The elites that have dominated the republic’s economy since independence have brought it to ruin. Conor McCabe, the author a major new analysis of the Irish economic crisis, identifies these classes and outlines their malign influence.
There have been many attempts to explain why the Irish banking crisis developed the way it did, and the argument that it was due to a breakdown in moral standards is quite a popular one. The Irish Times has talked of a “frightening lack of morality” within Anglo Irish Bank, the most indebted of the Irish institutions, and how the actions of its chairman “cast a shadow over the ethical culture of the bank he ran for most of the past 33 years.” The newspaper’s senior business correspondent, Arthur Beesley, said that the directors of Irish Life and Permanent inhabit an “ethical cocoon in which the sense of right and wrong is at odds with standards in the outside world”, while the economist Brian Lucey talked of the immorality of the government’s actions in pouring money into Anglo Irish Bank in a desperate attempt to keep it going as a business concern.
Yet, the banking crisis in Ireland was not caused by pockets of immorality in an otherwise reasonably well functioning system. The ruthless pursuit of profit is not personal; that is the way business works. And what is condemned as immoral in times of crisis, is often praised as savvy and pragmatic in times of prosperity. Similarly, there is nothing particularly unique about the ethical cocoons of Irish bankers, their frightening lack of morality, or lack of restraint and sense of propriety. This was a worldwide financial crisis, after all, not a regional or a Celtic one. In other words, it was not the implosion of speculative debt, but the ability to transfer that debt wholesale onto the shoulders of the State, which marked out Irish bankers as a step above their worldwide contemporaries.
The decision by the Irish government on the 30th September 2008 to guarantee almost all the liabilities of six Irish financial institutions was not an economic decision but an exercise in power. “The deeper truth exposed by the present crisis” wrote the journalist and politician Shane Ross, “is that Ireland harbors more powerful forces than Fianna Fáil.” And while this is true, it is not enough to point out that banks and property developers are indeed powerful in Ireland, but to explore why that is the case. What is it about the Irish economy that financial and property speculation is a core activity and not, say, fisheries or gas? Why are builders and insurance salesmen fêted as entrepreneurs, while indigenous exporters outside of agriculture and tourism struggle to find support? How did this situation arise, and how deep are the roots?
Put as concisely as possible, the type of business activities which dominated the Irish economy in the twentieth century – cattle exports to Britain; financial investment in London; the development of green-field sites; and the construction of factories and office buildings to facilitate foreign industrial and commercial investment; the birth of the suburbs and subsequent housing booms predicated on an expanding urban workforce – saw the development of an indigenous moneyed class based around cattle, construction and banking. These sectional interests were able to control successive government policy, much to the detriment of the rest of the economy. In 2008 the construction and banking sectors of that class closed ranks in order to protect themselves from oblivion, resulting in the bank guarantee and the creation of the National Assets Management Agency (NAMA).
At the time of its independence, the Irish Free State was a fully integrated part of the UK economy. Its role within that economy was primarily agricultural, more specifically, the provision of livestock for the finishing farms and slaughterhouses of England. This relationship, not surprisingly, benefitted livestock breeders and traders, who had come to prominence in the post-famine era, with land cleared and secured for grazing rather than tillage.
This became a source of conflict within Irish rural society, between small farmers and graziers. Upon independence, however, it was the graziers who were in the ascent and Irish economic policy developed with their interests very much at heart.
The end of formal political links with Westminster meant that the Free State was now an independent country without an independent economy. In order to secure its future, it needed to expand its industrial base and develop new markets. For this it needed credit, something that a central bank based around a national currency could provide. The Irish banking system, however, was entirely focused towards the London financial markets, and resistant to the development of a national currency focused on the economic demands of the state. The need to expand agricultural and industrial output, in order to provide an economic base for sustainable communities, was pushed to one side. The result was increased emigration, with the Free State providing not only cattle and finance to the UK, but also a steady stream of labour.
The lack of industrial growth also meant that there wasn’t a sufficiently strong economic base to provide the standard of living demanded by the aspirational Irish urban middle class, who turned to the state for grants and tax relief in order to fund the type of home ownership and petit-bourgeois lifestyle they read about in the newspapers, and watched on cinema screens.
The emergence of Fianna Fáil as a political force in 1927, followed by its rise to power in 1932, saw a change in aspects of economic policy, with greater use of tariffs to encourage industrial growth. These initiatives were soon hampered by self-inflicted blows. The party kept the parity link with sterling. It also decided to focus on the expansion of produc- tion for the home market only. The structural deficiencies within Irish agriculture, including the continued use of the Shorthorn cow for both dairy and beef production and the serious lack of a food processing industry, remained untouched, as did any attempt to expand exports to anywhere except Britain.
The demands placed on the Irish economy in order to maintain parity included periodic deflations, which were timed in line with the dynamics of the British, not Irish, economy, and an obsessive concern with inflation at home. By the end of the 1940s the Irish economy was more dependent on Britain than it had been at the time of independence, while an overweight Irish pound stood drenched in sterling and out of breath, with hands on knees, desperately trying to take a few more steps towards expansion before it collapsed from exhaustion.
In 1952 the Irish government commissioned a report from the American consultancy firm, Ibec Technical Services Corporation. Its authors simply could not understand why the state persisted in exporting livestock to Britain, given the potential for industrial growth which the slaughter and processing of animal produce would provide. Similarly, the practice by Irish banks of investing in British securities with the full support of the central bank and Irish government seemed bizarre, given the fundamental need for credit and investment in Ireland. Its calls for an expansionary policy, with a fully-funded central bank using deposits to underwrite the Irish pound and provide credit, as well as an agricultural policy which would see the creation of a viable and profitable food processing industry on Irish shores, were dismissed in favour of the pursuit of foreign investment. Such a move allowed the Irish state to appease the banking sector and its cheerleaders in the Department of Finance. It allowed credit and foreign investment to enter the Irish economy without a revaluation of the Irish pound – something that was needed in order for indigenous businesses to attain the level of credit needed for sustainable growth. The state was on a path to industrial expansion, but one which was centred on tax breaks and financial incentives to multinational companies, and not ecessarily the development of local industry and Irish-sourced exports The expansion in financial investment, construction, and land sales, gave rise to a particular type of Irish capitalist entrepreneur. There was money to be made by providing services to foreign investors. Construction, banking, insurance, property, road haulage, and legal services – these were the areas of commercial activity that gained a commanding presence in the Irish economy, all of which benefited from the influx of American, German, British and Dutch companies.
At the same time, there was also money to be made by speculating on the boon to the economy which foreign investment brought. In the 1960s and 1970s the state started to provide these entrepreneurs with a similar range of grants and tax incentives as those offered to multinationals. In the case of office blocks in the 1960s, the state not only funded the speculation, it acted as tenant as well. The PAYE system, first introduced in the late 1950s, became a cash faucet for the government. The revenue generated through the direct taxation of ordinary workers was fed directly to speculators and foreign investors via the litany of tax havens which propped up these new industries.
Such was the lack of concern about developing indigenous growth that the country’s natural resources were sold off wholesale without a second thought. In Ireland, the handshake did not secure the deal, the handshake was the deal. The type of local business interests which expanded on the back of foreign finance were all about making the deal happen. Construction, finance, land and law: this was the four-leaf clover, the new lucky charm for the modern Ireland of Lemass.
By the 1970s the trick of foreign investment, and speculation on same, was running out of steam. Growth in the Irish economy relied more and more on construction, both commercial and residential. The notion that exports needed to be linked to the wider economy was given lip-service but little else.
The growth in building societies and the entry of banks into the private mortgage market took place alongside moves to strangle public housing as a viable option for working people and the increased use of tax incentives to bolster owner-occupancy as the only real option open to families. Housing was increasingly portrayed as a cure for all social ills, a bulwark against inflation, a nest-egg for retirement, a fool-proof pension plan for the honest worker. It was also a multi-billion pound industry, where standards and security played a very minor role.
The 1974 Kenny Report into the price of building land was shelved precisely because it threatened to upset the speculation machine. It threatened the livelihoods of the various politicians, bankers, builders and land-owners who profiteered from the rezoning game.
By 1981 only 8% of all materials used by foreign companies in Ireland were sourced from Ireland. This was in spite of repeated calls by foreign companies for the development of secondary industries to act as feeders for production.
The Irish entrepreneur as middleman was firmly, and fatally, entrenched in the way the economy functioned. Construction and services can only work as an aid to growth – in Ireland they had become growth itself. In the late 1980s, the widening of Ireland’s tax relief schemes to include financial services helped to turn the state into a glorified offshore bank. Incredibly it became a tax haven for Irish financial and commercial businesses. Ireland had become its own tax haven.
The decision by the Irish government in 2008 to guarantee almost the entire deposits and liabilities of the Irish banking system was everything people saw it as at the time; a bailout of well-connected bankers, speculators and builders – the dominant strands of Irish economic and political life. We need to understand why things happened the way they did, and to recognise that the old ways of doing business are not going to help us. It falls on us to make different choices if we want different results.