THE PUZZLING GROWTH OF IRELAND AND ITS

IBERIAN COUNTERPARTSAn analysis of The “Iberian tigers” versus the “Celtic Tiger”: Economic growth paths in an Economic History perspective

By Tiago Neves Sequeira

Alex BauerDavid Sundaram

Outline• Introduction

• Discussion of new production functions and growth models• What does convergence mean?

• Analysis of growth factors• Spain• Portugal• Ireland

• Conclusion• Overall effects

Fuente (1995)

Fuente & Vives (1997)

• Very similar to the previous convergence equation• We use ßy0 to specify convergence• We use ßait to specify the catch-up process• If technology is distributed across countries quickly, those technically

less advanced should grow faster• How do these models compare to those we’ve studied in class?

Convergence factors• The Catching-up process

• The adoption of foreign develop technology• Total factor productivity• Institutional changes

• Trade liberalization• Labor market and wage regulations

Spain• 30s: Catch-up resistance

• Spanish Civil War 33-39; led to dictatorship, destroyed infrastructure• Labor organization changes (Corporations)• Great Depression

• Protectionism (limtations to FDI through “Lei de nacionalizacao do Capital Industria Nacional”)

• Industrial conditioning• Slower Tech Progress• Incentivized new industry

• 40s: Catch-up Friction• UN diplomatic embargo (1946), not granted full UN membership• Currency depreciation making valuable imports scarce• Abandonment of autarky

Spain• 50s: Converging

• Acceleration of GDP growth starts• Joined IMF, World Bank (1958)• Sought help from USA in reducing inflation (Stabilization Plan)

(successful)

• 60s: Fast Convergence• 1961-1973 GDP per capita growth was 7.2%

Spain• 70s

• Transition to Democracy• Oil crisis• Labor markets became more rigid, workers’ rights increased,

unemployment increased• Expansionary monetary policy (seen as a negative within the

overall economic context)• Status as “converged”

Portugal• 30s: Protectionism

• Great Depression• Protectionism: High Tariffs, Barriers to entry (Acto Colonial), limitations to FDI• Lowering of interest rates to encourage domestic investment, expenditures

• 40s: Residual Protectionism, Infrastructure increases• Second World War

• Portugal was able to accumulate capital during this period due to and exports boom during the war

• After the war there was huge inflation due to supply restrictions (latent protectionism)

• Increases to the national infrastructure (Law for Development and Industrial Reorganization)

• Import Substitution Industrialization (financed publicly with government-owned commodities like gold)

Portugal• 50s: Convergence begins

• The 50s were defined by an environment of accelerating growth• Portugal joined the IMF, World Bank in 1958• Infrastructure increases, trade liberalization, and emigrants’

remittances all contributed to growth starting in the late 50s, though remittances began earlier

• 60s: Convergence accelerates• 1961-1973 GDP per capita growth was 7.0%

Portugal• 70s

• Transition to Democracy• Carnation Revolution of 1974 (nonviolent) from Estado Novo to the Third

Republic• Decolonialization, Immigration from the colonies created increased

pressure• Democratic transition resulted in increased social spending during this

period, which led to higher public debt• The labor structure became more rigid, which ultimately led to lower

wage rates (spot increase in N lowers short-term wages)• Status as “converged”

Ireland• Political regime/Institutions

• Democracy• Free labor unions• Centralized wage negotiation

• Country wide wages determined by unions’ federations and employers’ associations

• Wages grew higher than productivity levels• In all countries, the era in which the wage rate increased more slowly than the

productivity increase defined the high-growth periods

Ireland• 20s

• Democratic government• Gained independence from England• “Social traumas” associated with sovereignty

• 30’s: Protectionism• Great depression

• Protectionism • High Tariffs, Barriers to entry, • limitations to FDI (Manufactures Act)

• Industrial conditioning• Less competition• Less technological advancement

Ireland• 40s

• The beginning of trade liberalization• Anglo-Irish Commercial Agreement (1948)

• English market open to Irish agriculture• Proved unsuccessful and shifted back to protectionism for agriculture

• Keynesian social policies• High sustained investment lead to successful future growth

• 50s• Few structural changes• Large numbers of both skilled and unskilled emigrants

• 60s• Free trade agreement with England (1966)

• Increased exports• Increased FDI

Ireland• 70’s: The beginning of convergence

• Education reform (1970’s)• Pre-1970’s education system run by the church

• Humanities• Social sciences

• Early 1970’s: Technological non-tertiary education system• Human capital stock dominated by non-technical skills until after

education reform

Ireland: Reasons for Late Growth• Labor force and wages

• Inefficient institutions and Labor regulations drove up wages• Free labor unions• Centralized wage negotiation

• Decrease in labor productivity lead to divergence• High wage growth compared to low productivity growth• Net productivity: Productivity growth less wage growth

• Positive growth in labor productivity (1973) lead to convergence• Negative labor force growth rates and Labor share near 70% lead to

high elasticity of output to labor (response of GDP growth rates to the labor growth rates is high)

Growth Accounting• Convergence effects

• Abandonment of autarky• Removal of barriers to trade• Fostering of FDI • Adoption of more foreign-developed technology increases a nation’s

catch-up (convergence to most industrialized countries), transforms their own steady state

• Non-protectionist trade policy informs the periods of foremost growth in all three countries• Spain, Portugal in the 1960s• Ireland in the 1980s, 90s

Growth Accounting

Growth Accounting• Total factor productivity was most important in Ireland

Growth Accounting• Capital accumulation was most important for Iberian

countries

Conclusion• We notice large growth rates during periods when the

steady state of each country was expanded to get closer to that of the OECD average• This Catch-Up, as defined, was due more to trade liberalization

than any one other factor• New growth theory factors define the non-convergence

paths of each of the three countries (R&D, Human Capital)• Portugal and Spain prepared for the surge in growth due to

convergence by building capital (Inv/GDP)• In Ireland, the advancement of the institutional infrastructure set

the stage for longer-term, ultimately higher, convergence-based growth