The ESRI’s analysis as released last week contains a very useful emphasis on the fact that Ireland’s Current Account deficit is fast approaching zero. However, the report also contains a seeming inconsistency, arguing as it does that that the current account imbalance is proof that Ireland has a substantial competitiveness deficit (page 2).
If both are true, could this mean that the vanishing deficit is proof that the competitiveness problem has dissipated over the last year or so? Ok, not necessarily, as the reason could be that a structural competitiveness problem could be temporarily masked by unusually high household ‘recession’ savings.
However there is another explanation. A CA deficit can come about with a very large domestic imbalance, even if a country has no external competitiveness problem. Does this simple description accurately characterise the Irish economy in 2009?
Finding out which explanation is more likely can be helped by decomposing the structure of the CA deficit that had emerged by 2007. In other words, we were importing more than we could afford for some reason – can examining those same imports help us understand why we were importing them?
Most imports go into intermediate production, so it is not easy to link each import with an ultimate end use. However using the CSO input-output tables allows us to estimate pretty well where imports were ultimately destined.
Such an IO analysis results in a stark conclusion. In 2000, final demand for GFCF induced imports of €10bn. By 2007, this had risen €8bn to €18bn. The large scale construction activity was pulling in a huge amount of imports which (ultimately) we could not afford. Add in the imports from construction workers spending wages etc, and it is very easy to see that the scale of growth of importing linked to construction could easily explain the vast bulk of the €10bn deficit that had emerged by 2007.
In contrast, while imports for the export sector increased (allowing for income repatriation), exports increased at a far faster rate. The net contribution of exports in 2000 was €21 bn, by 2007 this had risen to €33 bn.
This does not seem to be consistent with the view of an economy that had by 2007 supposedly developed a chronic competitiveness problem. Other measures would back this up – consider the UNCTAD’s measure of inward investment, which put Ireland second only to Singapore in 2007 (see NCC report).
As the construction boom source of domestic demand disappears, so too has the deficit, and well before any cost measures could possibly have an effect in terms of improving our trade performance. This is happening before our eyes in the trade figures, yet the virtually unanimous view of the Irish economic community that Ireland has a chronic competitiveness problem remains. This view is actually based on very little data – relative CPI/wage indices over the last decade or so. Without knowing where we stood competitiveness-wise at the start of this period, or relative productivity since, this proves very little.
Does all this logic (if true) change the current ‘competitive devaluation’ policy proscription much? Possibly not. The domestic imbalance is so large that a very large stimulus will be needed to reduce unemployment once again. However, if I am right, and Ireland is far more competitive that generally believed, then the upswing when it comes might be more dramatic and persistent than we could think to hope for as of today.
13 replies on “Ireland is Internationally Competitive: Guest Post from Ronnie O’Toole”
Of course we were more competitive than some would have us believe, they advocate this line to further increase their profits.
But the malinvestment of the 1988 to 2007 period is over, in that there will be no more credit flowing than levels in say, 1988. So we must now find activities that require no credit to function, in a deflationary environment, where other economies are so disrupted that they will look like a warzone. Food, water and so on are likely to be the main areas where we can make the most profit. Pharma is under threat as health budgets will be slashed. IT isn’t productive enough and the export of these items is tied to Ireland only while they make profits. Otherwise they go to Poland as with Dell.
Stimulus may be much more useful if applied later when we see how bad things are. In the meantime it may be best kept safe? We should organize socially as inequality in Ireland scares me. Nothing good will occur if riots break out. They can become a regular occurrence and we have enough no go zones as it is. Our position in EU and diplomatic skills may enable us help other nations thereby gaining us and them advantage? Much of what we exported was illusory profit, acting as a tax haven. As a result the main impact of loss of these industries is the payroll. We can only replace that with indigenous industry, in agriculture.
It seems your argument for competitiveness is based on a comparison of exports to imports.
Which leads me to ask:
How much of the exports picture can be attributed to transfer pricing from multinationals benefitting from our low corporate tax rates?
I mean, if I’m Coke, I want all my costs to accrue in Ireland (ie so my profits are cheaper to tax), pushing up the nominal export value of my syrupy stuff which gets sold into the (High-tax) finished markets on the continent, right? Of course, these artificially expensive exports are just a tax trick and shouldn’t be confused with actual productivity.
I think this idea can be traced back to a paper by Bartelsman and Beetsma (2000), available here:
http://www.cepr.org/pubs/new-dps/dplist.asp?dpno=2543
So, given this risk of mismeasurement, it seems logic would dictate we should adopt a more inductive approach to determining competitiveness. For instance, looking at micro level indicators of productivity and wage costs for Irish visavis other EU workers.
And that is a scary comparison.
The net contribution of exports to the Irish economy (which takes into account of the money lost in income repartriation) in 2000 was €21 bn, by 2007 this had risen to €33 bn. As such, the export sector has significantly increased its to the Irish economy.
The problm with the micro-level approach is that we don’t know the productivity in MNC enterprise, and could easily end up with a wrong diagnosis of our problems. Given that our BOP deficit seems to be disappearing as the domestic imbalance disappears, and that FDI per capita is well ahead of the virtually every other developed western economy, it would suggest that whatever disadvantages we have, we also have significant advantages which we may not be measuring.
But does the “net contribution of exports” really take account of profit repatriation? If it does, then ok, my objection is baseless.
Then I wonder, though, what it is I’m missing as I go through the two CSO publications:
http://www.cso.ie/releasespublications/documents/economy/current/bop.pdf
and
http://www.cso.ie/releasespublications/documents/external_trade/current/extrade.pdf
The “income” deficit on the balance of payments increased from 14bn in 2000 to 28bn in 2008 (most of this looks like profit repatriation); while exports for the same period only increased marginally (from 83bn to 86bn).
Of course, not all repatriated profits are attributable to exports (foreign owned companies selling in the Irish market must also repatriate, non?), still these numbers are moving us in the opposite direction to your central point here, which is that net contribution of exports (I guess this is total exports, minus intermediary imports, minus profit repatriation on exports) is growing fast in the naughties.
Am I doing something very wrong?
The posts in this thread seem to suggest that decomposing these BOP aggregates and attempting to track them to quantify changes in Ireland’s international competitiveness may present an application in economics of Heisenberg’s Uncertainty Principle. I think the advantages Ronnie believes are relevant relate less to the concept of competitiveness and more to the more nebulous concept of “attractiveness”. This is comprised of features (beloved of Enterprise Ireland) such as, a relatively young, well-educated, English-speaking workforce, a low corporate tax regime, an export platorm to the EU, “quality of life”, etc. These advantages have not disappeared.
However, with regard to competitiveness per se, the National Competitiveness Council presented some good quality analysis in its 2008 reports (published in January 2009) that fully supports Graham’s final “scary” comment. Nevertheless I would caution against an excessive focus on relative wage costs and productivity – important and all as these are. Utility costs – in particular, energy costs – and professional service costs are equally – and scarily – out of line with those of our major trading partners.
My focus is primarily on the costs of electricity and gas. The recent falls in international energy prices mean that domestically controllable costs comprise, approx. 60% and 50% of the final prices, respectively, of electricity and gas to smaller volume final consumers. Energy sector regulation has proved to be spectacularly damaging and dysfunctional in Ireland and these controllable costs on a per unit basis are significantly higher than those in most of the established EU member-states.
The Commission for Energy Regulation (CER) recently issued an information paper on the methodolgy it proposes to apply to set the revenues and tariffs for the electricity transmission and distribution networks from 2011 to 2016. These comprise a signifciant proportion of the domestically controllable costs in final prices. The CER relies on high-level qualitative descriptions of the methodology it uses to determine assets valuations for regulatory purposes and the resulting stream of annual capital charges which comprise approx. 70% of allowed network revenues. The limited evidence available suggests that the CER’s approach is a major contributor to excessively high electricity and gas prices in Ireland. The CER, not surprisingly has resisted repeated requests to publish the calculations it performs.
On a number of grounds this is entirely inappropriate and unacceptable:
1. Public trust in, and acceptance of, regulation relies on external scrutiny of the process and of how key determinations are made.
2. Most final consumers do not have the time, resources or specialist knowledge (or the resources required to retain the necessary specialist knowledge) to apply the necessary scrutiny of the Commission’s determinations.
3. Best international regulatory practice requires full and transparent disclosure.
4. As regulated, public, majority publicly-owned, open access network businesses no issues of commercial confidentiality arise.
This is simply another example of the ability of regulators in Ireland to evade proper scrutiny.
I have written, once again, to the CER requesting full and comprehensive publication of the calculations it performs. I fully expect some clever ploy (or ploys) will be dreamed up to justify non-publication.
Graham: My calculation tries to pull out the contribution of the MNC sector, and tries to take account of profit flows. 3 data issues on your comment:
> Exports have increased from €101bn (2000) to €150bn (2007). Your figure only related to goods, while the growth has been in services;
> I must also admit an error – I just included direct income repatriation in my initial calculation, and should have included indirect as well. Allowing for this, instead of an increase from €21bn to €33bn in terms of the contribution of the export sector, it should have been €21 bn to €26.5 (I can send the excel sheets to anyone interested). However this doesn’t change the core point. Our export sector has grown at a healthy rate, during a period of a momentous transformation away from electronics, towards a pharma/services composition.
Paul: Energy costs are a relatively small proportion of total costs (I think 2%) against almost 2/3rds in terms of wages. While not-unimportant, energy costs have received probably more attention than they warrant. As John Fitzgerald once said, many a mole hill makes a mountain, so there are a number of non-pay costs we should be examining. An exclusive focus on one may not be optimal, though any pressure on the CER has to be welcome!
My main point remains: does it not now seem obvious that the BOP deficit was a function of the domestic imbalance, not an external imbalance? Further, in terms of inwards FDI flows, why does that same NCC report show that we still fare so well? Are either of these facts consistent with a country with significant competitiveness imbalance and relative cost disadvantages?
Ronnie,
I take your point about the need to maintain some perspective. However, much of the attention energy costs have received has been comprised of dubious Government-sponsored efforts to justify the excessively high costs.
I’m sure Colm McCarthy, in his role as Chairman of An Bord Snip Nua, has eyed up some juicy low-hanging fruit, but those of us who are less-exalted and labouring in other corners of the vineyard must tackle the bushes within our reach. In addition, my preliminary estimates suggest that a combination of dysfunctional energy policy and regulation is adding an additional and unnecessary €500 million a year to electricity and gas costs. This is impacting on the budget of every household and business in the state and could be stripped out relatively easily. And it is also perhaps worth noting that high utility bills exert upward pressure on wage demands – and one would expect the reverse to be true also.
Ronnie, I think you’ve proved your point that the current account balance of payments deficit was driven by the construction boom financed by foreign borrowing. It certainly is striking how MNC exports have held up reasonably well.
But would you not agree that the determined resumption in 2000, after 15 years of trendless fluctuation, of an upward trend in relative wage per employee, could nevertheless have eroded the competitiveness of labour-intensive firms to the point where employment in the exposed sectors may be very vulnerable.
In other words, could it not be that employment, just like imports, has been sustained by the borrowing boom despite underlying loss of labour competitiveness?
If I get a chance I’ll paste here my slightly out-of-date chart that shows the dramatic change in competitiveness trend I’m talking about (the data — at least for the later years — are natuonal compenstion per employee vis a vis 35 industrial countries from Eurostat AMECO database.
Just how to measure competitiveness in a very small, very open, economy with endogenous factor supplies is tricky. My instinct is that crude real wage or real exchange rate figs point in the right direction, but are not conclusive. Persistent evidence that the volume of income generated by the open sector has declined relative to meaningful (ie European?) competitors is better, and on this basis, Ireland has been losing competitiveness since the turn of the decade. I don’t agree with Ronnie on this one.
I fully agree that the balance of payments deficit was a sign of internal imbalance. However, the housing and building boom crowded out a significant part of the tradable sector of the economy. It drove up wage rates making existing firms less competitive. Some of them closed. This freed up domestic resources, especially labour, to fuel the building boom.
Today we are faced with a rapid increase in unused domestic labour, reflected in the unemployment rate. This labour has been”freed up” by the building bust. If they are to find employment in the future new business that is sustainable will have to be generated. In turn, this will require a substantial improvement in the cost of producing in Ireland relative to our competitors to attract an increased share of the world production of goods and servces to Ireland. When this happens the unused labour will be “crowded into” employment.
Ireland needs to improve its competitiveness in the sense that without such an improvement a world recovery would not restore full employment to Ireland within a reasonable time scale.
Where I agree with all of you is that:
a) Irish wages have been rising at a fast rate, and
b) this was almost certainly caused by the domestic property boom and
c) this has been very unhelpful from a competitiveness perspective.
However, that is not to say that Ireland is now significantly out of kilter in terms of international competitiveness (though rightly is a red flashing light).
Absolute measures of payroll costs would show that while Ireland has become more expensive, it is not out of line. The UNITE document comparing private sector wages and employers PRSI rate show that (even allowing for subsequent slippage from 2005-2008), we were around the EU average. Of course it is telling that UNITE did no corresponding study of public sector pay, which would have told a very different story.
Could it be that:
1. In 2000 Ireland was an over-competitive economy. Our very fast economic evolution meant that our wage rate had not caught up with our now impressive export base;
2. This has not been easy to see from 2003-2006, as the export sector was in the bottom of a ‘U-shape’ caused by the transition out of electronics to new areas of comparative advantage. Only since then have we started to see Pharma / services exports more than make up for the fall in electronics, i.e. we were on the upper right hand part of the ‘U’. This upward momentum has been rudely interrupted by the international economic woes;
3. Private sector wages in Ireland are probably in-line, though to sum up John’s point, we definitely need a competitive devaluation as the unwinding of the domestic imbalance has been so dramatic;
Finally, non-pay costs are high, which suggests that productivity enhancement in locally provided services has to get to get more attention alongside the other fixes. This is one reason that life is expensive for consumers in Ireland, while not as expensive for businesses (consumers don’t have employees).
@Ronnie
I see my error on the Exports figure. Combined with your latter correction, my calculations are now much more in line with yours.
Sorry for the confusion.
The ‘competitiveness’ argument is a ruse. Its designed to pave the way for slashing wage rates in Ireland to the level of those in eastern Europe, even though productivity in Ireland is one of the highest in the world.
How can lack of competitiveness be the cause of the global increase in unemployment? Every country can’t be losing competitiveness, since competitiveness is a relative concept. By definition, there must be some countries in the world today that are gaining in competitiveness. Actually, if the stories in the press of wage cuts being imposed in Ireland are true, Ireland is likely one of them. Yet, unemployment is rising in every country, nowhere more so than in Ireland. Do the unemployed in every country have to hang around doing nothing until every country improves its competitiveness? Which, of course, is a contradiction in terms.
The real explanation for the increase in unemployment worldwide is lack of demand, nowhere more so than in Ireland. The wage cuts being imposed in Ireland will reduce demand still further.