Economist Writing Every Day

Poor Ireland. Long oppressed by the Brits. Losing 25% of their population in the Great Famine due to both deaths and emigration. Today, there are possibly 10 times as many Irish Americans as there are residents of Ireland. There are as many Irish Canadians as there are residents of Ireland.

Poor Ireland.

And indeed, Ireland used to be literally very poor, at least in an economic sense. In 1960, their GDP per capita was about half of the United Kingdom. As recently as 1990, they were still only at about 70% of the United Kingdom and the rest of Western Europe. That’s all according to the latest Maddison database figures, which are probably as close to accurate as we can find. But after 1990, we probably shouldn’t use those figures, for reasons peculiar to Ireland.

Today? Ireland is much wealthier. But how much wealthier? It’s tricky. Ireland’s GDP is inflated significantly due to a lot of foreign investment. And possibly some tax evasion/avoidance. You see, Ireland is a tax haven. It has one of the lowest corporate tax rates in the world. That means we have to interpret the data with care, but only because it is such a great place to invest.

So where exactly does Ireland rank in well-being, if we use a reasonable measure of individual income? It’s hard to say. If we use Ireland’s unique “modified GNI per capita” measure, Ireland is still the 8th richest in the European Union. Or if we want to make the worst case scenario, we can use “actual individual consumption,” which puts Ireland right at about the EU average (95%, but PPP adjustments are tough so let’s say right at the average). That’s certainly on the low end for Western Europe, but even using this worst-case measure, Ireland’s consumption is around 85% of the UK or the non-oil Nordics. That’s pretty good.

So what caused Ireland’s relative improvement, even if we can acknowledge they aren’t the 4th richest place in the world, as GDP would seem to indicate? That’s the natural question to ask. And there are many theories which try to explain the “Celtic Tiger.” Answering it world take more than a blog post, but I’ll offer a few thoughts.

The low corporate tax rate is one possibility. At 12.5%, it’s the lowest in Western Europe, and half of the OECD average. Not only does this make Ireland a large tax haven and distort their GDP figures, it does have real benefits for the country. Others have suggested industrial policy as a major cause.

Here is my best guess: Ireland is ranked as the 10th most free economy in the world. It has not always been so. According to the Fraser Institute, Ireland’s economic freedom score has increased from about 6.5 in the 1970s to over 8.0 today (that’s out of 10). And what parts of economic freedom have increased the most? It appears to not be taxes, but rather freedom to trade internationally.

For example, Ireland’s mean tariff rate was 9.4% in 1975, which gradually declined to 2.4% in 2000 (it’s come up again since then to around 5%, but still much more open than in the 1970s). And Ireland’s “financial openness” score, or restrictions on foreign investment, has also increased dramatically: from a score of 2.5 in the 1970s to a perfect 10 today. Much of this openness to foreign trade and investment is certainly due to join the European Economic Community and later the European Union, opening Ireland up not only to Europe but the rest of the world.

So as you raise a toast to the Irish and Irish Americans today, be sure to also raise a toast to international trade and confusing measures of economic well being!