Even the Irish punter is in retreat. “The cash has gone out of the game,” said veteran bookie Daragh Fitzpatrick surveying the disappointing crowd at this year’s Irish Derby at the Curragh. “The ordinary person ain’t got any disposable cash anymore.”
Real estate debt
As it happens, it’s not only Irish households that are burdened by real estate debt. As many as a half of all small and medium-size firms are also in arrears — not necessarily because they don’t have healthy core businesses, but because they took out loans to speculate in the real estate market on the side.
The Irish fixation with real estate investment has roots going back to the days of British rule. Since independence, however, this fixation has contributed to a series of speculative bubbles and robbed the rest of the economy of the domestic capital it needs to grow. The Irish stock market, for example, remains tiny, while the few venture capital and private-equity firms rely heavily on government money and foreign investors. As for the banks, they’ve relied on real estate lending for so long that they have never developed the expertise and confidence required to make loans to businesses in other sectors.
The lack of private financing for entrepreneurial ventures reflects, in part, a cultural bias. Irish mothers traditionally wanted their sons to go into the church, medicine, law or government — anything that was “permanent and pensionable.” Starting a business, or working in a small firm, was way down on the list.
That began to change in the 1980s with the arrival of U.S. multinationals. Before long, some of their Irish employees, fortified with an idea or a supply contract, left to start their own businesses, and some of those businesses began to take off. An entrepreneurial ecosystem began to develop.
What strikes an American visitor, however, is how few of those successful Irish start-ups have grown into large Irish corporations. The normal pattern is that once the firms reach sales of $10 million, the founders sell out to a bigger firm, usually foreign, that is willing to pay a premium for the product or the customer base. The riskier course — taking the company public, making a big push into foreign markets, creating a billion-dollar company that spins off other firms and creates a cadre of Irish millionaires who invest in other Irish startups — rarely happens.
As John O’Shaughnessy puts it, it’s not the lack of financing or ambition that explains this urge to sell out so much as the fact that Ireland is simply at a relatively early stage of its economic development.
In many ways, O’Shaughnessy is typical of the today’s successful Irish entrepreneurs. Back in the 1980s, he was general manager of a Swiss company making stents in Galway when it was sold to Minnesota-based Medtronic. He left soon thereafter, helping to launch two medical device companies that were also sold to big U.S. corporations. Now he’s out raising money for a third.
O’Shaunessy says it’s only natural for those of his generation, which grew up in in a small and relatively poor country, to seize the opportunity of financial security for themselves and their families by selling out to multinational corporations that come knocking. But he vows that the next time he’ll be swinging for the fences, and he expects the next generation of Irish entrepreneurs will have the confidence and financial security to do the same.
Certainly that’s what Andrew Murphy has in mind. After working for eight years as a chemical engineer for a German conglomerate, Murphy went back to school for an MBA, where he got the idea for a software company that would create paperless medical records with the look and feel of the old medical charts, dramatically improving hospital efficiency and quality. Since its launch in 2010, Slainte Healthcare (Slainte means health in Gaelic) has doubled in size every year.
Now with $20 million in annual revenue and 80 employees, Slainte is at precisely the point at which many Irish start-ups tend to sell out. To fund a splashy entry into big markets such as the United States, Slainte will need additional capital, and hardly a week goes by that he doesn’t get a call from an investment banker or private-equity firm. But Murphy, a boyish 37 dressed for work in jeans and a T-shirt, is not interested in taking money off the table or giving up control. He’s determined to list Slainte on NASDAQ and build a billion-dollar global enterprise based in Ireland.
It will take many more Andrew Murphys for Ireland to finally overcome its overreliance on foreign direct investment and “branch-plant” orientation. Unfortunately, the most pernicious long-term effect of the recent financial crisis and recession may be that it stalls that transition by reaffirming the old bias against risk-taking and entrepreneurship.
That same bias is also reflected in Ireland’s tax code, which imposes relatively high taxes on incomes of the self-employed (55 percent) and capital gains (33 percent) but infamously low taxes (12.5 percent) on the profits of domestic and foreign corporations. The low corporate rate has become such an integral part of the Irish “brand” that even the deputy prime minister, a one-time socialist, dismisses any consideration of raising it even temporarily to deal with the government’s fiscal crisis. Yet it’s hard to find a small-business owner or venture capitalist who doesn’t volunteer, without prompting, that high taxes on personal income and investments are driving away entrepreneurial activity.
And it’s not just entrepreneurs who are leaving. Among more than two dozen economists and business leaders, I found that virtually all of their grown children live outside of Ireland. While young Europeans may be flocking to Dublin, many more young Irish are flocking to England, Australia, Canada and the United States. The net outflow of 35,000 people last year, most of them young, has become an emotional issue, a symbol of national failure for a country that still remembers the days of raising its offspring “for the boat.”
There’s no doubt that some have gone abroad just to have a bit of fun and expose themselves to different cultures. But the consensus among their parents and their school chums back home is that the longer they are away, the less likely it is they will return.
The Irish Times, in fact, has an entire section on its Web site called “Emigration Nation.” And it is not lost on anyone here that one of the two teams competing for the championship of the All-Ireland Gaelic football league this year was from London, which boasts a thriving Irish community.
Reading through the postings from abroad at “Emigration Nation,” it’s clear the expats aren’t merely discouraged by the lack of jobs back home, but frustrated by a political and economic establishment they view as insular, unresponsive and incapable of carrying out fundamental reform of the country’s outdated institutions.
This frustration is shared widely back home as well, where the deep anger with what has happened has yet to translate into meaningful reform.
“This is a country that, economically, has ruined itself three times since independence,” said Karl Whelan, an economist at Trinity College, Dublin. “Yet nothing seems to have changed in the political system.”
Time and again it was described to me as a system characterized by mediocrity, nepotism, secrecy and a lack of genuine competition. It is a system in which the governing philosophy of “social partnership” has morphed into nothing more than an excuse for buying off special interests. And it is a system in which the top priority of those who run it is preserving their powers, perks and prerogatives.
In a new book, “The Fall of the Celtic Tiger,” economists Donal Donovan and Antoin Murphy look beyond the property bubble and the bank meltdown and argue that the root cause of the crisis was “the absence of sufficient questioning and internal debate” within a political, economic and media establishment too easily prone to “wearing of the green jersey.” That comfortable consensus and cheerleading culture stifled serious analysis or criticism of what was really going on during the boom years. A stubborn “lack of transparency in the political decision making process,” they write, undermined the political legitimacy of the government’s response to the crisis.
“We have a very insular political system here,” agrees Alan Dukes, a former finance minister and leader of the parliamentary opposition. “The influence of interest groups makes politicians incapable of making hard decisions. We wind up doing a little of everything and not enough of the things that really matter.”