Stabilization and adjustment in a small open economy: Ireland, 1979-1995

At the end of the 1970s, the Irish economy was faced with an unsustainable current account deficit, rising unemployment, high inflation, and a rapidly increasing public debt. By the mid-1990s Ireland's growth rate was the highest in the OECD, unemployment was declining rapidly, the current account was in surplus, and the country seemed likely to meet the Maastricht financial and fiscal convergence criteria. Domestic absorption has been sharply reduced despite a mild appreciation of the real exchange rate. External competitiveness, measured in terms of relative unit wage costs in a common currency, improved dramatically owing to the sharp increase in the share of foreign direct investment (FDI) in total capital formation. While the fiscal correction of the late 1980s helped restore private-sector confidence and was indispensable for progress on financial convergence, the boost to labour productivity given by the increased inflow of FDI is credited with the key role in the economy's transformation.