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Virtuous and vicious cycles: boom and bust in Ireland. Dr. Malcolm Brady DCU Business School Dublin City University Visiting Scholar to Wuhan University, Hubei Province, China 12 th – 13 th March 2012 malcolm.brady@dcu.ie http://webpages.dcu.ie/~bradym. Ireland before the 1990’s….

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virtuous and vicious cycles boom and bust in ireland

Virtuous and vicious cycles: boom and bust in Ireland

Dr. Malcolm Brady

DCU Business School

Dublin City University

Visiting Scholar to

Wuhan University, Hubei Province, China

12th – 13th March 2012

malcolm.brady@dcu.ie

http://webpages.dcu.ie/~bradym

ireland before the 1990 s
Ireland before the 1990’s…
  • A sleepy backwater
  • Long legacy of emigration
  • Poor infrastructure
  • Small industrial base
    • drinks, clothing, agriculture (beef, foodstuffs)
  • Strong rural links/ Church influence
  • Buying votes, but high taxes and interest rates
  • ‘living away beyond our means’, fiscal rectitude
but had resource advantages
but had resource advantages…
  • Young, educated, low-cost workforce
  • Only English speaking Euro-zone country
  • Easy access to European markets
  • Good educational system
  • Pro-business government policies
  • Agencies active in seeking investment
    • Especially in knowledge-based industry
  • Low corporation tax at 12.5%
that attracted in investment
that attracted in investment…
  • Technology firms
    • Intel, Dell…
  • Pharmaceutical
    • Pfizer, Wyeth…
  • Financial services firms
    • Insurance, re-insurance…
  • Software…
    • Microsoft…
which led to amazing growth
which led to amazing growth…
  • Initially due to higher productivity
    • People worked harder, smarter and longer
    • Higher skill work
      • Financial services/ software/ hi-tech manufacturing
  • Second phase due to building boom
    • Houses/ apartments/ shopping centres
    • Dublin, then hinterland, then entire country
    • Not well-planned or integrated
        • Schools/ shops lag housing
        • Transport difficulties in outer suburbs, dormitory towns
    • Funded by borrowing
increasing confidence arrogance
increasing confidence, arrogance…
  • First population growth since Great Famine
  • Net immigration/ heterogeneous society
  • Cultural impact on world
    • Riverdance/ U2
  • Diaspora buying up European property
  • But politicians ignoring people
  • No to Lisbon treaty
    • Annoyed European colleagues
and corruption
and corruption…
  • Tribunals of inquiry estimated cost €434m
  • Mostly in fees to the legal profession
  • Ongoing - Two took 12 years, one 7 years
  • Ignominious end to a number of political careers
  • Little outcome to date except national loss of innocence
society changed
Society changed…
  • Pluri-cultural and pluri-lingual
    • Many non-Irish immigrants
    • New religions and customs
  • New infrastructure
    • M50 ring motorway around Dublin
    • Significantly upgraded roads to the capital
  • Thriving urban entertainment culture
  • Conspicuous consumption
    • Temple Bar and Grafton Street
but growth caused strain
but growth caused strain…
  • Infrastructure inadequate
    • Long commutes
    • Traffic congestion
  • Health care system ‘third world’
  • Large class size in primary schools
  • Services price inflation
    • Professionals/ craftsmen
    • Restaurants/ coffee shops/ bars/ hotels
  • Increasingly stressful lifestyles
    • ‘Breakfast roll man’/ ‘Yummy mummy’
and more serious problems
and more serious problems…
  • Cost of living 20% above European average
        • Siptu, 2009
  • Labour cost increase
      • Beginning to lose national competitive advantage
  • Senior private/public salaries dramatic increase
      • Widening gap between haves and have-nots
  • Binge drinking - young/ cocaine - middle class
      • Development of hedonistic culture
  • Drug-related gangland wars
      • Development of urban underclass
and house price inflation
and house price inflation…
  • Average house price increased from €87,000 in 1996 to €300,000 in 2006 (CSO 2008:22)
  • Banks – relaxed mortgage requirements
    • from 3 x salary to 8 x salary
    • from 20 years to 25/ 30 years
    • 100% mortgages available
  • Two incomes, plus parents
  • Many sectors benefit from high prices
    • Developers, builders – windfall profits
    • Government – stamp duty
    • Estate agents, lawyers - fee % of price
then worldwide shock
Then worldwide shock…
  • Ireland is a small open economy
    • Susceptible to benefit/ suffer from worldwide changes
  • Interest rate increases
    • Increased cost of mortgages
  • Credit crunch
  • Recession in main trading partners UK/US
banks got into trouble
banks got into trouble…
  • Bank of Ireland predicts €6b losses on property loans over next three years
  • Government provides €3.5b to BoI & AIB
      • demanding cap on executive earnings
  • Anglo Irish Bank nationalised, scandals
      • €7b customer deposit - switched with another bank
      • CEO’s loans hidden from auditors
      • €451m Golden Circle customers/ shareholders

Source: Irish Times 12 Feb 2009

and bankers respond
and bankers respond…
  • BoI’s Goggin admits mistakes made, but
      • declined to apologise
      • “And I suppose that if I have a regret, my regret is that I didn’t see this coming and perhaps the lessons of economics were forgotten. Economics ultimately are cyclical
      • …Irish people in general, rather than just the banks, “all got carried away on the euphoria” of that prosperity”
  • AIB’s Sheehy less conciliatory
      • “bank remuneration…got out of control to some degree where there was too much reward for short-term gain.” “That clearly has to be changed, not only in Ireland but everywhere. . .remuneration has to be linked to long-term risk and risk taking”
flagship companies in trouble
flagship companies in trouble…
  • Waterford Wedgwood in receivership
  • Independent Newspapers share price tumbles
  • Ryanair letting go 200 staff in Dublin
    • Monthly airport passenger numbers down 9%
    • ‘Idiotic’ departure tax
      • “This Government must realise you can only promote tourism by welcoming visitors, not taxing them” - Michael O’Leary CEO Ryanair

Source: Irish Times, 12th Feb 2009

a changed economy
A changed economy…
  • Credit crisis and bailout of the banks
  • Consumer spending halted
  • 266k houses vacant (15% of stock 2006 census, cso)
  • Job losses - unemployment rises to 9% Jan 2009
  • Government revenue down 6.3% in 2008
      • €20b budget deficit
      • Cutbacks across entire public sector
        • Budget levy/ Pension levy (viewed as paycut)
        • Benefits reductions/ Remedial teaching…
      • Increased taxes: departure tax/ income tax?
and frightening bust
and frightening bust…
  • Retail sales for 2008 down 4.5%
  • January deflation first for 50 years
      • Inflation forecast at -3% for 2009
      • Mortgages, retail prices down
      • Wages and prices must drop 20% to restore competitiveness (Bloxham economist)
  • Contraction in economy of 6% forecast for 2009
  • Living standards to drop 10% over next years
  • ‘It’s a battle for financial survival. We have to keep working at it’
      • Brian Lenihan, Finance Minister

Sources: Irish Times 12/13/25 Feb 2009 RTE 17 Feb 2009

slide19

Average New House Price - Ireland

Source:http://www.globalpropertyguide.com/

real-estate-house-prices/I

Permanent TSB/ ESRI

Source: CSO Ireland

Source: Yahoo Finance

Source: Irish Stock Exchange

Annual Statistical Review 2008

hostile public reaction
hostile public reaction…
  • Breakup of the Partnership Agreement
        • Between government, employers and unions
        • Street protests by unions, students, Gardaí
        • Strikes by transport and public sector workers
  • Senior bankers stepping down
          • remuneration checked (AIB CEO 60% pay cut)
  • Government debt rating under threat
        • bank guarantee scheme may backfire
  • EU reaction
        • Ireland’s policymakers failed to maintain ‘prudent fiscal course’ during the boom
        • Government recovery plan: ‘lack of clarity’
        • Trichet optimistic, but hard decisions to be made
followed by collapse
followed by collapse…
  • Government bonds failed in capital market
  • Ireland downgraded by rating agencies
  • Bailout in November 2011 by EU/IMF/ECB
  • Leading to huge debt and tax burden
  • EU seen to protect European banks at expense of Irish taxpayer
  • Much emigration of young people to Australia, Canada, Britain
and slow recovery
and slow recovery…
  • Investment by social media companies
    • Google, Facebook, Paypal, eBay
  • Small but positive growth in the economy
  • Agricultural products sector growing
  • Exports growing
    • Software, pharmaceuticals, IT products, financial services
a retrospective view
A retrospective view…
  • Small economy
      • An absolute amount of investment provides big relative boost
      • downturn hurts disproportionately
  • Small society
      • Senior decision makers know each other
        • executives, bankers, developers, politicians, civil servants…
  • Fear that ‘Golden Circle’ still exists
      • Many senior bankers and developers remain
  • Public sector being scape-goated
      • But, except for senior staff, gained little during boom
  • Poor government blamed
      • FF satisfaction rating at historic low and its vote collapsed
and some theory
and some theory…
  • Compound/ exponential growth cannot continue indefinitely
  • Virtuous and vicious cycles spring from the same underlying system
    • Reinforcing feedback loops can lead to increase/ decrease
    • Change in parameter value changes system behaviour
  • Delay/lag leads to oscillation
slide25

Interest rate factor

Confidence

Credit availability factor

+

Expected value

+

R

-

+

+

-

Housing demand

B

House price

+

B

-

+

+

-

B

House construction

Housing stock

+

+

Desired housing stock

Population

+