- Origin and Significance of Small Open Economy
Small open economies such as Ireland’s are heavily dependent on international markets therefore influenced by global markets. Financial fortunes of these economies largely rely on the success of external markets. This implies to the fact that, such an economy has to establish strong relationships with other states both in the Union and outside. Prior to joining the EU, Ireland’s economy was dependent on agriculture. However, since its admission to the union in 1973, the economy has grown in a tremendous way including the expansion to sectors including financial. Further, Ireland’s economic power has intensified subject to the foreign direct investment by outsiders in the country (Ng & Feng, 2016).
The formation of the European Union saw the expansion of the economies of member states through increased cooperation and partnership among countries. Ireland as a small country benefited a lot from this partnership hence moving to a modern and free market economy. Further, with the EU’s single market policy alongside adoption of low corporate taxes, Ireland’s competitive advantage abroad was boosted immensely. However, small open economies like Ireland’s are more vulnerable to global factors as this economy heavily depends on other economies. For instance, Ireland’s strongest economic growth period that occurred between the mid 90’s and mid 2000s was followed by a dramatic crash. The crash had been sparked and fueled by the 2008-2009 global financial crisis (Darvas & Simon, 2015).
The Irish government on the other hand took a fast action to mend the damage by seeking financial assistance from the European Central Bank as well as the International Monetary Fund. The Irish economy meltdown subsequent to the rising series of banking scandals and a property bubble that reached its tipping point in the mid ‘00s. More importantly, the Irish Stock Exchange general index that registered a high of 10,000 points by April 2007, but within no time the points fell to below 1987 points leading to the government admitting that the country was headed to a recession. Idealistically, Ireland became the first country in the Eurozone to face recession with the rate of unemployment rising from 6.5% to about 14%. However, the recession attracted demonstrations on the streets of Dublin by 2009 as well as a series of industrial action and protests. The Irish economy made a recovery mainly because of wage adjustment that brought the cost of domestic labor down and competitive and gradual deleveraging of public and private sector balance sheets. Last but least, the Irish government undertook to bail out the banks by guaranteeing all banks, loans as well as deposits (Keane, 2015).
- Competitiveness as A Policy Objective
The cost of living in Ireland is reasonably manageable when compared to other cities in the world thanks to the recovery process that the Irish government has put in place. The recovery process has bestowed Ireland with competitive wages, low rates of inflation, improving consumer demand, and strengthened balance sheets as well as reduced housing costs. However, the economy very much needs the government’s intervention in improving the lending ability of the banks and hence the growth of money. The ECB interest rate is considered very low and thus bad for a robust growing economy like Ireland’s hence requiring some increase to suit the economy’s needs (Ng & Feng, 2016).
The financial crisis of 2007-08 took a great toll on Ireland’s labor market with unemployment rates hitting a high of 15% by 2012. However, the positive thing is that the country has witnessed numerous reforms and efforts that are focused on salvaging the economy. Today, the levels of unemployment have fallen significantly to below 8%. Employment creation remains at the heart of Ireland’s economic growth and social policy formulation. The positive statistics are credited to extensive and elaborate program by the government to restore competitiveness. In a bid to restore competitiveness, the government should in that case work on putting forward policies that address the supply and demand side deficiencies (Darvas & Simon, 2015).
The Irish government has further put in place measures to support the small and medium enterprises so that more job are created. The government acknowledges that this sector contributes a majority (40%) of the total employment opportunities in the economy. the SMEs are empowered through increasing their access to finance to support their bid to develop and expand. As part of the National Entrepreneurship Strategy, female entrepreneurs remain at the forefront of the government’s affirmative action. Besides improving access to finance, businesses and corporations are encouraged to take up winning new technologies that add value to the organizations (Keane, 2015).
The government alongside private investors have to come up with complementary polices that will boost research and development, innovation, and boosting skills in a bid to improve productivity. Investment in scientific research will surely position the Irish economy in a competitive level when compared with other nations. Sustainable employment can only accrue from a stable economy, an economy powered by strong innovations. In that regard, there is need to invest in improved expertise in wider markets through smaller and medium enterprises. The Irish government targets or projects to create at least 200,000 additional jobs by 2020. However, this is inclusive of at least 135,000 posts outside Dublin (Hazelkorn, 2014).
Shortage of skills in various sectors of the economy limit the competitiveness of the Irish economy as well as employment ability of the population. Therefore, there have to be measures and initiatives that will ensure a balanced as well as equitable job growth. In essence, skill shortage has been predominant in health, ICT, and financial services sectors noting that these are important pillars in the growth of a country’s competitiveness. Training, education, and enterprises linkage have to be appropriately adjusted to reduce unnecessary friction. Appropriate policies should be formulated to facilitate smooth skill advancement both in mid-level and tertiary education for those already in the job market. It is notable to report that these steps have worked and will work for the betterment of the Irish economy. For instance, since the near-trough of 2012, at least 160,000 employment opportunities have since been created. In fact, more than half of all the jobs that were lost during the financial crisis have been fully replaced (Ng & Feng, 2016).
Some of the supply side measures to achieve full employment entail attempts to reduce the natural rate of unemployment. In that regard, structural unemployment can be reduced through improving the skills of workers. Additionally, the government through policy formulation can reduce barriers to the hiring and recruitment of new employees hence increasing the labor market’s flexibility. However, increased market flexibility can lead to job insecurity therefore lead to the rise in part-time temporary jobs but in overall reduced unemployment rates. As much as zero unemployment remains the first priority of any administration, there is need for close examination of all the policies put forward to address the problem (Darvas & Simon, 2015).
- Rationale for Levels of Government Intervention in A Small Open Economy
The government’s intervention in the economy has a very huge impact in the advancement of the growth agenda. A small open economy is effectively defined as one who actions insignificant of influencing the worlds interest rate. Government intervention in the economy remains a contentious topic of discussion as majority of the economists argue against and for. However, those opposed to the idea of government involvement in business argue that this involvement can lead to inefficient allocation of resources. However, those pro intervention advice that there are several issues that are too sensitive to be left in the hands of the private sector. The open economy just like the closed economy deserves some form of government intervention. For instance, when the government or state gets involved in the economy, it brings about greater equality in the redistribution of income and resources to all sectors of the economy.
The government approached the International Monetary Fund for an 85 billion euros financial assistance program to bring the country’s financial sector. Also in an attempt to stabilize the economy of the Euro zone, the Irish government entered into a collaboration with other members of the Union increase tax. Prior to the government’s intervention, the Republic of Ireland’s unemployment rates had reached a high of 15% by 2012, the highest in the country. However, with the government’s policies in place, the rate of unemployment has significantly fallen below 8% as of 2017 statistics. More than 160,000 new jobs were created since 2012 to 2017 courtesy of the government stepping in to bail out the major banks as well as guaranteeing loans and savings. The Irish government has further participated in the improvement of employment capacity by spearheading reforms in Further Education and Training sector to ensure enhanced evaluation programs with a closer focus on increased performance as well as positive outcomes (Keane, 2015).
Also, the government possesses the legislative capability and power to enact policies that can either affect the economy positively or negatively. In a bid to ensuring long-term sustainability of employment, the government ensures there is provision of adequate infrastructural development. For instance, the Irish government has committed over 42 billion Euros towards the building of basic infrastructure spanning from 2016 all the way to 2021. The government has further realized that SMEs occupy a central position creating sustainable employment opportunities (Baturo & Arlow, 2017).
The government comes in when it perceives a market failure that is often caused by failure of private businesses to recognize externalities that would not produce public merit. For instance, since the Irish economy is small and heavily depends on the performance of other big economies and global factors, the banks and investment institutions made a property burble out of the property market. The burble was about to burst by the time the 2007-08 financial crisis set in. rising interest rates globally affected the loan repayment abilities of Irish citizens causing a subsequent collapse of the financial sector. However, the government’s intervention in terms of guaranteeing and bailing out large banks positively contributed to the revival of the Republic of Ireland’s economy to where it used to be in the 90s and early ‘000s.
- Government Policy Response
State intervention can also take the shape of macroeconomic intervention especially in terms of deep recessions. A sharp decline in the private sector spending as well as investment can seriously lead to lower economic growth. Additionally, if the state were to cut their level of spending, there will be a huge fall in economic expansion due to a collapse in confidence by investors. Sometimes, during deep recession periods, the state can always borrow from the private as well as other institutions to spend the funds in unemployed resources. For instance, the Irish government sought the intervention of the International Monetary Fund and the European Central Bank during the 2007-08 financial crisis.
When large industries and companies collapse or threatened to go out of business, there is a possibility of regional or national unemployment rates going up. Additionally, the likelihood of market failure occurring is high since there is increased difficulty in finding new employment opportunities. Ireland’s unemployment rate rose significantly as a result of declining and collapse of major banks, financial organizations and companies in different other sectors. However, during such times, the intervention of the state becomes critical. The state therefore intervenes through reviving and saving declining industries. The Republic of Ireland government undertook to invest in the revamping of large banks that had been affected by the crisis to restore investors’ confidence in the institutions. The government has further invested at least 42 billion Euros towards the improvement of basic infrastructure in a bid to attract and boot foreign direct investment (Darvas & Simon, 2015).
Government’s policy response
The Ireland 2008 financial crisis is claimed to have emanated from an uncontrolled real estate bubble that had been built over the years. The financial system was also so much exposed to the property market thus when the collapse occurred, it caused an immediate and severe impact on all aspects of the economy. The economy recovery and reform that began in 2009 involved a serious fiscal adjustment and has continued to date. The severity of the crisis was actually realized in late 2008 therefore to deal with the problem, rapid measures had to be taken. However, since the crisis had taken root, the measures undertaken did not produce immediate results (Baturo & Arlow, 2017).
The government responded however by bringing its borrowing to below three percent by 2015 before approaching the Troika for assistance. Adjustment program initiated in early 2010 took at least four years to produce tangible results. In fact, the adjustment plan by the Irish government was eventually accepted by the Troika and implemented in full without significant changes made on it. Besides adjustment in the borrowings made by the government, the Irish administration also responded by cutting expenditure as well as increasing taxation. In that regard, the government introduced cuts in the public sector pay as well as on welfare benefits to help achieve its ambition of restoring the economy to normality (Keane, 2015).
A practical example of reducing deficits policy can be observed from the Spanish government’s efforts. The outgoing Spanish government had set the bar too high for the incoming administration to attain forcing it to adjust. In fact, failure to meet this ambitious plan and targets, investors lost confidence in the financial markets as well as the ability of the Spanish government to deliver causing the Spanish bond yields rising above comparable Ireland bonds. The Irish government’s main point of success arose from under promising but over delivering to gain the confidence of investors (Baturo & Arlow, 2017).
Majority of the Irish banks were domestically owned meaning that they had a large bulk of their assets and investment in the country. Therefore, whenever there is a collapse in the domestic market, definitely the whole financial system collapses. This is exactly what occurred in the case of Ireland’s 2008 financial crisis. Additionally, there is an important lesson that can be drawn from this account; having banks that are fully domestically owned can be very costly to the economy. In tackling the banking crisis, the Irish authorities had to over-capitalize the financial sector to protect the banks from failing.
In the course of solving the Ireland crisis, the sovereign came under immense pressure to source for funds in order to meet the financial needs of the big banks. Therefore, the Irish authorities had to seek the intervention of other EU partners as well as the International Monetary Fund.
- Principle Factors Affecting Economic Growth
Economic growth of any economy is directly related and associated with the percentage of increase in gross national products attained. More importantly, economic growth arises from an increase in per capita income. Additionally, economic growth is considered to have taken place when the increase in population exceeds total output. There are therefore several principle factors that can affect the economic growth of any country, namely human resources, natural resources, capital formation, technological development, and social factors (Hazelkorn, 2014).
The quantity and quality of human resources have both a direct and indirect impact on the growth of an economy of a country. The quality is usually dependent on the level of education, training, creative abilities, and skills. It therefore accrues that if the human resource of a nation is highly skilled and trained, the output will obviously be of superb quality. Whenever there is a shortage of skills, the growth of an economy is largely hampered and affected. For instance, the Irish authorities have over the past embarked on investing tertiary learning institutions to increase the capacity to dispense the much needed skills to increase the viability of the Irish labor force (Keane, 2015).
Capital formation is also another critical principle factor that can influence economic growth of any country. In that regard, the basic infrastructural developments have to be put in place to ensure that the local industries in the country benefit from improved transport, banking, and communication networks. The Irish authorities committed at least 42 billion Euros in the 2016-2021 strategic plan towards infrastructural development in a bid to ensure that it becomes attractive to external and internal investors (Hazelkorn, 2014).
Technological development is also another crucial factor in determining economic growth of an economy. Technology is therefore effectively defined as the application of scientific techniques in business processes. Technological development thus assists countries and organizations to allocate scarce resources to various sectors of the economy. Additionally, income redistribution to various sects increases the chances of the economy growing at rates that match global standards. For instance, the Ireland labor market is characterized as one that is elastic as compared to other EU countries. However, this fact is soon changing due to various dynamics such as immigration and emigration.
Courtesy of the Irish authorities’ efforts in addressing the crisis, there has been a return to rapid growth in employment since 2012. However, it should be acknowledged that there is little recovery in employment for the people with lower levels of education and skills. The reforms have been mainly led by the high tech businesses that happen to operate in the tradeable sector. Truth be said, the rate of unemployment has dropped from around 15% by the end of 2012 to less than 8% in 2016. The intervention of the government in the Ireland crisis has been so significant that without its input, the economy could not have recovered as fast as it did.
Baturo, A., & Arlow, J. (2017). Is there a ‘revolving door’to the private sector in Irish politics?. Irish Political Studies, 1-26.
Darvas, Z., & Simon, A. (2015). Filling the gap: open economy considerations for more reliable potential output estimates.
Hazelkorn, E. (2014). Rebooting Irish higher education: policy challenges for challenging times. Studies in Higher Education, 39(8), 1343-1354.
Keane, C. (2015). Irish public finances through the financial crisis. Fiscal Studies, 36(4), 475- 497.
Ng, E. C., & Feng, N. (2016). Housing market dynamics in a small open economy: Do external and news shocks matter? Journal of International Money and Finance, 63, 64-88.