GDP gives false impression, says report

LIVING standards in Ireland will be determined by the pace of productivity growth the economy can achieve in the medium term, a new report concludes.

Commissioned by Microsoft to commemorate its 20 years in Ireland it raises the old canard of Gross National Product (GNP) versus Gross Domestic Product (GDP) growth and its implications for the economy.

In essence, the report’s author Paul Tansey argued GDP figures gave a false impression of Irish productivity and economic growth.

At its most basic, Mr Tansey says productivity in Ireland between 1995 and 2004 grew by 3.5% on average measured in GDP terms, which includes the contribution of the overseas companies.

When they are taken out of the equation, that figure shrinks to 2.2%, based on GNP figures. On top of GNP-based productivity, growth has been shrinking since 2000 when it averaged less than 1%.

Mr Tansey says the implications are stark.

For starters, past economic performance is no guarantee for the future.

Therefore, if we want to sustain our living standards, and indeed fund the borrowings, providing that standard for hundreds of thousands of us, we need to wake up to the productivity trap threatening to ensnare us. Previously labour force growth of 2.7% on average in recent years was a huge factor in driving the output level of the economy. That, and productivity, gave us the growth we have enjoyed.

With labour force growth destined to grow by just 1.5% in the years ahead to achieve growth of 5%, we will require productivity levels of 3.5%, well ahead of where we are at.

In the past, we were also engaged in a big catch-up and the Celtic Tiger phenomenon was partly due to that.

However, the catching up has been accomplished and we are rubbing shoulders with the best internationally as an economy.

Many have struggled to explain how we averaged growth of 9% during that heady period, brought to a dramatic halt by the New York stock market crash in 2001.

The economist said the economy is in no grave danger, noting we have reverted to trend growth of around 5% for the foreseeable future.

This is still high octane stuff by contrast with most countries.

But the concern is, in a few years, declining productivity in the services sectors will have a corrosive impact and threaten to undermine the entire economy.

It is also the case we are no longer a low-cost country and, in future, we will have to counter those negatives by higher output.

It will be our only way to maintain our living standards, the economist warned. Enterprise Minister Micheál Martin, with responsibility for enterprise, responded promptly to the survey.

He has asked Forfás to build on this work by undertaking a significant study to assess the drivers of productivity growth and to make recommendations to Government.

Clearly the minister has accepted the general thrust of the report. Mr Tansey and the Microsoft boss in Ireland, Joe Macri, made it clear this was not an attempt to coerce employees into working harder.

Mr Macri said it was about “working smarter” and it was up to management to lead on the issue.

Mr Tansey suggested the State needed to deploy training schemes to boost the skills levels of workers in need of training.

In his view, higher output is the crunch issue coming down the tracks.

It can be dealt with, but, if ignored, consequences will be huge. Both agreed this would only be achieved by making the best possible use of technology and does not involve working people to the bone.