Last Friday Eurostat released the 2004 data on comparative per capita PPP’s (purchasing power parities) across the EU. Perhaps the most surprising fact which emerges is that Ireland is now in second place (after Luzembourg) with a PPP 40% above the EU average. For a country that not so long ago was considered one of the ‘poorer’ EU members this is truly stunning.
It is generally well known that Ireland had (and continues to have) one of the highest fertility and population growth rates in the EU, but this has not been regarded as especially important since conventional neo-clasical growth theory (and the new ‘super-duper’endogenous growth theory for that matter) argue that increased population means a bigger economy, but not necessarily an increase in per capita income. However, as I said yesterday, it’s all about population structure. What we are now understanding is that the right age structure can produce very rapid increases in per capita income, and Ireland is, of course, a good case in point.
In the case of the ‘Celtic Tiger’, New Economic Paradigm theorists David Bloom and David Canning, who have made a specific study of the Irish case, reached the following conclusions:
“Ireland has been slow to complete the demographic transition. The death rate in Ireland, which drifted down only slightly during the period 1950-2000, has been relatively low by international standards……and comparable to the rest of Europe. By contrast, the birth rate was much higher through the early 1980s (over 20 per thousand). Indeed, Ireland has long been seen as a demographic outlier within Europe, since its fertility rate was still moderately high when those in other European countries had fallen to near, or below, replacement level………….”
“In the aftermath of societal and legal changes regarding contraception, the decline in fertility rates in Ireland accelerated after 1979 and the crude birth rate fell sharply during the 1980?s, from 21.0 per thousand to 14.2 per thousand. To some extent Ireland represents a ?natural experiment? in which the legalization of contraception catalyzed a large demographic change, independent of economic activity rates.”
“Ireland?s rapidly falling birth rate led to falling youth dependency and a higher share of working age people……..It is clear…. in Ireland mirrored that in East Asia through the mid-1970s. At that point, East Asia?s fertility transition, which had begun in the mid-1960s, was well underway and its dependency burden was falling sharply. By contrast, Ireland?s dependency burden shows signs of sharp decline by the latter portion of the 1980s, as a consequence of a declining birth rate during the 1980s. By the mid-1990s the dependency burden in Ireland had dropped to a level below that in the United Kingdom.”
“From 1960 to 1990, the growth rate of income per capita in Ireland was approximately 3.5 percent per annum. In the 1990s, the growth rate jumped to 5.8 percent, which is well in excess of any other European economy, thereby giving rise to the notion of the ?Celtic Tiger.? This boost in the growth rate coincides closely with the falling dependency rate in Ireland. Thus, the raw data are consistent with the view that demographic change contributed to Ireland?s economic surge in the 1990s. Bloom and Canning (Bloom D, Canning D Contraception and the Celtic tiger. Economic and Social Review, 34(3):229-247.) examine this argument more closely and argue that the economic boom that occurred in Ireland in the 1990s is well predicted by estimates of a model similar to that shown (here). As part of their analysis, they also show that the growth in the working age to total population ratio was matched by an increase in labor supply per capita.”
“Economic growth in Ireland was also fueled by two additional demography based factors that increased labor supply per capita. While male labor force participation rates remained fairly static, the period 1980?2000 saw a substantial increase in female labor force participation rates, particularly in the 25-40 year old age group. While one would expect rapid economic growth to encourage female labor participation, it seems likely that at least some of the increase was due to the availability of contraception and women?s increased freedom to choose between working and rearing children. In addition, Ireland has historically had high levels of outward migration of young adults (around 1 percent of the population per year) due to the inability of its economy to absorb the large inflows of young workers created by its high fertility rate. The loss of these young workers of course exacerbated the problem of the high youth dependency rate. The decline in youth cohort sizes and rapid economic growth of the 1990s led to a reversal of this flow, resulting in net in-migration of workers, made up partly of return migrants but also for the first time of substantial numbers of foreign migrants.“