It appears growth will comfortably exceed targets of some of thefinancial pessimists, writes Colin Hunt.
The Irish economy has drawn more than its fair share of detractors since its fortunes revived in the late 1980s. As growth levels surprised on the upside, an array of explanatory factors was presented by those who believed that the reported increase in activity levels was in some way unreal. In the initial period of national recovery, exports of Coca-Cola concentrate were accused of distorting the true level of economic activity and overstating GDP growth. In the intervening years, CAP inflows, EU Structural Funds and Microsoft have all been labelled as artificial drivers of activity in attempts to suggest that the extraordinary level of growth enjoyed over the 1987-2001 period was something of a mirage at times.
Fortunately, the argument that GDP buoyancy gave a false impression of real underlying economic activity lost credibility in the face of a 12-point decline in the unemployment rate and a 58% increase in the numbers at work since 1988. Accounting tricks or transfer payments designed to massage corporation tax bills might overstate GDP but don't generate employment outside the legal and financial advice spheres.
However, in line with increasing pessimism about the global economic outlook, the argument that the Irish economy is in receipt of artificial aid has reappeared once more, with Viagra identified as the great distorter of the truth on this occasion.
Ireland's ability to withstand the worst effects of the US and European slowdowns is due exclusively, it is implied, to the wonders of a blue pill manufactured (for export!) in Cork. However, a glance through the trade data will reveal that the family of chemical compounds of which Viagra is a member enjoyed export growth of a mere 0.6% in the first quarter of 2002 over 2001. Of course, one should never allow the facts to get in the way of a smirk-raising headline.
The publicity currently being enjoyed by the exporters of Ringaskiddy can be put down to the pressure exerted by the summer's traditional dearth of quality news stories and the inconvenience of a surprisingly robust economic performance in the first three months of 2002. Just when growth was supposed to be deserting these shores, it has been revealed that GDP advanced by 2.9% year-on-year in the first quarter. If you adjust the data for seasonal factors, GDP growth hit 4.2% in the year's opening months. These numbers may appear paltry in comparison with the double-digit growth experiences of the late 1990s. They are impressive enough, however, to ensure that GDP will increase by at least 2.6% in real terms this year even if the economy stagnated from April Fool's Day to New Year's Eve.
Certainly, the surprising strength of GDP in the first quarter was driven by exports, which advanced by 8.3% on the year while consumption increased by a relatively modest but still commendable 3.6%. Regardless of the driver, it appears that growth will comfortably exceed the targets of the more doom-laden members of the economics community. However, now having lost the quantity argument, the pessimists wish to move the debate on to issues of quality.
The output of the chemicals and pharmaceuticals sectors is seen as somehow inferior to that of more traditional industries, primarily because they are less labour-intensive. Exports from these sectors will create fewer new jobs than improving trade performances from industries such as clothing and footwear. Following the logic of the pessimists, Ireland would be better off if we reversed the industrial policy of the past 15 years and concentrated on labour-intensive industries where competitive pressures are driven by price rather than profit considerations.
The outperformance of chemicals and pharmaceuticals, rather than a recent phenomenon, has been a distinguishing characteristic of the economy's industrial evolution. Up to the late 1980s, Ireland's industrial base was mainly dependent on low value-adding, marginal profitability, high-labour-input, low-wage sectors which were exposed to rampant international price competitiveness. Today, the industrial base is increasingly specialised in low-labour input, high-wage, high value-added sectors such as chemicals, pharmaceuticals and IT. These sectors also happen to have super-normal profit-earning capacity and their presence in the State is underpinned by low corporation taxes and high margins rather than cheap labour.
Certainly, a strategic decision to compete with Burma in the manufacture of plastic sandals would create more jobs and greater "quality growth" in the short term. It would also generate little if any corporation tax receipts, put wages on an unending downward spiral and expose the economy to the vagaries of global demand and emerging market devaluations.
The scale of the economy's value-adding transformation is neatly captured in the trade data. Taking 1986 as our base year, chemical and pharmaceutical exports have increased in an orderly manner from 13% of the total to 40% today at the expense of more traditional industries, such as the food, beverages and tobacco sector, which has seen its share of exports falling from 26% to 6% over the same period.
Colin Hunt is head of research at Goodbody Stockbrokers