Ireland after the tiger years

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For the past 15 years, Ireland has been by far the fastest growing economy in the European Union. Looking forward, growth prospects remain solid, but expectations will have to be reigned in.Wage increases, fiscal policy, and housing prices will all have to adjust to the prospect of growth in the order of 4-5 percent a year, half the growth rate of the boom years.

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Ireland: Challenges after the tiger years

During the 1990s, income per capita in Ireland grew rapidly, converging to the European Union (EU) average as output and employment expanded. But over the medium term, growth rates are projected to be significantly lower, given the limited scope for further increases in labor supply and productivity catch-up.Marialuz Moreno-Badia from the IMF's European Department outlines the challenges facing the Irish economy.

Ireland experienced a period of unprecedented growth in the 1990s-a performance that earned it the nickname "Celtic tiger." Real GNP growth averaged 6.4 percent a year in 1991-2001, bringing per capita income up to the EU average (Chart 1), while unemployment declined sharply from almost 15 percent to less than 4 percent.

This impressive performance reflected sound policies, including openness to trade; participation in the EU; and a positive external environment. Membership in the European Economic and Monetary Union (EMU) brought a sharp decline in real interest rates and encouraged foreign direct investment.

National wage agreements helped to quell industrial unrest and contributed to wage moderation, allowing the burgeoning labor force to be absorbed into employment.

Fiscal consolidation reduced public debt from over 100 percent of GDP in 1988 to 36 percent in 2001 and created scope for tax reforms that increased incentives to work and invest.

Finally, the global boom in information technology further boosted foreign direct investment, while the depreciation of the euro from its inception at the beginning of 1999 to early 2002 helped improve competitiveness.

Although the economic outlook remains favorable, growth over the medium term is expected to be markedly lower than during the boom years.With labor force participation rates leveling off because of falling fertility and a decline in immigration, and most of the catch-up in productivity already...