Ground Floor: For many years, Waterford Glass was the jewel in the crown of Irish industry. Its recent difficulties must, therefore, be viewed with concern and it is important to see if they are peculiar to Waterford Glass or if they have a wider applicability, writes Mike Casey.

There were firm-specific problems in the cut-crystal division, including the weakness of the dollar. The company's fortunes also waned during the late 1980s due to the dollar's weakness.

Few businesses can afford to make the same mistake twice. Tastes may have changed towards more "feminine" glassware and/or more modern designs, but they do not change that suddenly and there should have been time to anticipate, and cope with, any such changes. The John Rocha designs probably came too late.

It was once believed that Waterford Glass was such a wonderful product that it sold itself regardless of price to Irish-Americans and Irish-Britons. Wages and other costs were allowed to drift upwards. While some labour flexibility was in evidence before the recent fall from grace, it is clear that the unit cost of production was too high and competitiveness was seriously eroded.

One intriguing insight, provided by a rival glass manufacturer, is that Waterford had become too big to compete in the area of customised glassware. This niche had been taken over by smaller producersand the irony is that Waterford, although maintaining its reputation for hand-made glass, had incurred some of the difficulties normally associated with mass production.

At a general level, the story of Waterford Glass can be seen as a microcosm of the economy, particularly the dual nature of the manufacturing sector. Over the past 10 years or so, the real output of the indigenous sector grew only by about 3 per cent a year.

Contrast that with high-tech manufacturing, which grew by almost 15 per cent a year. If productivity is high, it doesn't matter all that much if production costs are high, but what if high costs of production are transmitted to low productivity areas?

Then we have a problem. The traditional sector will find it more difficult to compete on domestic and foreign markets, sales and profits will fall, and jobs will be lost. The question must be faced: Is Waterford Glass a straw in the wind?

Several commentators have argued that old-style manufacturing is past its sell-by date.

Deindustrialisation, which used to worry observers of the UK economy, is now seen to be a good thing. It's all right for workers in cheap-labour countries such as China and India to hold pieces of glass up to cutting wheels, but an advanced economy such as the Republic should switch to higher value-added, information-intensive activities.

The recent Enterprise Ireland Strategy states that "the low-cost model is no longer an option". This surprising admission means that traditional Irish manufacturing firms have priced themselves out of a viable future and must rapidly move up the value-added chain or go to the wall. The aspiration to increase value-added is fine in theory but why hasn't it happened already?

The Enterprise Ireland documents refers to software and engineering as "emerging" areas. This must mean that our entrepreneurs have learnt little from having US multinationals on their own doorstep and that linkages have been weak.

So how do our traditional firms transform themselves when their owners and managers - with some exceptions - have been passive to date; when the State's spend on R&D is the lowest in Europe (as a proportion of gross national product); when infrastructure is inadequate; and when enrolment rates in the sciences, at all levels, are now half what they were at the start of the Celtic Tiger?

There will not be enough science graduates available to work in the foreign multinationals as well as the indigenous companies. Will we be facing the unseemly prospect of the IDA competing with Enterprise Ireland for scarce human resources?

The important point is that moving up the value-added chain - or making Ireland "a hotspot for knowledge and innovation" as Minister for Enterprise, Trade and Employment Micheál Martin put it - is unlikely to happen automatically and an interventionist approach will hardly be free of difficulties, especially for an accident-prone Government.

We should not be too impressed by the fact that consumer demand is buoyant. We can only consume if we produce at more or less the same rate. If there is a shortfall, borrowing can tide us over for a while but, because of high debt levels, we may be approaching the limit of indebtedness.

Consequently, it is vital to see where production is going to come from in the future. Agriculture has fallen to less than 4 per cent of GNP.

Old-style manufacturing is on the way out and official policy seems to be geared towards speeding up that process. Construction will soon fall back to normal levels.

It seems as if we are placing a huge amount of hope on moving up the value-added chain into the information economy - which is far from being labour intensive.

The problem is that, if this upward move doesn't work, we have few alternatives because we have allowed our cost base to become so high.

Mike Casey is the former chief economist and assistant director general of the Central Bank.

Sheila O'Flanagan is away