Potential of demographic forces driving growth should not be dismissed

Dermot O'Brien of NCB Stockbrokers responds to Jim O'Leary's criticisms of its long-term economic forecast

An article by Jim O'Leary in Business This Week (April 7th) on our recent report 2020 Vision: Ireland's Demographic Dividend concluded that "the great merit of such an exercise... is that it helps to focus light and attention on the future".

Such, indeed, was our hope in undertaking the research. That concluding sentence, however, came after a thousand or so words devoted only to the criticism of a couple of the assumptions underlying our projections. Disappointingly, no opportunity was taken to discuss what light our report may have shed on the future.

Neither was an alternative view offered.

All exercises in projecting the future necessarily depend on making at least some assumptions and all assumptions are open to the criticism, as the headline to Jim O'Leary's article put it, that they are based on uncertain premises. Were that fact of life to be seen as an insuperable obstacle, however, it goes without saying how little forward planning would ever be done.

Indeed, if the experience of the stresses and strains imposed by the economic boom of the past 10 years tells us anything it is the penalty we pay when we do not plan, when the forces at work in the economy are poorly understood and when their implications are unprepared for.

Failure, for example, to anticipate the shift in the age structure of the population that sharply boosted demand for housing meant that the planning authorities and construction industry were not geared to respond with an adequate increase in supply. The result was years of unnecessarily high house price inflation.

Failure to anticipate the sustainability of the boom and its implications, for example, for traffic congestion is a primary reason that a period of such unprecedented prosperity has been so uncomfortable an experience.

How close the assumptions we made in our projections correspond to reality will emerge in time. But this is not, in any event, the important question. The real question is whether planning for the minimum economic performance in the hope that problems will not arise is a prudent way to order our affairs. If there are identifiable forces which could mean that the economy will continue to grow robustly, would it not be more sensible to take account of such a possibility in setting public policy?

None of this is to suggest that we do not regard as plausible the assumptions we made on growth in productivity and on the likely extent of immigration.

On the contrary, we believe that continued strong growth in productivity is substantially guaranteed by the ongoing transformation in the average level of educational attainment in the Irish labour force. As far as immigration is concerned, we acknowledged in our report that assumptions must necessarily be conjectural but the indications currently available for immigration suggest that, if anything, our assumptions may prove to be conservative.

The link we draw between education and productivity growth is based on the contrast between the educational attainments of older labour force participants and those of their younger counterparts. The 2002 census showed that 46 per cent of persons then between 25 and 29 years of age had third level qualifications compared with less than 14 per cent of those in their early sixties. By contrast, over 42 per cent of people between 60 and 64 years of age had ceased formal education at primary level compared with only 4 per cent of those in their late twenties. Clearly, those joining the labour force are much better educated and, therefore, inherently more productive than those in the age groups leaving it.

As younger people substitute for retiring older workers, the average level of education in the labour force - and, therefore, its inherent productivity - is in a process of constant upgrading.

This will continue until such time as educational attainment is similar at all age groups in the workforce. Since we are a long way from such a situation, continued growth in the productivity of the labour force seems unavoidable. Nor should this be materially affected by the transition to a "post-industrial services-oriented economy".

Jim O'Leary's article implied that such an economy is inherently less productive but this flies in the face, for example, of the increase in the rate of productivity growth recorded in just such an economy - the US - in the 1990s. It also implies that a factory worker with second-level qualifications is more productive than someone in the services sector with a university degree.

With regard to immigration, the available evidence suggests that the current level of inflow is substantially higher than was assumed in our report.

Rising living standards in the new member states may, as Jim O'Leary suggests, ultimately reduce the outflow from those countries. Our own experience should tell us, however, that this is not something that is likely to be accomplished in a short period of years. The precise scale of the immigrant flow into Ireland remains to be seen but the probability seems a strong one to us that there will be more people coming to work in this country than leaving it in the period ahead.

What is at the heart of our analysis is that demographic change - the pace of growth in the population and the age groups in which that growth has been concentrated - has been the most powerful determinant of Ireland's economic fortunes in the past 10 years. Those positive forces are by no means spent and simply to deny their potential to drive the economy in the period ahead is to risk repeating the mistakes of the past.