Learning from Ireland
A few years ago a visitor to Ireland became lost when driving the back roads of Galway. Spotting a local farmer, he inquired: “Can you tell me how to get to Dublin?” To which the farmer replied, “If I wanted to go to Dublin, I wouldn’t start from here!”
The story is no doubt apocryphal, but let me take it as my theme in a week that we have celebrated St Patrick’s Day. Where do we wish to go, and what can we learn from Ireland?
Ireland and Australia are nations that stand at the periphery of their regions; one Europe, the other Asia. For long periods, they had little economic contact with other countries in their region. In Australia’s case because we traded with Europe and the United States; In Ireland’s experience because the economy was largely inward-looking and reliant upon domestic activity.
The Australian story is well-known, so let me briefly chronicle the Irish journey.
Encouraged by low taxes, and a young well-educated workforce, huge inward-investment from the US, combined with billions of dollars of EU development funds saw exports soar and growth double within a decade. The Celtic Tiger was born.
But rather than sufficiently invest the proceeds in long term infrastructure and capital growth, much of the profit was splashed on a housing boom, which leapt to almost 20 per cent of economic activity, and starved exporters of valuable resources.
Unfortunately Ireland is now paying the price. The housing bubble burst, the Anglo-Irish Bank collapsed and others were damaged, the national debt ballooned, and exports fell. Along with Greece, Spain, Portugal and Italy, Ireland now faces massive fiscal tightening and growing unemployment.
While there are welcome signs of export growth for Ireland, it is timely to recall that Japan is still slumbering, two decades after its construction boom ended, and which has been saved to date, like Singapore, only by its own savings.
Consider then that the White House budget projections indicate that the gross US federal debt will exceed 100 per cent of GDP in just two year’s time, and America would require a fiscal tightening of similar proportion to Ireland, Spain and Greece to restore fiscal stability over the next decade, and you can appreciate the challenges that the world faces in the coming years.
The experience may well be repeated in other countries, such as Britain and Japan, which, according to the IMF, require much greater fiscal adjustments as a proportion of GDP than Ireland and the Mediterranean countries.
Australia is not immune from these trends, despite the great wealth of our natural resources. Many suggest that, we too, have a housing bubble.
To adapt my story of the tourist and the farmer, this is not where you would prefer to begin to achieve economic prosperity.
While all of us wish the best for the Irish people, we can learn from the recent experiences of Ireland and other nations.
One lesson is that a measure of thrift, even if it slows consumption, leads to economic growth via capital accumulation. Ireland’s focus on bigger and better housing disguised the true state of its economy.
The second lesson is that if a nation does not encourage domestic savings, it will become increasingly reliant on the savings of others.
Thirdly, as European nations and the US are required to use their capital and savings for domestic purposes, Australia will become increasingly dependant on China for capital.
While this is offset by our resource exports, it will require careful national management, as Australians rightly are worried about high levels of state-controlled foreign investment
Finally, China has warned recently of the possibility of a further recession, which could impact significantly on Australia. If we waste the proceeds of the current export boom, we will not have a buffer when the next inevitable downturn occurs.