The Politics of Capitalist Diversity in Europe

48 Pages·2016·1.3 MB·English

Articles
The Politics of Capitalist Diversity in
Europe: Explaining Ireland’s Divergent
Recovery from the Euro Crisis
Samuel BrazysandAidan Regan*
The 2008financial crisishit fewplaces harderthanthe Euro periphery. Facedwithhigh levels ofpublic debt,Portugal, Italy,
Ireland,Greece,andSpainwereeachcompelledtoimplementharshausterityreforms.Yetdespitethiscommonpolicyresponse,
therecoverieshaveshownsignificantdivergence.Inparticular,Irelandseemstohavemanagedtosucceedeconomicallyinawaythat
theotherperipheralcountrieshavenot.TheprevailingnarrativeisthatIreland’srecoveryfromthecrisisisdueto“austerity”and
improved“costcompetitiveness.”Drawingupontheoriesfromthestudyofcomparativecapitalismwechallengethisnarrative,and
arguethattheIrishrecoveryisanoutcomeofastate-ledenterprisepolicyaimedatnurturingacloserelationshipwithcorporatefirms
fromSiliconValley.Usingqualitativeandquantitativeinvestigationwefindevidencethatthisstate-ledFDIgrowthmodel,rather
thanausterityinducedcompetitiveness,kick-startedIreland’srecoveryfromcrisis.AsIrelandisacriticalcaseforthe“success”story
of austerity in Europe, our findings represent a significant challenge to the politics of adjustment. It suggests the strategies of
business-stateelites,andnotsimplytheworkingsofelectoralcoalitions,explainsthepoliticsofadjustmentinadvancedcapitalism.
“GreecehasarolemodelandthatrolemodelisIreland”1 considering the poorer-performing Southern European
—Jean Claude-Trichet, as President of the European Central countriesas“ClubMed,”quicklybroughtIrelandintothe
Bank(2010) group,withthenow-infamouspoliticalre-brandingusing
T the inflammatory moniker “PIIGS,” a heuristic that
he fury of the 2008 housing and financial crisis
becamesynonymouswiththebankingcumsovereigndebt
struck few places harder than the countries of the
crisisintheEurozone.2
Eurozone periphery. Massive shocks to growth,
The 2008 crisis represented an existential moment for
employment, and public finance plunged Portugal,
neoliberal economics, predicated on open markets and
Greece, and Ireland into international bailouts and
light-touch regulation from the state, with notable
brought Spain and Italy to the brink of that shared fate.
economists such as Joseph Stiglitz going so far as to
Financial markets, seizing on the long tradition of declare that “neoliberalism is dead.”3 Yet despite
A link to supplementary materials provided by the authors precedes the references section.
Aidan Regan is Assistant Professor of Comparative and International Political Economy at University College Dublin, and
DirectoroftheDublinEuropeanResearchInstitute([email protected])(*correspondingauthor).PriortocomingtoUniversity
CollegeDublinhewasapostdoctoralfellowattheMaxPlanckInstitutefortheStudyofSocietiesandtheEuropeanUniversity
Institute.HisresearchisfocusedonthepoliticsofadjustmenttotheEurozonecrisis,comparativecapitalisms,industrialrelations,
andthewelfarestate.Hisworkhasappeared,orisforthcoming,inPoliticsandSociety,theJournalforCommonMarketStudies,
NewPoliticalEconomy,ComparativeEuropeanPolitics,Socio-EconomicReview,andIntereconomics,amongotheroutlets.
SamuelBrazysisAssistantProfessorofInternationalRelationsandDirectoroftheInternationalPoliticalEconomyMA/MSc
programmeatUniversityCollegeDublin([email protected]).HecompletedhisPh.D.atIndianaUniversity.Priortocoming
toUniversityCollegeDublinheworkedasanEconomicAdvisertotheFederatedStatesofMicronesiaandtaughtattheCollegeof
William&Mary.Hisworkfocusesonthenexusbetweeninternationalpoliticaleconomyanddevelopmentandhasappeared,oris
forthcoming,inAsiaandthePacificPolicyStudies,theCambridgeReviewofInternationalAffairs,ElectoralStudies,the
EuropeanJournalofPoliticalResearch,theEuropeanJournalofDevelopmentResearch,theInternationalPoliticalScience
Review,theJournalofDevelopmentStudies,andtheReviewofInternationalPoliticalEconomy,amongotheroutlets.
doi:10.1017/S1537592717000093
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Articles | The Politics of Capitalist Diversity in Europe
well-reasoned arguments that financial deregulation and European Commission,17 and the German govern-
speculative international capital flows were at the heart of ment18 have all argued that Ireland’s political commit-
the problem, the international institutions tasked with ment to austerity has been central to its recovery.
respondingtothecrisisdoubled-downonthesamebesieged Indeed, after implementing an internal adjustment
ideology.4Accordingly,thePIIGS’commonentryintocrisis equivalent to 26 percent of gross domestic product
ledtoacommonpolicyresponseof“austerity.”Theseaustere (GDP), Ireland has become one of the fastest growing
adjustments included public sector cuts and supply-side economies in Europe, exceeding the other PIIGS and
structural reforms aimed at an internal devaluation, the aggregate EU growth rate since 2011, leading the
coordinated by the so-called “Troika” of international OECDtocelebrateIrelandasthe“comebackkid”ofthe
institutions:theEuropeanCommission(EC),theEuropean Euro periphery.19 Others, such Paul Krugman, offer
CentralBank(ECB),andtheInternationalMonetaryFund anoteofcaution,describingtheinflatedheadlineGDP
(IMF).5 The policy prescription for recovery was less state, figuresasacaseof“leprechauneconomics.”20Allofthis
more market.6 Hence, whilst Stiglitz may have declared makesIrelanda“crucial”caseinthestudyofEuropean
“neoliberalism dead” in the economics profession, it political economy.21
remainedverymuchaliveinEuropeanpolicymakingcircles, Drawing upon theories from the study of comparative
leadingsomescholars,suchasColinCrouch,tolamentthe capitalism, we challenge the Troika’sanalysisoftheIrish
“strangenon-deathofneoliberalism.”7 case. Our core claim is that the Ireland’s economic
As detailed by Mark Blyth, the imposition of austerity recovery has little, if anything, to do with austerity-
has led tomassive social andpolitical upheaval across the induced cost competitiveness. Rather it is the outcome
Euro periphery, with consequences ranging from un- ofanactiviststate-ledenterprisepolicyaimedat“picking
employmentandgrowinginequalities,8tomassivecutsto winners” from Silicon Valley. This state-led enterprise
healthcareandeducationservices,andincreasedmortality policy of attracting Foreign Direct Investment (FDI) is
rates.9 Contrary to the assumptions of “growth friendly coordinated by business-state elites via the Industrial De-
fiscalcontractions,”10therehavebeennoelectoralrewards velopment Authority (IDA), and long preceded the
for imposing “tough reforms.” Fiscal consolidations and economic crisis. Contrary to the assumptions of the
supply-side structural reforms aimed at liberalizing the austerity hawks, it is a case of state-led development, not
welfarestate,reducingpublicservices,cuttingwages,and freemarkets.Ofthecrisis-afflictedcountriesintheEuro-
limiting collective bargaining are perceived by electorates zone,onlyIrelandtradesinhigh-techexports,asevidenced
as being imposed from outside, and thereby lacking the by the rapid growth of internationally traded service
necessarylegitimacytowinpopularsupport.11Hence,the exports since 2008.22 Underpinning this growth is the
externalimpositionofausteritybytheTroikahascrippled high-tech, high-wage Internet sector, built around large
all elected governments. Since 2008, no government in U.S.multinationalcorporations.Theimportantquestion,
Ireland or Southern Europe has managed to return then,ishowdidtheIrishstatedeveloptheconditionsfor
agoverningmajority. theemergenceofthisFDI-ledgrowthregimeinaperiodof
Further,theimpositionofausterityhasledtoincreased austerityandcontractingdomesticdemand,whiletherest
fragmentation of parliaments; new radical left parties, oftheEuroperipherycouldnot?
social movements, violent street protests, populist Our analysis suggests that while low corporate taxes
parties,12 and in some countries, the rise of xenophobic and a flexible labor market are clearly important in
far-right parties.13 Regardless of the electoral rejection of attracting U.S. FDI, it is the activist role of state elites
austerity,thecoreeconomicideashapingtheadjustment, that ultimately determines the success of Ireland’s FDI
both within the technocratic EU Commission, and the growth model. In developing these findings, we make
intergovernmental arena of the European Council, threecontributionstothestudyofpoliticalscience.First,
remainssteadfast:ifmember-stateswanttoretaintheeuro we show that variation in FDI, not austerity, or cost
currency then they must commit to austerity, reduce competitiveness, explains the divergent recovery among
public debt, stimulate an internal devaluation, and force theEuroperiphery.Second,wedemonstratethatIreland’s
aconvergence withtheGerman growthmodel.14Hence, FDI-growth regime can be traced to the activist role of
atthebehestoftheunelectedTroika,member-statesofthe state elites, nurturing a closed-door relationship with
Eurohavebeeneffectivelyreducedtodemocracieswithout corporatecapital,notthemarketortheelectorate.Third,
choice.15Or,asWolfgangStreeckhasputit,inratherstark we suggest that the strategies of business-state elites, and
terms,“inordertosavetheeuro,”Europeaneliteshavehad not simply the workings of electoral coalitions, explains
to“abandondemocracy.”16 the politics of diversity among advanced capitalist socie-
Assuggestedbyourepigraph,asignificantportionof ties.ThesefindingscomplementtheworkofHackerand
the remaining support for the contention that austerity Pierson,23 who have long argued that economic policy is
“works” revolves around the perceived success of the more a function of corporate influence over politics than
policies in Ireland. The European Central Bank, the electoralcompetition.
412 Perspectiveson Politics
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In what follows we draw on existing political science politicalunderpinningsofnationalvarietiesofcapitalism,
debatestochallengewidespreadmisunderstandingsabout better explains the divergent recoveries between Ireland
the politics of austerity and the importance of neoliberal andSouthernEurope.Thisdivergencecanbeilluminated
reforms.Webeginbyoutliningthestateoftheartinthe via two stark descriptive statistics. First, as figure 1
study of comparative capitalism, highlighting the limi- demonstrates, Ireland attracts significantly more FDI per
tations of electoral and macroeconomic approaches in capita when compared to Portugal, Italy, Greece, and
explaining national varieties of capitalism, and arguing Spain. Hence, unlike Southern Europe, and more like
that both perspectives underestimate the role of the Eastern and Central Europe, Ireland can be described as
corporate-state elites in shaping the politics of advanced having an “FDI-led growth model.”27 Further, FDI into
capitalism.Wethensubstantiateourtheoreticalargument Ireland increased significantly after 2008 and during the
intwoways.First,wepursueawithin-casestudyanalysis periodoftheTroikaausterityadjustment.
ofIreland’s“SiliconDocks”todemonstratethatIreland’s Second, as figure 2 shows, international trade, as
FDIgrowthregimeisduetoitsspecificroleasaU.S.tech a percentage of GDP, is significantly higher in Ireland
hub,andthattheemergenceofthissectorisadirectresult when compared to the other PIIGS countries. Total
of the actions of state elites via the IDA. Second, we exports accounted for 113 percent of Irish GDP in
conduct a comparative quantitative analysis of foreign 2015, and almost 90 per cent of this comes from foreign
investmentdecisionsinthePIIGScountriesintherunup owned global U.S. multinationals.28 In particular, total
to,andduring,theEurocrisis,tofurthersubstantiatethe service exports account for approximately €90 billion of
importance of FDI in explaining divergent recovery in Irish exports (over 100 percent of GDP), with Silicon
Europe.Weconcludebyreturningtoabroaderdiscussion Valley firms accounting for around €40 billion of this.29
on the politics of capitalist diversity, suggesting that the Indeed in 2015 Ireland was the largest exporter of
neoliberalattempttoimposeaone-size-fits-alladjustment computerandinformationservicesintheworld.30While
on heterogeneous political economies in the EU is only these figures are undoubtedly distorted by the corporate
likely to exacerbate the growing crisis of “democracy taxavoidancestrategiesofU.S.firms,31suchasApple,for
withoutchoice”inEurope. themostpart,aswedemonstrateinthecasestudy,itisreal
investmentleadingtorealjobs.Itisthishigh-techFDI-led
Framing the Puzzle of Ireland’s export growth model that accounts for Ireland’s recovery
Recovery from the Euro Crisis
fromcrisis.
Many commentators consider Ireland to be a textbook The other PIIGS countries, whose trade portfolios are
case of successful economic recovery due to neoliberal more dominated by low-tech manufactured goods, saw
reforms. Testifying before the Irish Parliament in Octo- significant downturns in exports in 2009 as global
ber 2015, Marco Buti, Director General of Economic demand fell. As figure 2 demonstrates, exports have only
andFinancialAffairsattheEuropeanCommissionnoted: ever accounted for between 20–25 percent of GDP in
“Most importantly, the EU–IMF financial assistance Greece, and between 25–35 percent in Portugal, Spain,
programme achieved its main objectives. Ireland imple- andItaly.Putsimply,SouthernEuropeancountriesdonot
mented substantial financial sector repair and fiscal con- have an export-sector large enough to offset the worst
solidation,regainedmarketaccess,returnedtosustainable effects of austerity on domestic demand. These countries
economic growth and started to create jobs again.” In relyalmostentirelyondomesticconsumptiontogenerate
respondingtoaquestionfromtheChairthatsuggestedthe growth. It is this basic observation that has been almost
EC were “too severe in its austerity approach,” Mr. Buti entirelylostontheTroika.Thequestionthenishowdid
replied. “I would not subscribe to that statement.”24 Ireland manage to carve out a high-tech, export-oriented
Similarly,anOECDreportstatedthat“determinedpolicy FDIgrowthmodelinaperiodofausteritywhilsttheother
efforts have boosted confidence and underpinned the PIIGS could not? By drawing on perspectives from the
robust, broad-based recovery now underway in Ireland. studyofcomparativecapitalism,wesuggesttheanswerlies
Unemployment is falling steadily, the budget deficit is in the political sources of a state-led strategy based on
declining, public debt has peaked and international acoalitionofbusiness-orientedelites.
credibilityhas been strengthened.”25For the OECD and
theEuropeanCommission,Ireland’seconomicrecoveryis Varieties of Capitalism, Growth
synonymouswiththesuccessfulimpositionofausterity.26 Models and Elite Politics
Yet this interpretation by the Troika and the OECD As suggested by Peter Hall, comparative political econ-
cannotaccountforthefactthatothercrisis-afflictedEuro omyhasbeenslowtoconsiderhowtherevolutioninICT
countries who have adopted similar measures to an equal and internationally traded services might be changing
or greater extent have struggled to generate substantial the nature of economic growth and employment in
and sustained economic growth. We contend that developeddemocracies.32Giventhatcomparativepolitical
a “growth models” perspective, which takes seriously the economy emerged when manufacturing dominated the
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Articles | The Politics of Capitalist Diversity in Europe
Figure 1
Lowess-smoothed measures of FDI projects per capita with 95 percent confidence interval. The
location of the data points reflects the number of FDI projects per capita while the size reflects
the quarterly GDP growth
Source:fDiMarketsDatabase,OECD,Eurostat,authors’calculations.
growth engine of capitalist development, political science economic performance among advanced industrial socie-
researchremainedfixatedonproducer-grouppolitics.The ties. Capitalist diversity was an outcome of the path-
core finding was that the variation in organization of dependent effect of domestic institutions, which shaped
employers and unions tended to explain the variation in thecross-nationalvariationinthebehaviorofgovernment,
Figure 2
Lowess-smoothed measures of Total Exports and Total Trade in Services with 95 percent
confidence interval
Source:WorldBank,WorldDevelopmentIndicators,Authors’calculations.
414 Perspectiveson Politics
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unions,andemployerassociations.Thestructuraldecline macroeconomics.38 Unlike the “electoral turn” the
ofmanufacturinghaschangedallofthis.Inresponse,the dependent variable in this approach is not the welfare
study of comparative capitalism has taken two distinct state;itisratherthedeterminantsofaggregatedemandand
turns:electoralandmacroeconomic. economic growth. For Lucio Baccaro and Jonas Pontus-
The “electoral perspective”33 focuses on the supply son,thecross-nationalvariationineconomicandemploy-
(parties) and demand (electorate) of politics, and is best mentperformanceisexplainedlessbyvariationinelectoral
articulated in the recently published book by Pablo coalitions or institutional complementarities, but “the
Beramendi, Silja Häusermann, Herbert Kitschelt, and extent to which economic growth is shaped by export-
Hanspeter Kriesi: The Politics of Advanced Capitalism. orientationordomesticconsumption.”Thequestionasto
These scholars argue that the economic policies that whether a country is export-led or consumption-led, in
governments pursue, and the cross-national variance in turn, depends on the politics of “distributive conflict”
economic performance, is not so much shaped by the amongdifferent“socialcoalitions”inagivensociety.39
dominantproducer–groupinterestsofagivensocietybut This political perspective differs fundamentally from
the changing nature of electoral cleavages, and the path- mainstreamneoliberal economicsinthatitprioritizesthe
dependent effect of previous policy choices. These new roleofconflict.Countrieswithexport-ledgrowth,suchas
electoral cleavages have been transformed by the radical Germany, must repress wages, and hold down domestic
transformation of economic change, which has uprooted demand. John Miller calls this German wage repression
thelabormovementandoccupationalstructures,withthe a “beggaring (of) its own people” that has meant “con-
implication that there is increased job polarization (and sumptionstagnated”andcorporationshave“hoardedtheir
educational attainment) among low- and high-skilled profits.”40 Countries with consumption-led growth, such
workers.34 as the UK, must allow wages or credit to expand.
Thiselectoralapproachisparticularlyusefulinexplain- Countries with a balanced growth path, such as Sweden,
ing social policy. That is, it works best when the allow wages and profits to grow simultaneously. The
dependent variable is the welfare state or the different growth-model perspective is particularly important in
components of public expenditure. Some voters want the context of the Euro crisis. It implies that countries
income replacement; others want social investment. In with manufacturing-led growth models that are based on
the context of the Euro crisis, this implies that govern- costcompetitiveness(i.e.,pricesensitivity)mustpolitically
ments will implement different fiscal adjustments, simulate a German-style variant of austerity and internal
depending on the dominant electoral cleavages in soci- devaluation, if they are to generate the conditions for
ety.35 Few would disagree with the observation that economicrecovery.41
governments must sustain the support of voters to get In this perspective, the politics of export growth
re-elected.Butdotheelectoratereallyshapethetrajectory depends upon the tacit support of employers and unions
anddynamicsofacountry’scapitalisteconomyandnational to hold down unit labor costs. These countries tend to
growthregime?Surely,itisanempiricalquestionwhether cluster around the “coordinated market economies”
national governments primarily respond to organized (CMEs)ofNorthwestEurope,andthereforethe“growth
businessinterestsortheelectorate. model” perspective complements the classic varieties of
We tend to agree that producer-group politics, and in capitalism typology (“liberal market economies” [LMEs]
particular,theroleofmanufacturing,mattermuchlessin versusCMEs).Exportgrowthismadepossiblenotbecause
explaining the politics of advanced capitalism. But the of neoliberal markets; rather it is the presence of a set of
weakened nature of trade unions and employer associa- domesticpoliticalinstitutionsthatensurethatprofitsgrow
tions does not imply that corporateinterestsmatterlessin at the expense of wages.42 Cost competitiveness is iden-
shaping policy outcomes. Nor does it imply that public tified with unit labor costs. Hence, unlike the electoral
opinion and electorates determine economic policy. We turnincomparativecapitalism,whichtakestherevolution
tend to agree with Pepper Culpepper that the politics of in services and information technology seriously,43 the
capitalist diversity is best conceived “as a set of mutual varieties of capitalism “growth models” perspective, we
dependencies between business and the state.”36 This contend, remains wedded to an understanding of the
suggests that any analysis on divergent recovery in the politicaleconomythatisbasedonmanufacturing,andin
Europeripheryneedstoanalyzecross-countryvariationin particular,theGermanmanufacturinggrowthmodel.
thebusiness-staterelationship,ratherthanelectoralcoali- Both the “electoral”and“growthmodels”perspectives
tions per se. It is also where questions of power and state in the study of comparative capitalism have given rise to
capturecomeintoplay,whichisparticularlyimportantin afruitfulliteratureontheoriginsandconsequencesofthe
trying to explain how party linkages shape austerity Eurozone crisis.44 These perspectives, however, suffer
politics.37 from one major shortcoming: neither pays sufficient
The second big turn in comparative political economy attentiontoelitepolitics,themutualdependencybetween
is a renewed focus on national growth regimes and business interests and the state, and the extent to which
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Articles | The Politics of Capitalist Diversity in Europe
stateelitesandlargecorporatefirmsarekeypoliticalactors ahigh-growthsectorontheassumptionthattheirpresence
inshapingthedynamicsofcapitalistdevelopment.Thisis will generate a sectoral cluster effect (or what Irish elites
surprising given that classic studies in comparative capi- callacompetitive“eco-system”).
talism identified an activist role for state-business elites, Irish political elites in the IDA work from the
particularly the capacity to engage in industrial policy, as assumption that the spillovers in the high-tech computer
thecentralfactorinexplainingcross-national variationin andinformationservicesectorarehigh,sothepresenceof
economicandemploymentperformanceamongadvanced a major multinational in the sector will increase the
industrialsocieties.45 likelihood of attracting other firms. Over time, the
presence of a global leader in an emergent growth sector,
The Politics of a State-led FDI Growth
such as Apple, Google or Microsoft facilitates the
Model in Europe emergence of a high-tech business cluster.50Wecontend
We concur with the “electoral” perspective that the that the cost competitiveness argument underpinning
structuraltransformationbroughtaboutbytheshiftfrom austeritypoliciesinEurope,whicharebuiltontheGerman
manufacturing to service-based economies has led to manufacturing model, apply to low-tech manufacturing
a qualitative change in the politics of advanced capital- production, but not to high-tech globally-traded services.
ism46. However, we suggest that to explain country- Inthelatter,laborcostsaccountforlessthan10percentof
specific models of capitalism, such as Ireland’s high-tech total costs, with the implication that price-based wage
FDIgrowthmodel,requiresanexaminationofelitestate- competitiveness is not a determinant of economic growth
business politics. Likewise, we agree with the “growth ininternationallytradedservices.51
models”perspectivethatthedifferencebetweenconsump- There can be no doubt that Silicon Valley firms who
tionandexport-ledgrowthiscrucialtoexplainpost-crisis invest in Ireland have a preference for low taxes and
recoveryintheEuroperiphery.However,thisperspective flexible labor markets, and that Ireland is a variant of
remains wedded to an understanding of the political a “liberal market economy” (LME). But what’s often
economyofproducer-grouppoliticsandcostcompetitive- missed in this observation is that Ireland’s “neoliberal
ness. Neither takes the political role of the state and the economy” is a state-led model of capitalist development.
strategiesofcorporatefirmsseriously.47 While any state can set a lowcorporate tax rate, building
New political perspectives on the role of the state in a credible commitment to that tax rate takes years, if not
shaping high-tech growth suggests a much more activist decades,wherethestatedemonstratesitsfortitudethrough
role for politics.48 Mariana Mazzucato, in particular, government changes and crisis (such as the troika adjust-
convincingly argues that entrepreneurial states can and ment). Further, while low taxes may be necessary in
do “pick winners” by actively “fostering entrepreneurial enticing corporate firms in high-value traded services,
growth and development.” However, while her analysis these conditions are not sufficient as multiple states can
hastractionforlargefederalstates,suchastheUSA,which and do offer very similar structures (using legal tax
can afford many “failures” in waiting for a “winner,” it is avoidance strategies, multinationals can effectively get
less applicable to those states operating within the the same corporate tax rate in the Netherlands, Switzer-
constraints of the EU. In this regard, we argue that the land, Luxembourg, and most Eastern and Central Euro-
statecanplayanactiveroleinshapingthegrowthmodelof peanstates).Toputitanotherway,itisnotassimpleasthe
Europeanpoliticaleconomies,less throughentrepreneur- government turning down the corporate tax dial, liberal-
ial policy, but through enterprise policy, which is distinct izingthelabormarket,andthenwatchinghigh-techFDI
fromsocialpolicy(i.e.,itisspecificallyaimedatgenerating growinresponse.Thepoliticalroleofthestateisfarmore
economic growth, and therefore intimately related to hands-on.
country-specificmodelsofcapitalistdevelopment). Our argument is that the presence of an activist state
In the Irish case, enterprise policy is an approach by agent tasked with coordinating enterprise policy is also
state elites tocreate the institutional conditionsnecessary necessary. Beyond acting as a transmittal mechanism for
to attract leading-edge production from global multina- credible institutional commitments, state elites in the
tionals. It is specifically focused on winning FDI from IDA serve as a shepherd through the regulatory and
high-tech,high-wagefirmsfromSiliconValley.Crucially, financial transaction costs that face any firm when
the strategies underpinning Irish enterprise policy are establishing a part of its global supply chain in a new
coordinated by a publicsectoragentwhoareindependent location,activitiessuchassourcingofficespace,recruiting
oftheelectoralcycle:theIDA.Theirtaskistoidentifyand staff,andlinkingintodomesticsupply-chains.Aswewill
attract corporate leaders in emergent innovative sectors now evidence in the case study, the role of state elites in
(such as born on the Internet firms) with the explicit Ireland’smodelofcapitalistdevelopmentgoesfarbeyond
intentionofbuildingahigh-techbusinesscluster.49Hence, offeringlowcorporatetaxes.Itinvolveslong-termpolitical
itisnotaboutpickingfirmsrandomly.Ratheritisaimedat strategies explicitly aimed at building high-tech sectoral
winning the investment of a global multinational in clusters. In the classic CMEs of northern Europe, this
416 Perspectiveson Politics
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coordination among firms occurs through sophisticated directlycommissionedaconsultancygrouptorecruit300
employer and trade union associations. In the world of Irish expatriates from California, to return to Ireland to
internationally traded services, it requires a much more work for the company.58 Further, the IDA “offered
directroleforthepublicsector. agenerousfinancialpackage”worthIR£87million,equal
to80percentoftheirannualbudget.Intel’spresenceasan
Case Study: How Irish State Elites industry leader quickly attracted other leading-edge firms
Built the “Silicon Docks”
in the same sector. IBM, Apple, Dell, and other manu-
Tosubstantiatethatitwasastate-ledFDIgrowthmodel, facturers either established or expanded their operations
coordinated by elites in the IDA, rather than austerity, during this emergent period. Employment in the sector
whichexplainsIreland’seconomicrecoveryfromtheEuro doubled during the 1990s with Apple and Intel each
crisis52 we now turn to a within-case study analysis of employingover4,000peopleby2014.59
Ireland’s “Silicon Docks.” The case study, which draws
upon over twenty-five semi-structured elite interviews, Software Development—Microsoft
tracestheoriginsofIreland’sinformation-andcomputer- As computer manufacturing became commoditized dur-
services sector to the role of the publi-sector agent, the ingthemid-1990smanyICTfirms “begantomovetheir
IDA. We outline three distinct waves of high-tech in- hardware manufacturing operations outside Ireland to
vestmentfromSiliconValley,puttingparticularemphasis low-wage, low-cost economies.” Rather than attempt to
on the third wave of investment that emerged with convincethesefirmstokeepthesenowcomparativelylow-
Google,andtheInternetsector. value activities in Ireland “either through subsidies, or
The strategy of the IDA, since they became an otherwise, we (the IDA) shifted strategy, and began to
autonomous state-sponsored body (ASSB) in the 1970s, target new software companies.”60,61 This led to the
hasbeenconsistent:identifyanindustryleaderinahigh- secondwaveofinwardinvestment,particularlyfromthose
growth sector; encourage them to locate their European ICT firms “seeking to cluster around the externalities
headquarters in Ireland; bank on the cluster effect that created by Microsoft.”62 By the early 2000s, Ireland was
this will create; and work closely with these firms to thesecondlargestexporterofsoftwareintheworld.63
ensure their expansion. The core objective is to “attract A central strategy of the IDA is to “maintain a close
thosefirmsinahigh-growthsectorthatareattheleading relationship”withtheseniorexecutivesoftheirclientfirms
edge of technological change.”53 Hence, it’s about build- after they establish their operations in Ireland. The
ingahigh-wagetechnologycluster. purpose ofthis isto“monitorchange andtobeprepared
The strategy of the IDA starts with a “detailed in- toassistandfacilitatethetransformationoftheirbusiness
vestigation of a Silicon Valley firm, particularly those in model.” A large part of the IDA’s strategy is to
receipt of venture capital funding.”54 Once they target “getinformationandthenfeeditbacktopolicymakers,”
afirm,thesepublicsectoragentsthentryto“convincethe particularlyifjobretentionbecomesanissue.Forexample,
executive managers to visit Ireland,” making clear that IBMemployed4,000workersinmanufacturinginIreland
there are nostrings attached. As partofthis sitevisit,the in the early 2000s. In 2015, they continued to employ
IDA introduces the executives to other IDA client firms 4,000 people, but none of whom worked in manufactur-
workinginthesamesector.Thepurposeofthesesitevisits ing.64IDAofficials“workedcloselywithIBMduringthis
is “to allow executives to network and to discuss their transition process,” and “ensured that a direct line of
experienceofworkinginIreland.”Theexecutivesarethen contactexistedbetweenthefirmandpolicymakersoutside
introducedto“universityleadersandanyotherfirmswith theformalbureaucracy.”65
whom they may need to develop supplier relationships.” During this second wave of investment the IDA also
Meetings are also organized with “banking and finance begantotargetnewSiliconValleyfirms,luringemergent
officials,inadditiontorecruitmentspecialists,andifneed California-based software companies such as Oracle,
be,governmentministries.”55FortheIDA,thesitevisitis AOL, and one of the world’s first Internet browsers,
amarketingexercise.ToquoteaseniormanageratanIDA Netscape.66Whilesomeofthesefirmswereunsuccessful,
client firm, it is a “networking opportunity, whereby the “theirpresenceensuredthattherewasagrowingclusterof
IDA makes it clear that the Irish state is open for seniormanagerswithU.S.corporateexperienceinthenew
internationalbusiness.”56 Internet tech sector.” Crucially, some of the investment
during this period led to the construction of IDA
ICT Manufacturing—Intel sponsored data storage labs, that “went unused for over
The first wave of Silicon Valley investment started in a decade.” Thesedata centerswould subsequently “prove
1989 when the IDA “convinced Intel to establish their tobeacrucialincentivetoattractandwintheinvestment
European micro-processing plant in Ireland.”57 The core of Google,”67 given the importance of data security and
problem facing Intel in their investment decision “was data storage to Internet firms operating in the online
recruiting high-skilled engineers.” In response, the IDA digitaleconomy.
June 2017|Vol.15/No.2 417
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Articles | The Politics of Capitalist Diversity in Europe
Born on the Internet—Google
In response to the dot.com stock market crash in the
ModelVIIIomparisonAltWage) –0.0005(1.02)0.0098(1.50)0.0024*(2.23)–0.0316(1.51) 68621.480.0000 owcaeocafotruSiluvyrilseldei2lcy0ona0nnen0uvdVsertrmaurlegrlameoenyaay,gilcon“olsnebotdasatetlh.ei”rendeHlaeaSsvtosieiluowliocmneopsvpnmhetiripeV,onntwathlialteethghyaIe,DtnwcaIAeinnbetds“ecsprotbnuameeyllgtepeaddfiannrotmihuteoesst
C 1
( thatnobodyhadyetheard,suchasPayPal,Overtureand
Google.”Itwasthisthirdwaveofinvestmentfrom“born
elVIIarison) 2(0.47)3**(3.13)1*(2.02)1(0.22) 02 0 oIitrn’eslaitmnhdep’soIrnetactnoertnnoteomt”nicofitrreemctohsvaetthrpyautfbrilosicmcsee2cn0ttor0ar9lagoteonnwtesaxrwpdlosa.rinkBiinnuggt
odmp 00210205 6000 for the IDA in California had been building these
MCo 0.00.00.00.0 8.60.0 networks and relationships for over a decade. Or to
( – – 12 quoteaseniormanageratanIrish-basedtechfirm,“they
3) persevered, kept knocking on doors, and became real
ModelVI(PIIGS) 0002(0.40)0219**(3.4 602250000 etoxpTaethrttresaccitnr.i”tt6ihc8aolsejuenmcteurgreintghamtacrhkaentsgethdaetvtehreyythwinegrefotrryitnhge
0.0. 1.0. IDAcanbetracedtowinningtheinvestmentofGoogle,
9
whoestablishedtheirEuropeanHQinDublinin2004,
V(PIGS) 3(0.54)0**(3.35) 79 0 i“wnGhtoihcoahgtlietwE“aefsffefecfcot”tlilvwoewalyseedlaquubnivycahleeFdnatcaetonbeotwhoekteeacirhnlnieo2rl0“oI0gny8t.es6el9cetfofTerchitin”s
el 0023 4200 Ireland.”Or,asstatedbyanIDAofficialinterviewedfor
d 00 40
Mo –0.0. 90.0. thisproject“itpromotedIrelandtothePremierleagueof
Internet tech investment.”70 Google employed less than
d
an 89)5) 70 employees when they established their operations in
V(Irelmbo) 7†(1.5(0.2 23 2 n20en0t3–a2n0d04c.7o1ntBrayct20w1o5r,ktehrse.y72emGpoloogyleed, 5T,7w0i0ttepr,ermanad-
elICo 001006 113000 Facebook all “worked out of IDA offices until they
od 0.0. 8.0. sourcedcommercialofficespaceinDublin’sDocklands,”
M – 2 vel a run-down area of Dublin’s inner city, which was
e
ModelIII(IrelandM) 0.0022**(2.58)0.0015(0.12) 1382.570.0000 nificantat10%l rwlrseeehnhgloaediutcnishlodenortashubtheteeidpItiDhniunedAniirdIcwraeoetralwiasvannecdesn.otoaftftrfieatc-hlle.e”edsT“pdhhaeacevnevedeltosroypomgfnale”ocntbbtathulpasrcitonotjerhepscesot-,rIsatD“atoetAesf
3 g
Si
sandQE ModelIModelII(IrelandC)(IrelandJ) 0.0019*(2.13)0.0018*(2.13)0.0067(0.23)–0.0089(0.23) 12912631.0529.780.00010.0001 ofzscoreinparentheses. 1%level,*Significantat5%level,† T“wmlteTTyaahxhGerhhohaepaegoueieriraeesrkoldrGdcaeigcdeasrtlootrnaomferisIaotfcvatracpgeesaetileSsalllceaatiogiwteagonnyfaEnbnifddtttllfezuiefGwbseaeerrharsmyacsoilne,tsao”andbtgngheebpwdlwedIteal.hNha”sIwecteiwDTchiedBrahaeEAswva,iErLoesahieunt,tpedoor“rtrowfdehetsposihaaeereGensdceenaIudconcaDtrtiaoertehgsA”oigHesoulutueinheQsntmIdtacecDrloi,otparhimAtiutwnneeiil’onegovdsDneyveuocseepluftowsdsrmtttbneahamalv“oseabifisinnemtloi“vinntsutey,tiihko”s-tf,.
Table1FDIproject Variable ΔQE_ΔWages_%ΔQE_*IrelandWages_%Δ*IrelandNx2 .x2Prob Absolutevalue **Significantat fcgIinrDaioapmnAiett’xa.slpaTrefewcuhstnoheaudotisirlontecrnegahs,teotosgshentyea,ktowitfnhitnghcenoertemiiornfopgcrpaeltnur,heiseeswteesnairnsicnaverteoorseuwtmcfnooedeiucpnultdttshooea“fflglIvGneeontnofeeortruntaghrteleeeet
418 Perspectiveson Politics
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ahigh-growthcluster”ofweb-basedfirmsinSiliconValley withintheEurozone.”76Inthisregard,Ireland’seconomic
seekingtogrowtheirEuropeanmarkets.73 recovery can be traced to the positive effects of free
This has proven to be correct. During the period movement and internal EU labor mobility, rather than
of austerity (2009–2014) the IDA secured the inward thebenefitsofcheaplaborcosts.
investment of Zynga, Twitter, Amazon, DropBox, Link- During the period of the troika adjustment, the IDA
edIn, Hubspot, Trip Advisor, AirBnB, Square Space, dedicatedalmost“three-quartersoftheirannualbudgetto
Sales-forceandEngineYard,tonamebutafew.Wehave marketing,” and launched a massive business advertising
identifiedanadditional80IDAsponsoredfirmsthathave campaign in the United States. This strategy was specif-
investedinIrelandduringthissametimeperiod,listedin icallytargetedattechnologyinvestorsandincludedslogans
AppendixIV.74Withinthespaceoftenyears,anddespite such as “Facebook found a place for people who think
comparatively high labor costs, “the IDA won sufficient a certain way: it is called Ireland,” and “Google searched
investment from Silicon Valley to turn Dublin into theplanetforaplacetodobusiness:theychooseIreland,”
a European digital tech hub.” By 2016, Ireland hosted and “hire the young Europeans before they hire you.”
nine out of ten of the top global U.S. technology firms, While it is tempting to dismiss these “sales strategies” as
employing24,000peopleandgenerating€16bninannual anecdotal,theyprovideimportantevidencetocorroborate
exports.75 This is the FDI cluster effect, which economic the claim that the IDA was using the presence of global
scholars such as Enrico Moretti argue, is causally con- tech firms to lure other Silicon Valley-based firms, in
nectedtotheexpansionandhumancapitalexternalitiesof receipt of venture capital funding, to expand their Euro-
“thicklabormarkets.” peanoperationsandinvestinIreland.77
Much like Intel, the primary concern for Google Itisnoteasytopreciselymeasuretheeffectofstateelites
when they opened their Dublin office was “sourcingthe inwinningFDIfromSiliconValley,andtheircentralrole
right kind of human capital.” Google, initially, never inshapingIrelandshigh-techexportgrowthregime.Butto
intended their Dublin office to “industrialize the digital quote a corporate executive interviewed for this project,
servicesector.”Thisoccurredbecauseofthe“rapidinflow and who was a core actor in the expansion of Google
of young European workers.” The IDA facilitated this Ireland:“theIDAisthecatalyst.It’sabitlikechemistry....
process by “acting as point of contact to ensure that difficult to measure, but without the catalyst, nothing
Google did not face any restrictions when seeking work happens, they bring it all together.” It is perhaps also
permitsfortalentedoverseasworkers.”Further,theIDA important to note that the IDA is not the only actor
actively supported “a wider recruitment campaign” to responsible for Ireland’s state-led enterprise policy, which
facilitate Google-Ireland’s strategy to “industrialize the involves a large network of administrative and business
digitaleconomy,” through“marketing Ireland asa place elites. “Enterprise Ireland” is specifically tasked with de-
to work.” This was the dominant theme that emerged veloping indigenous export-firms. Since 2008, the fastest
from the interviews carried out for this project. All tech growing indigenous exportgrowth sector is also computer
firms want a competitive corporate tax rate. But a more services, which would suggest that the cluster effect is
important factor determining investment choice is the impactingonIrish-basedfirms.
labor market. It is the “human capital externalities” that
emergefromthicklabormarketsthatattractsinvestment Alternative Explanations
into an emerging high-tech business cluster. Further, According to a senior manager interviewed for this
U.S.firmsdonotnecessarilywantaccesstoIrishworkers; project, “the only time we (tech) experienced austerity
rather,theywantdirectaccesstothelabormarketofthe was when we walked through the streets after leaving the
EU28. office.”Theinformationandcomputerservicessector, in
additiontofinancial services,weretheonly sectorsofthe
Human Capital Externalities Irisheconomythatexperiencedincreasedwagesduringthe
The global presence of Google and Facebook, among period of the troika adjustment. The computer and
others, has created a large internal labor market in the information services sector was actively expanding em-
tech sector now colloquially called the “Silicon Docks.” ployment and recruiting high-skilled workers, not just
The 80 web-based IDA client firms that invested in within Ireland, but from across the EU. Simply put,
Irelandeffectively“feedoffGoogle’slabormarket.”These cutting wages via austerity had nothing to do with
firms require “graduates with multi-lingual proficiency,” attractingtheFDIthatledtoIreland’seconomicrecovery.
and although this locks out many Irish graduates from Ratherthefiscaladjustmentwasastrategypursuedbythe
workinginthetechsector,thisdoesnotmatteraslongas statetoretainmembershipoftheEurozone.Butitisworth
thesefirmshaveaccesstothelaborsupplyofthemember askingwhetherthepoliticalcommitmenttofiscalausterity
statesoftheEuropeanUnion(EU).IntheUnitedStates, mayhaveimprovedinvestorconfidence?
a core part of the IDA strategy is to actively market “the This was never mentioned by anyone interviewed for
beneficialeffectsoftheopennessoftheIrishlabormarket this project. However, concerns about “government
June 2017|Vol.15/No.2 419
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Articles | The Politics of Capitalist Diversity in Europe
stability,” a commitment to “the corporate tax rate,” and While our argument here centers on the process-
“declining public infrastructure” were all mentioned. tracing and qualitative analysis offered in the case study,
Many interviewees were highly critical of the “inflexible we look to further support our claims via a statistical
nature of EU fiscal rules,” particularly when it comes to analysis. If our argument is correct, we would expect to
capitalinvestment.Onthisfront,itisworthnotingthatno observe a comparative increase in FDI in response to
Irish government has succeeded in being re-elected since a common, positive, exogenous credit shock in global
2008. This is a consequence of imposing austerity, not finance. This would then serve as an observableempirical
least the implementation of what is perceived to be an implicationthatIreland’sFDI-ledexportgrowthmodelis
arbitrary water tax, which was introduced as part of the at work. Fortunately, we have just such a shock with the
troika adjustment. In this regard, and in agreement with U.S. quantitative easing (QE) program, which ran from
Beramendi et al, electoral politics clearly do matter, December 2008 to December 2013.80 If our logic is
particularly for government stability. Since the 2016 correct, then as a result of this shock, we should see
election, the Irish parliament has never been more increased FDI into Ireland both in absolute terms and
fragmented. But this electoral dynamic is distinct from vis-à-vis the rest of the periphery. Likewise, if we are
theelitebusiness-state coalitionthatshapesthedynamics correctthatwage-costcompetitivenessdoesnotexplainthe
of Ireland’s growth model of capitalist development. We Irish recovery, we should see no relationship between
nowtestourclaimthatwagecompetitivenesshadlittleto decreasedwagesandincreasedFDI.
dowithattractingFDIthroughacomparativequantitative To test this claim we focused on the relationship
analysiswiththeotherPIIGScountries. between the number of FDI Projects as the dependent
variable and expansions in the U.S. Federal Reserve’s
Expanding a High-Tech Business Treasuries Holdings, QE_Δ, during quantitative easing
Cluster through Wage Cuts or FDI? andthepercentchangeinwages,Wages_%Δ,asthemain
A Quantitative Test independent variables, in each of the Euro crisis afflicted
Our case-study analysis demonstrates how the Irish countries,fromJanuary2003toDecember2014.Wealso
economy was differentially situated from its peers on includedanumberofstandardcontrolvariablesincluded
the Euro periphery, and deeply problematizes the intheliteratureonQEandFDIandwerananumberof
assumption that export-growth in high-value services robustness checks to consider different wage categories,
was a causal outcome of austerity induced cost compet- variabletiming(lags),andalternativeestimationmethods.
itiveness. This recognition forms the basis of our Substantive details on the data, specification and model
expectation for why Ireland has experienced such choices, and the full regression results can be found in
a dramatic divergence in its recovery from the 2008 AppendicesIandII.Wepresentlimitedregressionoutput
financial crisis vis-à-vis the rest of the Euro periphery. onthemainvariablesofinterestintable1anddiscussthe
Due toits decades-long, state-directed enterprise policy, substantivefindingshere.
which is aimed at nurturing a close relationship with- The findings in table1providesubstantialsupportfor
corporate capital, Ireland was well primed to our argument. Increased credit is associated with more
receive inflows of FDI. As suggested by the “growth FDIprojectsinIrelandinthemodelsthatconsiderIreland
model” perspective in the study of comparative capital- alone(QE_ΔinmodelsI–IV,whichusedifferentmeasures
ism, the rest of Euro periphery relied on a political of wages) and in comparison to the other PIIGS
economy model driven, to a large extent, by domestic (QE_Δ*Ireland in models VII–VIII which use two alter-
consumption. native measures of wages). Substantively these models
We contend that the presence of a high-tech business suggest that over the period of U.S. quantitative easing,
cluster,notcostcompetitiveness,makethePIIGSmoreor Irelandreceivedanadditional30to81FDIprojects,ceteris
less attractive as FDI destinations. In Ireland, the central paribus, and 66 to 121 more FDI projects vis-à-vis the
strategy of state elites is to build a high-tech, high-wage other PIIGS.81 Further, and more important for the
business cluster, as most high-tech firms want to locate argument being developed here, in models I–IV and
around other high-techfirms,78If Ireland’s state-led FDI VII–VIII, decreased wages, Wages_%Δ and Wages_%
policywasworkingaswecontend,theninwardinvestment Δ*Ireland, respectively, have no statistically significant
during the crisis came not from austerity-induced wage relationship with more FDI projects82. All of this would
competitiveness, but from the business cluster effect that suggestthattheearlyactionsoftheU.S.centralbankhad
this policy created. Note that this is different from the a more significant impact on Ireland’s FDI-led recovery
argument that Ireland’s growth model is nothing other thantheTroikaausterityprogram.
thanafunctionoflowcorporatetaxes.Thisisclearlypart Conversely, when considering the other PIIGS either
ofthearsenalofstatepolicy,butourcontentionisthatthe collectively(ModelV)orindividually(AppendixII,table
pull effect of a high-tech cluster ultimately draws in II.4), we see no relationship between increased credit,
additionalFDI.79 QE_Δ,andFDIprojectsand,ifanything,weseeadirect
420 Perspectiveson Politics
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