In the Irish case, due to the limited potential for increasing exports from the main resource-based traded sector (agriculture), we must concentrate on raising production in internationally traded manufactured goods in order to increase domestic consumption and future output growth without pressure on our balance of payments. The vital importance of trade to Ireland is evident since we must import goods for production and consumption due to our limited supply of natural resources and therefore must exchange exports to pay our way. Yet even if we were to imagine an economy that could be totally self-sufficient, differences in consumer tastes and economies of scale would still make it uneconomical to remain isolated. Two important points can therefore be made concerning the relative roles of the traded and non-traded sectors of a small open economy. Firstly the traded sector is vital if the economy needs to purchase imports, and secondly it is this sector that really determines the total level of national output. Total output is determined by production in both sectors, but since the value added to this total from the non-traded sector is determined by its allocated proportion of national spending, it is expansion of the traded sector and its multiplier effects on the protected sector that determine the overall expansion of national output.
Economic policy in Ireland has concentrated on facilitating expansion of output in this sector. As prices for traded good are exogenously given from international markets, policy has focused on attempting to increase the share of world and Irish investment that the domestic open sector can attract. One of the most obvious policy measures that discriminates between the sectors is the differential tax rates on profits, with the non-traded and traded sectors subject to a 38% and 10% tax on profits respectively. Government grants and subsidies have also been directed largely towards developing export industries which are seen as the primary means to aid the balance of payments and to indirectly enhance growth and employment in other sectors of the economy. The generally accepted view of policy makers, therefore has been that enhancing the competitive position of the economy to attract a greater share of world investment to its traded sector is the key to economic expansion.
Over 900 foreign firms operate in Ireland but less than one-third of their material input needs are met internally. By ensuring foreign firms can be competitively supplied by domestic markets, the output of the non-traded sector as well as the real value added by foreign firms to the economy can be raised. The infrastructure and institutional environment of a country may also serve as important determinants for potential investors, so it is desirable to maintain a supply of utilities. The relative price and quality of labour is also another key competitive factor, and as the most powerful Irish trade unions are based in the non-traded industries, national wage levels are determined to a large extent within this sector. Government efforts to moderate wage levels, therefore, must be directed towards the non-traded sector,and improving education and training services should be at the top of the government's agenda. Finally, it must be recognised that spending on non-traded goods and services accounts for around 60% of national output, which means that policies aimed at price reductions and quality improvements within this sector will not only enhance our competitive position, but also directly improve the living standards and incomes of the population. In essence, the non-traded sector is crucial for the nation's economic welfare and if policy can get the non-traded sector "right", the open sector will take care of itself.
The effects of a single market are most prevalent in the previously unpenenetrated Irish services sector, which will force many firms to drop prices to remain competitive. In this decade, the services sector will face the same shake-out that took place in manufacturing when Ireland joined the EEC in 1973. Dramatic changes have already come to pass in the distribution, transport and financial services sectors, whilst moves to liberalise public purchasing are beginning to expose the traditionally protected public utilities, such as energy and telecommunications to new levels of competition. The movement towards a common market for telecommunications services and equipment (as spelled out in the European Commission 1987 Green Paper) has coaxed Telecom Éireann to review its cost and pricing structures. Finally, with increased mobility of labour and capital in the EU, the prices of goods that remain non-traded will also become indirectly linked with prices in other countries are increasingly harmonised.
Therefore, it is important to realise that if a non-traded sector's performance is damaging Irish competitiveness, the government may be able to alter the sector into a traded one. Foreign competition may then reduce prices and improve quality if the reasons that the sector is non-traded have to do with government policy. The 1992 programme implies precisely such changes for many service industries that have been non-traded.