Padraid McGowan, Ireland - experiences in EMU
Presentation by Mr Padraig McGowan, Director General of the Central Bank of Ireland, at the Central
Bank of Iceland on 7th December 2000.
* * *
Ladies and Gentlemen, let me begin by thanking you for inviting me to speak here today. It is a great
pleasure for me to have this opportunity to discuss the recent performance of the Irish economy as
well as some of the challenges for Ireland which participation in Economic and Monetary Union
(EMU) presents.
Economic performance since 1994
The performance of the Irish economy in recent years has been excellent, both in historical terms and
by international standards. Since 1994, the economy has expanded at an annual average rate of around
8%. Expressed another way, output at the end of 2000 will be around 70% higher in real terms than at
the beginning of the current phase of strong growth. To put this into perspective, the annual growth
rate of the Irish economy averaged around 31⁄2% between 1960 and 1993.
The buoyant economic conditions of recent years have facilitated a significant improvement in living
standards - as measured by GDP per capita - relative to the EU average. In Ireland's case, however,
GNP per capita - around 85% of per capita GDP - is a more appropriate measure of domestic living
standards, given the large profit repatriations of foreign-owned multinational corporations whose scale
of operations in Ireland has expanded significantly in recent years. On this measure, income per capita,
although rising, remains somewhat below the EU average. In addition, the stock of wealth in Ireland
remains below the EU norm.
This strong growth has paid large dividends in the labour market - traditionally Ireland's Achilles'
heel. For many years, Ireland's employment performance had been quite anaemic, with many
commentators characterising the economic situation as being one of "jobless growth". Total
employment actually fell during the 1980s. Since 1994, however, strong economic growth has been
associated with employment increases of around 43⁄4% per annum. In overall terms, employment is
now almost 40% higher than in 1994. This large increase in employment has been facilitated by
transfers from unemployment into employment as well as a significant increase in the size of the
labour force. The latter reflects the increase in the population of working age, increased participation
and net inward migration. This has resulted in the employment rate for the active population
increasing by around one-quarter between 1994 and this year.
Unemployment has fallen below 4% and, while precise estimates are difficult to pin down, it is now
clear that the economy is operating at or very close to full-employment. For an economy with a long
history of unemployment problems, the virtual attainment of full-employment is the most encouraging
feature of the recent economic performance. With sustained strong labour demand, the level of
longterm unemployment, i.e. unemployed for one year or longer, has fallen dramatically since 1997 to
1.4% at present. Involuntary emigration - for so long a symbol of Ireland's dismal economic
performance - has been eliminated and, for a number of years now, Ireland has experienced net inward
migration. Since 1994, the population has expanded by around 1% per annum, with net inflows
returning migrants and others - accounting for about two-fifths of this increase.
The transformation of the economy which has led to a higher level of economic activity has also
resulted in a reversal of fortunes for the public finances. A surplus has been recorded since 1997 and
this year, a general government surplus of 3.7% of GDP is currently expected. The improved fiscal
position and the increase in output have resulted in a decline in the ratio of debt to GDP, to around
41.5% this year, one of the lowest ratios in the EU. With the increase in output experienced in recent
years and with nominal interest rates relatively low by international standards, the burden of debt has
fallen significantly.
These favourable developments have given rise to a range of issues, some of which are new to us. The
rate of inflation has picked up significantly, there are increasing labour market pressures, and a wide
range of asset prices have been increasing very substantially for some years. This has been associated
with a rapid increase in bank lending and an accompanying increase in private sector indebtedness. In
addition, a considerable infrastructural deficit has emerged which has implications not just for
economic development but for the quality of life in Ireland. With Ireland's participation in EMU,
monetary policy cannot be used to deal with these developments. I will return to these issues later.
a
Recent Indicators of Economic Performance
c
1994 1995 1996 1997 1998 1999 2000 (f)
GNP 6.3 8.2 7.4 9.3 7.8 7.8 81⁄2
GNP per capita 6.0 7.7 6.6 8.3 6.6 6.7 71⁄4
b
Employment 3.2 5.0 3.6 3.9 6.8 6.3 43⁄4
b
Unemployment 14.7 12.2 11.9 10.3 7.8 5.6 41⁄2
Inflation (CPI) 2.4 2.5 1.6 1.5 2.4 1.6 51⁄2
Exports/GNP 78.8 86.3 87.6 90.7 98.9 102.4 107.0
General Gov. Balance - 2.0 - 2.2 - 0.2 0.7 2.1 1.9 3.7
Revenue/GDP 40.1 37.4 37.8 36.9 36.0 36.2 35.2
Expenditure/GDP 42.1 39.7 38.0 36.2 33.9 34.3 31.5
(a) Growth rates, except unemployment (rate) and Government balance (percentage of GDP).
(b) As at April of each year, except for 1999 and 2000 which are full year averages of quarterly data.
(c) Central Bank of Ireland forecasts (Autumn 2000).
Experience in the EU
Changing structure of the economy
For about two decades up to the late 1970s, the Irish economy had performed relatively well,
following the adoption of more outward-oriented policies from the late 1950s. This necessitated a
restructuring of the economy and the inevitable demise of some firms and sectors which had
developed behind sometimes quite high tariff barriers. Membership of the then European Economic
Community in 1973 was a major milestone on this road. However, given the point from which Ireland
was starting in 1973, it was evident that the advent of free trade resulting from membership would
bring major changes to the trading relations and structure of the Irish economy. Prior to membership,
Ireland had a relatively large agricultural sector, which was highly dependent on the adjacent UK
market. Industry was predominantly small-scale, and was still in the process of adjusting to the
lowering of tariff barriers to improve competition and to the adoption of a more export-oriented
perspective. In this environment, productivity and living standards were relatively low.
GDP by Sector: Percentage Distribution
1970 1980 1990 1999
Agriculture 17 12 9 4
Industry 36 37 35 38
Services 47 51 56 58
Source: National Income and Expenditure (various issues), Central Statistics Office.
Transformation of Manufacturing Sector: Per Cent of Total
1983 1990 1998
Irish Foreign Irish Foreign Irish Foreign
Output 41 59 32 68 18 82
Employment 61 39 55 45 53 47
Source: Census of Industrial Production, various issues.
The structure of the manufacturing sector has been radically altered in the thirty-odd years since EU
entry. The traditional sectors - typically relatively low skilled relying on local inputs - have declined in
relative importance, and have been replaced by high-technology, largely foreign-owned firms in
sectors such as computer hardware, chemicals, software and medical instruments. Currently, these
modern sub-sectors account for almost three-quarters of output and around one-third of employment in
the manufacturing sector. The structural changes in the economy have also been associated with
substantial change in the destination of exports, mainly from the UK to the rest of the EU.
Destination of Total Exports: Percentage Distribution
1970 1980 1990 1999
UK 66 43 34 22
a
Other EU 9 32 41 43
Elsewhere (Including USA) 25 25 25 35
(a) Countries comprising EEC/EC/EU in the relevant years.
Source: Central Statistics Office.
Foreign direct investment
There are a number of factors that lie behind this transformation of industry. First, the regulatory
environment for setting up and running businesses in Ireland has been relatively light. Secondly, an
emphasis was placed on the rapid modernisation of the telecommunications infrastructure. Finally, and
most importantly, has been the successful industrial policy of encouraging inward foreign direct
investment. A wide range of measures have been used to attract foreign firms to Ireland. These include
a low corporate tax environment, the development of the educational and technical skills of the
workforce, a relatively low cost environment and the opportunity to use Ireland as a gateway to the
vast EU market.
Traditionally, foreign direct investment (FDI) in Ireland has typically taken the form of "greenfield"
investment as well as expansions of existing plants. This has had a greater direct impact on output and
employment than would have been the case if it had taken the form of mergers and acquisitions. In
addition, foreign direct investment has helped to transfer technology, skills and modern management
methods in a relatively easy way to the Irish economy. The high-technology sectors have imparted a
new dynamism to business, and have led to a large number of start-ups by former employees of these
foreign-owned enterprises - the software industry being perhaps the best example. It should also be
stated that, although there has been a sizeable shake-up of domestically-owned industry in the new
free-trade environment, much of domestically-owned industry has been radically modernised and put
on a sound, efficient footing.
US Direct Investment Abroad: Irish Percentage Share of EU Total
1994 1995 1996 1997 1998
Manufacturing 8.4 2.9 10.9 15.0 7.0
of which:
Chemicals 6.9 2.4 13.0 17.3 15.4
Electrical & Electronics 7.6 5.4 18.0 33.2 39.2
Source: US Department of Commerce.
A significant proportion of FDI inflows into Ireland originates in the United States: in 1998, 41% of
all foreign-owned manufacturing firms in Ireland were from the US. Between 1994 and 1998, annual
inflows of manufacturing FDI from the US amounted to around 11⁄2% of Irish GDP. Indeed, Ireland
receives a large share of all US FDI. For example, in 1998, Ireland received 7% of all US
manufacturing inflows into the EU, a not insignificant proportion for a country with around 1% of the
EU GDP.
The success which various foreign multinationals have enjoyed has encouraged others to establish
manufacturing bases in Ireland. As a result, agglomeration economies have developed over time:
success has bred success. In more recent years, the manufacturing economy has benefited from what is
known as "distance independence" - transports costs as a percentage of output value have fallen
substantially for high-technology outputs such as software and chemicals. This has significantly
reduced Ireland's peripheral location disadvantage.
A number of implications arise from this policy of targeting high-technology FDI. Firstly, a sharp
dichotomy has emerged within the industrial sector between the relatively low value-added traditional
sector which produces largely for the domestic and UK markets, and the more dynamic higher
valueadded technology sector, which produces primarily for the rest of the EU and US markets. This
dichotomy is most apparent in the productivity data, with the high-technology sector being an
estimated five times more productive than the traditional sector. Secondly, in Ireland, the relative
importance of the industrial sector has been rising in recent years, albeit at a moderate rate. This
situation contrasts strongly with the experience of other advanced economies, where the industrial
sector has been in relative decline for some time.
EU financial support
I should also mention that the various financial support mechanisms of the European Union - the
Structural Funds and the Cohesion Funds - have been of assistance in adapting to the new economic
structures and in financing infrastructural development. These supports have averaged around 21⁄4% of
GDP since 1989, and have been in relative decline during the past six to seven years of strong
economic growth. Indeed, it has been argued that the impact of the structural fund process on the
administrative and political system has been at least as important as the investment itself. In particular,
transfers under the Community Support Framework encouraged the government to raise public
investment from its extremely low level in the 1980s. Finally, transfers to the agricultural sector under
the Common Agricultural Policy, which have averaged 31⁄2% of GDP since 1989, have provided
protection to the farming sector from global trends.
Experience in the EU single market
The full implication of the EU single market by the end of 1992 was regarded with some trepidation, it
has to be acknowledged, by a number of commentators on the Irish economy, when this EU initiative
was taken in the mid-1980s. This centered around a concern that the core countries of the EU would
reap most of the benefits of the new single market, with the countries on the periphery running the risk
of becoming economic backwaters. These fears focused on the possibility that positive externalities
and increasing returns to scale were most likely to be available to the developed, industrial core of the
EU. Industries that are characterised by increasing returns to scale - motor vehicles, heavy chemicals,
man-made fibres etc. - were deeply embedded in the economies of the countries at the centre of the
EU, but were of little significance in most of the peripheral countries such as Ireland. In this view, the
developed regions of the EU would therefore benefit from first mover advantage.
The counter-argument pointed to the benefits that could accrue to small countries from the much larger
market. Even if, for historical reasons, small countries did not have many sectors characterised by
increasing returns to scale, the opportunity existed for these to operate at an efficient scale in the new
large single EU market. The removal of barriers to trade and lower transport costs also reduced the
necessity for industry to be located close to the largest markets. Thirdly, less developed regions in the
ceteris
EU were normally characterised by lower costs, and this, paribus, placed them at an advantage
in the development of new sectors and enterprises. Finally, it was evident that the location of new
knowledge-based industries characterised by innovation and technology was much less tied to
comparative advantage based on natural endowments. Comparative advantage in these sectors was
something that could be created and acquired in the right institutional and policy environment. In the
event, the worst fears of the pessimists in the argument of the periphery vis-à-vis the centre have not
been realised, with the experience of peripheral regions in the single EU market, including Ireland,
being generally satisfactory.
Ireland and the single monetary policy
Ireland adopted the euro at its inception in January 1999 and became part of a large monetary union.
This was not something fundamentally new in Ireland, however, as until 1979 Ireland had participated
in a currency area with sterling for over one hundred and fifty years previously; the Irish currency and
sterling were amalgamated at parity in 1826. With the introduction of the Irish pound in the late 1920s,
there was a no-margins one-for-one link between the Irish pound and sterling which prevailed until
1979. Coupled with complete freedom of capital mobility, this resulted in virtually the same levels of
interest rates in Ireland and the UK. Given the high degree of trade integration as well as capital and
labour mobility which existed during this period, it could be argued that this exchange rate regime was
an entirely natural phenomenon; in this regard, Ireland and the UK could have been regarded as an
optimum currency area.
In the mid-1970s, the link with sterling began to be questioned following persistent high inflation rates
in the UK coupled with a significant depreciation of sterling which inevitably resulted in broadly
similar rates of inflation in Ireland. The establishment of the European Monetary System (EMS) - with
its primary objective of being a "zone of monetary stability" - provided an alternative to the sterling
link. Ireland joined the EMS at its inception in 1979, and the link with sterling ended shortly
afterwards as sterling rose against EMS currencies.
The experience in the EMS has not always been positive, particularly in the early years, with a
sizeable appreciation of sterling and the pursuit of pro-cyclical fiscal policies which undermined
stability. In August 1986, the Irish pound was devalued by 8%, in part to reverse an unwarranted
appreciation of the Irish pound's effective exchange rate that had occurred mainly due to a sharp
weakening of sterling. For over a decade thereafter, the nominal effective exchange rate for the Irish
pound was generally stable, apart from the 10% devaluation in January 1993. This devaluation, in the
context of the European currency crisis of 1992/1993, was again partly correcting an unwarranted
appreciation in the Autumn of 1992. This was an example of where Ireland was affected by contagion
in the international foreign exchange markets.
From 1994, the Irish economy began to grow strongly. During this period, economic policy was
primarily driven by the need to meet the criteria for EMU membership. Policies of fiscal prudence
were continued while exchange rate policy was consistent with price stability. In the two years prior to
membership of the euro area the Irish pound was relatively strong. This was consolidated by a 3%
revaluation of the Irish pound in the EMS in March 1998.
Benefits of EMU
In a small open economy with a high degree of trade integration into the EU and world economies, it
is logical for Ireland to be amongst the keenest supporters of EMU. A small economy such as Ireland,
which exports a significant part of its output to other participating countries, should stand to derive
significant benefit. Secondly, the prospect of monetary stability will have a long-term beneficial
impact on investment and growth. Over time, in accordance with the price stability mandate of the
ECB, inflation is unlikely to exceed 2% per annum for any sustained period of time. As a result,
nominal interest rates should not, in general, carry a significant inflation risk premium. In addition,
EMU imposes a discipline on participating countries, in the sense that sound fiscal policies and
enhanced structural reform assume greater importance in a monetary union. Finally, some positive
effects resulting from the single currency will become evident in capital and financial markets. Over
time, for example, the development of deep and liquid capital markets will improve the potential for
companies to raise finance. This will enhance the growth prospects of younger firms, in particular;
these are typically innovating firms which bring new technologies to the market. In addition, the
increased efficiency and competitiveness of financial markets in the euro area will facilitate an
increase in corporate restructuring through mergers and acquisitions activity. On the latter point, there
is evidence that this process is already underway.
Implications for policy of joining the euro area
From an Irish macroeconomic perspective, however, the initial impact of the adoption of the single
currency on 1 January 1999 was a significant easing of monetary conditions. While the decline in
nominal interest rates had for the most part been discounted, subsequent developments in relation to
real interest rates - in the light of Ireland's higher inflation rate - have led to a further easing of
monetary conditions. This has been compounded by the decline in the external value of the euro. This
easing of monetary conditions has occurred at a time when the Irish economy is performing very well
compared to the central euro area countries, with strong domestic demand in particular giving rise to
significant risks of overheating in the economy. With monetary policy now geared towards the
objective of price stability for the euro area as a whole, it cannot be deployed to meet region-specific
requirements. The corollary of this is that, in order to cope with regional or country-specific
difficulties, policies other than the single monetary policy must be employed more vigorously.
Fiscal policy
In particular, fiscal policy must assume a greater role in restoring macroeconomic balance. Within
EMU, fiscal policy must be conducted within the framework of the Stability and Growth Pact, which
requires the national authorities to ensure that their budget balances are "close to balance or in
surplus" over the medium-term. The reason for this is to limit negative externalities resulting from lax
fiscal policy by individual countries within the single currency.
For Ireland, it is arguably the case that fiscal policy is now more effective than in the past. With both
interest and exchange rates now given, the effects of fiscal policy are no longer likely to "crowd out"
or "crowd in" private sector consumption and investment. In these circumstances, fiscal policy is a
relevant policy instrument for Ireland. Despite this, the impact of fiscal policy is subject to a number
of limiting criteria. Firstly, given the high degree of openness of the Irish economy, it is inevitable that
at least part of the impact of fiscal policy will be reflected in external trade developments rather than
in domestic activity. Secondly, given the large exchequer surpluses which have been recorded for
some time now, expectations may impose some constraint on a tighter fiscal policy stance. Finally,
given the consensus-based approach to macroeconomic determination, the stance of fiscal policy is, at
least to some extent, somewhat pre-empted in Ireland by commitments made under national wage
agreements.
Incomes determination
The evolution of pay in Ireland has been conducted within a partnership framework, encompassing
government, employers and unions since 1987, with the first agreement applying from the beginning
of 1988. The current agreement - Programme for Prosperity and Fairness - is the fifth such
agreement. The pay terms typically involve a three-year process in which unions accept moderate
nominal wage increases in return for income tax reductions. Indeed, these reductions in income taxes
have delivered a not insignificant part of the increase in take-home pay.
National agreements were undoubtedly an important feature in restoring confidence and
competitiveness in the late 1980s and early 1990s. The moderate evolution of nominal pay created a
virtuous cycle in which the economy's competitiveness improved and total employment rose. As I
outlined earlier, the public finances were put on a more stable footing while, over time, the income tax
burden was reduced significantly. In 1988, the standard and higher rates of income tax were 35 and
58% respectively; for the tax year which began in April 2000, the corresponding rates are 22 and 44%,
and the income level at which the higher rate in particular is applied has been increased significantly.
More recently, the usefulness of national wage agreements in an environment of virtually full
employment has been questioned. The fact that, at present, the wage agreements apply formally to
only around one-third of workers, many of whom are in the public sector, is encouraging this
questioning.
However, for a small open economy where competitiveness is extremely important, one should be
wary about dismissing the partnership process. In particular, given the recent acceleration in headline
inflation, the partnership approach may have an important role to play in preventing inflationary
expectations becoming entrenched in the decision making process and the emergence of a wage-price
spiral. Such an adverse eventuality could set the conditions for a serious loss of competitiveness in the
future, particularly if exacerbated by a significant strengthening of the euro.
Structural reform and competition policy
Structural reform is another tool available to policymakers in EMU, although, by definition, the
benefits of any reforms will be limited in the short-term. Nevertheless, policies aimed at improving the
functioning of both product and factor markets can enhance the business environment and increase the
flexibility of markets in the medium-term. Such reforms play an important role in meeting the
economic objectives of higher growth and employment without creating inflationary pressures, and as
a result, in delivering higher living standards.
Some reform of markets has been undertaken in recent years. The labour market is one area where
flexibility has been improved. For example, income tax reforms have enhanced incentives in recent
years, while labour market legislation in Ireland is somewhat lighter than elsewhere in the EU. In
product markets, the process of liberalisation has been speeded up. In particular, markets which have
traditionally been under direct control of government have undergone significant reform: the
telecommunications sector, for example, has been fully liberalised and this is already having a
favourable impact on prices. Elsewhere, however, the pace of reform has been slower, with barriers to
entry, in particular, remaining a feature of a number of markets.
Prudential standards in the financial sector
The fourth strand in the range of policies that can be employed in EMU relates to the maintenance of a
sound financial sector. In Ireland, the Central Bank is responsible for supervision of almost the entire
financial sector, apart from insurance companies. In particular, credit institutions are required to
conform to a wide range of standards that have been agreed at BIS and EU Commission levels. What
is of importance for us at present is that credit institutions are constrained from over-extending their
lending to individual, or a group of related, economic sectors. This limits the risk, for example, of an
undue concentration of lending to the broad property sector, which has frequently been subject to
booms and busts in many countries, with consequential problems for the solvency of the financial
sector.
The Central Bank has been active in alerting banks to the risks posed by rapid overall and
propertyrelated lending. As part of this process, banks have been required to conduct regular stress tests to
assess how fitted they are to cope with various types of shocks including a catastrophic fall in property
prices. The results of tests so far suggest a high degree of resilience to such adverse developments.
Earlier this year, Ireland participated in the World Bank - IMF Financial Sector Assessment Program
(FSAP). This entailed an assessment of financial sector vulnerabilities and of the observance and
implementation of supervisory standards and best practices. The FSAP found that Ireland had a sound
and highly developed financial system that has been very stable even during periods of international
turmoil. Banking sector capitalisation and asset quality are high, and profitability levels are higher
than for most European competitors. The assessment also found that the overall framework of
prudential regulation and supervision in the Central Bank is well developed, and shows a high degree
of observation of international standards and codes. The review noted that current developments
financial sector innovation, increased competition, increased cross-border activities associated with
Dublin's International Financial Services Centre and sustained rapid credit growth - pose a
considerable challenge to market participants and supervisors to maintain Ireland's record of financial
stability.
In summary, Ireland is now participating in a single currency where monetary conditions are set in
terms of requirements for the euro area as a whole. Individual countries must operate within this
context. This may not always be appropriate to their specific needs. As outlined above, policy-makers
have a number of instruments available to tackle macroeconomic imbalances and to respond more
efficiently to regional-specific shocks that will inevitably occur from time-to-time. The effective use
of these tools should minimise the impact on the economy of the loss of monetary and exchange rate
policy.
Current problems and issues
As I mentioned earlier, the greatest challenge within EMU is to steer the economy onto a more
sustainable growth path after having experienced very strong growth over the last seven years. This
will be no easy task given that imbalances have already begun to manifest themselves.
Inflation
Perhaps the most visible example of current problems is the acceleration in headline inflation which
has occurred over the last twelve months or so. The Harmonised Index of Consumer Prices (HICP) has
accelerated from its most recent low-point of 1.8% in mid-1999 to the current rate of 6.0%. While
some of this increase reflects temporary factors such as indirect tax changes, general inflationary
pressures have been evident for some time. The headline rate in Ireland is around 31⁄4 percentage
points higher than the comparable rate for the euro area as a whole. It is estimated that, in the context
of the decline of the euro in the foreign exchange markets, the greater exposure of the Irish economy
to non-euro currencies accounts for around 1⁄2 of a percentage point of this difference. In addition,
approximately 1 percentage point can be explained by higher productivity growth in the traded sector
relative to the non-traded sector. This results in higher wages in the non-traded sector, which when
combined with lower productivity growth in this sector, leads to upward pressure on prices. Taking
account of these factors implies that the remaining inflation differential vis-à-vis the euro area is about
13⁄4 percentage points. About 3⁄4 percentage points of this is due to Irish indirect tax increases, with the
remainder largely attributable to the strength of domestic demand in Ireland.
Decomposition of Irish Inflation vis-à-vis the Euro Area
HICP - Ireland 6
HICP - euro area 23⁄4
Inflation Differential 31⁄4
of which:
Price Level Convergence 1
Larger Effective Exchange Rate Effect 1⁄2
Indirect Tax Effect 3⁄4
Excess Domestic Inflation 1
Wage expectations
The labour market is an area where imbalances have been evident for some time. The virtual
attainment of full employment, with the resulting transfer of bargaining power from employer to
employee, has put upward pressure on wages in all sectors. While rising wage levels may ultimately
be one of the mechanisms which will slow the economy, there is a risk that wage developments are
being driven by expectations based on the exceptional growth of the recent past. In this context, wage
settlements must recognise the inevitability of a reduction in growth to a more sustainable rate, as well
as the openness of the economy which increases its exposure to external developments. At present,
firms in Ireland, particularly those in the indigenous sector, are benefiting from the decline in the value
of the euro against sterling. In this environment, wage increases which were compounded by any
significant appreciation of the euro could impose serious competitiveness difficulties on these firms.
Infrastructure
The strains on the economy's infrastructure - most notably transportation and housing - have been
evident for some time. In more developed countries, economic development was, generally speaking, a
more gradual process. This facilitated improvements in the physical infrastructure to be undertaken in
tandem with economic growth. In Ireland, infrastructural developments have been unable to match the
intensity of economic growth which has occurred over a relatively short period of time, so that
bottlenecks have emerged. In an effort to reduce the infrastructural deficit, the Government has
initiated a programme of significantly increased expenditure as part of the National Development Plan.
However, since the construction sector is already operating at full capacity, it will be some time before
the benefits of this are visible.
Diversification/exposure to sector shocks
By definition, it is difficult for small open economies to ensure a high degree of diversification. As a
result, a shock affecting one sector can have implications for the economy as a whole. In Ireland's
case, it is useful to focus on the two very distinct broad sectors in the economy. The first comprises the
indigenous manufacturing sector as wel