OECD ECONOMIC SURVEYS IRELAND APRIL 1972 BASIC STATISTICS OF IRELAND THE LAND Area (thousands sq.km) 69 Population ofmajorcities, with suburbs, Agricultural area (average 1961-66) 1966 census (thousands): as percent oftotal area 67 Dublin, Co. Borough 650 Cork, Co. Borough 125 Dun Laoghaire, Co. Borough 85 Limerick, Co. Borough 58 THE PEOPLE Population (April 1971) 2971000 Emigration: No. ofinhabitants per sq.km. 43 Annual average 1966 71 12184 Increase in population: Annual average per thousand Annual average 1961-71 15300 ofpopulation 4.2 Natural increase in population: Labour force, total at work. Annual average 1966-71 29630 April 1971 1 071000 Employment in: Agriculture, forestry and fishing 282000 Industry and construction 328000 Other sectors 461000 THE GOVERNMENT Publiccurrentexpenditure on goods and Composition ofParliament (March 1972): services, 1971 (as per cent ofGNP) 14 seats General government current revenue Fianna Fail 73 1969-70 (as per cent ofGNP in 1969) 32 Fine Gael 31 Publicdebt, 31st March 1970 Labour 17 (as percent ofcentral government Aontacht Eireann 1 current revenue 1969-70) 229 Others 2 Last election: June, 1969 FOREIGN TRADE Exports: Imports: Exportsofgoodsandservicesaspercent Importsofgoodsandservicesaspercent ofGNP, 1970 35.4 ofGNP, 1970 43.3 Main exports, 1970 (per cent oftotal Main imports, 1970 (per cent oftotal): domestic exports): Machinery and electrical goods 20 Meat and meat preparations 18 Chemicals, including fertilizers 9 Live animals 14 Textile manufactures 7 Dairy products and eggs 6 Petroleum and products 7 Clothing 5 Main suppliers, 1970 (percent oftotal): Textilemanufactures 6 United Kingdom 54 Machinery and electrical goods 5 European Economic Community 16 Metal ores and scrap 5 United States 7 Medicinal products 2 Maincustomers, 1970(percentoftotal): United Kingdom 66 European Economic Community 12 United States 10 THE CURRENCY Monetary unit: Irish pound Currency unit per US dollar: 0.384 Note An international comparison ofcertain basic and demographic statistics is given in an annex table. OECD ECONOMIC SURVEYS IRELAND ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT The Organisation for Economic Co-operation and Development (OECD) was set up under a Convention signed in Paris on 14th December, I960, which provides that the OECD shall promote policies designed: to achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintaining financial sta¬ bility, and thus to contribute to the development of the world economy; to contribute to sound economic expansion in Member as well as non-member countries in the process of economic development; to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accord¬ ance with international obligations. The Members of OECD are Australia, Austria, Belgium, Canada, Denmark, Finland, France, the Federal RepublicofGermany, Greece,Iceland,Ireland,Italy,lapon, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The Socialist Federal Republic of Yugoslavia is associated in certain work of the OECD, particularly that of the Economic and Development Review Committee. The annual review ofIreland bytheOECDEconomicandDevelopmentReviewCommittee took place on 21st March 1972. The present Survey has been updated subsequently. CONTENTS Introduction I Recent economic developments 5 The pattern of demand 5 Output and employment 7 Prices, incomes and costs 10 Foreign trade 11 Invisibles and the balance of payments 14 II Economic policies 15 Inflation and stagnation 15 Monetary policy and developments 18 in Short-term prospects 19 IV Medium-term issues 21 Recent performance 22 The inflationary record 23 Industrial relations, prices and incomes 29 EEC entry 30 V Conclusions 32 TABLES Text: 1 Growth of GNP 6 2 Volume of production, numbers employed and productivity in major industrial groups 8 3 Prices, wages and costs 10 4 Merchandise exports and imports 13 5 Balance of Payments 14 6 Budget 1967/68-1971/72 16 7 Medium-term trends 22 8 Trends by sector, 1969-72 23 9 Earnings, costs and prices 24 10 Unit labour costs and export performance 25 11 Development of new industry 26 12 Domestic expenditure and imports 26 13 Public investment and output 27 14 Employment changes 28 15 Time lost in industrial disputes 20 Statistical Annex: A Expenditure on gross national product 39 B Production, employment and other economic indicators 40 C Prices and wages 41 D Money and banking 42 E Foreign trade and payments 43 CHARTS 1 Unemployment and emigration 9 2 Fluctuations in exports and imports 12 INTRODUCTION Following the relatively satisfactory performance of the 1960s, economic activity slowed sharply in 1970. Demand remained depressed in 1971 while overall production recovered moderately. Growing unemployment was aggravated over the course of the year by difficult conditions in the United Kingdom. While the National Wage Agreement improved conditions in the labour market and productivity developments were encouraging, infla¬ tionary pressures remained strong. Although the current account deficit remained substantial invisible receipts, in particular, being affected by external political tensions there was some underlying improvement and net capital inflows were more than double the current deficit. As a result, exter¬ nal reserves rose sharply to a record level. At the turn of the year there was considerable economic slack and a high level ofunemployment. While a continuing revival ofgrowth is expec¬ ted, the recovery of demand seems unlikely, in the absence of strongpolicy action, to be sufficient to enable the economy to enjoy a growth at or near potential. But rapid and forceful reflationary measures, ifthey are to achieve the desired results, must be preceded by action designed to bring cost/price developments under control. Recent experience with institutional arran¬ gements, while not entirely satisfactory, may have paved the way for making more rapid progress in this area. Policy measures taken should also be designed with the needs of longer-term growth strategy in mind. Such a strategy will be necessary if problems of growth, employment, inflation and external balance are to be dealt with comprehensively and to promote the structural changes required to meet the challenge of EEC entry successfully. Parts I and II ofthe present Survey review recent economicdevelopments and policy measures, while Part III considers short-term prospects for the next year or so. Part IV looks at certain longer-term trends, and attempts to identify some of the principal structural problems and bottlenecks, parti¬ cularly in the light of changing conditions likely to result from accession to the European Communities. The final Part draws the short-term outlook and longer-term problems together and considers their policy implications. I RECENT ECONOMIC DEVELOPMENTS The pattern ofdemand Economic activity, as measured by total demand, seems to have revived modestly in 1971; real GNP is estimated to have increased some 3 per cent, as compared with a 1 to 2 per cent increase in 1970 (in 1967 - 69 the annual OECD Economic Surveys average was 5\ per cent). But a significant part ofthe growth merely repre¬ sented a catching-up process after the losses due to the previous year's indus¬ trial disputes, affecting mainly the construction sector. Allowing for this, the underlying growth rate may not have been significantly above 2 per cent. The main stimulus was provided by public expenditure and by exports, slug¬ gish private demand having served to weaken the economic climate. Refla¬ tionarymeasures to stimulate both investment and consumption were announ¬ ced in October 1971, but it may take some time for the impact on domestic activity to become noticeable. Certain other features of last year's develop¬ ments suggest that a solid and broadly based resumption of growth could come quickly but only if inflationary pressures continue to slacken; on this condition, the present buoyancy ofexports together with the better prospects forinternational trade in 1972 would offerreason for guarded optimism about the future. Table 1 Growth of GNP Per cent volume changes from previous year 1968 1969 1970 1971 Consumer's expenditure 8.5 4* H 2 Public current expenditure 6.7 8} 3* 5* Fixed capital formation 12.1 23i -H 5J Stockbuilding1 1.0 li a i Total domestic demand 10.7 9 1 3 Exports 10.0 3i 6 5J Total final expenditure 10.5 n 2i 3* Imports 17.1 13 3} 4} Net factor income from abroad 17.9 -3± -2 GNP 7.9 H 1} 2\ 1 A*percentofONP. Source: Reviewfor 1970andOutlookfor 1971;Iriihsubmission totheOECD. In volume terms, consumer spending continued to grow comparatively slowly (Table 1). After a modest spurt in the first quarter, the seasonally adjustedvalueofretailsalesshowedlittlechangeoverthefollowingsixmonths, but the removal of instalment credit restrictions in October seems to have given rise to some revival oftrade in consumer durables. Taking prices into account, the volume of retail sales seems to have been declining after the first quarter. As in the previous year, the rise in consumer prices (9 per cent year on year in 1971) was among the fastest in Member countries. There is, however, evidence of a slow-down, which is expected to continue into 1972. Public sector purchases were stepped up in 1971 to provide some subs¬ titute for weak private demand. The wage and salary cost of the public service lay behind the above-average growth of public current expenditure in both volume and price. Total gross fixed investment grew by about 6 per cent in 1971; the increase arose mainly from a higher level ofbuilding activity Ireland and increased imports ofaircraft. Available indicators ofprivate investment, such as investment surveys and imports of producers' capital goods, suggest thatprivate productive investment was contracting up to the Autumn. There may have been some upturn since then, and the October and later decisions toincreasethepubliccapitalprogrammeby 12percent(£25 million) isexpect¬ ed to bolster investment spending in the second half of the 1971/72 financial year1. The apparent recent upturn in private non-residential investment would seem to indicate a recovery ofplant and machinery investment with a view to rationalisation and modernisation, rather than construction ofindus¬ trial floorspace ofwhich thereis no shortage. Private residential construction was rather weak up to end-1971, but the strength ofpublic housing seems to have been sufficient to offset the weakness in private housing. Despite depressed tourist earnings and some other adverse factors in trade patterns, exports continued to expand and provided a substitute for weak domestic demand. But the weakness of domestic demand did not prevent imports from rising, though at a receding pace after the first quarter. The result was to reduce an already weak rate ofgrowth oftotal final expen¬ diture to a GNP growth rate of not more than 3 per cent. Output and employment Agricultural conditions were favourable and the rise in the volume of gross agricultural product in 1971 has been estimated at about 5 per cent. The year was a particularly good one for cattle producers, with exports of cattle and beefrising both in price and volume terms. It was somewhat less satisfactory for sheep and pig breeders although production nonetheless exceeded 1970 levels. Crop harvests were good, and the dairy output took up the slack of previous years by expanding some 4 per cent2. Manufacturing production picked up in the first half of 1971; by the second quarter, thevolume ofoutputwas 6percenthigherthan ayearearlier. But this rate of growth reflected post-strike effects; indications are that the advance was smaller in the second half-year so that the total annual increase would be about 3-4 per cent. Judging by the latest statistics, and ignoring strike recoveries in industries serving housebuilding, there were no dramatic shifts in the sectoral pattern of production. The food and drink industries improved steadily as did wood and furniture manufactures. Clothing and footwear production, on the other hand as well as metal and engineering industries output was curtailed by marketing and price difficulties. Outside 1 The financial year runs from 1st April to 31st March. 2 Inthisconnection,itmaybeofinteresttonotetheexpectedpriceandmarketeffects ofEECentryonfarmoutput. Instockfarming,thelargestincreasesareexpectedtooccur inmilkanddairying,andinbeefproduction;whilesheepandpigoutputislikelytocontract in relative terms. In cereals, no large net effect is foreseen; but production shifts from wheat to barley and oats may take place. Current developments seem to anticipate these trends. ThepolicystancehasbeentopromotebeefcattlebreedingthroughtheBeefCattle Incentive scheme, and to restrain the rate of growth in commercial milk production by meansofamulti-tieredmilkpricingsystem. InDecember1971thelattersystemwasreplaced bypricingarrangements modelledtoeaseadjustmenttotheEECsystem. OECD Economic Surveys Table 2 Volume ofProduction, Numbers Employed and Productivity in Major Industrial Groups Percentage change from corresponding period a year earlier First three quarters of 1971 3 1 2 Production Production Employment per man (1/2) Industrial Group: Food 3.5 -0.5 3.4 Drink and tobacco 5.2 -0.5 4.7 Textiles 4.5 -1.9 6.5 Clothing and footwear -0.4 -3.7 4.3 Wood, furniture, etc. 10.6 -3.7 14.8 Paper and printing 0.1 -1.2 1.3 Chemicals and chemical products etc. -0.5 -1.2 1.7 Clay, glass, cement, etc. 54.61 24.11 l Metaland engineering(incl. vehicles) -6.4 -0.3 Xè.\ Other manufacturing industries 11.3 6.7 4.3 Total Manufacturing industries 4.3 -0.2 4.5 Total Mining, quarrying and turf 6.6 0.9 5.6 Total Transportable goods industries 4.5 -0.1 4.6 1 Affected bycement disputein 1970. manufacturing industries proper, mining production continued to expand1 although the expansion was restrained byadverseworld marketdevelopments. The increase in industrial production was brought about wholly by improved productivity; there was little change in the level of industrial em¬ ployment. Table 2 illustrates that the adverse trend has been almost uni¬ versal. Significant increases occurred only in the building materials and in the " other " industries group, the latter including many newly-established enterprises. Two different patterns can be observed in the decline of em¬ ployment. The clothing, textiles and furniture groups experienced large drops, but in the case of textiles and furniture, this reflected an exceptional rise in productivity (column 3). The decline in the clothing group as well as in the metal and engineering group was brought about by adverse demand trends rather than by productivity increases. This aggregate picture of little or no growth in industrial employment conceals major structural changes; while the creation of new jobs increased 1 Significant discoveries of base metal deposits (mainly lead, zinc, copper, barite, silver), most ofthe output ofwhich is exported, have led to a strongexpansion ofmining production in recent years. 8