The winning hare? Structural change and productivity performance in Ireland and Portugal, 1979-2003

"In the 1990s, the Irish economy experienced exceptional rates of growth and the income gap that for a long time had separated it from the richest European economies was finally bridged. During the same decade, the Portuguese economy lagged behind and faced a contraction in the rate of catching-up. The better performance of Ireland in the context of the European periphery is new in the second post-war period. In fact, Ireland experienced lower rates of income growth during 1950-1973, whereas Portugal caught up substantially to the European core. During most of the 1980s the two economies faced low growth again and experienced hard times in financing the government and the external deficits. Economic historians failed to predict the growth surge of the Irish economy in the 1990s, as the country was compared unfavourably with other peripheral countries, such as Portugal and Spain, where protectionism, state interventionism and the regulation of labour and capital markets were abandoned earlier during the European “golden age”. Irish income per capita growth in the 1990’s was a consequence, in roughly equal parts, of the growth of labour participation rates and of labour productivity. Changes in labour participation rates derived from Ireland’s high degree of international labour mobility. During the 1990s, the country received increasing amounts of young and skilled immigrants, reversing a traditional history of emigration (this partially explains labour productivity growth as the new entrants in the labour market had above average productivity levels). Some studies have shown that labour productivity growth was due to high levels of foreign capital and high levels of investment in information and communication technology (ICT) intensive industries. But the performance of ICT industries are only part of the story as their share in total output remained relatively small and as there were major productivity increases in traditional industries too, in both the industrial and the service sectors. Moreover, although impressive in historical terms, the growth of ICT industries in Ireland was only slightly quicker than in other countries such as Portugal. In order to measure the impact of different industries on labour productivity growth this paper presents a shift-share analysis of labour productivity growth in Ireland and Portugal since 1979. We use in the paper the Groningen Growth and Development Centre database, which provides information for 56 industries on value added, persons engaged, number of employees, hours worked and labour compensation for the period from 1979 to 2001. This data is complemented with the OECD STAN database which has a more limited industrial coverage but extends to 2003. The high level of disaggregation in the present paper will allow us to compare the contribution to labour productivity growth of different sets of sectors or industries, namely: government vs. private sectors; service vs. manufacturing industries; ICT vs. traditional industries; labour intensive vs. capital intensive industries; and of industries with a large share of foreign capital vs. predominantly domestically owned industries. It is important to reveal the sources of productivity growth at such a disaggregate level because it will help determine the prospects for future growth."