Europe’s ‘Tiger’

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.

22 thoughts on “Europe’s ‘Tiger’

  1. Interesting post.

    as an irishman who benifited greatly from the tiger its interesting, but hardly new. its pretty much government propaganda now about how many extra peoeple are at work here compared to 10 years ago. 1 million vs 1.8 million i think. the rise in the PPP is obvious compared lets say to the asian tiger (who was based more on sweatshops, ie cheap industrial labour). the rise in the workforce was also matched by a rise in the quality of the work available (high pay vs low pay).

    however im sceptical on the statistics releating to the PPP. an observed effect of the celtic boom was runaway inflation, added to the euro switch over (ie excuse to raise prices) has ment we are now one of the most expensive countries in europe (if not most).

    imo the people who benifited most were those already on the property ladder (i dont know if u know but the irish have one of the worlds highest homeownerships percentages), already working and if we consider Familys as the lowest unit of worker, then many could also pack the wife off to work aswell.

    however for those of us in the demographic that the report talks about we have seen benifits, but the PPP does not reflect the reality that we live in.

  2. Thank you Oscar this is useful.

    “but the PPP does not reflect the reality that we live in.”

    I was wondering about this. You are much better off, but that much?

    “imo the people who benifited most were those already on the property ladder (i dont know if u know but the irish have one of the worlds highest homeownerships percentages),”

    I think you are hitting on part of the issue here. The ‘net worth’ of the population has risen, as property values have risen, and the proportion of home owners has gone up. (Incidentally another aspect of the demographic structure thing is the rate of new household formation, and again this feeds the construction boom).

    All this home ownership doesn’t directly impact on per capita GDP, but it does influence how much people are prepared to borrow and then spend, and this of course does.

    “an observed effect of the celtic boom was runaway inflation”

    Yes, this is clearly a problem, and can turn a virtuous circle into a vicious one at some stage. This inflation, with ECB rates at 2% is partly what fuels your homeownership boom. You really need significantly higher interest rates.

    “many extra people are at work here compared to 10 years ago”

    Yes, but the point is that it is the extra people working *as a proportion* of total population which drives the per-capita income growth. This is the part that tends to get overlooked.

  3. A helpful and illuminating recent brief posted from Ireland on EU member state contributions to the EU budget:

    Another brief, also from Ireland, reminds us that, “Despite being one of the richest countries of the European Union, Ireland will continue to receive significant amounts of what can be termed ‘Foreign Aid,’ until 2007.”

    This second brief includes a chart showing how Ireland attracted more cash income from the EU per head of population than any other EU member state.

    “Only four countries benefited from EU money in 2003 – Portugal, Greece, Ireland and Spain – while the rest were net contributors. In terms of cash per head, the funding amounted to a net receipt of ?391.70 for each Irish national. At the other of the scale, Dutch, Luxembourg and German nationals pay ?120, ?125 and ?92.7 respectively, while each Briton pays ?46.50.”

    A table reports that in 2003 – the latest year for which figures are shown here – Ireland made a net receipt of ? 1,563.3 millions, equivalent to 1.4% of Ireland’s GDP.

  4. “it?s [gdp growth] all about population structure. What we are now understanding is that the right age structure can produce very rapid increases in per capita income”

    I hope you’re not advocating Logans Run as the way to keep the population structure constant, by using an age based “cut-off”?

  5. Extremely interesting. A few quick thoughts. Remember this is GDP not GNP. A big chunk of Irish GDP is profits of multinationals. From these figures it looks close to 20 percent. The demographic story is tempting but it can’t do everything. Labour supply was already high in the 1980s — that’s why emigration was so high in the first place. I can see how it would be sustaining, but it’s more difficult to see it as triggering — indeed the huge unemployment benefits that the state was trying to pay in the 1980s was part of the bad fiscal dynamics. Finally, we know from 1847 and current low income country experience that big labour supply growth alone is not enough.

  6. “The demographic story is tempting but it can’t do everything.”

    No, I don’t claim it can, I’m not a reductionist. There are obviously other factors, these are the ones normally mentioned by economists, getting the institutional structure right etc. And there are the accidental ones of timing of eg the IT boom.

    “Finally, we know from 1847 and current low income country experience that big labour supply growth alone is not enough.”

    No, this is clear, the interesting thing is what is different. Age structure in some ways determines saving. I recommend reading the entire paper.And this one from Harvard economic historian (another of this group of economists) Jeffrey Williamson:

    See also the Italy Ageing and Saving post, and the McKinsey report mentioned for the demographic downside. Basically it is something to do with the shape of the pyramid, there is a critical moment. The details aren’t cracked yet, but they will be.

    “I hope you’re not advocating Logans Run”

    Who me :). Nor am I in favour of ‘Soylent Green’.

    But I do fear that this issue could become one of the programmatic corner stones of a future right-wing populist movement.

  7. But I do fear that this issue could become one of the programmatic corner stones of a future right-wing populist movement.

    I’d be mildly surprised. The obvious next question is “so what are you going to do about it?” And, well. Historically, pro-natalist policies that are acceptable to modern liberal democracies have not worked very well.

    More generally, “You must have more babies!” does not seem like a sure-fire vote getter with a certain 50% of the electorate.

    Note that there are countries with demographics /much/ less favorable than Ireland, who have nonetheless sustained decent economic growth in recent years. Pretty much all the countries of Eastern Europe went through the demographic transition between 1955 and 1980. Many of them have more 55 year olds than 25 year olds. But several have clocked up good growth nonetheless. Whether this is sustainable is a separate question, but it’s worth noting.

    Doug M.

  8. “But several have clocked up good growth nonetheless. Whether this is sustainable is a separate question, but it’s worth noting.”

    Again, I’d say I’m not claiming it’s the only factor. The problem is Doug, Central Europe from this point of view is a problem waiting to happen. The demography is very, very bad. At present they can grow because of the price differential with the rest of the EU – which for example the old ddr, which might be instructive in this regard, can’t, but as they need to move up the value chain they are going to be stuck for bottom end labour, unless that is, they import labour from Ukraine and Russia, and all points East (and this only passes the problem on of course).

    This was where I got into the issue of Bulgarian immigrants, from the demographic profile Bulgaria shouldn’t have emigrants, but inward migrants.

    Maybe Hungary or the Czech republic could follow the Singapore model (Singapore is planning to have an active immigration policy to build population) but Poland???

    The baltic states could accept a lot of people from Russia, but somehow I don’t think they want to.

    On ‘Logans run’, I’d be thinking of some Dr Strangelove type IVF or genetically engineered post modern authoritarianism stuff. The Boys from Brazil, you know.

  9. “A big chunk of Irish GDP is profits of multinationals”

    I think this is one of the weaknesses of the model you have applied in Ireland. You obviously need to build your own MNC’s and start outsourcing yourselves – to Central Europe or China – but maybe you haven’t been able to create them. The develoment plan needs a strategic component. The Asian tigers always realised this, and now look at China. (Although maybe you are more like Spore come to think of it, maybe you can leverage the MNC’s. I’m not sure. Something to think about :) ).

  10. Edward’s most recent comment gets to a core issue of the Republic’s MNC-led growth strategy: what has the domestic economy gained from it? Clearly it has gained wages and tax revenue, but the technological spillovers are harder to see. There are few successful companies that genuinely appear to use local capacity, e.g. Elan, but of course that’s a bad example at the moment with Elan’s MS drug problems.

    My own jaundiced view is that the government has blown it, there’s been no attempt to build a self-sustaining tech centre in the country. The classic example is the much-hyped attraction of the MIT Media Lab to put their European operation in Dublin, and then the government put it in a tourist area, away from where the synergies with universities and other tech firms could have developed. So it collapsed. Money has been sloshed around to firms and colleges, but with no real sense of how a productivity network could emerge from it all. Thus the risk is that country remains a tax-shelter for tech assembly operations until a better shelter comes along, although the demographic considerations that got this thread started may at least help with retaining some of those footloose firms.

  11. According to an advert placed in the FT last weekend by the Polish government half the population are under 35. Check the back page of the second section of the Weekend FT.

    Ireland has had a lot of FDI from Irish Americans in the past decade or so, then there was the creation an offshore financial centre in Dublin – I’m sure these factors have helped.

  12. But isn’t cheaper to offshore to India (and when the Euro rises again) homeshoring

  13. just for info

    Ireland lost Cohesion fund money from the EU from 2004 onwards (about 60 million a year) because they are now too rich to qualify

  14. Edward says:” You obviously need to build your own MNC’s and start outsourcing yourselves – to Central Europe or China – but maybe you haven’t been able to create them”

    Interestingly there have been significant capital outflows from Ireland in recent years. These have however mostly been in the form of property investment abroad. In part this represents Irish people taking a bet that CEECs will replicate Irelands performance in the EU and consequently will reap the dividend through capital appreciation (and enhanced rental values). The question is as to whether this is a sound strategy.

  15. “been in the form of property investment abroad.”

    Chalets in Bulgaria :)

    “The question is as to whether this is a sound strategy.”

    I really don’t know. It will depend on the relative currency and price movements.

  16. “by the Polish government half the population are under 35″

    Well this seems to be false I’m afraid. Detailed info are available eg at the UN, but this rough and ready Yahoo listing will do our present purposes:

    38,622,660 (July 2003)

    Age structure:
    0-14 years: 17.5% (male:3,458,844; female:3,284,995)
    15-64 years: 69.8% (male:13,407,012; female:13,547,728)
    65 years and over: 12.7% (male:1,879,445; female:3,044,636)

    Population growth rate:
    0 % (2003 est.)

    Now what the zero means is that since people are living longer, and the fertility rate (same page) is 1.3, the population is ageing and not replacing itself, with dwindling of the pyramid at the bottom.

    Now lets do some back of the envelope arithmetic.

    15- 64 (thats 50 years) 69.8%. Assuming even distribution that is 1.396% a year. Times 20 (15 -35) that is 27.92%. Plus 0-15 17.5% gives a grand total of 45.42%.

    Now if we go to this page:

    We will see that the boom cohort born during the postwar upswing ranged in age from thirty-five to forty-four in 1990, or 50 -59 in 2005. So this mean there is a much bigger weighting in the upper part of the working age population, which you would expect given the demographic profile.

    Bottom line: under thirty five is a maximum of 40% and it just goes to prove you shouldn’t believe everything you read in the papers :).

  17. Um. The Polish government says half their population is under 35, and you say that can’t be right because _if you assume an even distribution_ of the 15- 64 age group, you get 45%. The major assumption you made gives you an error margin of at least 5%.

    Now, the distribution could be uneven in either direction, of course. But the country studies page you linked to says that in 1991, 30% of the population was under 18, so – just going by those two sources – the 50% under 35 figure does not seem unlikely.

  18. Edward,

    You may well be correct. It isn’t just the newspapers, the following statement is made by the Polish government’s Information and Foreign Investment Agency –

    {{{- Poles are one of Europe?s youngest societies (half of the nation is below the age of 35). The country also holds the second place in Europe in terms of the number of students. – }}}
    From Invest in Poland @

    also from the same source @ Invest in Poland – People

    {{ – 50% of the Polish society is under the age of 34 years and 35% is under 25 years of age. – }}

    They claim to have 7 million aged 15 or under but …. the best is to come …… “The high unemployment rate, which reached 20% at the end of 2003, has a positive impact on the availability of labour for foreign companies and makes it easy for investors to find the right employees.”

    Well I suppose that’s one way of looking at it. :)

  19. “the distribution could be uneven in either direction, of course”

    Yes, except that the bulge generation is up at the top, in the 50-60 range, the pyramid has inverted in Poland. Fertility 1.3. Of course there are mini bulges, but still.

    30% of the population was under 18 in 1991. That is 14 years ago. So we know that now 30% is between 14 and 32. We also know that 0-15 now is 17.5%. So that does give us a little under 47.5% under 32 (there is a one year overlap). Hmm, it is just possible I suppose. But this means a very peculiar and irregular ‘pyramid’. I mean the change between the numbers under 15 in 1991 and 2005 is startling. Interesting.

    I suppose the lesson here is that instead of doing all these fancy calculations it would be better just to locate the appropriate table :).

  20. “You may well be correct.”

    No, I concede defeat. I just found the tables. Anyone else foolish enough to get interested in this should go here:

    the relevant bits are the first two tables. Actually the one thing they don’t give is a breakdown of 0-35. Very canny. But making some rough numbers from what they do publish: I accept and retract.

    Now the interesting thing is the second table:

    Size of population, vital statistics and migration in 1946-2003.

    Look in the live births column. From 1950 to 1967 this is faling. Then from 1967 to 1983 it rise in absolute terms (not as a proportion) then after 1983 it crashes. So the correct interpretation would be that Poland is one of Europe’s youngest, but most rapidly ageing societies. I’ll buy that description, but they only put the first half in the ad.

    And remember, we got into all of this because I wanted to suggest that Poland was short of children, and would need immigrants, but from where? I still stand by that.

    Interesting, the things you learn by blogging :).

  21. OK I’m also looking at the UN 2002 world population revision tables:

    This is a huge file, and definitely only for the population freaks. Now Poland has a statistical population decline rate of -0.14% per annum between now and 2025, and then a rate of -0.49% per annum 2025 – 2050 according to the medium variant. To get an idea of this, Portugal which is one of the rapid agers in WE has a rate of -0.07, and -0.34 for the comparative periods.

    Poland comes in tenth place of countries set to lose population in the next 50 years. Russia is first, Ukraine second, Bulgaria third and Italy fourth.

    Having said all this, I want to make clear I am only trying to analyse what is happening, and possibly challenge some misleading information, it is certainly not my intention to be critical of Poland, or its citizens. I am worried for them, but I wish them well.

  22. If 50% of the population is under 35, then the birth rate over the next few years has a lot of potential to rise. I’m not saying it definitely will, but the potential is obviously there.