Is There a "New Economy" in Ireland?

Abstract

This paper reviews the sources of economic growth in Ireland between 1962 and 2000. The purpose of this analysis is to assess if there is a “new economy” in Ireland. The “new economy” phenomenon is reflected in higher productivity growth as a result of technical progress in the Information and Communications Technology (ICT) sector. The consequences of a “new economy” include, among other things, a higher potential output growth rate, higher productivity growth, lower unemployment and improved living standards. At the aggregate level, productivity growth increased from 2.5 per cent per annum between 1990 and 1995 to approximately 4.0 per cent per annum between 1996 and 2000. This step-up in productivity growth would suggest a new era in the Irish economy. A sub-sectoral analysis was undertaken to assess which sectors were significant in accounting for this increase in productivity growth. Productivity growth in the industrial sector averaged 2.7 per cent per annum between 1996 and 2000. Within the industrial sector, the manufacturing sector was a significant contributor to productivity growth. Productivity growth in the manufacturing sector averaged 6.3 per cent per annum between 1995 and 1999. The performance of this sector was primarily driven by the high-tech sector, where productivity growth averaged 5.7 per cent per annum between 1995 and 1999. The results suggest that although there has been a significant step-up in the overall productivity growth rate of the economy, this was primarily related to the high-tech sector, particularly the chemicals sector. The large values of net output per worker in this sector may be the result of transfer pricing and/or high returns to research and development. Thus while there has been a structural change of the economy in recent years, this may represent a sectoral shift of resources from more traditional sectors to high-tech sectors rather than a “new economy” effect.