Irish policy-makers need to hold their nerve and persist with the formula that has brought Ireland economic success, Mr Terry Baker of the Economic and Social Research Institute (ESRI) said yesterday.

Delivering his "valedictory seminar" to an audience at the ESRI, Mr Baker said there was no reason the Irish economy should crash. However, he warned that there are threats from both Europe and the UK.

As editor of the ESRI's Economic Quarterly, Mr Baker, who retired in August, is one of the longest-standing observers of the Irish economy. One of the key problems looking forward, he argues, is that, with no single overriding threat now facing the economy, it will be more difficult to define a consensus strategy. Industrial relations difficulties, which have understandable roots, are the main current potential threat to social partnership, according to Mr Baker.

"There is genuine and somewhat justified resentment at what is seen as unfair distribution of income - and recent revelations do not help," he said.

On the other hand, he says, there is a danger that the prospects for prolonged steady growth will be "frittered" away through excessive wage increases, leading to too great a loss of competitiveness in the single currency zone.

But a continuing flexible and adaptable strategy on attracting foreign direct investment - as well as avoidance of external resentment from our EU partners, which could lead to policies such as harmonising tax rates - should allow success to continue.

Mr Baker also warned that there are threats to Ireland's near-unique balance between the European social market model and the much harsher free market system prevalent in the US and the UK.

Avoiding the "malignant influence" of the purely monetarist market economists, particularly in London, will be important, according to Mr Baker. While the economy is strong, he said, this will be relatively easy to do, "but when growth turns down, they are likely to put the boot in".

Other priorities should include fostering social inclusiveness, he said, although it is important to define what is meant by this. Much has been done already to eliminate the very real poverty of the 1950s, but more can be done if the goals are set out, he added.

Surprisingly, Mr Baker does not believe that the bottlenecks that have emerged in the economy, particularly in transport and housing, are a large problem. He thinks both will be sorted out as market forces and policy feed through.

Foreign misconceptions of Ireland are more of a problem. According to Mr Baker, the International Monetary Fund and the German finance ministry - probably referring to with former minister Oskar Lafontaine's tax threats probably in mind - misunderstand the economy and apply inappropriate thinking to Irish circumstances. The seminar ranged widely over the progress of the Irish economy from the impoverished 1960s, when more than a third of the population was engaged in agriculture, to the present day, in which Ireland is an outward-looking region of Europe.