The global credit crisis is set to test how sustainable Ireland's economic growth is, writes Michael O'Sullivan, so policy makers should seek answers abroad
The global credit crisis has rumbled through financial markets for some six months now, and its effects are being felt more widely across economies, with Ireland being no exception here.
In particular, the eruption of the crisis has already marked out a number of important lessons that are relevant to a highly globalised country like Ireland.
The credit crunch has signalled the fact that many countries that have typically been regarded as emerging markets have now grown up in economic and financial terms. In particular, the stress test of the crisis has shown many Asian economies, China chief among them, to be liquidity rich and economically robust.
At the same time as the Irish economy is slowing, the economies of similarly globalised countries in Asia, Singapore and Hong Kong, are powering ahead. This economic strength is accompanied by growing political confidence in the region. For instance, China has become a very significant influence on African politics, while the trade and political ties that link both China and India to Burma are likely to help keep its generals in power.
If the new-found stability of emerging markets is one of the lessons of this crisis, then its corollary is the potential fragility of the so-called Anglo-Saxon model - for which Ireland has been the poster-child over the past decade. The Anglo-Saxon economies (principally those of the English-speaking world - eg, the US, the UK, Australia and Ireland) typically have high levels of household debt, high property prices, relatively low savings rates and low taxes.
In short, the panic in markets highlighted the shortcomings of the Anglo-Saxon model of growth - it works well when money is cheap and confidence is high but it falters when risk appetite falls, asset prices become extended and when the price of credit and liquidity rises.
Though many would rather see Ireland as having its own economic model, the credit crisis is exposing its fault lines and in this regard it would not be unfair to compare parts of the Irish economy to sub-prime USA.
For example, personal debt to income ratios and house prices (relative to earnings) are more over-extended in Ireland than they are in the US. Similarly, outside the construction and property sector, US multinationals are one of the key sustaining forces of the Irish economy.
Though economic growth in Ireland is still high by comparison with many of its European peers, there are increasing signs that critical parts of the Irish economy are slowing - property prices are now falling, competitiveness is ebbing, some multinationals are leaving and retail sales have softened recently.
While these developments will provide ammunition for some of the more alarmist commentators, they should at the same time give us food for thought and make us realise just how highly geared we are to globalisation.
More than ever, they should make us ponder the nature of the tired cliche we call the Celtic Tiger, and wonder whether our economic model is a sustainable one that has been spawned by policy genius, or simply an old-fashioned bubble economy that has been fed by negative real interest rates for much of the past 10 years.
In current circumstances the view that the Irish model is a robust and unique one offers little comfort.
The trouble with this attitude is that not only is it complacent but many of the factors that are heralded as examples of good policy making - our education system and ability to attract inward investment - are now being shown up by other small growing countries, notably those in Asia.
If our economy is in a bubble phase, and it has many of the trappings of classic bubbles - not least the ability of many people to deny the very existence of the bubble - then difficult times are ahead.
One serious issue is that public expectations of growth, incomes and wealth have been set so high that a downward adjustment could prove painful.
In much the same way that 20 years ago it was inconceivable that Ireland would become one of the world's richest countries, it appears similarly unimaginable to many today that the Irish economy could undergo a severe contraction.
This possibility heightens the need for policy makers and the various social partners to set their minds on the next stage of the development of the Irish economy. In this respect at least two things need to happen.
First, policy makers and politicians in particular should put an end to the introspection that has been fostered by the envious attention that many other countries have paid to Ireland's economic "miracle".
They need to look abroad to see how other small countries are battling the pressures of globalisation. Starting points might be Israel's technology sector and impressive levels of entrepreneurship, as well as the way in which the much vaunted Nordic model is evolving to adjust to the competitive pressures brought on by globalisation.
As the tide of construction-based wealth goes out, we will be left looking at a relatively meagre domestic industrial sector. In a post-property boom future, the onus will be on this segment of the economy to drive growth.
Secondly, policy makers must increasingly find ways of dealing with problems like inflation, though without key policy tools.
In the absence of its own monetary policy and currency, Ireland must innovate in terms of micro-economic policy to counter the side-effects of globalisation.
Specifically, fiscal policy must be used to ensure that the side-effects of a deflating property bubble do not lead to a hard landing, and future investment is channelled into more sustainable and less speculative areas.
The consequences of not doing so are unfolding before our eyes, in subprime USA.
Michael O'Sullivan is the author of Ireland and the Global Question (Cork University Press and Syracuse University Press in the US)