Global Leaders Forum, Prague

2 February 2005

Human Capital and Economic Growth

The success of Ireland is no longer news but it remains striking. A small peripheral country with no substantial natural resources has managed to tackle and overcome its twin historic problems of mass unemployment and mass emigration. As recently as the mid-1980s we had nearly 20% unemployment and the highest per capita national debt in the world. Turning this around was not a matter of chance – it was a matter of making the right choices and sticking with them.

The main elements have been:

• A pro-enterprise tax policy,
• Responsible fiscal policies,
• The active engagement of Government in responding to the needs of enterprise,
• A positive and constructive approach to membership of the European Union, and
• A sustained programme for increasing participation at all levels of the education system

Each of these elements was a necessary but not in itself sufficient contributor to growth. Every serious analysis which has been carried out in the past few years has especially emphasised the role of education. Over the last three decades there has been a steady and major expansion of the numbers at both second and third-level – and we have equally emphasised the need to maintain quality as participation has expanded. To put the importance of this in a very direct manner – companies like Microsoft, Intel and Pfizer would not be in Ireland today if we didn’t have people with the skills they require.

My first job in cabinet was as Minister for Education and I was very clear that it was not just a social ministry; it was also an economic ministry. In that role I met with many industry leaders and they emphasised time and again that the skills of our people was central to their decision to invest in Ireland. But, as I have said, we know that we have no reason to be complacent.

From Investment-Driven to Innovation and Knowledge-Driven

Today Ireland is widely recognised for its high level of performance in an investment driven context. We secure a disproportionate share of foreign direct investment relative to our size and have become the location of choice for manufacturing and international services in areas such as electronics, pharmaceuticals and financial services. We are an exceptionally open economy, critically dependent on trade. Because of our willingness to embrace openness we have benefited hugely from the creation of the single market within the EU and from the wider trend towards global trade liberalisation. But, we also know that the process that has yielded those benefits also brings challenges.

Put simply, the industrial structure which was appropriate to our development in the late twentieth century will not serve us in the new millennium. Many developing countries are now competing to be the location of choice for routine manufacturing operations and lower value added industries – and rightly so. It is a step on the same staircase to prosperity that we took. As our competitors ascend the staircase, we must ourselves also keep moving upwards.

Our challenge is the direct and demanding one of moving from being an investment-driven economy to an innovation and knowledge driven economy. We are not alone in this, it is the same challenge faced by all of Europe and our policies on the development of skills will determine if we are successful or not. This involves addressing issues of basic education, higher education, research and the development of a culture of life long learning.

Basic Education

A basic education system which achieves a high level of core skills and completion of upper secondary-level is an absolutely irreplaceable part of knowledge-based growth and social cohesion. We often lose sight of this when considering areas which are more immediately linked to industrial needs. Investment in pre-school, primary and second-level education should always remain a priority for countries which want to ensure sustainable growth.

Setting and working towards high standards will continue to be vital. There are also other practical issues which have the potential to become a serious constraint on growth if not addressed, particularly in relation to education in the sciences. New approaches to attracting and retaining as school teachers persons with science degrees are required. Partnerships between industry and education systems will have to be considered.

There is no question that the importance of technology is not yet comprehensively reflected in our schools. After the extraordinary burst of activity from the middle to the end of the last decade, we have moved to a time of reflection on what works and what doesn’t. I have no doubt that more needs to be done, and that we have only begun exploring how technology can be used in education. Equally I have no doubt that the use of technology within schools needs to be more focused on specific curriculum needs. For example, the potential of technology to help with literacy development has been explored in far too few cases.

One step which could be taken more immediately is to move towards empowering schools to plan for their own technology needs rather than following a top-down approach. While we do not have the level of integration of others, Ireland was the first country in Europe to connect all schools to the internet and ensure that the majority of all teachers had received training in the use of technology. This programme was run on the basis of setting basic standards to protect public investment, providing access to economies of scale and then letting schools to take control of meeting their own needs. This is an approach which could be more widely followed.

I would also like to mention second-chance education, which is worth distinguishing from life long learning, which I will mention later. By second-chance I mean helping the huge numbers who have left education without any qualification or, even more importantly, without having mastered basic skills. These people dominate the lists of the long-term unemployed, but many are also to be found in employment. Wherever they are they represent huge wasted potential. There is no reason why they cannot be given another chance, and the social and economic benefits can be incredible.

Higher Education

In Ireland, a dramatic expansion in the numbers participating in higher education has been central to our growth. In the last seven years alone we have expanded the number of higher education places by over 30%. The national strategic objective has been set of maintaining a place near the top of OECD countries in terms of higher-education qualification levels. We have also worked hard to respond to the particular needs of emerging industries. For us it is a key competitive advantage, and it should also be for Europe as a whole.

The demand for persons with higher education qualifications will continue to grow, but there remains a question as to whether or not the supply will be there. It is not just an issue of the numbers going through higher education institutions. More fundamentally it is about ensuring proper standards and the appropriate balance between different levels of qualifications. If we get this balance right, higher education can be a driver of growth. If we get it wrong, we can spend a lot of scarce resources achieving little or nothing.

The Need to Embrace Research

If there is one knowledge-intensive area which will, above all, determine future success it is research activity. This has rightly been identified by the EU as one of the core elements of achieving the objective of making Europe the most competitive economy in the world. The reality of today is that Europe is experiencing a sustained competitive disadvantage because of its relatively low level of research activity. The target has now been set of reaching a research investment level of 3% of Gross Domestic Product by 2010, with two thirds of the increased investment to come from the private sector.

What makes this a particularly hard area for productive governmental action is that, by its very nature, ground-breaking research tends not to emerge from the sort of tightly-controlled and directed programmes that make up the bulk of government actions.

Ireland strongly supports the Commission’s efforts in this area. In fact, we believe that this is one of the areas of the Lisbon Agenda where action at a pan-European level will be vital. As such, we used our presidency of the Council of Ministers last year to help move forward revisions of the Framework Funding Programmes, including an agenda which will make them more directly responsive to the needs of industry.

Action at a national level is, of course, also essential. For us in Ireland this has required us to move quickly into an area which we had little experience of. Building research capacity and activity is at the heart of our current National Development Plan. If you visit any University campus in Ireland you will see major new dedicated-research facilities and thousands of extra researchers working within them.

We have established Science Foundation Ireland as our largest programme-based research funder. It is helping to attract researchers with international reputations as well as developing our domestic talent. They and their full research teams are particularly working on areas identified as national priorities. At the same time, a range of supports are ensuring that we are not too proscriptive and that we allow new areas of expertise to emerge.

Support for building R&D capability and capacity in industry is also expanding using a number of different approaches, including tax-based schemes. One of the areas I am most enthusiastic about is systematically expanding collaboration between industry and higher education institutions. The sort of ongoing interchange between industry and universities which is second nature in the United States needs to be developed on this side of the Atlantic. Only then will we unlock the full potential of our researchers and provide the sort of opportunities which will make sure we attract and retain the best researchers in the world.

An additional development which should be encouraged is cooperation between institutions, both within countries and internationally. While many institutions lack the critical mass in specific areas to develop comprehensive expertise, this can often be addressed through collaborations. I have seen many successful examples of this and I have no doubt that there remains a huge scope for more expansive collaborations.

Life Long Learning

If there’s one phrase which has been over-used in the last decade at ministerial meetings it is ‘life long learning’. In a world where the job for life is largely gone, and the reality of rapid change is accepted by all, the idea that learning must not stop at the completion of formal education is common sense – as well as an economic and social imperative.

You can define it many ways, but the most useful is to take it as being ongoing learning activity which has a set purpose in terms of improving knowledge and skills.

The concept of the development of human potential continuously through life dates back to Aristotle – but it remains elusive, especially as we are used to thinking in terms of relatively inflexible education systems. Outside of the realm of compulsory education, the individual must take primary responsibility for their own ongoing development, but equally we can create the conditions within which they will be more likely to work on that development.

For enterprises, taking a role in the development of the skills of their own workforce has the potential to deliver major benefits. The most important part of this is the end of the idea that new skills must always be sought from outside the company. A very good example of this can be seen in a couple of major IT companies based around Dublin. They have partnered with higher education institutions in designing programmes for their low-skill workers. In the past they have succeeded in turning warehouse workers into skilled technicians. The return on this investment has been incredible – a motivated, skilled and developing workplace.

A similar approach is being taken by other firms, who realise that only the very largest can provide programmes within the company to maintain knowledge and skills at the highest levels. They are seeking formal ways to provide their staff with access to the cutting edge of academic discoveries. In the medium-term, I believe that this will lead to an entirely new dimension in the work of higher education institutions

There is also scope for active cooperation between social partners. One example of how this is working can be found in an innovative company founded by the social partners in Ireland which works to facilitate and support enterprise-led training through groups or networks of companies. The pilot phase of the company demonstrated that companies can work together on workplace training, even when they are in competition with each other. It also showed that companies become particularly committed to training when they have a large measure of control of the nature and method of delivery of the training.

We know what works

One of the great choices which societies have to make is whether they want to look beyond their own boundaries to trade. Ireland, just like most countries, went through its own protectionist phase. It was at this time that it was commented that we had only two exports – our cattle and our people. We learnt that we had to trade to grow and, eventually, we learnt that to trade successfully we had to be competitive. Today, while we still have a vibrant trade in cattle, we are in the middle of an extraordinary return of emigrants and we are the largest exporter of software in the world.

As I have said, this would not have been possible without an educated workforce – and just as investing in human capital helped us to become successful, it will become even more important in the work of protecting and building on this success.

For us and for Europe as a whole this requires an agenda which addresses all levels of the education system, the development of a genuine research culture and the adoption of life long learning as a concrete programme rather than a general objective.

Sustained and Long-Term Action Required

One of the principal themes of the work of the most recent Nobel Laureates in Economics, Prescott and Kydland, is that the credibility of policy is a key contributor to economic growth. In this they emphasised that consistency over time helps provide the framework within which people and companies take pro-growth investment decisions. The importance of this for fiscal and monetary policy is by now well accepted, if not always delivered upon. I believe it is equally important in relation to human capital policies. Enterprise in knowledge-based industries needs to feel confident that they will be able to find the skills they need within our countries, not just today but in the years ahead. Otherwise they will view it as an unacceptable risk to invest the huge resources which such industries generally require.

In Ireland we intend maintaining our approach of responsible fiscal policies, a pro-enterprise tax regime, responsiveness to the needs of enterprise and a positive approach to the European Union. We also understand that simply maintaining our human capital policies will not be enough – we must go further. To maintain a competitive edge, we must actively foster the sort of base of knowledge and creativity which means that we will be able to benefit from change rather than be its victim.

This is a lesson which is relevant throughout Europe as well. We must keep our fiscal house in order, but equally we must understand that the skills of our people represents the essential economic infrastructure for competitiveness and growth in the 21^st Century.

ENDS/ETE 1306