In this blog and its associated NERI Research InBrief No. 89, NERI Co-director, Paul Mac Flynn considers how transitioning to high value sectors can contribute to building more productive economies on the island of Ireland.
During the discussion on the cost of Irish unification last week, there was much debate about the difference in productivity levels on the island of Ireland North and South. The gap in productivity, and therefore living standards, means that integrating both economies on the island of Ireland may produce many challenges.
Productivity is one of the most important metrics we use to assess the performance of our economy. Productivity is about more than economic growth, it is about how efficient we are in achieving growth. Productivity is also the key to achieving more sustainable growth by minimising the resources that go into economic activity. However, as the debate surrounding unification shows, productivity is also a key determinant of living standards and this is why it is such a big factor in any debate about integrating the economies on the island of Ireland.
While the debate last week rightly called attention to the gap in productivity north and south, it should also encourage us to look at productivity levels in both economies individually. Northern Ireland has underperformed in terms of its productivity for the best part of two decades. It also started from a much diminished base due to the conflict period and the lack of investment and growth over that period. But, there are issues of productivity south of the border as well. In the Republic of Ireland, productivity levels are greatly impacted by the role of multinational corporations and profit-sharing activities. While, domestic productivity levels are still higher than those in Northern Ireland, there is much scope for improvement. There are weaknesses that are common to both economies.
Achieving a productive economy is not just about carrying out economic activity more efficiently, in many cases it concerns the mix of economic activity that we carry out. Efficient firms drive productivity, but there is also a limit to what efficiency efforts can contribute to overall productivity. Firms are, in effect, limited by the nature of their activity in terms of what they can produce for any level of output. A firm producing meat products can be extremely efficient, but it may never be able to match the value of the output that a software firm produced even if both use the same amount of resources.
This is an area where we can seek improvement for both economies on the island of Ireland. In this new InBrief we look at how transitioning to high value sectors can contribute to building more productive economies on the island of Ireland. It proposes that we should, over the longer term, enact policies that encourage the allocation of resources to sectors and activities that will generate higher productivity and ultimately higher living standards. This should be a key part of building a new Economic Model on the island of Ireland.