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Cultivating Long-Run Economic Growth in the Republic of Ireland

Cultivating Long-Run Economic Growth in the Republic of Ireland

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Author

Tom McDonnell

Summary

New ideas and their subsequent diffusion are the ultimate source of long-run quality of life improvements. In many respects the stories of economic growth and human history are the stories of technological change and changing beliefs and ideas. Economic growth comes from the accumulation of labour and capital inputs combined with improvements in the productivity of labour and capital arising from on-going scientific progress and technological change.

Sustainable growth in per capita economic output depends on improving labour productivity. This paper discusses the Irish economy’s recent growth performance and considers its medium-and-long-term prospects for growth. A range of policy reforms to increase the economy’s long-run potential output are identified. The best way to sustain productivity growth is to increase investment in education and skills, particularly early years learning; to increase investment in the production, diffusion and use of new ideas, and to increase investment in productivity enhancing infrastructure. Human capital is a complement to innovation and technological progress and is therefore fundamental to economic change. A country or region’s innovative capacity is a function of education levels; the cost of knowledge; the quality of capital markets and government policies that support R&D. Investment in infrastructure is associated with long-run increases in productive capacity. Where capital markets are not well-functioning there is a strong case for a state investment bank to provide patient long-term finance to support innovative effort and technology diffusion.

The use of tax incentives as a tool of public policy is cautioned against. In general, tax incentives negatively affect growth by distorting allocative efficiency, by creating inefficiencies in production and consumption, and by diverting economic activity toward rent-seeking behaviour. The use of subsidies is also argued against. In general, subsidies for home ownership, business and agriculture are deleterious to long-run growth because they skew economic activity and distort resource allocation. There may be exceptions. For example, subsidies to childcare would increase potential output by incentivising the labour force participation of second earners and lone parents. This in turn would increase the effective size and quality of the available workforce while retaining valuable human capital. Similarly, carefully designed tax incentives for R&D activity can be justified given potential for market failure in the production of knowledge and for productivity gains from knowledge spillovers.

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