Ireland has long been a poster boy of free-market capitalism. But that may no longer be so. As the global economic recession deepens, Ireland, much like Argentina and Mexico earlier before the Peso and Tequila crises disgraced them, is fast hurtling into an abyss from where escape will be long and hard.
Over the past quarter century, Ireland has reinvented itself in a spectacular manner by heavy investments in education and skill development, cuts in taxes, opened up the economy and cut tariffs, introduced flexible labour markets, deregulated financial markets, privatized public utilities and promoted Public Private Partnerships (PPP) and aggressively courted foreign investments. All this had catapulted Ireland to being the fourth richest economy among OECD nations. In many respects, Ireland had come to be considered as the alter ego of the American style of capitalism across the Atlantic.
However, all this appears to have come at a cost. The same excesses that have now become so evident, to disastrous effect, in the US economy as a severe recession takes hold is afflicting the Irish economy too. The "Irish disease" is characterized by the same equity markets, real estate bubbles and reckless bank lending to private developers that have decimated the domestic financial market. The economic recession started earlier and its bite has been deeper. Housing prices have fallen by as much as 50% and bank shares have plummeted by more than 90%, while unemployment is approaching 10%. NYT has this excellent account of the "Irish disease".
The graphic below captures the full story accurately.
None of these events will take away from the fact that Ireland has grown from being one of the weakest economies in Europe to being the most vibrant economy in the continent, spectacularly improving the living standards of its citizens. But the recent events also show that there are very serious costs associated with the type of un-frettered play of markets that the Irish Government had permitted to hold sway for the past two decades.