Speech by Dermot McCarthy, Secretary General to the Irish Government at the OECD Forum 2003 - Governing for Growth and Development: The Irish Experience,

I am honoured to have been invited to contribute to this important session during the Forum.   The contribution of governance to the attainment of societys goals is a matter of perennial interest.   Appreciation of the importance of appropriate institutional arrangements to secure growth and development has grown over recent years.   The effectiveness of governance arrangements as a source of competitive advantage attracts interest from a variety of disciplines and is particularly important in the current period of global economic uncertainty.     

In the course of this paper I would like to outline the Irish experience in the development of institutional arrangements to secure growth and development.   I wish to focus in particular on the social partnership arrangements which have developed over the past fifteen years or so.  I want to say a little, then, about the process of public service modernisation which is proceeding in that context, and, finally, to address the process of regulatory reform which we are also pursuing.

Irelands long-run growth performance

By way of historical context, in the nineteenth century Ireland experienced de-industrialisation and a dramatic reduction in population through emigration.   For much of the twentieth century, the growth of output per capita in Ireland was the lowest among twenty-three European countries, with the single exception of the UK.  Irish output and living standards declined substantially relative to the European average.   

Since 1960, economic growth in Ireland has been sufficient, for the most part, to maintain Irelands position relative to continental Europe and to converge with UK living standards.   However, until the 1990s there was little progress towards convergence with average EU output per head.   Then, during the 1990s Irish GNP per head leaped ahead and converged at a rapid pace with the EU average - Irish income per head was at 99.8% of the EU average by 2001.

The recent strong performance began in the late 1980s.   The correction of the public finances was a significant feature of the late 1980s.

Between 1993 and 2000 average GNP growth was over 8% per year, while employment grew by an average of almost 5%.   In total, the numbers at work increased by 43% between 1993 and 2000 - a dramatic performance unprecedented in Irish economic history.   Employment grew across all sectors of the economy.   Female employment grew particularly strongly, with rapidly increasing participation rates especially among married women.   The strong employment performance was mirrored in unemployment, which fell from 16% in 1993 to 4.3% in 2000.   Particularly marked was the decline in  long-term unemployment.

Since 2000, there has been a significant slowdown in the pace of economic growth and recent months have seen a marginal increase in unemployment.   Despite a strong primary fiscal surplus, significant investment in infrastructure has produced a modest deficit on a general government balance basis.

Factors underpinning growth

Despite recent setbacks, the strong Irish performance over the last decade has reflected a number of key factors.   

Firstly, the quantity and quality of labour supply facilitated rapid growth.   The fruits of decisions to increase investment in education services, leading to higher participation rates in third-level in particular, bore fruit in the 1990s in the availability of large numbers of highly qualified young people.   The previously low participation rate of women and the presence of large numbers of Irish people who had emigrated in earlier years but were anxious to return, created a potential for rapid employment growth. 

Strong flows of foreign direct investment into Ireland through the 1990s were also a major contributor, with particular strengths in software, electronics and chemicals.   This has provided a very significant export base, with significant linkages to the indigenous economy.   That strength reflects an active national development policy of targeting emerging global leaders in high-growth sectors, increasing the capability of indigenous business to exploit opportunities from the investment flows, and an emphasis on increasing the supply of graduates in relevant disciplines. 

A third critical factor was the dynamic impact of our membership of the EU.   Receipts of structural funds contributed significantly to strengthening our capacity, at a time when domestic public expenditure was significantly constrained.   However, access to the internal market and the dynamic effects of the strengthening of the internal market regime were critical drivers of business growth, both indigenous and foreign.    

Strong cost competitiveness through the 1990s also contributed to this performance.   Unit labour costs rose at a much slower rate than the rest of the OECD area, influenced by the strong growth of high productivity sectors.   Ireland increased its share of growing export markets as a result.   However, competitiveness was also enhanced through improved industrial relations, greater entrepreneurship and increased organisational capability. 

It is however, in the area of domestic policy and institutional change that much of the critical capacity for change arose.   Fundamentally, this reflected a strong commitment to a consistent policy framework.  Over the 1990s macro-economic policy was based on preparation for, and the eventual move to the euro.   National agreements on pay, taxation, social welfare and social provision shaped distribution and generally ensured a low level of industrial relations conflict.   Finally, there was considerable progress in developing appropriate structural policies, especially regarding economic development.   This consistency of approach produced a virtuous circle:  buoyant tax revenue allowed tax reductions, that supported continued wage moderation and further increased competitiveness, which increased inward investment, yielding income that increased domestic demand, giving rise to non-traded business activity and further employment. 

That consistency of approach was underpinned, and largely made possible, by the development of social partnership since 1987.   Developed in the context of the fiscal crisis of the 1980s, this approach saw the development of a confidence-building system of national wage bargaining.   This prioritised employment growth over incomes growth, and the resultant moderation in wage rates through the 90s stimulated investment and jobs.   However, the effect of partnership extended beyond pay to a consensus, in broad terms, on the consistent policy framework being pursued.   The benefits of stability and reduction in industrial conflict, were reflected in the availability of energy on the part of management and trade unions to engage on issues of real competitiveness, such as corporate strategy, technical change, training, working practices and local development strategies. 

Lessons about governing for growth

It has been observed that Ireland over the past decade or so has become a strong developmental State.   It does not meet the classical definition of such a State, which protects the local economy in order to develop strong localised enterprises capable of competing in the international economy.   On the contrary, public policy has reflected a strong commitment to openness and engagement with the globalisation process.   Its activism is devoted to successful engagement, building optimum connections to flows of capital and building local networks of production and innovation linked to this new industrial organisation.  It is therefore best thought of as a Flexible Developmental State. 

By definition, such a strategy requires extensive engagement by public authorities with critical actors in the economy and society.  It requires development agencies to be closely in tune with trends in the international economy, both in terms of technological innovation and the implications of corporate strategy.   

It requires a flexible approach to regulatory institutions and policies, recognising speed of change and adaptation as a source of competitive advantage.   

It requires positive engagement with key domestic stakeholders:  employers, trade unions and leaders of civic society.   A consistency of approach requires effort not only on the part of public policy makers, but also on the part of other actors whose decisions and behaviour are critical to the performance of the economy and society.   

Sustaining such a shared agenda requires a significant commitment of energy and appropriate institutional frameworks.   In the Irish case that has been reflected in a commitment across all of the main political parties to the process of social partnership.   It has required, and received, positive engagement on the part of the key organised interests. 

That engagement requires appropriate institutional support.   In particular, we have developed mechanisms to support shared analysis and deliberation - such as the National Economic and Social Council, and institutionalised a bargaining process, covering pay and policy issues in the light of that shared analysis.   This has developed in the form of three-yearly agreements between government and the social partners. 

To sustain a consensus across the wide range of relevant policy issues requires legitimacy and an appropriate breadth of participation.  In the Irish context, social partnership extends beyond employers and trade unions to include farm organisations and civil society bodies known, in our case, as the community and voluntary sector.   All of this process requires political leadership through a recognition on the part of government that steering this process successfully can deliver as much, or more, of a Governments policy agenda as more traditional forms of engagement.   It cannot, of course, blur issues of political and parliamentary accountability, nor the necessary freedom of action which governments require in, for example, budgetary matters.

Public Service Modernisation

Supporting this engagement makes significant demands of the public service, both in its policy advisory and programme delivery roles.   In the context of the radical changes occurring in Irish society over the past decade, we have also pursued a programme of public service reform under the heading of the Strategic Management Initiative. 

The process of public service modernisation has itself raised a number of important governance issues.  While Ireland has not pursued the stronger form of new public management, attempts to provide greater clarity about the relationship between the political and administrative systems, through legislative change and assessment of performance through specified outcomes\outputs, raise complex issues about the impact on informal decision-making processes and the costs and potentially perverse impacts of performance targets. 

A recent review in Ireland on the Accountability of Secretaries Generals and Accounting Officers examined the role of the heads of Civil Service Departments in terms of their accountability to the Parliament for the stewardship of public funds, and their responsibilities in terms of delivering outputs and advice to their Minister as defined in recent legislation.   

The review made a wide number of recommendations which cover the areas of:

  • internal financial controls, internal audit functions and formal risk management strategies 

  • defining the responsibilities of CEOs of bodies under the aegis of Departments 

  • the role of Parliamentary Committees in evaluating the Strategy Statements prepared by Departments and progress reports thereon 

Other recent developments relevant to governance in the Irish public sector include:

  • new legislation requiring disclosure of interests by politicians and civil servants and related matters 

  • an updated Code of Practice for the Governance of State Bodies 

  • a draft Civil Service Code of Standards and Behaviour which is currently under discussion with trade unions and the relevant parliamentary committee

However complex challenges are still faced as reforms aimed at a more strategic and performance-orientated public sector are introduced.  To what extent can civil servants as opposed to Ministers be held accountable for performance of an organisation?  how to generate flows of meaningful and useful information on performance?  how to balance the need for innovation and appropriate risk-taking with accountability for prudent use of public resources and value-for-money? 

Devolution of decision-making authority and resources needs to be combined with the appropriate incentives and support for a culture which rewards cooperation and information sharing.  Likewise, devolution and decentralisation needs to support continued accountability and avoid undue institutional instability.  These challenges are more complex as they must address changes in the distribution of power at both national and international levels. 

Regulatory Reform

A significant recent focus within the strategy of public service modernisation has been that of regulatory reform. 

Over the past year, following the OECD Review of Regulatory Reform in Ireland published in 2001, the Irish Government has been engaged in the preparation of a White Paper on Regulation. 

This provides us with the opportunity to establish core principles around the regulatory process, allowing greater participation and transparency in policy-making while seeking to ensure that we create a better environment for doing business.  It will set down, for the first time in Irelands case, some core principles around what gets regulated in the economy and in society, and why.  It will deal with issues relating to proper consultation in advance of making regulations, better analysis of the likely impacts of regulation, and using alternative and more imaginative approaches to achieving objectives. 

To inform the preparation of the White Paper, the Government published a consultation document in 2002 (Towards Better Regulation - available at www.betterregulation.ie).   This highlighted, in particular, the significance of regulatory policy for the quality of governance.

Governance has been defined as rules, processes and behaviour that affect the way in which powers are exercised ... particularly as regards openness, participation, accountability, effectiveness and coherence.  (European Governance - A White Paper;  European Commission, 2001)  It comprises the often complex mechanisms and institutions through which citizens and groups articulate their interests, mediate their differences and exercise their legal rights and obligations. Governance grows in importance as an issue as the relationships between government, civil society and the market, nationally and internationally, become more intense and complex. 

The Commission White Paper suggested five principles of good governance:

  • openness

  • participation

  • accountability

  • effectiveness

  • coherence

which in turn reinforce the principles of proportionality and subsidiarity. 

Conclusions

Better regulation, more effective and focused public services and an appropriately anchored consistent set of public policies are critical to achieving national competitiveness in a global context.   Flexibility of structure and agility of approach are vital for success.   They require an engagement on the part not only of government and the public administration, but of all those who have a stake in a successful national outcome.  In particular, a challenge arises from the fact that innovative solutions developed in one period may rapidly require to be replaced or renewed.  It is appropriate, in concluding, to acknowledge the very important contribution which the OECD makes in this process through the comparative analysis and networking on these issues which it provides.   It is a much appreciated resource to all of us engaged in that continuing endeavour.