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The core issues posed for the future of the Irish economy Back  
Terry Baker analyses the progress of the Irish economy from the 1960s to now, and assesses its strengths and weaknesses.
Not surprisingly, the prolonged period of rapid growth has produced several strains, some of which could prove damaging in the near future. The bottlenecks which have emerged in parts of the infrastructure, especially transport and housing are due largely to a combination of a collective failure to foresee the scale and persistence of growth and delays imposed by an efficient planning system. Although highly visible, these bottlenecks are essentially temporary, and in time will ease under a combination of policy decisions and market forces.

More likely to cause lasting problems is the weakening of the consensus on economic strategy which has been so beneficial over the past twelve years. It is only natural that a consensus originally based on fear should become eroded by a lengthy period of success, and this process has been exacerbated by a widespread and justified perception that the benefits of success have not been equitably distributed. Re-establishing a consensus is rendered more difficult by domestic misconceptions that the strength of the public finances has somehow removed the resource constraints (rather than merely the fiscal constraints) on public spending and on tax cuts. The re-emergence within the public sector of the old fallacy that there was once a time (different for different groups) when relativities were fair and proper is another damaging misconception.

Complicating life for the policy maker are foreign misconceptions concerning the condition of, and prospects for, the Irish economy. Applying inappropriate models to a small open economy, especially one which is now part of a currency union, some international organisations offer mistaken advice, and some foreign financial investors make wrong investment decisions, both of which could prove mildly damaging.

Immediate outlook

With interest rates externally determined, and likely to remain below optimum from an Irish viewpoint, an autonomous crash of the Irish economy, or even of Irish asset prices, remains most unlikely. Far more likely, and indeed worryingly probable, is that the prospects for prolonged steady growth will be frittered away through excessive wage increases leading to too great a loss of competitiveness within the currency union. While such an outcome is still far from inevitable, its prevention will require the speedy rediscovery of a united sense of national economic purpose.

It is not my aim in this overview to present forecasts for the future. The outline analysis of how we got from the sixties to the end of the nineties does however raise some obvious questions concerning future developments.

Can the strategy be adapted?

So far as adaptation to changing global trends is concerned, there seems no good reason to suppose that the Industrial Development Authority will lose its proven ability to spot trends early and to act accordingly. So far as adapting to changing domestic trends and altered factor endowments, it is much less certain that appropriate decisions will be taken by the government and the social partners over the next few years.

Can a specific Irish approach be maintained?

Over the past few decades a specifically Irish approach to economic organisation has evolved. While some aspects of this should disappear, such as the cavalier attitude to fiscal legalities and the ‘poor-mouth’ gambit in financial relations with the EU, there is much in the approach which it would be desirable to maintain. This includes the balance maintained between the continental social-market model and the harsher open-market model of the major English-speaking countries, the mixed economy with the balance between public and private ownership determined pragmatically rather than ideologically, and a desire for consensus where this can reasonably be achieved. There will be institutional pressures from within the EU and financial pressures from international capital markets to move towards economic models which may well be much less appropriate than our own. The former threat might need to be countered by an ever-stronger advocacy of subsidiarity within the EU, and the latter, as in the past, by demonstrating that the model we operate is highly successful, even if it deviates from standard monetarist thinking.

Can social inclusiveness be fostered?

Part of the threat to the current consensus is due to Ireland sharing in the global trend towards greater income disparities and an apparent lack of concern for a disadvantaged minority. Both for its own sake, and because it would improve the chances of restoring some unity of purpose, early steps to foster greater social inclusiveness are desirable. The relaxation of the fiscal constraint should make such mores feasible, but underlying resource constraints mean that the mores need to be carefully planned and realistic in scale.

Can the physical environment be preserved?

Rapid income and output growth tend to be accompanied by increased pollution of land, air and water. Such an association has been present during the current boom, although to be fair, the rise in pollution appears to have been slower than the increase in output. Both for our own sake, and in response to international pressure, it is certain that extra resources will need to be devoted to environmental protection or restoration in future, and that a wide range of decisions will need to be taken in a full awareness of environmental implications. An early extension of public awareness of such developments appears to be necessary.

Can we decide our desired path?

Most of the development of the past three and a half decades did not result from formal agreements between the social partners or from conscious democratic choices. The key decisions were taken by a small number of administrators, politicians, and businessmen, and, crucially, were subsequently validated by the electoral process. Since the late eighties the economic strategy has been defined by formal agreements and by a remarkable degree of political consensus. With no single overriding threat now facing the economy, it will be much more difficult to define the aims of a consensus strategy. While it remains most important that the correct key decisions are taken centrally, it would certainly be preferable if this were in the context of an agreed consensual package of aims. Such a package can only emerge from debate, and I hope that the majority of foreign direct investment, will encourage and participate in
such a debate.

Should the past strategy continue?

The key strategic element of seeking FDI to raise output and employment in fast growing hightech, sectors should be continued. However, strategy as a whole needs to be modified to reflect both changing domestic priorities and evolving global trends.

Can the strategy continue?

Threats from unduly rising domestic costs and from external resentments need to be consciously countered. However, many fundamental advantages remain, and should enable continuation, even in the context of EU expansion.

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