We need to raise productivity across the entire economy if we are to build on the success already achieved, writes Don Thornhill.
Twenty years ago the competitiveness challenge facing Ireland was clear - the need to reduce double-digit price and pay inflation, to lower government spending and debt, to resolve industrial unrest and to improve infrastructure.
All this was aimed at reducing unemployment and emigration, and closing the gap between Irish and EU living standards.
A strategy of positioning Ireland as an export-driven, high-tech production hub for the EU market was pursued by successive governments.
This centred on a number of key policy objectives such as industrial peace and pay predictability through social partnership, a competitive corporate tax regime, reforming personal taxes to create incentives for work and enterprise, the aggressive pursuit of foreign investment, educational reform and development of indigenous enterprise.
These strategies have been hugely successful.
In the 10 years to 2004, Irish GNP growth averaged over 7 per cent per annum in real terms, more than double that of the US and close to triple that of the euro zone.
Real GNP is expected to grow by a further 5 per cent this year, compared with an OECD average of 2.6 per cent. Almost two million people are at work in Ireland, immigration has replaced emigration, and the public finances are in a strong position.
If sustained economic growth is a key measure of competitiveness, then Ireland ranks as one of the most competitive economies in the world.
Yet competition and change are relentless. The National Competitiveness Council (NCC) has just launched its annual policy statement, the Competitiveness Challenge 2005. Our focus is on how our economic success and future competitiveness can be sustained, and to identify initiatives necessary to support and further improve Ireland's competitiveness position.
At present Ireland faces challenges to our competitiveness on several fronts - global competition, the rising cost of doing business here, the ongoing shift from manufacturing to services, and the growing role of knowledge as the basis for competition.
In addition, much of the recent growth in the economy has been driven by rapid growth in domestic spending by households on personal services and housing rather than increased exports. Private debt has increased significantly. Debt-financed growth in consumption and construction cannot support an expansion in employment and incomes indefinitely.
In the long run, the further development of our dynamic and competitive export sector is the platform which will support the rest of the economy.
In the view of the NCC, raising productivity across the entire economy will be central to supporting our international competitiveness and prosperity.
With employment rates in Ireland now above the EU average, Ireland's ability to catch up with the living standards of the world's richest regions will, relatively speaking, depend less on increasing employment and more on increasing productivity by those already at work.
High productivity is the glue which enables countries to achieve high income levels and competitiveness at the same time. Productivity is not about working harder, for longer hours and for less money. It is about working smarter.
The good news is that this year's Annual Competitiveness Report, published in September by the NCC, shows that Ireland achieved high rates of labour-productivity growth in the 1990s. Ireland's average productivity levels are now above the EU average.
However this productivity growth has been concentrated in a small number of capital-intensive industries dominated by multinational companies such as chemicals, pharmaceuticals and electronics.
There is evidence of weaker productivity and slower growth in more traditional manufacturing sectors and in those services sectors of the Irish economy less exposed to international competition, such as utilities, construction and retailing.
The NCC believes that the need for continually increasing productivity should now be put at the centre of economic policy. It provides the means of generating the resources for investment in social progress. We have identified a number of important policy directions for achieving this.
There is a need to achieve greater value for money in the delivery of physical infrastructure, and more generally the need to improve the effectiveness and efficiency of the public sector.
The NCC believes that there is a need to broaden the tax revenue base that finances public spending through the measured introduction of new taxes and the elimination of tax incentives.
Broadening the tax base, particularly in the direction of recurring taxes on property, will boost over time the long-term sustainability of competitive direct tax rates on labour, profits and capital gains. Furthermore, property taxes can be pro-work and enterprise in that they are not a tax on economic activity.
The next National Development Plan is a unique opportunity to make a reality of the National Spatial Strategy as the platform for regional and infrastructural development in Ireland.
In the Greater Dublin Area we see it as crucial that the national and local authorities work together on transport planning.
As outlined in the Programme for Government, this may require an overarching body to co-ordinate the city's development.
Ireland's education system should be the best in the world. There is a need to reduce educational disadvantage throughout the school system, promote life-long learning, and build an internationally-competitive higher education and research system at the highest levels of achievement.
All parts of the educational system require significant additional resources, and the NCC sees an increased role for private finance in higher education. It is unlikely that the State will be able to fund the expanding tertiary education sector to the required level of internationally-competitive quality from tax payers' funds alone because of tax revenue constraints and competition from other demands.
In addition, the very considerable private rates of return enjoyed by graduates of the higher education system suggest that students should make a contribution to the costs of their education.
Government can support technological innovation by industry in a number of ways.
This requires increased support for research and development in the business sector, the development of networks and clusters, and by developing effective frameworks to facilitate the commercialisation and diffusion of knowledge.
There is also a need to improve business process innovation through increased ICT literacy and management skills.
Some of the recommendations in the Competitiveness Challenge 2005 are controversial. The NCC is proposing these policy directions because we consider that they are necessary to sustain and build on the remarkable economic progress that has already been achieved.
These arguments for change are not just addressed at Government and the wider political system. Many - if not most - of the actions needed to move Ireland to a more innovation-oriented stage of economic development are outside the direct remit of policy makers.
Significant decisions also lie in the hands of, among others, the managers and employees of individual firms, educationalists, and the members and leaderships of industry associations and trade unions.
We look forward to a broadly-based, constructive and measured debate on these proposals.
Dr Don Thornhill is chairman of the National Competitiveness Council