The following OECD assessment and recommendations summarise Chapter 1 of the Economic Survey of Ireland 2006 published on 2 March 2006.
The Irish economy continues to perform well. Growth remains strong, foreign investment is still coming in, industry has shrugged off global shocks and house prices keep on climbing. The question is: for how long will this continue? The economy doubled in size in the 1990s, achieving the fastest growth in the OECD over that period. It also achieved the highest growth rate in the first half of the 2000s despite being hit by the worldwide slump in the information and communication technology (ICT) sector. This resilience reflects strong economic fundamentals, including a business-friendly regulatory environment, a flexible labour market, moderate tax rates and sound fiscal policy. It has also helped that a construction boom has taken over from manufacturing in driving activity.
Alternative measures of well-being
Thousand euros per capita, 20041
At current prices and purchasing power parities. The euro average is unweighted and excludes Luxembourg. The numbers shown are the OECD ranking (26 countries only for median GNI).
Actual household consumption which includes an estimate of government and non-profit institutions’ services in kind provided to households.
Median GNI is estimated by assuming that the income distribution in each country follows a Pareto distribution (with the relevant parameters being determined by the observed mean and variance in each country).
Source: OECD Annual National Accounts database, January 2006 and Boarini, R. et al. (2006), “Alternative Measures of Well-Being”, Economics Department Working Papers, No. 476, OECD, Paris.
What are the main challenges for the future?
While incomes have caught up with the European average, there is still room for further progress. To maintain a dynamic economy, Ireland faces challenges that are common to many OECD countries:
First, productivity growth will need to remain high since this is the primary determinant of living standards in the long term. The country’s remarkable productivity performance will become harder to sustain as activity shifts towards more labour-intensive services. Boosting competition will be important for meeting the productivity challenge, as will improving the education system and strengthening the research framework.
There are also some issues that are more specific to the Irish situation. The country’s infrastructure has come under severe pressure due to the extraordinary growth in population and economic activity. Bottlenecks have emerged that are imposing costs and may be acting as a brake on growth. The country is also going through a transition period during which it is upgrading many of its social services. The choices made here can affect other policy objectives in positive and negative ways. For example, better childcare and healthcare facilities would make Ireland more attractive for migrants with families. However, poorly designed and overly expensive welfare policies can reduce labour supply and drive up tax rates over time. Policymakers also face macroeconomic risks. As one of the OECD’s more open economies, Ireland is especially vulnerable to external shocks. But it also faces domestic risks. The most obvious of these concerns the housing market, but there is also a more general danger of the overall wage and price level overshooting its equilibrium level. Exports, foreign investment and immigration would all be harmed if Ireland priced itself out of the market. In this context, pursuing a prudent fiscal policy, strengthening the medium-term fiscal framework, enhancing competition and containing wage pressures via the centralised wage-bargaining framework will all be important.
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Return to the Economic Survey of Ireland 2006
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For further information please contact the Ireland Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by David Rae and Boris Cournède under the supervision of Peter Hoeller.