Economics: The Tánaiste and Minister for Finance Brian Cowen correctly identified faster productivity growth as the key to the economy's future success when he delivered the Indecon Public Policy Lecture last Monday, writes Paul Tansey.
For only a quicker pace of productivity growth can deliver the higher living standards to which the community aspires while ensuring that Irish goods and services remain price competitive on global markets.
Productivity essentially measures the amount of value added in any enterprise - private or public - per unit of input.
Productivity growth measures the changes over time in the amount of value added per unit of input. Usually, productivity growth is calculated as changes over time in Gross Value Added (GVA) per hour of labour input.
Productivity growth is shaped by an array of factors, including the scale and efficiency of physical capital investment, additions to the skills and knowledge of the workforce, the successful application of technological changes, and the quality and capability of management at both enterprise and national levels.
Irish productivity growth was explosive during the 1990s, when it played a major part in kick-starting the State's economic take-off.
While the pace of productivity growth has abated in recent years, it still remains quite respectable. The Tánaiste pointed out that real Gross Domestic Product per hour worked in Ireland had increased at an annual average rate of 2.9 per cent between 2000 and 2005.
At this rate, Irish productivity growth was twice as fast as that recorded by France and Germany, and almost three times as rapid as Danish productivity growth over the same period.
Mr Cowen also noted that rates of productivity growth were not uniform across the economy.
While high technology sectors have exhibited spectacular rates of productivity growth - a phenomenon not unrelated to transfer pricing - other sectors, most notably public services, have put in much weaker performances.
This assessment is confirmed by the latest productivity data generated by the EU KLEMS project, funded by the European Commission. Using volume indices of GVA per hour worked, the EU data show that Ireland has been running a two-speed economy over the past decade in terms of productivity growth.
The market economy, embracing production industries and market services such as the wholesale and retail trade, finance and business services, has seen steep increases in productivity over the past 10 years.
However, in non-market services - principally health, education, defence and public administration - the volume of Gross Value Added per hour worked was actually lower in 2005 than in 1995. These findings are illustrated in Table 1.
A number of caveats must be entered about these results. First, the performance of manufacturing productivity is overstated by the tax efficient location of value added in Ireland by multinational companies.
Second, estimating productivity in non-market services is notoriously difficult as, by definition, no final market prices are available for the computation of value added.
Even allowing for these caveats, however, it is clear that the non-market services segment is the locus of Ireland's productivity problem. In an effort to improve public service provision, public service numbers have risen rapidly over the past decade.
However, on the evidence available, the growth in outputs - services provided to the public - has not reflected the growth in inputs. Hence, public service productivity has fallen, most notably in the case of the health sector, where GVA per hour worked is almost 30 per cent below 1995 levels.
It would be deeply unfair to attribute these results to any lack of effort or dedication on the part of frontline public service staff. Frontline public servants - doctors, nurses, teachers and gardaí - usually have a strong vocational orientation and a genuine commitment to public service. The central problem resides elsewhere.
And that central problem is a problem of management. It exists on two levels. First, management and administration are wholly different functions. Management is active; administration, passive.
This clear conceptual difference does not seem to have percolated through public service hierarchies. As a result, we have public services that are over-administered and under-managed.
Second, it is simply a conceit to believe that inside every able administrator, there is a good manager struggling to get out.
Management is a professional skill, acquired only with time, effort and experience and usually backed by professional qualifications. It is simply not apparent - and indeed experience would speak otherwise - that, whatever their undoubted administrative skills, the key management cadres within the public services are sufficiently equipped as professional managers.
In his lecture, Mr Cowen rightly pointed to public sector reform as one of the future drivers of Irish productivity growth.
Happily, as Minister responsible for the public service, Mr Cowen has the power to initiate this reform process. And the first item on his reform agenda must be the management of the public services.
