Booming on

Ireland’s economic boom is into its second decade. Can it last?
OECD Observer

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The Irish economy has transformed in recent years. It grew by 5.1% in 2005, half a percentage point faster than in 2004, driven by strong domestic demand and positive net exports. This continued the remarkable performance of the past decade, during which Irish incomes per capita have caught up with the OECD average. The forecast is for more strong growth in 2006-2007, with unemployment (4.2%) to remain relatively low.

The debate about the causes and durability of Ireland’s booming economy is not new (see references) and the latest OECD Economic Survey of Ireland also devotes space to the question, pointing to the business-friendly regulatory environment, a flexible labour market, moderate tax rates and sound fiscal policy. It highlights not only the economy’s unprecedented growth in incomes, but its resilience too–it rode out the slump in the new economy remarkably well after 2000, for instance. Still, the OECD report sees risks, as well as areas for improvement.

Remaining competitive will be a challenge for a start. Competition policy should be stepped up in a bid to dampen prices, remove bottlenecks and promote productivity and growth. The network industries, such as electricity, telecoms and transport, are in particular need of reform, as are retail services, including pharmacies.

Also, productivity must be improved, the report urges. This may sound surprising, especially since Ireland’s labour productivity has recorded faster growth than any OECD economy since 1995. Also, its labour market has been highly flexible on the hiring and firing side, allowing labour to shift into dynamic services with impressive ease.

But it is precisely that shift that will make further productivity gains harder to achieve. More investment will be required in skills and innovation, for instance, and the labour supply will have to be raised even more, particularly among women. Already the increased presence of young women in the workforce has helped boost growth. Though recent figures from Ireland’s Central Statistics Office (CSO) show female employment is still rising, the potential is still considerable, since as the report notes, female participation remains below the OECD average. Improved childcare would help.

As a very open economy, Ireland’s export competitiveness will become a major challenge. Successive social pacts have played a part in making the business environment attractive, but wage growth has still been fast. According to the OECD report, centralised agreements must not prevent the economy from adjusting to external shocks, such as a sharp fall in the dollar. (Ireland is more exposed to the US dollar than most other EU countries, thanks in part to US business investment there.) One solution the report suggests would be for agreements to run for shorter periods, or to have built-in circuit-breakers, such as an “ability to pay” clause.

The country’s infrastructure, which has creaked a little under the pressure of Ireland’s demographic and economic dynamism, also needs attention. At the same time, the construction industry has been booming, with 80,000 houses built last year alone. House prices have tripled in real terms since the mid-1990s. Demographics, increased wealth and low European interest rates help explain much of this upsurge, and though the report’s authors believe a property market collapse is unlikely, a slowdown in the sector would nonetheless hurt government receipts and affect employment.

One card Ireland has been able to exploit effectively in recent years is its strong relationship with both Anglo-Saxon markets and the euro area, of which it is a member. For instance, its European dimension helped it cushion the effects of a falling dollar in 2002-2003. Investing in infrastructure, while boosting productivity and the labour supply, as well as creating room in public finances, would help Ireland’s economy retain such flexibility and strengthen its resilience further still. RJC

OECD (2006), Economic Survey of Ireland, Paris. The full survey can be ordered at www.oecd.org/bookshop. See summaries and Policy Brief at www.oecd.org/economics. For more commentary, contact Dave.Rae@oecd.org.

©OECD Observer No 254, March 2006




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