In most industrialised countries manufacturing ceased being a dynamic sector of the economy several decades ago: it is the services sector that has been contributing most to their economic growth.
Until now, Ireland has been a notable exception to this pattern. The primary driving force in our economy has for long been foreign industrial investment, the volume of which peaked in the late 1990s, aided by the extraordinarily rapid expansion of our skilled labour force during that decade.
The fact that in this respect we have been out of line with most of western Europe has reflected the exceptional skill of the IDA in attracting high-tech industrial investment to Ireland, especially from the United States. Among other EU member-states only Portugal has continued to grow its manufacturing sector in recent times, but for a different reason, mostly because of its low labour costs.
How long more can we expect our manufacturing sector to go on expanding, after the current recession bottoms out? I have felt for some time that we may be nearing the end of this stage of our development; near the point where our primary source of further economic growth will instead become the services sector. There are several reasons why this has seemed likely.
On the negative side, competition from lower-cost eastern Europe and Asian countries like India is bound to draw off some lower-productivity activities located here and to reduce the flow to Ireland of such industrial projects in future. Already at the turn of the millennium the Irish proportion of new US firms locating in Europe had started to decline, as some eastern European countries began to attract US investment.
Moreover, in some key industrial sectors we have already attracted almost all the major industrial multinational firms, and future increases in output by these Irish plants may come from increased productivity rather than from increased employment.
It is, I believe, for reasons like these that the ESRI in its recent Medium-Term Review projects a further medium-term increase of little more than 10 per cent (16,000) in employment in foreign-owned high-tech firms, but at the end of the current recession, accompanied by a levelling-off in indigenous manufacturing employment during this period; and, later, a fall in total manufacturing employment of about 1-2 per cent a year.
On the positive side, over the years our market services sector has grown considerably in scale and sophistication, to the point where it has increasingly been able to sell its activities abroad. It is not generally realised that between 1961 and 1996 employment in business services - in which I include law, accountancy, architecture, engineering, insurance and finance, advertising, property firms, planning and research, and trade and professional organisations - grew almost fivefold, by 100,000, several times faster than employment in manufacturing, construction, distribution or transport.
We now have a major financial centre from which 8,000 people are providing services worldwide, as well as a major software industry, most of whose exports take the form of services rather than goods. Here as elsewhere, indigenous Irish as well as foreign IT firms suffered severely in the IT bubble collapse, but those that survived have a capacity to sell their services abroad.
Moreover, many professions which have been providing services locally to multinationals with plants here have been developing a capacity to offer their services also outside Ireland, in competition with established firms elsewhere.
It is these and other related considerations that have led the ESRI to project that, in addition to increases of about 15 per cent in employment in distribution, transport and communications between now and the end of the decade, employment in the export of services by the other more dynamic parts of the services sector will rise sharply.
This will increase the volume of services exports by some 60 per cent within the next seven years, and help to increase employment in the market services sector as a whole, including distribution and transport as well as business services, by 125,000, or one-third, in this period.
Together with a further expected increase of over 100,000 in public sector jobs (mainly in the health service and education after we emerge from the present period of Exchequer funding difficulties), this expected boom in other services should raise the total level of our employment by over 250,000 to around two million. (All this is, of course, subject to the triple proviso that real wages rise no faster than productivity; that investment in infrastructure proceed at a rate that will remove bottlenecks by 2015; and that impediments to competition are removed in the sheltered sections of the economy).
This expected shift from industry to market services as the principal source of economic dynamism in the years ahead clearly has implication for the educational system.
The industrial boom of recent years has required, and has been facilitated by, a large flow of well-educated young people emerging from the educational system, five-sixths of them with Leaving Certificates.
An ever-rising proportion of these have third-level qualifications. But the expanding export services sector will need an even higher proportion of people with third-level qualifications than high-tech industry required.
And by 2010 this part of the services sector, together with skill-intensive health and education, is expected to be providing 45 per cent of all employment.
In recent years more than one-half of young people have been entering higher education, and the proportion of these who drop out is low by international standards.
The consequent gradual replacement of an older generation of workers, two-thirds of whom never reached secondary education, by much better qualified new entrants to the labour force, is estimated to have been increasing our economic growth rate by almost one percentage point annually.
This process has been helped by the fact that the majority of immigrant workers have been skilled.
Their arrival, the ESRI says, has helped to moderate the upward pressure on the wages and salaries of skilled workers, and the institute believes that a revival of such immigration of skilled workers after the end of the present recession will play a significant role in further expanding the productive potential of our economy.