes.

McCracken (1958:128)

Gallagher (1985: 43) notes that in relation to social and economic policies, Fine Gael bore outOHiggins comment that we were probably the most conservative-minded revolutionariesever to put through a revolution (White, 1948: 2). Their predecessors in the Dil showedample evidence of this. In 1924, the Finance Minister, Ernest Blythe cut the old age pensionfrom ten to nine shillings a week (Fanning, 1978: 110-1) and in the same year, the Ministerfor Industry and Commerce, Patrick Quilligan, went so far as to suggest that people mighthave to die of starvation as a consequence of government expenditure cuts (Dil Debates, 30October 1924, 9: 561-2).

Established in 1926, following de Valeras withdrawal from Sinn Fein, the Fianna Fil partygained in political strength because of its disproportionate attraction to the poorer, lessanglicized, and peripheral sections of the nation (Garvin, 1978: 333). For many Fianna Filvoters, the Sinn Fein war had represented a battle against the whole existing order and itsmultitude of abuses (Moss, 1933: 135) and it could be argued that initially a good proportionof support for Fianna Fil was not simply because they were against the Treaty, but becausethey stood in opposition to Fine Gael (who were for the Treaty). In essence, Fianna Filappealed precisely to those groups who, up to then, had refused to identify with Free Statepolitics (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 urbanworking class as a consequence of increasing prosperity in the towns, which led to cheap

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food and better job prospects for many despite the continuing agricultural war that wasadversely affecting the farmers. In this regard, however, the association of Fine Gael withlarger farmers and the more prosperous ensured that Fianna Fil could maintain the supportof the smaller (and poorer) farmers, the small shopkeepers, the urban and rural petitbourgeoisie and even, in some measure, the urban working class (Bew and Patterson,

1982:3). The ability ofFianna Fil to compete for office in a state that it largely professed toreject was certainly a winning electoral ruse: once the electoral competition was focused onthe national question, the other parties were clearly outclassed by this masterful stroke ofpolitical manoeuvring. Fianna Fil was able to most effectively argue that it was the nationalparty, 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 aview of itself as the party most able to deliver an enduring societal vision for post-independent Ireland.

Of course that vision, encapsulated by de Valeras historic dream broadcast printed in theIrish 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 thecreation 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 therural Irish became strongly associated with the identification of the nation with the peasantry(Chubb, 1992: 14). Without doubt, the preservation and maintenance of conservative valuesand attitudes in Ireland can be attributed to the predominance of rural culture in Ireland. Theoutlook on life of the farming community, dubbed by Commins (1986:52) as ruralfundamentalism, nourished conservative and authoritarian values in Ireland. Deference - tomales and the elderly, to the Church and the school system - is a marked feature of Irishsociety (Chubb, 1992:17).4

Cut off from continental influence, the industrial revolution and the plight of the urbanworking classes were entirely foreign to Irish society. Scant interest was shown in the effortsof continental social reformers, and in Ireland even the phrase social question meant formost 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 industrialheartland of the country (OConnor, 1992), after partition as few as 5% of the population inthe rest of Ireland was engaged in manufacturing (McLaughlin, 1993: 208). As aconsequence, it was the economic interests of the conservative farming classes that initiallytook precedence in the new state and the labour movement failed to achieve a leading role. Itis 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):

3 [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, thecontests of athletic youths, the laughter of comely maidens, whose firesides would be the forums for the wisdomof 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 townpeople are very different to those from the country. At least half of the population of Dublin have moved fromthe country (many still travel home at the weekends) and with the continuous movement from the countrysideto the town, there are many urbandwellers who are but slowly becoming town people. In some senses, to tryand divide Irish people between urban and rural cultures, is to miss thesignificance of the great number of those

Irish people who are somewhere in between (Chubb, 1992:3-13).

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[the] outstanding performance of the Irish economy in the past decade or so should beinterpreted mainly as a delayed structural transformation as the proportion of thepopulation at work outside agriculture and their productivity at last spurted towardsthe levels long achieved in other industrialized countries, and the productivity of thelabour force remaining in agriculture rose.

So much for the impediments to development: the question remains, to what extent were theyovercome? And, to what degree was this the consequence of endogenous statedevelopmentalism 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 economicprosperity 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 thestates involvement in the economy. Between 1959 and 1972, national economic policy was re-oriented: in 1958, economic planning was adopted as part of a modernisation strategy andprotectionism was abandoned; in 1965, the Anglo-Irish free trade agreement was signed; in1967, Ireland joined the GATT; and in 1973, membership of the EC was finally achieved. By theearly 1970s, Ireland was experiencing net in-migration and both major political parties hadcommitted themselves to full employment (McLaughlin, 1993:213). Against this backdrop, Irishpolitical parties shared a general consensus that was in favour of higher public spending, whilstat the same time supported the mixed economy and reliance on private capital as the mainmotor of economic development (Coughlan, 1984:42).

Although it is possible to discern some policy traits that distinguish the mainstream partiesaccording to more usual socio-economic cleavages, in fact as the significance of civil warpolitics has receded both parties have moved closer to the middle ground a trend that isfurther facilitated by the Irish electoral system. Irelands Single Transferable Vote (STV)method of proportional representation (PR), which allows voters to mark as many preferencesas there are candidates in multiple seat constituencies, not only obliges candidates of the sameparty to compete against each other, but also offers the opportunity for voters to switchbetween parties, according to their preferences. The result is a highly personalised andlocalised electoral competition, where issues of national policy often take second place (ormay 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 partycompetition at local level makes it perfectly rational for politicians seeking to maximise theirvotes to develop a consensus relating to macro policy issues (in order to avail of vote transfersfrom candidates from a variety of parties), whilst differentiating themselves in relation tolocal issues. This trend was further encouraged by a number of developments within the partysystem throughout the late 1980s including: first, as Labour and Fine Gael moved closertogether, 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 minoritygovernment 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 ProgressiveDemocrats (Mitchell, 2000:131). Second, from the voters point of view, as coalition politics

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has become the contemporary norm in Irish politics, it is clear that Irish voters do not electgovernments: they elect local representatives from national parties who engage innegotiations 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 togovernments 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 theconditions considered necessary for economic development, by examining those areas ofmacro-economic policy management that are fundamental to securing the conditions foreconomic growth: the financial system; the tax system; and the governments ability to directinvestment. We find the states financial system to be generally weak, extremely globalisedand 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 somewhatregressive, 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 consumptiontaxes as a revenue source, and the long-standing biases in the Irish tax regime that acted tostifle investment. The failure to promote investment in productive growth is dealt with ingreater detail in the third section, which examines government capacities to promoteinvestment over consumption.

Developing institutions for financial intermediation

The literature on economic growth identifies financial sector development as a strong andsignificant causal factor for long-term economic growth (Levine, 2005), though typicallythere is scant consideration of this in explanations of Irish growth. One notable exception tothis 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 ofexplaining Irelands exceptional (celtic tiger) growth and that an examination of the creditdepth-GDP relationship 1971-1998 finds causality from GDP to finance (Hosford, 2002 inHonohan, 2006: 60). This points to the incredible significance of global financial system inproviding financial services to the Irish state (Honohan, 2006: 61). For example, a keymeasure 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 forthis, but even after its impact is excluded the Irish (onshore) figure is still relatively high at380 percent (ibid). By 2005 the net import of funds Irish financial institutions lent to Irishresidents 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 effectingpayments, mobilising funds, pooling and re-distributing risk), appraising credit-worthinessand 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 itseffectiveness of ensuring that the funds are well spent (2006: 61). In the Irish case, the

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property boom was financed by credit (Honohan, 2006: 69). Though there is no clearevidence 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 thatgovernment 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 followingthe 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 ahouse as tenants get on their rent.

Arguably in times of dangerous fiscal excess, the role of the financial system should be tointroduce a corrective into the system directly through interest rate changes to tackleinflation; or indirectly in its regulatory and monitoring procedures governing the issue ofcredit. In both these cases, it seems that the Irish financial system is handicapped: EMUmembership 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 tightregulatory frameworks bequeathed by the British system of banking regulation, the Irishbanking system developed an institutional fragility as a consequence of an institutional cultureof non-compliance and relaxed attitude to regulation, which together led to a very lax systemof regulation (see Elaines evidence of banking crises). Throughout the 1980s and 1990s, aseries of tribunals revealed the widespread collusion of banks, accountants and otherprofessionals in a series of corrupt payments to politicians, incidences of money launderingthrough offshore accounts and tax evasion (Moriarty, ). In December 2008, it emerged thatthe chairman of Anglo-Irish Bank, Sean FitzPatrick, had been hiding loans totalling 87million at the bank over an eight year period, regularly removing them from Anglo-Irishbooks (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-adversenature of the Celtic Tiger, had been so gravely weakened that it had to crawl under the wingof the State (Irish Times, 2 January 2009).

Irretrievably bound up in the global financial system, the effects of global recession and theknock-on effects of the decline in the construction sector focused attention on theconsequences to the banking system (Honohan, 26 July 2008). In June 2008, the Minister forFinance, 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 billionof their value, since their peak value at 50 million in early 2007 (Irish Times, January 22009). The knock-on effects Throughout July and August 2008, as Ireland moved towardsrecession, fears grew that the banks would be badly damaged, especially from losses on loansto property and construction sectors, to which 110 billion was outstanding. Realising thedramatic 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 loseup to 1.3 billion every year from 2009-2011 (Irish Times, 2 January 2009). By the end ofSeptember, the government was guaranteeing all deposits, including money owing tocorporate and inter-bank customers at the six Irish-owned banks and building societies. Theextraordinary 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 thevalue of the economys GDP (Irish Times, January 2 2009; Honohan and Lane, 28 February

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2009). By early 2009, the worst-case scenarios, which Irish banks had continually thoughtunlikely to ever occur, looked increasingly real. AIB said that it would be writing off 7.8% ofits 10.7 billion loans to Irish property developers over two years, while the Bank of Irelandsaid 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 afurther 2 billion in public money and possibly more promised will not be enough tocover up to 20billion and maybe even as high as 30billion in bad debts that theIrish 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 taxsystem. Throughout the towns and cities in Ireland, as many as 700,000 marched in protestagainst 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, PAYEworkers were estimated to be paying around 87% of Irish income tax (Sweeney, 2008a). Formost of the 1980s, macroeconomic debate in Ireland focussed on the question of the state andthe sustainability of the public finances (Madden, 2000: 113). Excessively expansionarybudgets in the late 1970s and early 1980s, coupled with the effects of international recessionled to a situation in the mid-1980s where the national debt had reached an absolutely criticallevel (ibid). Still, however, as Sweeny (2008a) notes; most of the change in the shift insources of taxes and in the level of taxes occurred in the past 13 years, not in the 23 yearssince the Tax Marches and reflect the Celtic Tiger growth phase of the Irish economy. Thatthis 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 notcomprehensively tackled: instead, the celtic tiger growth rates, enabled governments to over-look them. Although Irish governments ran annual budget surpluses until 2006, an increasingshare of the revenue that supported these surpluses was coming from taxes whose yield issensitive to high and increasing asset prices and asset transactions (capital gains tax, capitalacquisition tax and stamp duties) and on corporation profits taxes much of it coming frommultinationals (Honohan and Lane, February 2009). With the global downturn, however, therevenue from these taxes plummeted, exposing a structural deficit which was exacerbated bya strong upturn in public expenditure in the last few years (Honohan and Lane, February2009).

The influence of taxation on the volume and especially the allocation of savings has long beenrecognized as a topic of special importance in the Irish context (Honohan, 1995: 5) and wasconsequently the focus of detailed recommendations by the Commission on Taxationestablished in 1980 (Hederman OBrien, 1984). Thoms (1988) study of distortions created bythe Irish tax regime paid special attention to the fiscal privileging of different assets. Mostfavoured were investments in Business Expansion Schemes, followed by Housing, Pensionsand 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 offiscal privilege was enormous at around 313 per cent for housing (Honohan, 1995: 6). Thismeans that holding a house on mortgage could shelter other income from tax and convey taxbenefits 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 multipleof real earnings (Honohan, 1995: 6).

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Certainly much of the popular concern expressed during this period was in relation to theregressive nature of the tax system, insofar as many fiscal privileges were available only athigher income categories. But just as important, though less popularly discussed, was theeffect 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 late1980s, the impact of the BES on investment patterns was considerable: more generally, theincome 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 therecommendations of the (first) Commission on Taxation, comprehensive tax reform has notoccurred, 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 ofour 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 haveadequate 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 sub-optimal.6 Spending taxes, which are high in Ireland (VAT rate is 21 per cent compared to 17per cent in Britain) have contributed much the same proportion of government income fromtaxation around 46 per cent as in the 1980s (Sweeney, 2008a), whereas in 2000, incometax contributed 30.8 per cent of tax revenue (NESC, 2003: 293), compared to 44 per cent in1980 (Sweeney, 2008a). The reduction in rates of income tax since the 1980s has beensignificant and largely due to National Programmes for Government executed since the late1980s. During the period 1987-2001, for example, whilst workers real earnings increased by25%, their take-home pay increased much more dramatically as much as 60% for a singleindustrial worker and 54% for a married worker (NESC, 2003: 61). The tax take as aproportion 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 late1980s, this reduction has been substantially less than the corresponding reduction in theexpenditure share (NESC, 2003: 291). Elsewhere among the EU 15, tax takes to GDP ratioshave remained stable, or, as is the case with other periphery states, continued to rise. Irelandsdecline is a notable exception. Whilst the average tax take as a percentage proportion of GDPchanged by only -0.1 per cent across the EU 15 for the period 1995-2002; in Ireland itdeclined by -4.8 per cent (NESC, 2005: 14). This is of course significant, since it means thattax 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 isgreater 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 budgetarybehaviour 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+20086 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 negotiatedtax regime with all the hallmarks of the soft incentive structure. By 2008, the Irish Revenue Commissionadmitted to 33 tax breaks, where they had no idea of the cost to the taxpayer (see Fitzgerald, 2008).

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government spending was not counter-cyclical; it did not fall and rise according the behaviourof economic fundamentals (Lane, 1998). In essence, what this means is that governmentspending did not work to ameliorate changes in economic circumstance and create conditionsto facilitate growth but was a response to other social pressures and political priorities. Thisappears 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 thatthe government is committed to spending by statute was acyclical and the greater thediscretion of politicians the less related spending was to economic fundamentals.Discretionary spending on consumption (including inter alia welfare) was not cyclical (i.e. itdid not vary at all with business cycles) and on investment was pro-cyclical. In other wordsdiscretionary government spending on consumption does not appear to have been undertakenwith any particular policy goal of growth in mind, whilst discretionary investmentexpenditure from the late 1960s and through the main part of the boom did not work tostimulate the economy in periods of downturn and prevent overheating in periods of upturnbut 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 togovernment-funded capital formation, reduce the economys sustainable growth potential.

One sign that government did not enact policies to help convert domestic savings or incomein to investment in value added, tradable sectors was the growth of the housing bubble, andthe fact that the growth of the Irish economy over the 1990s and early 2000s did not developthe Irish small and medium enterprise (SME) sector (outside of the construction sector) tolevels comparable with other developed EU economies. There were many factors that drovethe price of housing up, not least the relative shortage of housing stock in comparison to thesize of the population. However poor planning in the housing sector plus traditionalinclination to private home ownership and rising incomes led to a greater transfer of incomesand savings in to housing in Ireland in the 1990s and 2000s. Investment in housing as aproportion of gross fixed capital formation was at a median value of 23% in Ireland in the1980s, 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 2008property-related lending made up more than half of bank lending (60% in mid-2006) and withdeposits falling off the funding gap between deposits and credit had become the largest withinthe 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 localcommercial 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 valueadded (GVA) per employee in the EU-27 by 2005, but this was because of the exceptionallyhigh 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 betweenlarge (mostly foreign owned) and small (95% Irish owned) GVA was very large incomparison to other European states by a factor of 5; in Germany the GVA differencebetween large and small enterprise GVA was only x2, in Denmark it was x1.5, and in theNetherlands (which had the second highest large enterprise GVA per employee) thedifference 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.

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turnover; in Ireland, they accounted for 6% (all data from CSO, 2008, 72-72). Policies thatfacilitated (or actually encouraged) consumption rather than harder political option of forcingthe conversion of a larger proportion of income into savings and investment have thereforecontributed to relatively lop-sided development in which sustainable growth is dependent onexogenous 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 keypolicy areas that must be tackled to encourage economic growth and, second, that in doing solate developing states must often negotiate with a variety of constituencies of interest thattypically offer their political support at an economic cost. Making the tough choices thatestablish the foundations for sustainable economic growth is never easy. The economic costsof various political choices may be relatively hidden during periods of high growth whenmost (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 politicaldemands 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 willseek to co-opt actors from wider society to stabilize their hold or access to office. This mightentail some development but it will also encourage distribution to inefficient sectors andequalize the claims of consumption and investment. In short, politicians will service existinginterests - no matter that they may be economically inefficient and a barrier to growth inorder to gain political support.

The concept of precocious Keynesianism (Waldner, 1999) refers to Keynesian style macro-economic management before there is a developed industrial economy to manage. This entailsa high degree of state interference in the economy but the state does not fine tune theeconomy through expanding and contracting spending to manage the balance betweeninflation and unemployment as in a developed economy in which the foundations ofinnovation and the nature of comparative advantage are well established. Instead it pours itsrevenue into the economy haphazardly and without distinction between sectors that can growand have a comparative advantage, and those that do not. It may therefore have someKeynesian affects in that the state can promote employment or work against inflation to someextent but more importantly the broad base of politics created by elite division andcompetition constrains development and its sustainability since its policies which may

include setting tariff barriers, making welfare payments and schemes, as well as poor fiscalplanning and policy deter or skew investment and capital formation. In this section we pointto three areas of development in the Irish, which best exemplify some of these non-developmental legacies.

Industrialization and the state

Whereas prior to independence, the six northern counties comprised the industrial heartlandof the country (OConnor, 1992), after partition as few as 5% of the population in the rest ofIreland was engaged in manufacturing (McLaughlin, 1993: 208). As a consequence, it was theeconomic interests of the conservative farming classes that initially took precedence in thenew 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

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fact, it was not until 1958, with the publication of the now renowned government paper onEconomic Development(Government of Ireland, 1958) or Whitaker Report (so called afterthe Secretary of Finance charged with its composition) that the state achieved a 180 degreereorientation of economic policy, away from the insular and ultimately self-defeating attemptsat economic isolation and towards full integration with the international economy through

industrialisation by invitation (Adshead, 2008). Arguing for trade liberalisation, attractingforeign investment, and state intervention in capital-intensive, exportoriented production, thereport advocated a highly interventionist approach and marked the beginning of Irelandsmove towards export-oriented growth (Smith, 2006: 105). Ireland was one of the first latedeveloping states to adopt this approach (OMalley, 1989, 1992), which it is argued helpedlay 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 ofmanufacturing production came from foreign-owned firms the highest proportions for anyOECD 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 asource of contention in Irish industrial policy. In 1982, the Telesis Report emphasised theinadequacies of an industrial strategy based on foreign investments. Arguing for substantialreductions to grants to foreign firms and increased aid for indigenous firms with exportpotential, it also recommended that the government play a more active role in industrialpolicy. In 1992, the Culliton Report gave much the same advice. Following the literature oncompetitive advantage, the report recommended the promotion of industrial clusters (closelyrelated to the Telesis concern with the lack of linkages between foreign firms and localeconomies), 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 leftdealing with foreign business, whilst the creation of Enterprise Ireland was designed tosupport indigenous industry. Whilst some critics of the Culliton Report argued that itsproposals were incapable of delivering the necessary number of jobs (Sweeney, 1992), othersargued 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 implementpolicies that might induce local innovation. It thus incapacitated itself by overspendingon 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 awide range of state grants and soft budget constraints (where government might extend a bankloan or tolerate payments arrears) helped to foster a grant mentality (which had alreadybeen identified in the Culliton Report), which itself was damaging to the creation ofproductive and profitable business (Honohan, 1992)9.

9 This substantive point had already been made earlier by Meenans (1970: 390) consideration of Irishdevelopment, when he suggested that: Public resources have been spent to encourage production. There hasbeen 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 aneconomy in which the feckless use of land or unenterprising management in business has been so immune to

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These critiques are important because they point to widespread misgivings about Irishindustrial policy, from both the left and the right, yet recent accounts of the success of theceltic tiger are keen to point to state activity in this capacity as evidence of statedevelopmentalism (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 celtictiger 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 growthrates). Up until now, the mainstream tendency has been to assume that state industrial policywas effective, but not broadly spread. Here, we query the effectiveness of those interventionsand 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 aconcerted effort to plan population dispersal to facilitate economic growth and has left a

population and urban structure that we can hypothesize impose significant and ongoingeconomic costs. In comparison to Western Europe Ireland has a highly dispersed populationwith on average 58 people per square kilometre in Ireland compared to 168 in WesternEurope. 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 andpolitical 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 sizeand economic importance, and an even more highly dispersed population over the rest of thestate than the average suggests. This pattern of development is the result of poor developmentand creates economic strains and political problems. Welfare and infrastructure demands areuniform across the state even though the population concentrations to support welfare andinfrastructural development are not. The result is sub-optimal for all: welfare andinfrastructural demands for sparsely populated areas require transfers from economicallyproductive areas but these are then left with sub-optimal services and their infrastructuraldevelopment lags behind economic need and population growth. Resolving these problemsrequires either planning economic development to facilitate population dispersal or increasingtax takes. Neither of these is politically easy. When there is no increased taxation or improvedplanning, 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 theurban-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 beltaround Dublin without a full and concomitant development of transport and welfareinfrastructures. There is obviously great potential for vicious circles to develop; peri-urbanization increases demands for new high cost government investment stretching budgetseven further, whilst at the same time it creates high costs for workers (particularlytransportation services) that are passed on in wage demands to employers and pressure for taxbreaks to politicians.

The developmental welfare state?

In an examination of the five main realms of social protection in the Republic, reveals Irelandto 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 onefor one that aspires to economic development.

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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 phenomenalgrowth in the economy), still when we compare the absolute levels of social spending percapita across the EU in terms of a common purchasing power standard (PPS), Ireland wasestimated 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, socialspending 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, Japanand 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 thedifference between private and public social spending. Some private spending (on mandatorysocial insurance schemes, for example) provides a significant component to overallexpenditure. This is noteworthy since there are very different distributional consequencesattached to private versus public social expenditure. For example, higher private socialspending (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-calledAnglo-Saxon countries, characterised by liberal welfare regimes, Ireland was estimated tohave 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 therelatively low expenditure on public social protection, has led the OECD to conclude thatIreland 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 expenditurethan Ireland (Adema, 2001). Moreover, despite the inevitable time-lag in cross-national datacollection and analysis, NESC (2005: 110) notes that even though this conclusion is drawn inrelation to 1997 data, the relatively stable structures of alternative state taxation systems meanthat 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 ofcatch up through good husbandry of the states resources for economic growth. In the Irishstate, the small size of the Irish economy, plus the geographic dispersal of its population makeIreland a high cost economy for business investment in the domestic market and work againstdevelopment. In consequence, development requires hard choices about the allocation (and

rationalisation) of state resources and effective planning: substantial growth is only possiblewith international economic liberalisation and export-led growth. The serendipity to be awestern European late developer (ahead of other later eastern European states experiencingeconomic transition) meant that Irelands path to prosperity deviated from the typical patternof late development. In the Irish case, the role of traditional developmental state wasdisplaced on to the European Union, which channelled investment into infrastructural projectswithout the need for the Irish state to curtail consumption to finance developments tounderpin general economic growth. International economic liberalization enabled the Irishstate to free ride on the benefits of globalisation (in the form of access to global financialmarkets and foreign direct investment), which enabled the Irish state to avoid having to takeaction 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 ofwelfare could remain relatively static as it did not increase its general level of welfare

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spending (amount increased, proportion GNP decreased). As Honohan and Walsh (2002)note; the Irish transformation seems to have occurred by means of social partnership butwithout the concomitant rise in social welfare expenditure that has been part of thesettlement 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, intoproperty. Second, investment in property and the unplanned nature of development free ofinfrastructural development (roads, public transport systems) have made Ireland dependent onprivate 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 ofunder investment in welfare that have created a large recurrent cost of financing a social stratathat has remained detached from national prosperity. In short, the Irish state has not managedto overcome the politicians dilemma and in consequence its developmental capacity hasbeen constrained.

economic development will create new problems at least as quickly as it solves theold. Many changes can be provided for in advance; but there is little chance of thathappening if it is generally felt that no change is to be expected from growth butchange for the better. (Meenan, 1970, 390-391)

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