Preoccupations with the short-term problems of the Irish economy have distracted attention from a much more important long-term revolution that is taking place behind the scenes, so to speak, moving us from a high growth economy to one of lesser, but still significant, growth, writes Garret FitzGerald.
At some as yet unforeseeable point in the not too distant future we shall emerge from what at the global level is essentially a temporary economic downturn. But the situation in which we shall then find ourselves will be different from what we had been experiencing between the end of 1993 and the early part of last year. The 8 per cent growth rate of those years is something we will never see again.
Why? First of all, because much of our exceptional labour supply during that period derived from a huge once-off movement of Irish people out of dependency and into the labour force. But now, with unemployment at a low level, with labour force participation by younger women already at a very high level, and with the number of young people emerging from the education system in decline, this rapid drop in our dependency ratio to well below the EU average level is coming to an end.
The 1990s were years of transition in central and eastern Europe, whose economies were then struggling to adapt to the capitalist system, and were not yet in a position to cater for hi-tech investment. But since 1998 some central and eastern European countries have emerged as effective competitors for external industrial investment - just at the time when Ireland was starting to face a labour shortage that was bound to have an impact upon the rate of economic growth here. Between 1998 and 2000 the proportion of new US industrial investments locating in these emerging economies more than doubled, to something like a fifth of the total - at the expense mainly of Britain, and Ireland.
The world recession is now causing some unemployment here - not just in foreign-owned industrial firms but also, as we have seen recently, in old, established industries such as the Ardagh glass bottle company and Youghal Carpets. but this does not mean we have lost our capacity to attract further high-tech investment in the years ahead.
However, after the recession the scale of such investment will almost certainly be somewhat lower than in the past, dropping back to a level that our slower-growing labour supply will be able to handle without having continually to import workers on a scale imposing inflationary pressures on our society.
All the indications are that the future demand for and supply of labour in Ireland should be sufficient to enable us for the remainder of the current decade to sustain a growth rate that will still be higher than elsewhere in Europe.
That's not at all a bad prospect. However, during these recent years we became so accustomed to rapid improvements in our living standards that we may have difficulty in adjusting to more modest improvements in the future - and it is quite certain that they will be much more modest. In order to grasp why this will be so, it is necessary to understand the process that has dramatically improved our material living standards since 1993.
Three factors determine the rate at which a nation's living standards rise. The first and most obvious of these factors is the rate of growth of output per worker - labour productivity. In recent times output per worker has been rising much faster in Ireland than elsewhere: since 1993 output per hour worked has risen by over 4.5 per cent a year.
However, our workers have been taking some of the benefits of this increased output in the form of shorter working hours - not unreasonably, as Irish workers have in the past worked considerably longer hours than elsewhere, and even after the recent shortening of the average working day are still doing so now. Accordingly, output per worker has been rising by about 3.5 per cent a year, and, all other things being equal, this would have enabled our living standards to rise at about that rate.
THE second factor is that because so many school-leavers, women previously caring for children at home, and unemployed people, have secured jobs in recent years, there has been a huge change in the average number of dependants that the average worker has had to "carry" - either directly as members of his or her family or indirectly through the tax system.
As recently as 1993 the resources produced by every 100 workers had to support 206 dependants. But last year this figure was down to 124. Thus, including these 100 workers, their output in 1993 was spread over 306 people - but last year over only 224. And that meant that even if there had been no increase whatever in output per worker during this period, there would have been an improvement of almost 40 per cent in living standards - simply because of this remarkable transformation in the proportion of our population at work.
Now, combining these two factors - the rapid increase in output per worker and the sharp fall in the ratio of dependants to workers - what we got was an increase of no less than 7.5 per cent a year in the volume of resources available per head of population between 1993 and 2001.
But there is a third, sometimes overlooked, factor potentially involved in the determination of changes in living standards, viz. changes in the proportion of resources used up in administration or in investment in the future. During the last eight years the proportion of our output absorbed by public administration fell by one-fifth - but the proportion set aside to invest in our future virtually doubled. Thus, taken together, these two elements currently use up a one-fifth larger share of our resources than was the case in 1993. And so, living standards have not risen by 7.5 per cent a year, but rather by 5.5 per cent a year. However, that is more than twice as fast as living standards rose in the rest of the EU during those years.
In the future living standards will rise a lot more slowly. For our ratio of dependants to workers cannot fall much further: already the proportion of our population at work is a good deal higher than in the rest of the EU. And so this special temporary factor that recently boosted our living standards and our level of investment so dramatically is no longer available to us. What we now have to face up to is the fact that, allowing for the likelihood of a somewhat slower rise in labour productivity during a period of less rapid growth, in the future living standards are likely to rise at less than half the rate we have recently been accustomed to: perhaps by 2.5 per cent to 3 per cent a year.