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The puzzling growth of IRELAND And its Iberian counterparts

The puzzling growth of IRELAND And its Iberian counterparts. An analysis of The “Iberian tigers” versus the “Celtic Tiger”: Economic growth paths in an Economic History perspective By Tiago Neves Sequeira Alex Bauer David Sundaram. Outline. Introduction

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The puzzling growth of IRELAND And its Iberian counterparts

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  1. The puzzling growth of IRELAND And its Iberian counterparts An analysis of The “Iberian tigers” versus the “Celtic Tiger”: Economic growth paths in an Economic History perspective By Tiago NevesSequeira Alex Bauer David Sundaram

  2. Outline • Introduction • Discussion of new production functions and growth models • What does convergence mean? • Analysis of growth factors • Spain • Portugal • Ireland • Conclusion • Overall effects

  3. Fuente (1995)

  4. Fuente & Vives (1997) • Very similar to the previous convergence equation • We use ßy0 to specify convergence • We use ßait to specify the catch-up process • If technology is distributed across countries quickly, those technically less advanced should grow faster • How do these models compare to those we’ve studied in class?

  5. Convergence factors • The Catching-up process • The adoption of foreign develop technology • Total factor productivity • Institutional changes • Trade liberalization • Labor market and wage regulations

  6. Spain • 30s: Catch-up resistance • Spanish Civil War 33-39; led to dictatorship, destroyed infrastructure • Labor organization changes (Corporations) • Great Depression • Protectionism (limtations to FDI through “Lei de nacionalizacao do Capital IndustriaNacional”) • Industrial conditioning • Slower Tech Progress • Incentivized new industry • 40s: Catch-up Friction • UN diplomatic embargo (1946), not granted full UN membership • Currency depreciation making valuable imports scarce • Abandonment of autarky

  7. Spain • 50s: Converging • Acceleration of GDP growth starts • Joined IMF, World Bank (1958) • Sought help from USA in reducing inflation (Stabilization Plan) (successful) • 60s: Fast Convergence • 1961-1973 GDP per capita growth was 7.2%

  8. Spain • 70s • Transition to Democracy • Oil crisis • Labor markets became more rigid, workers’ rights increased, unemployment increased • Expansionary monetary policy (seen as a negative within the overall economic context) • Status as “converged”

  9. Portugal • 30s: Protectionism • Great Depression • Protectionism: High Tariffs, Barriers to entry (Acto Colonial), limitations to FDI • Lowering of interest rates to encourage domestic investment, expenditures • 40s: Residual Protectionism, Infrastructure increases • Second World War • Portugal was able to accumulate capital during this period due to and exports boom during the war • After the war there was huge inflation due to supply restrictions (latent protectionism) • Increases to the national infrastructure (Law for Development and Industrial Reorganization) • Import Substitution Industrialization (financed publicly with government-owned commodities like gold)

  10. Portugal • 50s: Convergence begins • The 50s were defined by an environment of accelerating growth • Portugal joined the IMF, World Bank in 1958 • Infrastructure increases, trade liberalization, and emigrants’ remittances all contributed to growth starting in the late 50s, though remittances began earlier • 60s: Convergence accelerates • 1961-1973 GDP per capita growth was 7.0%

  11. Portugal • 70s • Transition to Democracy • Carnation Revolution of 1974 (nonviolent) from Estado Novo to the Third Republic • Decolonialization, Immigration from the colonies created increased pressure • Democratic transition resulted in increased social spending during this period, which led to higher public debt • The labor structure became more rigid, which ultimately led to lower wage rates (spot increase in N lowers short-term wages) • Status as “converged”

  12. Ireland • Political regime/Institutions • Democracy • Free labor unions • Centralized wage negotiation • Country wide wages determined by unions’ federations and employers’ associations • Wages grew higher than productivity levels • In all countries, the era in which the wage rate increased more slowly than the productivity increase defined the high-growth periods

  13. Ireland • 20s • Democratic government • Gained independence from England • “Social traumas” associated with sovereignty • 30’s: Protectionism • Great depression • Protectionism • High Tariffs, Barriers to entry, • limitations to FDI (Manufactures Act) • Industrial conditioning • Less competition • Less technological advancement

  14. Ireland • 40s • The beginning of trade liberalization • Anglo-Irish Commercial Agreement (1948) • English market open to Irish agriculture • Proved unsuccessful and shifted back to protectionism for agriculture • Keynesian social policies • High sustained investment lead to successful future growth • 50s • Few structural changes • Large numbers of both skilled and unskilled emigrants • 60s • Free trade agreement with England (1966) • Increased exports • Increased FDI

  15. Ireland • 70’s: The beginning of convergence • Education reform (1970’s) • Pre-1970’s education system run by the church • Humanities • Social sciences • Early 1970’s: Technological non-tertiary education system • Human capital stock dominated by non-technical skills until after education reform

  16. Ireland: Reasons for Late Growth • Labor force and wages • Inefficient institutions and Labor regulations drove up wages • Free labor unions • Centralized wage negotiation • Decrease in labor productivity lead to divergence • High wage growth compared to low productivity growth • Net productivity: Productivity growth less wage growth • Positive growth in labor productivity (1973) lead to convergence • Negative labor force growth rates and Labor share near 70% lead to high elasticity of output to labor (response of GDP growth rates to the labor growth rates is high)

  17. Growth Accounting • Convergence effects • Abandonment of autarky • Removal of barriers to trade • Fostering of FDI • Adoption of more foreign-developed technology increases a nation’s catch-up (convergence to most industrialized countries), transforms their own steady state • Non-protectionist trade policy informs the periods of foremost growth in all three countries • Spain, Portugal in the 1960s • Ireland in the 1980s, 90s

  18. Growth Accounting

  19. Growth Accounting • Total factor productivity was most important in Ireland

  20. Growth Accounting • Capital accumulation was most important for Iberian countries

  21. Conclusion • We notice large growth rates during periods when the steady state of each country was expanded to get closer to that of the OECD average • This Catch-Up, as defined, was due more to trade liberalization than any one other factor • New growth theory factors define the non-convergence paths of each of the three countries (R&D, Human Capital) • Portugal and Spain prepared for the surge in growth due to convergence by building capital (Inv/GDP) • In Ireland, the advancement of the institutional infrastructure set the stage for longer-term, ultimately higher, convergence-based growth

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