Irish economy has developed own momentum

Let us be clear about one thing. The extraordinary growth rates and performance of the Irish economy in recent years cannot continue indefinitely. This is no prophesy of doom, just common sense. Arguments about how to maintain double-digit growth are beside the point.

Much more interesting debates surround questions in relation to how we can ensure the boom is not ended prematurely or is followed by a crash which undoes achievements.

We should also consider how the opportunities created by the boom can be exploited to relieve the social and economic problems which persist.

So, while I concur with Sara Dillon, writing in this column on October 30th, in not wishing to cast gloom over current performance, I also agree that the performance of recent years, as measured by GDP growth, is unlikely to be maintained. However, her central argument, that the State is too reliant on footloose multinational corporations and does not have any alternative strategy for economic development, does not stand up.

A more accurate analysis sees the State's policy in relation to multinationals as one part - albeit a very important part - of a long-term development strategy. This strategy has experienced episodes of failure and recent success, and is now faced with some important challenges as a result of that success. These challenges should not be construed as indications of failure in the overall strategy.

There is no doubt that the State's corporate tax regime has been the single most important factor attracting multinationals to Ireland. There is still some debate as to the future of the relevant provisions. However, it cannot be concluded at this stage that radical change is inevitable, or even likely.

More important, even if there is some unforeseen change which weakens the State's ability to attract foreign direct investment inflows, it cannot be deduced that this will reverse the process of industrial growth and development which has taken place. In other words, while further industrial growth may be hampered, it does not mean that existing firms are going to leave to the extent suggested.

A more useful analysis of the future of the economy should instead concentrate on the most likely developments, particularly those with predictable effects.

The ability to produce in the most advantageous geographical regions is at the core of the success of multinationals. However, this is not the same as saying they are totally footloose. In fact, many of them form long-term relationships with particular regions. The key to success has been to discover why this is so and create the conditions to bring it about. The characterisation of multinationals as footloose more accurately describes the situation and the firms in Ireland in the early 1980s than those in the late 1990s.

Foreign-owned firms are now much more deeply embedded in the economy that in earlier years. As a result, factors such as the pool of available skills, work practices, back-up services and external and agglomeration economies are much more important.

Part of the evidence for this change is how the location of the drivers of growth in the economy has been shifting from the foreign to the indigenous sector in recent years. This process is far from total and no one should suggest that the multinationals are becoming irrelevant. But the strategy of developing competitive indigenous industry and economic growth around a core of foreign-owned industry has begun to succeed.

This has not happened in a policy vacuum, and numerous studies from bodies such as the National Economic and Social Council and Forfas, among others, have contributed to the development. The result is that the State is no longer a peripheral location for multinationals to invest in, but is a central player, albeit in a limited number of industries. At the same time, Irish firms are developing the competencies to ensure the economy gains the benefits of having these firms here. They now have a stake in the State which goes beyond the initial inducements to invest.

So where will problems arise? The first is the general global economic slump which now seems inevitable. This is sure to affect demand for exports and could also affect the inward flow of investment as profits are reduced and expansion plans put on hold. Some outflow of older cost-driven foreign direct investment inflow will also occur, although this is likely to be ongoing irrespective of global events.

The most that Irish policy can do in the face of these developments is to ensure that the economy remains an attractive location for foreign investment. This means keeping the economic environment as stable as possible and ensuring that the competitive gains of recent years are not reversed.

The second challenge arises from the rapidity of growth in recent years and some weaknesses which remain in the economy. Growth cannot continue unchecked if inputs are constrained. The key input is the supply of a skilled labour force. There is now considerable tightness in the labour market.

While this may be most obvious in relation to certain high-tech industries, it is a problem facing firms requiring a wide range of skills. The failure to develop adequate infrastructure means logistical problems now threaten further expansion. These are features of national policy. It is essential that both these problems are addressed in the upcoming Budget.

Despite what the EU forecasters might think, Irish growth is likely to ease back in the next few years. But this is not because the development strategy in relation to foreign direct investment inflows has been erroneous. In fact, it has laid the basis for much of recent success and for the dynamism which indigenous industry is now demonstrating. Neither does it mean that all the gains made are about to be reversed.

Industrial policy has not been perfect and some areas remain weak. However, it cannot be concluded that there is some grand alternative plan, which could counteract global trends and overcome existing deficiencies, but which remains undiscovered because of some planning failure on the part of policymakers.

It is accepted that simply attracting foreign industry to locate in the State will not achieve sustainable prosperity. But it cannot be concluded that the foreign direct investment inflow-focused strategy followed in recent years has been misguided or is doomed to failure.

Dr Kevin Hannigan is head of economic research at the Irish Management Institute.