Vol. 571 No. 1
352 Mr. C. Lenihan asked the Minister for Finance his views on the reported productivity gains made by the Irish workforce over the past few years as reported by external agencies; and his further views on the way in which this can be improved upon. [19963/03]
The OECD, in its 2003 Economic Survey of Ireland, points out that Ireland's remarkable growth performance that began from the mid-1990s and continued into the start of the new millennium has led to rapid convergence of productivity levels towards the EU average. Growth since the mid- 1990s has been above the economy's potential growth rate. The diversification of FDI in recent years seems to have helped buffer Ireland's growth performance. A persistent and widening gap between GDP and GNP is an important feature of the economy and arises from a dependence on foreign direct investment as it arises mostly from profits accruing to foreign companies operating in Ireland and this affects productivity measurement.
As to the future, the OECD is of the view that the Irish economy is operating at or close to full employment and participation rates are now close to the EU average placing the focus on underlying productivity as the key determinant of the potential growth rate. Average productivity growth is forecast by the OECD to decline slightly as high technology industries mature and the economy continues to become more services intensive. In their central scenario, productivity as measure by GDP per worker is assumed to grow by 3.5% per year.
The IMF's most recent report on Ireland states that over the medium term, output is projected to grow at a trend rate of about 4-5% a year reflecting slower labour force and productivity growth compared with the late-1990s due to income convergence and lower foreign direct investment flows following the bursting of the global ICT bubble. IMF directors have commended the Irish authorities for their exemplary track record of sound economic policies, which have resulted in a dynamic, open, and robust economy – with growth notably above the EU average over the past decade – and resilience to external shocks. Directors saw signs, however, that trend growth was beginning to moderate toward euro-area levels, with implications for macroeconomic policy implementation and the expectations of economic agents.
As to my views on the way in which productivity can be improved, in addition to our industrial policy which is geared at moving the economy to higher value added activities, it is important to ensure a robust healthy economic environment in which businesses can prosper and by implication, productivity can be maximised. I would strongly agree with the assessment and recommendations of both organisations. It is important to ensure that both income expectations and public finances adjust to a slower growth environment, assist competitiveness, reflect closely changes in productivity and economic conditions and ensure fiscal sustainability. I would agree with the IMF conclusion that: "the likelihood of sustained slower growth in the period ahead calls for a sharper policy focus on reducing inflation further toward the euro-area average, improving competitiveness, safeguarding financial sector soundness and flexibility, and securing the medium-term fiscal position, in line with the Stability and Growth Pact (SGP) objective".
