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Economic Performance

Competitiveness Benchmarking Report

The NCC has released its benchmarking report (you can download it here).

The National Competitiveness Council (NCC), which reports to the Taoiseach on key competitiveness issues facing the Irish economy, today published its Annual Competitiveness Report: Volume I, Benchmarking Ireland’s Performance. The report provides an assessment of the competitiveness strengths and weaknesses of the Irish economy relative to competitor countries.

The Irish economy is experiencing a rapid and painful adjustment to the bursting of the property bubble, the international financial crises and the downturn in world trade. As a small, open and competitive economy, Ireland prospered from an export boom driven by globalisation and investment in the 1990s and early 2000s. In recent years, strong growth in the domestic economy, driven by housing and consumption, replaced exports as the key driver of growth. Though economic growth rates remained strong, our international competitiveness weakened as the domestic boom increased the costs of doing business here and as reforms to improve competitiveness were delayed.

The NCC’s Annual Competitiveness Report found that Ireland’s competitiveness position, while weakening over a number of years, has not changed dramatically in the past year. The recent rapid decline in national income is primarily a reflection of the collapse of the property market and its effects on the wider economy. Ireland continues to retain a range of important competitive strengths including a young and comparatively well educated workforce, improving infrastructure, growing levels of research and development activity, a modern internationally trading enterprise base and a long track record as a successful location for overseas investors.

The ability of Ireland to protect the gains in living standards of recent decades and to secure future increases rests on our ability to succeed as competitive exporters of high quality goods and services on international markets. To date, the report highlights that Irish exporters have performed relatively well. While Irish exports of goods and services are expected to decline by 3.9 percent in 2009, the OECD forecasts that OECD exports will fall by 16.5 percent. The fall in the value of sterling is noted as a significant challenge, particularly for indigenous exporters who are focused on the UK market and compete against UK firms in other markets.

The NCC believes that targeting export-led growth is the only sustainable strategy to maintain living standards and to secure long term prosperity. The Irish economy needs to respond to the current crises and position itself to benefit from a global recovery by improving our competitiveness. Given the severity of our current economic position, it is now time for Ireland to achieve a swift improvement in competitiveness across a range of areas.

Cost Competitiveness
Strong domestic growth in recent years led to significant increases in the costs of doing business in Ireland. There are initial signs that cost competitiveness is beginning to improve but the cost base in Ireland remains high.
·         Between January 2000 and April 2008, Ireland experienced a 35 percent loss in its trade-weighted international price competitiveness. Between January 2000 and June 2009, the index has fallen to 30 percent.
·         Irish inflation, as measured by the HICP, declined by 1.7 percent in the year to May 2009, compared to a decline of 0.7 percent in the EU[1].
·         Following a number of years of strong growth, growth rates in Irish labour costs slowed significantly in 2008 and were lower than the EU-15 average. Data for 2009 is not yet available. Unemployment in Ireland is now significantly above the OECD average. Younger and lower skilled workers are particularly exposed.
·         Non-pay costs in Ireland compare poorly with other countries across a range of business inputs. These include utilities (electricity, communications and waste) and a range of services, such as accountancy and legal fees. For example:
o   Ireland has the second most expensive industrial electricity prices of the EU-14. At the end of 2008 industrial electricity prices were 34 percent above the EU-14 average.
o   The incumbent broadband provider in Ireland offers a relatively low speed at a relatively high cost in comparison to the benchmarked countries.
·         While the annual rate of inflation declined by 5.4 percent in June 2009 – the sharpest fall in Ireland since 1933 – administered services inflation (e.g. public transport, health insurance, education) is projected to average 13.2 percent this year.
·         Growth in productivity can offset higher costs. The report outlines that productivity growth between 2004 and 2008 has been relatively low.

Broader Business Environment
The broader business environment that supports competitiveness comprises a wide range of areas including taxation, regulation and competition, finance, infrastructure, education and research and development.
·         Taxation: Taxes on both profits and labour are low relative to other countries, though recent increases in personal taxes have weakened the competitiveness of Ireland’s labour tax wedge. In terms of the creditability of the Government’s finances, Ireland’s general government consolidated debt as a percentage of GDP has risen sharply since the end of 2007, and payments on national debt will rise substantially in the coming years.
·         Regulation and Competition: The general regulatory environment in Ireland is perceived to be supportive of enterprise – for example the financial and administrative costs of starting a business in Ireland are low compared to other countries. In relation to domestic competition, while competition legislation is perceived to be relatively efficient, incumbents still dominate the market in certain utilities.
·         Finance: The turmoil in global financial markets and the exposure of Irish banks to bad loans in the declining property sector is affecting Irish firms in terms of their ease of access to finance and its cost. With regard to the cost of credit, the majority of loan types in Ireland were more expensive than the Eurozone average in 2009 Q1.
·         Infrastructure: Ireland’s investment rates in infrastructure have been among the highest in the EU in recent years and there have been tangible improvements. Deficits remain, particularly with respect to the availability of advanced broadband services where Ireland ranks 25th in the OECD in terms of its readiness to support next generation services.
·         Education: Ireland has a young and comparatively well educated workforce. For example:
o   42 percent of the 25-34 year age group in Ireland possess a third-level qualification. This compares very favourably with the OECD average of 34 percent.
o   Ireland continued to have a high number of graduates in the fields of mathematics, science and computing per 1,000 of population aged 20-29.
o   Older workers in Ireland remain less qualified than the OECD average and a relatively large share of the working age population (34 percent) has no more than lower secondary education. Adult participation in life-long learning remains relatively low.
·         Innovation and R&D: Starting from a relatively low base, Ireland is making significant progress. For example:
o   Ireland’s innovation performance continues to improve and its score on the summary innovation index is above the EU 15 average.
o   The number of researchers in Ireland is growing, up from five researchers per 1,000 of total employment in 2000 to six per 1,000 in 2006.
o   Total R&D spending in Ireland increased from 1.26 percent of GNP in 2000 to 1.68 percent of GNP in 2008. Expenditure on R&D by businesses has increased significantly in recent years.

Benchmarking Ireland’s Performance provides a statistical assessment of Ireland’s competitiveness. Its findings will underpin Volume 2 of the Annual Competitiveness Report, Ireland’s Competitiveness Challenge, which identifies the key competitiveness challenges facing enterprise in Ireland and sets out clear policy actions that can help restore Ireland’s competitiveness. Volume 2: Ireland’s Competitiveness Challenge will be published later this year. The NCC issued a short report in June, Getting Fit Again, which outlined the immediate actions required to support Ireland’s competitiveness.

15 replies on “Competitiveness Benchmarking Report”

The main contribution of the Benchmarking part of the NCC report is to provide a consolidated evidence base that informs public policy – and indeed public debate, on forums (fora?) such as this one.

In that regard, it’s worth flicking through the report and seeing the 100+ criteria on which Ireland is benchmarked, across all the headings from Knowledge Infrastructure to Labour Supply.

As an ex-NCC staffer, I can hopefully still suggest that the guys in the NCC would also be keen to hear any thoughts on new metrics for benchmarking, as it is an evolving concept of competitiveness.

I’m not too sure about new metrics. We run the risk of statistical overload. What might be interesting – though it could be effort and time-consuming – is some high-level impact assessment on, say, standards of living and competitiveness that would examine the costs and benefits of improving our ranking in selected metrics.

Obviously we will have to wait for the second volume which will identify feasible policy actions, but, given the seriously straitened fiscal circumstances, it is unlikely that the resources will be available to finance meaningful and effective policy interventions. In this context, however, some indication of key steps, costs and benefits for specific interventions might be useful, as some interventions might simply require the exercise of existing powers – or their more effective enforcement. There is a requirement to give some substance to the Government’s aspiration-loaded “Smart Economy” document from last year.

Having commented frequently on the continuing scandal of electricity and gas prices I will simply note that the Government could issue very simple directions to the relevant semi-states that would result in price reductions of up to 20% for gas and 10% for electricity rather than the 10% and 0% being proposed respectively from 1 October.

Despite the best intentions of the NCC I fear we are facing a protracted and jobless recovery and the gradual pick-up in the international economy will release the emigration safety valve. Why can we not break this continuing cycle of losing those whom we need the most?

One omission from this report is any discussion of governance or corruption. Of course one can claim that “competiveness” is essentially an issue of costs. But the focus of the report is on potential investors in Ireland and in that respect, events of recent years (if not decades) must have left a few foreign investors wondering exactly what kind of government they would be dealing with. Or what kind of banks they would be dealing with. Does an investor have to be politically connected to, for example, get big loans, get planning permission, or avoid prosecution for certain offences?

@Frank Galton

You might be interested in the “Sustainable Governance Indicators” produced by a group sponsored by the Bertelsmann Stiftung. (I served as a “country expert” for Ireland.)
It is available here: http://www.sgi-network.org/

@Paul
That’s a fair enough comment about stats overload, and I’m pretty sure the Secretariat are on top of their brief, but tapping the wisdom of the crowds in costless way, like this forum, is probably no harm.
As the world becomes more instrumented, more and more is becoming measurable and thus the set of measurable factors intersects a little better with the set of factors that should be measured – e.g. no index of competitiveness would have included quantitative measures of administrative burden 10 years ago but all do/should now, using things such as the World Bank’s Doing Business.

Competitiveness usually means lower costs, and a suitable workforce and infrastructure. But only some industries are actually mobile and able to relocate.

As Frank Galton says there are unknowns. These are in fact very well knowns via the worldwide accounting and consultancy companies that thrive in Ireland and can act as recruiters for such industries. This might explain why so many contracts are awarded to these companies by the government. There is an important strategic role played by these companies. They are after all very familiar with tax and other policies and unofficial matters that do not appear in glossy brochures. We compete with Scotland Singapore etc for these industries.

Do we incentivize these companies, whose audit arms are so fallible, adequately? Appropriately?

@Ronan L,

Not diasgreeing with increased quantification, simply looking at how this plethora of metrics may be used to identify interventions that will generate the biggest bang for rapidly diminishing bucks.

@Pat,

Competitiveness means many, many things, and cost is just one element. If cost was the predominant factor, then forget the Finnish and Danish examples, we should all be mirroring Zimbabwean industrial policy.

Unfortunately, the two elements that are easiest for lazy analysts to track (non-wage costs and exchange rates) are negative for Ireland now, as the NCC report shows. Also unfortunately, rather than do real thinking about the export sector, most domestic and international economists start and end with the Real Exchange Rate, which only judges these two factors.

The value of the NCC report is that it shines a light on other very important competitiveness factors such as regulatory environment, infrastructure, tax rates etc, as well as highlighting measurements of actual performance, such as Ireland’s ability to attract Greenfield FDI etc.

Sorry, shouldn’t have directed this last post at Pat, who mentions infrastructure and workforce, but instead Paul Hunt.

Paul, the stats in the NCC report on many aspects related to our export performance and competitiveness are clearly not understood based on the posts I have seen on this blog site over the last year. if it takes a little work to learn about these important factors, then so be it.

@Ronnie,

I don’t think we are in disagreement. All I was pointing out in my earlier post is that if there are implicit taxes and rent-gouging (resulting from ineffective – or an ineffective application of – competiton and regulatory policy) that increase the cost of doing business, they should be stripped out. I don’t see this as a panacea to enhance economic performance and competitiveness; it’s just something that should be done. I fully accept that a more complex set of factors has a greater bearing and I’m simply interested in seeing how the increased quantification of some of these factors might guide effective policy interventions.

@Frank.
Excellent point. It would be naive to think international investors ignore corruption in making their decisions.

@Brendan Walsh

http://www.sgi-network.org/

It is seriously dated. Bertie Ahern is still shown as Taoiseach.
If this is so for one easily verified fact, how reliable is any other evidence on Ireland or any other country for that matter?

@Donal O’Brolchain:
Donal, I agree, and a lot of the material I contributed has been rendered irrelevant by “the events” of 2007/8. None the less, the exercise involved a considerable input by serious (mostly Germanic!) scholars – and some brilliant software development – but is seems to have vanished without a trace.

In terms of metrics for competitiveness, a figure I find very interesting, but which is not to be found in the NCC report, is the rate of return on investment by US companies in Ireland.

A 2005 figure from ‘Economic and Budget Issue Brief’ of the Congressional Budget Office gives a figure of 7.6% for US-Owned Assets Abroad (Direct Investment).

I have seen recent references to the figure for Ireland as being 19%, down from about 24% five years ago.

Is this differential explained in terms of low corporation tax rates together with transfer pricing?

I have yet to see a paper by any Irish academic explaining how US subsidiaries in Ireland are so profitable, despite our weak ‘competitiveness’.

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