Address by Minister Martin at the Launch of the a Forfás report “The Changing nature of manufacturing and services – Irish trends and international context”

In the College of Physicians, Kildare Street, Dublin 2

Ladies and gentlemen,

I would like to welcome you all here today to the launch of Forfás’ latest report entitled “The changing nature of manufacturing and services – Irish trends and international context”.

Early in 2006, in view of the growing concerns being voiced concerning the manufacturing sector in Ireland, I asked Forfás to produce a report on the current position in the sector. I wanted to probe developments affecting the sector, which has been central to our economic success, and place them in a broader context, having particular regard to the growth of internationally traded services. I am delighted to say that Forfás have answered that request very speedily and comprehensively through their production of the report you see before you today. I would like to compliment and thank Forfás for the report.

The report makes for some very interesting reading. For decades Irish enterprise policy has focused on exports – on building indigenous companies and attracting in foreign companies which would produce goods that they could sell on international markets. The basis of that policy was that it is only through trading successfully on international markets that a small economy can generate wealth and raise the living standards of its people. That policy succeeded spectacularly in the 1990s when our exports of manufactured goods – principally from multinational subsidiaries – increased at a rate that dwarfed the performance of any other Member State of the European Union.

This was how we became very wealthy very fast. It was thus a matter of major concern when some commentators began to predict the demise of the manufacturing sector. Is the goose that laid the golden egg in terminal decline? That is why I commissioned this study. I wanted to know what is happening to manufacturing. As the Enterprise Strategy Group confirmed, we have built up a high level of expertise in manufacturing. But can it continue to perform in the high cost environment that has developed on the back of our economic success? And if not manufacturing, how else are we going to generate the wealth in the future to sustain the quality of life and the services to which we aspire? What are the challenges and are our policies addressing these challenges?

I believe that this report provides an excellent basis for the discussion that must take place on where we want this economy and this society to go. The main message for me is that manufacturing continues to play a central role in this economy. The sector is changing very fast and we must respond with equal alacrity to the evolving demands of the new order. It is likely to employ fewer people in the future but this is a global trend, a trend that we bucked in the 1990s but which is now asserting itself here. But output is still increasing. And it is vital that we maintain that momentum. As the report confirms, a vibrant manufacturing sector is vital to a dynamic economy as it drives innovation and productivity.

But the report does not only deal with manufacturing. It also charts the progress of the services sector with a particular focus on internationally traded services. When we first placed manufacturing at the centre of our enterprise policy it was because we saw trading as critical to a small economy and, at that time, we traded almost exclusively in goods. However, services can also be traded and, in recent years, technology has greatly extended the range of services that can be traded. The report documents the extraordinary growth of our exports in services in recent years which has made us one of the world’s leading services’ exporters. Furthermore, employment has been rising rapidly in this sector compensating, to a large extent, for the decline in employment in manufacturing.

Some of the details in the report are worth citing:

• Manufacturing output has increased 28% between 2000 and 2005, although the average price received for goods has declined by 10% over that period.
• The sector spends about €25 billion a year on wages and Irish suppliers, and it accounts for almost 30% of total corporation tax to the State.
• While the number of firms in the sector has remained stable, employment in manufacturing has declined significantly since its peak in 2000, by 13% or 31,000 jobs, indicating greater productivity.
• However, productivity improvements are concentrated in a small number of sectors.
• About 11% of Irish workers are employed in manufacturing.
• Most regions have higher numbers of people working in manufacturing than in 1995.
• Sectors such as medical devices and chemicals have seen growth in employment since 1995, while employment in textiles and electrical machinery have fallen.
• Because of the high proportion of US and UK owned firms, the sector is quite exposed to currency shocks.
• Ireland is not unique in terms of recent employment losses in manufacturing. Employment in manufacturing is falling globally.

The decline in employment should be seen in the context of the general trend of economic development in OECD countries which has been characterised by a gradual process of structural change. In the initial stages of economic development agriculture typically accounts for the bulk of GDP and employment. In the next stage, as industrialisation intensifies, the share of agriculture in total value added and employment declines and the manufacturing sector grows. More recently, OECD economies have experienced a decrease in the number of jobs in the manufacturing sector, with a rise in the number of jobs in services.

However manufacturing continues to play a critical role in the global economy as a driver of productivity growth, innovation and R&D and technological change. Furthermore, the manufacturing sector provides key inputs to the wider economy and satisfies a broad range of final and intermediate demands.

However, while manufacturing must retain a central role, the importance of the services sector to the Irish economy has grown significantly, as illustrated by the following facts:

• Employment in services has increased 21% since 2000 (compared to an average G7 rise of 6%).
• Almost seven out of 10 people now work in this expanding sector.
• The contribution of services to total Irish exports increased from 22% to 35%.
• Exporting service companies are concentrated in Dublin with 67% of employment, although all regions apart from the Mid-East have seen job growth in this sector.
• Computer services is the most significant export service sector, accounting for 35% of services exports.
• There is also a strong export base of insurance and financial services companies which account for a further 25% of total services exports.
• Ireland remains a net importer of services with a deficit of €9.9 billion in 2005, although this deficit is declining (as is the trade surplus in merchandise goods, which currently stands at about €30bn.)

Overall, the message from this report is positive. The sectors that generate wealth in the Irish economy – manufacturing and internationally traded services – are performing strongly, although much care and attention will be required to ensure that they continue to do so. But it must also be acknowledged that the bulk of employment growth in recent years has been in other sectors – locally traded services, public services and construction. These have traditionally been sectors of low productivity growth and there are issues that need to be addressed, regarding competition in these sectors for example, to ensure that they do not become a drag on the economy as a whole. We must keep reminding ourselves that our wealth comes from trading and the Celtic Tiger dies when we lose our competitiveness.

The most pressing immediate concern is to maintain competitiveness in manufacturing. During the recent talks under social partnership, the Government, employers and trade unions all acknowledged the critical role played by manufacturing in the development of the Irish economy. The three parties also recognised that there are challenges facing the sector at present and that all three parties have a role to play in meeting those challenges. To this end they committed themselves to taking the measures required to ensure that manufacturing continues to play a central role in the Irish economy in the future.

As an immediate response, it is proposed that a High-level Manufacturing Group will be established to review the challenges facing the manufacturing sector and to identify further measures to meet those challenges. Let me assure you all that the Government takes this commitment seriously. The report being launched today will provide a factual analysis and statistical overview of the recent trends in the manufacturing and services sectors in Ireland, and place these trends in an international context. As such, this report aims to serve as a stimulus for informed discussion and evidence-based policy making and will allow the High-level Group to examine the challenges facing the manufacturing sector without delay. I hope that this report will inform those discussions by prompting the questions that need to be addressed and providing a common view as to where we are and where we need to go.

The Government is fully committed to sustaining an environment in which the wealth creators in our economy, both in manufacturing and traded services, can flourish. We know that this means we must be agile and responsive to the developing needs of business. The recent launch of the Strategy for Science, Technology and Innovation 2006-2013 was an example of Government commitment in this regard as is our determination to vigorously implement the recommendations of the Enterprise Strategy Group. As the title of the ESG’s report implies, it is critical for a small economy like ours that we keep “ahead of the curve” and the Government is determined to play its part in seeing that we do.

Ireland is rightly proud of its economic development in the last decade. We have evolved into a modern economy with impressive developments in the sophistication of our industrial and enterprise sector as well as a concurrent rise in standards of living. Like any maturing process, there has been some pain along the way: this has been all the more obvious given the speed of our growth. We have risen to the many challenges that have faced us in the past with impressive results and I foresee the same type of determination and innovation being applied to the challenges we face in the future, both for the manufacturing and services sectors. The Government is determined to address and meet these challenges with your help.

Thank you.

ENDS

ETE 1607A