What Works: Success in Stressful Times

That leads to what seems to be an even bigger issue than the fallout from the 2008/9 recession. It is what happens to globalization. A number of things trouble me here. One is rising inequality. As a rule, globalization of the world economy decreases inequalities between countries but increases inequalities within them. Perhaps the most important consequence of the present burst of globalization is the rise of China and India from developing to some sort of developed status. Rising inequality is most evident in these countries as some people get left behind, but it is also a feature of the US economy and of the London one. This creates strains and injustices that must be tackled.

It may be that in trying to cope with these strains, a British government makes the same mistake as US administrations have done, bringing in legislation, taxation or regulation that has the effect of shifting business elsewhere. There will in any case be some rebalancing of international finance, with Asian centres taking on a larger role. As China moves towards becoming the world’s largest economy, is it almost inevitable a Chinese city will become the principal financial centre of the region. The main issue would seem to be whether it is Hong Kong or Shanghai. That will depend as much on the willingness of the authorities to permit such a development as the acumen with which both cities are run. Tokyo is the prime example of a domestic financial centre that has not developed significant international business because the Japanese authorities have maintained a regulatory environment that has deterred international participation.

Beyond this, however, we have to accept that as financial power shifts east so, too, will the value system of international finance. Global capitalism will no longer march principally to the beat of the West. For Europeans and North Americans this will be disturbing-far more disturbing than late twentieth-century concerns as to whether the ‘Anglo’ or the ‘continental’ or the Japanese versions of capitalism were the most effective. We are not used to a world where financial power is located in China and India rather than Europe and North America. Despite the size of the Japanese economy, its financial model has had little influence on the rest of the planet. And, for the moment, the financial services industry of China remains primitive by global standards. But it will become both larger and more influential as China moves closer to becoming the world’s largest economy. My own view is to welcome that, but, of course, this process will create strains.

That leads to a wider concern-of something happening to the world economy that undermines the fundamental role of international trade and finance. The shift from an ever-more global economy to one where international trade and investment fall back a bit, for example, could easily trigger protectionism-restrictions on the movement of capital and maybe goods and services. That happened in the 1930s.

(#litres_trial_promo) Were it to happen again, London, as the most dependent city on international business, would suffer most. However, what happens to the City, or indeed to the UK economy, is less important than what happens to the world.

Put bluntly, were anything to go wrong with globalization-and it has had a pretty severe blow-that would herald a most dangerous period not just for the world economy but for humankind. At some stage in the first half of the twenty-first century, the world will probably cease to become more global. International trade and investment will stop growing faster than world output. We may go back to protectionism and a collapse of world trade, as happened in the 1930s; though maybe we will move to more of a plateau rather than falling backwards. But it is not hard to hear the voices against globalization, calling for protection from cheap imports from China and India, or resenting the shift of power away from Europe and towards Asia. Were the general economic downturn also to be associated with widespread conflict, such as happened in 1914, that would be even worse.

This hardly bears thinking about. My point is simply that no one should assume the present burst of global prosperity, which involves more of the world’s population than ever before, will continue for ever. It will not. With luck, thoughtful political leadership and a sensitive attitude within the financial services industry, the threats to world prosperity will be averted. But there will be nail-biting years ahead. This future will be shaped in part by a handful of politicians in the various world capitals, but also, maybe to a rather greater extent, by the myriad anonymous players in the world’s business and financial community.

Arguably, at the beginning of the twenty-first century, the City of London has become the focal point for this community. It is a gigantic responsibility to carry. In the years running up to the First World War it was widely believed that war was impossible because the world economy was so interdependent. It was unthinkable that countries that depended on each other for their prosperity and had invested so substantially in each other could throw that progress away. Countries were by definition national but finance was international. Yet the financial markets failed to discipline the European politicians into cooperation. The world was allowed the slither into the First World War. The markets failed to educate the politicians on the economic disaster (let alone the human catastrophe) that nationalistic policies might provoke. Now we face similar dangers, at least potentially. Yet the markets have themselves misbehaved, or more specifically some of the protagonists in those markets, including some in London, have failed. Their moral authority is under challenge, and understandably so.

Maybe it is too much to ask when the future is so uncertain, but I still think the question is worth putting: who on balance over the years are likely to be better custodians of global prosperity, politicians or financial markets? I think, comparing their records over the past couple of centuries and notwithstanding the disaster of 2008/9, it is no contest. That is why I respect the City. It is why I believe it has much to teach the world. It is why, too, I believe that global prosperity will be rekindled and why world financial markets have a crucial role in that process.

CHAPTER THREE (#ulink_ad196d02-4db4-55d1-a241-2bf5edd08a19)

I. WHAT IS THE STORY?

During the 1990s something amazing happened in Ireland. At the beginning of the decade it was about the poorest country in the European Union. By the Millennium it was among the richest. In between it had become by far the fastest growing economy not just in Europe but in the entire developed world.

(#litres_trial_promo) The most obvious parallel was with the explosive growth of the Asian ‘tiger’ economies, such as Singapore and Hong Kong, and in 1994 a friend, David McWilliams, the Irish economist and TV show host, came up with the phrase that caught it all: the Celtic tiger.

My own perspective on this is acutely personal. I grew up there.

In the spring of 1951 my father was in Dublin for a business trip. He walked down Grafton Street and, on a whim, went into a phone box to call my mother. ‘I am looking at the happy, smiling faces here in Dublin,’ he said, ‘and I think we should come and live here.’

We were living in the Isle of Man at the time. My mother was eager to live in a larger place and immediately agreed. We would, my father warned her, be very poor. She pointed out that we were very poor already. I was seven at the time-and so that was how I came to be brought up in County Wicklow just south of Dublin.

But it was not just us who were poor. The whole country was poor and it continued to be right through to the 1990s. Of course, the poverty was relative: people were well fed, rather better fed than they were in Britain, which still had rationing at the beginning of the 1950s. The Dublin of the 1950s and 1960s had a cheerful if shabby charm: the place was indeed full of happy smiling faces. But while, of course, there were pockets of wealth-I remember the father of a school friend who had a huge American car with a wiper on the back window-for most people, including my parents, it was a struggle to get by. The life was pretty simple too. We eventually got a car but even well into the 1950s, the milk arrived in a horse-drawn cart with a huge churn on it and they measured the milk into your own jug. Right through the middle 1950s there was a recession.

By the 1960s things were picking up a bit, but not by enough to employ the flood of young people coming onto the job market.

(#litres_trial_promo) The young left for jobs in America or more often Britain; some three-quarters of my economics class at Trinity College Dublin

(#litres_trial_promo) left the country on graduation. We were the lucky ones for economists then were in short supply. For the mass of emigrants who did not have a university degree, the more likely occupation was on the building sites of Britain.

Despite the highest birth rate in Europe,

(#litres_trial_promo) Ireland’s population slowly shrank. There were lots of children, lots of older people, but few young adults. The population of the twenty-six counties, the Republic of Ireland, was down to 2.8 million by the middle 1960s.

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And now? Well, it is no secret that the Irish economy has been among the hardest hit by the global recession, of which more later. But despite its current difficulties the centre of Dublin has become a shining modern European city. Superficially it is just a smartened-up version of its old self: Grafton Street is still the main shopping area and you can still drink at Davy Byrnes, the ‘nice quiet bar’ in James Joyce’s Ulysses, round the corner in Duke Street.

(#litres_trial_promo) But now it is a seafood dining haven, whereas then it was just somewhere we used to go for a drink after lectures. Trinity still occupies its thirty-five prime acres at the very centre of the city. You still walk through the front gate from the bustle of a capital city to the calm Georgian front square. But the streets around it are smart and stylish instead of, well, pretty drab. And despite recession they are filled with a multitude of different languages as well as different accents, for what has been the fastest-growing economy of the European Union has also been the fastest-growing job market.

(#litres_trial_promo) During the boom years the young of Europe came not just to spend money; they came to earn it.

Just south of the centre of Dublin, in Ballsbridge, the contrast between the old and the new is even sharper. A genteel suburb of late nineteenth-century villas has become the new hot location for offices, hotels, bars and apartments. Dublin is the fourth-most expensive city in Europe in which to rent, behind only London’s West End, Moscow and Paris, and is in the global top ten for office rents.

(#litres_trial_promo) Further south, stretching round Dublin Bay, are the rich suburbs, but alongside the older and grander houses are vast tracts of new suburbia. The expanding population of the Dublin area, at 1.6 million in the 2006 census,

(#litres_trial_promo) looks set to reach two million by 2021, making it the fastest-growing conurbation in Europe.

Ireland became a magnet for Europe’s ambitious youth. When the European Union was enlarged to include a new wave of entrants from Eastern Europe in 2004, only three member states fully opened their labour markets to this new workforce: Sweden, the UK and Ireland. In absolute numbers the largest wave of migrants went to Britain; unsurprisingly, since it too had a strong job market. But proportionately Ireland took more than anywhere else.

(#litres_trial_promo) The Dublin streets are full of young people again, and this time it is not only the Irish themselves but throngs of French, Germans, Scandinavians-and now Poles, Czechs and Hungarians too. Even in the 1960s Dublin had a different, almost continental feel to it, but now that feeling is immediately evident even to the weekend visitor.

I find this thrilling. Ahead of the recession Dubliners complained that people no longer seem to have time to talk to each other, though their felicity with language remains as extraordinary as ever. They fretted about the new immigrants, though they seemed to me to be pretty well behaved-a lot better than we were as students. They say that Dublin has changed and, of course, they are right. But a city that immigrants have flocked to is bound to be culturally different to one from which emigrants leave. People are voting with their feet for the new Dublin, the new Ireland. Success may bring problems but it is a sight better than failure, and Ireland has had too much of that.

We will come to how much ground has been lost during the recession in a moment. First, we focus on how the transformation happened. How in the space of less than ten years did the poorest member of the European Union become almost the richest? The story intrigues much of the rest of Europe-obviously those two other Celtic nations of Scotland and Wales but also the new EU members to the east: the Baltic states, Poland, the Czech Republic, Slovakia and so on. Anyone who knows anything about the Irish boom is bombarded with questions: what can we learn and how can we do it too?

The short answer is that Ireland was almost uniquely placed to benefit from the burst of globalization that took place through the 1990s, following the end of the Cold War. Its success was built on openness to the world market. But it had been held back by political errors, which saddled Ireland with high taxation and other restrictions. Once Ireland got its policies right, it was like a coiled spring, ready to uncurl. So it was a classic case of sensitivity to the needs of the market but also radical (and quite brave) decisions by a group of politicians with a mission. They realized that Ireland did not have to be an economic failure and that it was intolerable it should continue to be one.

The market element to the story runs like this. By the late 1980s there were at least six forces helping to give Ireland’s economy a tail-wind. They were:

The European Single Market, which from 1987 onwards encouraged foreign investors, particularly American ones, to choose Ireland as a base from which to manufacture for Europe.

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The associated massive increase in global capital flows, which Ireland was able to tap into.

Favourable demographics, for in the 1980s half of Ireland’s population were under the age of twenty-five;

(#litres_trial_promo) that many were unemployed further increased the potential labour supply.

The strong investment in education (at all levels) going back many years, but with a change of emphasis in the 1980s to encourage more maths, science and business studies.

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EU structural and regional funds,

(#litres_trial_promo) which Ireland spent well on infrastructure, especially roads-even if most Dubliners would say these initiatives did not move nearly fast enough.

Political stability, which has ensured that ever since 1957 the country has encouraged outsiders to invest in Ireland.

So the potential was there. It just needed the right policies. Here, Ireland had been unfortunate. Following its political independence from the UK, it had adhered to a policy of economic independence that ran right through to the 1960s. One key element to this was protectionism.

To give just one example, in the 1950s and 1960s nearly all the cars in Ireland were assembled there. Kits were imported in CKD (completely knocked down) form. The cars were made first on the original production lines in the UK, France, Germany or wherever, then taken to bits and packed into crates to be reassembled, painted and trimmed in Ireland. The rare imported vehicles suffered a large duty to protect the local industry. But there was no rational reason for the industry to exist at all. The quality was worse even than the same cars assembled in the UK-quite an achievement-and they cost more. Eventually, but not until the end of the 1970s, the industry was swept away.

From the 1970s onwards, after entry to the European Economic Community in 1973, the principal flaw in Irish economic policy was financial ill-discipline. Public spending rose, budget deficits soared, then tax rates were increased to try to curb the deficits … and the result was stagnation. There was a short-lived property boom at the end of the 1970s but that was followed by a slump in the early 1980s. By 1987, Ireland’s unemployment had risen to 17.5 per cent and its GDP per head was only two-thirds that of Britain’s, producing a vicious circle wherein public funds were pre-empted to pay social welfare and interest on the debt. Emigration eased the pain but many educated young people left.

(#litres_trial_promo) The following year The Economist magazine dubbed its survey of Ireland ‘The Poorest of the Rich’.

Then came the miracle. Just nine years later the magazine returned with another survey, and the title said it all: ‘Europe’s Shining Light’.