Global market services the key driver - ESRI

ANALYSIS:THE IRISH economy has entered a new phase of development with internationally traded market services gradually supplanting manufacturing as the key driver of economic growth in the years ahead. This is the central insight contained in the Medium-Term Review 2008-2015, published today by the Economic and Social Research Institute (ESRI).

As a small, open trading economy, Ireland must look to export markets to deliver economic growth over the long haul. As the recent short-lived domestic boom vividly illustrates, a small economy cannot depend on its home market to generate sustained gains in living standards over time.

Ireland is now fully integrated into the global economy. Like a cork on the sea, its future growth prospects are now largely shaped by the ebb and flow of the international economic tides. In the absence of domestic policy mistakes, demand growth in Ireland's larger trading partners flows over into an enhanced demand for Irish exports. However, the channel through which global growth filters through to Ireland is changing.

During the boom years of the late 1990s, manufacturing exports, principally produced by high-technology foreign enterprises based in Ireland, put the sizzle in Ireland's growth rate.

Over time, the entry of new low-cost producers to the global economic arena, the rising cost base in Ireland and competitive losses - caused, in part, by exchange rate changes - have dimmed the attractions of locating commodity-type manufacturing facilities in Ireland. In terms of the value added, Irish-based manufacturing enterprises have been forced to move up or move out.

Many have moved up the value chain, producing sophisticated output that requires a highly skilled labour force backed by research and development facilities. For this reason, manufacturing will remain highly important to the stimulation of future economic growth in Ireland, but only in high-technology niche segments.

Internationally traded market services are filling the growth gap. Already, by 2007, services accounted for 43 per cent of total exports. The ESRI foresees employment in market services reaching one million by 2015, representing more than half of total employment and making it "the dominant sector of the economy".

By 2025, the ESRI envisages market services accounting for 60 per cent of value added in the economy and 70 per cent of exports.

Moreover, business and financial services are the jewels in the market services crown. This sector includes banking, finance, insurance, real estate, professional services and RD.

Already, the ESRI notes this sector accounts for one-third of the output of the economy. By 2025, it estimates business and financial services will employ 754,000 people or 30 per cent of all those working in the economy. At that stage, employment in business and financial services is forecast to be twice the size of industrial employment.

Ireland holds a comparative advantage in the production and exporting of business and financial services. These segments are highly human-capital-intensive and the ESRI notes "There will be a very substantial increase in the supply of skilled labour out to 2020."

The ESRI has seen the future and it works - delivering sustained economic growth extending as far as 2025. On this basis, in the years 2020 to 2025, gross national product (GNP) per capita in Ireland would approach 120 per cent of the EU15 average. This would represent a heroic achievement over a 30-year span as, in 1990, Irish per capita GNP was hovering at 60 per cent of the EU average.

The final trick is to ensure domestic resources and policy apparatus are reallocated and refined to ensure the potential offered by the growth in traded market services is fully realised.