Our current economic boom is the result of an extraordinary and sustained rise in the average level of productivity of our economy, which has been reflected in a trebling of corporate profits from 1992 to 1999.
Principally, but not exclusively, because of external high-tech investment, the average gain in productivity - and thus in the profitability of business in Ireland - has been phenomenal. Our recent economic performance is unique in the industrialised world, outside the aftermath of destructive war. The speed with which we have moved from large-scale unemployment to what is effectively full employment has also been unique.
These developments have inevitably posed new and unfamiliar problems for our public administration. For the policies required in conditions of full employment are totally different from those that were formerly needed to achieve that objective. And a governmental system that spent decades battling unemployment and emigration has clearly found it very difficult to rethink fundamentally its traditional developmental approach to economic policy.
This problem has been complicated by the coincidence of two seminal events: our arrival at the point of full employment and our entry into European Monetary Union. Before last year's EMU accession many of the new and unfamiliar challenges of full employment could have been tackled by revaluing our currency within the Exchange Rate Mechanism, thus reducing inflationary pressures, as Germany did frequently in past decades.
Unhappily, this opportunity was missed at the time of our entry to EMU in 1998, when only a very modest revaluation of our currency, by a few percentage points, was undertaken on the eve of our entry to EMU.
Clearly our partners should, at that time, have insisted on a bigger revaluation of the Irish pound, but - as has been clear from almost all recent external comments on our economy - there was, and still is, little understanding outside Ireland of the unique character, as well as scale, of our recent economic success.
The Government's failure to effect an adequate revaluation of the pound in 1998 was accompanied by an equally unfortunate failure to appreciate that, in the face of an overheating economy, growing at a phenomenal 8 per cent a year as it approached full employment inside EMU with an undervalued currency, the only weapon available to avoid a dangerous overheating of the economy was budgetary restraint. Instead, what we got was an inappropriate expansionary budget last December - one that, according to the Central Bank, boosted already rapidly growing disposable income by a further 2 per cent.
To these serious mistakes was added what increasingly appears as a further tactical error: the negotiation at that point of a further national pay agreement.
In fairness, it should be emphasised that all the previous national agreements from 1987 onwards were very positive factors in the achievement of the economic growth that eliminated emigration and unemployment during the course of the 1990s.
The moderation of pay claims that was thus secured certainly contributed enormously to improved profitability, and this in turn helped to generate a huge increase of no less than 440,000, or 37 per cent, in employment during this period.
Increases in economic activity and employment always tend to raise productivity by making fuller use of existing capacity - a factor that, in the Irish case, was intensified by the significant proportion of this additional employment created by high-tech firms with exceptional levels of productivity and profitability. Thus, throughout most of 1990s we were becoming more and more competitive with our trading partners.
But by 1999, with the arrival of full employment, the need for such sustained moderation in pay claims had disappeared. Pay in the private sector was no longer going to be determined by national pay agreements, but rather by the forces of supply and demand in a labour market where shortages of workers was bound to force up wages rapidly.
Two examples are the fact that in 1999 skilled workers' wages in construction were over 20 per cent higher than two years earlier, while, as The Irish Times reported last Thursday, accountants' pay increases within the past year have been in the 11 per cent to 20 per cent range.
Moreover, by last year the shortage of various skills in the public sector were starting to create serious problems for the efficient delivery of some public services, and the Civil Service itself was losing many of its more able administrators to the private sector, as well as having serious recruitment problems.
If public services are to be maintained and public administration is to operate effectively, something much more sophisticated than a standardised annual increase of 5.5 per cent for the entire public service is clearly needed.
Moreover, the old formula of trading tax cuts for pay moderation, which had proved so effective in generating rapid economic growth during the 1990s, has now become a millstone around the neck of a Government that, in the post-EMU absence of the traditional weapons of interest-rate changes, or in extreme cases exchange-rate adjustments, badly needs the flexibility to use tax changes to fine-tune the economy.
What can be done now to get us out of the bind into which we have been led by these errors of policy? As Jim O'Leary cogently argued in yesterday's Business This Week, in the absence of the capacity to revalue our currency, market forces will help to fill the gap, achieving a somewhat similar result by pushing up labour costs. This process will slow the demand for labour, which is distorting our economy and creating the most serious underlying inflationary pressures.
In these circumstances the Government's task should be to review the pay situation constructively with the trade unions - not paying too much attention to the employer lobby, which collectively seeks to hold down pay rates that employers individually are happily bidding up. (The interests of the employers' collective lobby no longer corresponds with the broader national interest as it largely did during the 1990s). Such discussions could centre on how best to ensure further necessary pay increases do not create a wage/price spiral.
One conceivable method of securing this could be a combination of an agreement on a once-off special pay increase over and above what is provided for in the Programme for Prosperity and Fairness, with an agreement that thereafter pay increases would revert to the level provided for in that programme.
At the same time the Government needs to introduce market forces into public service pay determination. At this time such a move could be very beneficial for many underpaid able public servants. If the public service is to be able to attract, and thereafter to retain, people with special skills or exceptional ability, trade union opposition to such a development, deriving from long-established traditions of promotion by seniority and opposition to merit payments, badly needs to be overcome.
We have to face the fact that there will be inflation whether we allow wages and prices to take their own chaotic course, or seek instead to address the undervaluation of our currency by a rational approach to pay increases. The latter seems, however, a more sensible way to proceed.