This scene must have been played out a hundred times already this summer. On a pleasant afternoon, a group of town luminaries, a few businessmen, some clerics and a few individuals perspiring gently beneath their chains of office have all gathered to hum the praises of the organising committee, to mention the sponsors' unstinting, without-which support and finally, with great pleasure, to declare this arts festival open.

Last weekend, it was Kilkenny's turn, and this little scene was played out on the terrace at the front of Kilkenny Castle. Mayor of Kilkenny, Margaret Tynan, did the honours of offering the traditional praise, before introducing the Arts Week's new chairman, Ian Coulter.

Coulter took the podium and squinted into the afternoon sun. His few words, ostensibly to introduce guest of honour, BBC correspondent Fergal Keane, followed the conventional pattern. There was some celebration of the festival's history, a mention of an illustrious figure from its past, and a quick tour through this year's programme. In among the usual congratulations, however, Coulter slipped in a comment that for the most part seemed to go unnoticed by the listening crowds in the Rose Garden.

"Kilkenny is synonymous," he told the crowd, "with quality products". Products like beer, he said, and hurling teams. And Arts Week. All of these, he said, are intertwined in what he boldly described as "the product that is Kilkenny".

There it was, as baldly put as anyone could wish, the simple truth that arts festivals all over the country tacitly subscribed to, but for various reasons have found it hard to voice. Pious statements about cultural life and community enrichment may abound, but when it comes to staging a festival, art is about selling.

Way back in 1988, John O'Hagan of Trinity College, Dublin was asked to look into the "Economic and Social Contribution of the Wexford Opera Festival". The event, which began in 1951, was one of the fore-runners of the 1990s festivalmania. By the late-1980s, many interested parties were keen to find out what its real significance might be.

There were, the report concluded, many benefits of running an arts festival, and not all of them related to the promotion of artistic excellence. Weighing up the benefits, O'Hagan spoke of the supposed "social improvement arising from the edification of those attending artistic events". This argument in favour of public funding for arts festivals was similar, the report noted, to the argument regarding the public benefits of education "although rather less persuasive". Much of the good any festival did, it seemed, would have to be calculated in other terms, since they lay in the realms of economics, and of tourism.

Nevertheless, by the mid-1960s, Bord Failte, which had previously offered grants to Wexford and to several other arts festivals, appeared keen to relieve itself of this responsibility. The Arts Council, it was suggested, would be better suited to funding arts festivals. As O'Hagan's report puts it: "There was a shift in thinking, with the artistic and cultural contribution of the festival being emphasised more than the tourism contribution."

In the 1960s and 1970s, some questions certainly remained unanswered about the purposes of arts festivals. Were they about general economic growth or cultural capital or a strange and unknowable combinations of both? By the 1980s, however, the Arts Council had assumed the pre-eminent role in the channelling of State funding to these events.

The Arts Council currently funds 80 festivals and Summer schools, to the tune of £1,250,000. Ten years ago it annually spent £110,000 on such events. These days, Arts Council money goes into everything from the fireside tale spinning of Cape Clear's Storytelling Festival, to the far more expensive celluloid storytelling at Galway's Film Fleadh; from the serious torch-bearing of the Willie Clancy Festival in Milltown Malbay, to the free-form exuberance of Drogheda's Samba Festival.

This growth in festival spending is one that is matched by similar changes in Europe over the last decade and a half. Over this period, O'Hagan said recently, "there has been an explosion in the number of festivals throughout Europe". Some large scale post-war European festivals, such as Edinburgh, might have their origins in the spirit of reconciliation, but this hardly explains more recent growth in the sector.

According to recent European research on the question, much of the growth in numbers of arts festivals has had to do with the economics of artistic production. Producing theatre, for example, that will tour a number of festivals is a far more cost-efficient way of mounting a production than the older model, in which a play would be produced for a single venue. The same economies of scale might be imagined to be available to any performing art in which long and expensive rehearsals and pre-productions are involved.

There must be, however, some benefit for the towns and cities which decide to host international touring companies now available to festival committees which want to place their town on the circuit, to promote themselves to the festival premiership. This is where "the product that is Kilkenny" and indeed, the product that is Galway, the product that is Beara, the product that is Waterford, or Tallaght, or Cape Clear comes into the picture.

Kilkenny's Arts Week is an interesting case because of its rather particular set of values, related to its origins. This festival was, after all, established to attempt to improve the slightly seedy image the town gained through its beer festival. Since its purpose was to reconstruct an image, Arts Week has always paid more attention to classical music and visual art than to more popular art forms. At some stages in its history, this might have lead to suggestions that Kilkenny's was an elitist festival; now its unabashedly high-culture emphasis might be seen as astute niche marketing.

"You have to remember something," says Ian Coulter, a couple of days after the opening ceremony. As he chats one can't help but notice that his baggy green T-shirt has Kilkenny Credit Union embroidered on it. "When Kilkenny Arts Week began," he says, "there was no National Concert Hall, no Music in Great Irish Houses, there was no Royal Hospital at Kilmainham. There were just no high standard venues for classical music and Kilkenny provided that."

But what did Kilkenny get in return? "Well, the festival is held in August, which would be, of course, a busy time for the town in any case. But what Arts Week does is build on that. It enhances the city when it is at its best anyway. The overall effect is to enhance substantially people's image of Kilkenny, and that is crucial when it comes to investment and development in the city."

When talking to Coulter, as when talking to other festival organisers around Ireland, one event seems to shadow all their comments, to inform their view of what a festival might do: the growth of the city of Galway which has coincided with the growth of the city's arts festival cannot be ignored. This is especially true for those who would like - though they might deny it - to see similar transformations in their own towns.

"We don't necessarily want to be like Galway," is a protestation made by more than one Irish Arts festival organiser. The truth is, however, that in many ways, Galway's 20-year-old festival seems to offer a fine illustration of an irresistible recipe for turning cultural activity into economic growth.

The arts festival may yet prove to be the greatest weapon that eager entrepreneurs possess for leveraging the economic and social standing of their home town. If any area seems susceptible to increased scrutiny from those seeking to re-examine the cultural sector in terms of profit and loss, it is the area of the arts festival.

While the commitment of the Arts Council to the notion of arts festivals is reiterated in documents such as The Arts Plan, even there an undeniably utilitarian tones is struck, one that might suggest a gentle swing towards a pre-1960s picture of the role of the Arts Festival. Festivals, we are reminded above all, play a major role in "economic and social development".

The creation of an image, is one thing, cashing in on that image is quite another. For Ian Coulter, the new battle has already begun. "We are ready to take Kilkenny to the next stage now. We are ready to make it the biggest festival in Ireland." The product that is Kilkenny should be in your shops next August.

Festival facts

The Arts Council currently spends £1,250,000 on the 80 arts festivals and Summer schools it funds.

Among the events funded are Drogheda Samba Festival, West Cork Chamber Music Festival, Sligo International Choral Festival, International Cartoon Festival, Rathdrum, Lambert Puppet Festival, and two O'Carolan harp festivals, one in Co Meath, the other in Co Roscommon.

The main stipulation that the Arts Council currently makes regarding arts festival funding is that the council can only consider applications from festivals which have already occurred at least once.