Ireland’s Competitiveness Challenge Post author By Philip Lane Post date January 14, 2010 You can read the latest NCC study on this topic here. Categories In Economic Performance Tags NCC 29 Comments on Ireland’s Competitiveness Challenge ← Groceries Code Being Introduced → Martin Wolf on Iceland 29 replies on “Ireland’s Competitiveness Challenge” High aspirations, a lack of inspiration and a negligible prospect of implementation (and perspiration). As Colin “Pinetree” Meads once observed of the English rugby team “Too many sweatbands and not enough sweat”. The proposed tax on property is interesting. Maybe we should set up a commission on taxation to examine it further. I would have to totally disagree with Paul Hunt that there is a negligible prospect of a major improvement in competitiveness. In fact, a major improvement is allready well under way and is accelerating by the month. For clarity, we need to look at competitiveness versus the Eurozone and versus the U. Kingdom separately. It would have helped if the NCC had done that instead of lumping everything together. The decline in competitiveness versus the Eurozone peaked in August 2007 and has been improving ever since. Following the publication of today’s inflation figures by the CSO, it is now clear that Ireland has almost made up the ground lost following entry to the Euro on 1 Jan 2002. Between 1 Jan 2002 and August 2007, the HICP in Ireland increased by about 6%-8% MORE than the Eurozone average. However, since August 2007 the trend has been in the other direction, and the HICP in Ireland has risen by about 5%-7% LESS than the Eurozone average. So, relative to the Eurozone, we are now on the brink of restoring our competitiveness level back to where it stood on 1 Jan 2002. The following are the HICP changes in the 12 original Eurozone countries between 1 Jan 2002 and December 2009: [ 1] Finland +13.4% [ 2] Germany +14.4% [ 3] Netherlands +15.6% [ 4] Austria +15.9% [ 5] France +16.5% [ 6] Belgium +17.0% [ 8] Ireland +18.7% [ 7] Portugal +18.9% [ 9] Italy +20.2%  Luxembourg +24.5%  Spain +26.5%  Greece +29.8% [ ] Euro area +18.1% So, Ireland’s HICP increase since 1 Jan 2002 now stands at 18.7%, versus 18.1% for the Eurozone. We should overtake them this month or next. In December alone, the HICP fell by 0.5% in Ireland, but rose by 0.3% in the Eurozone, bringing a gain in competitiveness of 0.8% in that month alone. We might well have overtaken the Eurozone in January if December’s performance is repeated. But, if not, certainly by February. So, as things stand now (January 2010), Ireland’s comparitive price level versus the Eurozone is more or less back to where it was in December 2001, just prior to entry to the Euro. Of course, it can well be argued that we should be aiming to restore our relative price level versus the Eurozone not just back to its December 2001 level, but to its December 1998 level. No one argues that we were uncompetitive then. Betweeen December 1998 and December 2001, the HICP in Ireland increased by 13.4%, compared with 6.4% in the Eurozone. So, that means we need our HICP to increase by 6.4% less than the Eurozone HICP in the next couple of years to restore our comparitive price level versus the Eurozone back to where it was in December 1998. On present trends, this should be achieved by late 2011. But, if November’s acceleration is maintained, it could be achieved by late 2010. These figures make nonsense of claims by David McWilliams, and some posters on other threads on this site, that a 30%-50% devaluation is required to restore competitiveness versus the Eurozone. The continuing improvement in competitiveness versus the Eurozone is rendering the debate, such as it was, on whether Ireland should leave the Euro, a complete irrelevance. Regarding competitiveness versus the U. Kingdom, this is obviously complicated by the devaluation of sterling. While the decline in competitiveness versus the Eurozone peaked in August 2007, that versus the U. Kingdom did not peak until January 2009. Between August 2007, and January 2009, the U. Kingdom engineered a 23% devaluation of the Pound sterling versus the Euro. This obviously had a major effect on Ireland’s competitiveness. However, as I’ve posted here on many occasions, when such a devaluation occurs, the resultant situation is not static. Instead, the devaluation triggers a rise in inflation in the country experiencing the devaluation and a fall in inflation in countries that country devalues against (with this latter effect being greater if its a small country that imports a lot from the country devaluing). This process is now well under way in the U. Kingdom. Inflation there is soaring and their HICP annual inflation rate is predicted to hit 4% this January. Assuming (reasonably) that Ireland’s HICP inflation rate in January is about -2.5%, and bearing in mind that the Pound sterling has increased by 2.3% in value against the Euro from its low-point in January 2009 (1 Euro = 89.7p in January 2010 versus 91.8p in January 2009), I estimate that Ireland has allready experienced an improvement in competitiveness of about 9% versus the U. Kingdom since January 2009. Barring a resumption of the fall in the Pound sterling versus the Euro, this improvement is going to continue on through 2010. @ John the O Do you think that the Eurozone should be our ‘final’ template? A more international perspective may be needed? Alas I have neither the time nor the talent! Al AH, @JohntheO, I believe Paul Hunt was referring to the recommendations of the NCC being unlikely to be implemented, not to increased competitiveness… Can’t disagree with the rest of your post, though. I’ve wondered often why we need to follow the UK and US down, when there is a stable currency market bigger than either of them in close proximity to us. Add in the ERM II currencies, and it is a bigger market than both… I will say again also that we import far more from the UK than we export. The imports, being the stuff of shopping baskets, should have a much greater currency benefit than the loss of competitiveness for exports. That the full saving is not being passed on is something worthy of further competitive investigation. Anyway, unusually for me, I welcome a couple of aspects of the report: “Produce more graduates with domain-specific knowledge to meet the needs of software companies that develop products for specific sectors within the market. This will require higher education institutes to modify existing programmes to include modules that develop expertise and understanding of sectors in which the Irish software industry has a strong presence such as banking or telecommunications.” Are our universities ready to produce Cobol programmers? CICS specialists? MVS Systems programmers with IBM assembler? Jungle Camouflage Language? Deeply unsexy stuff. I’ll eat my 370 assembler instruction mnemonics book if it happens. “Enhance the number of high skilled graduates in the ICT area by creating bursaries for achieving over 500 points in their Leaving Certificate and entering into a computing and engineering degree course.” This one, however, missed the point. For export of services to be a viable industry, we need to be able to step people on. This means we need to be able to train those who are already working at mid-high level to move on to yet higher levels. This is provision of workplace MSC/PHD stuff. Without hugely impacting the earning of money. Few companies are now prepared to accept the whizz-kid wet behind the ears advising them on long-term IT strategy. No matter whether the whizz-kid has spent ten years of study… real world experience is important in addition to the academic ‘proof’ of that experience. So the next step for IT services is competition at mid-senior level, moving up the revenue chain in the companies that the entry level services are in. Nothing wrong with encouraging the next generation, but you have to encourage the current generation to move on. At the moment they are stuck between the exigecies of earning and the impossibility of further study. @yoganmayhew “I believe Paul Hunt was referring to the recommendations of the NCC being unlikely to be implemented, not to increased competitiveness” Oh, I see. Apologies to Paul. I thought he was referring mainly to price competitiveness. But, now that I’ve read the NCC report, I can see he was referring to wider issues. Irish and Eurozone Competitiveness Indicators 1999 – 2009: http://www.finfacts.ie/irishfinancenews/article_1018829.shtml As we have increased the pay of pollies when will we get the benefit of that? You mean an ex RTE journo is all we got? Cutting costs is so much easier than real strategy? Taking on easy credit of 54,000,000,000 euro and then finding:- http://www.independent.ie/business/irish/taxpayer-faces-bill-of-836430bn-in-early-anglo-windup-2014977.html may hamper competitiveness a little? Why not cut those costs? @JtO & YM, Now that the misunderstanding caused by my terseness has been cleared up (thank you, YM, and, JtO, no need to apologise) perhaps we can look more closely at the NCC’s “recommendations”. I tend to focus on energy (as I am familar with this sector), but I believe it is illustrative of the overall thrust. These are the specific recommendations on energy costs (p24) summarised from an earlier “Statement” in Oct. ’09. “1. Regulation needs to prioritise bringing the differential in controllable domestic costs (i.e. nonfuel costs) into line with costs in our main competitor countries; 2. Given the introduction of the single electricity market in November 2007, it is timely to review the market rules to ensure that the market is functioning optimally; 3. Electricity generated from renewable sources and peat receives a guaranteed price. ……..Regular reviews of the mechanisms in place and of the progress achieved are crucial to ensure that renewable energy penetration and deployment occurs smoothly and effectively; 4. Given that Ireland is likely to have to close its peat plants in future (to comply with EU legislation), there is merit in phasing out the subsidies due to the cost implications, especially now that the amount of spare electricity capacity has increased significantly; and 5. The carbon windfall should be recovered from electricity generators and passed back to electricity consumers through lower prices, on an annual basis, to 2012.” So what have we got? 1. An exhortation – but no analysis of the blindingly obvious reasons for these cost differentials (that also arise in the gas sector); 2. A review – but by whom? and to what effect? 3. Another review – same questions apply. 4. A suggestion that something might be nice. 5. A totally wrong-headed recommendation – these windfall gains were part of the bribe used to get EU members and their large CO2 emitters (primarily power generators) to sign up to the ETS. If they are to be extracted they should go into general government revenues; they should not be used to reduce prices. All this begs the question: what is the NCC for? @Paul Precisely, hence my: “Anyway, unusually for me, I welcome a couple of aspects of the report:” In fact, it was one aspect on the area that concerned me, the other aspect missed the point… Can somebody please explain the gulf in opinion between FinFacts and JTO on this point. I’m confused! @ Concubhar O’Caolai In simple terms, measures like unit labour costs are compiled as the ratio of the compensation per employee and labour productivity, with labour productivity measured as GDP at constant prices divided by the total number of persons employed. While wage costs could be similar between countries, the one with higher output per employee, would be considered as more competitive. As for price competitiveness, it is a measure of the impact of the change in the euro against the currencies of many of our trading partners and higher price inflation in Ireland. JTO appears to present raw price data. He begins at 2002. In the early years of the 10 year time period, the Irish inflation was high. Of course caveats can be applied to any comparisons. However, when the differential is wide, it should merit attention. @Michael Hennigan “JTO appears to present raw price data. He begins at 2002. In the early years of the 10 year time period, the Irish inflation was high.” Only partially true. My main point was that the comparative price level in Ireland is now back to where it was in December 2001 (the month prior to Ireland joining the Euro). However, in paragraph 6 in my post, I pointed out that there was further to go to get back to the December 1998 level and I gave figures for the Ireland and Eurozone inflation rates between December 1998 and December 2001, and then tried to estimate when, based on current monthly inflation figures, we might get back to that December 1998 level (I estimated between late 2010 and late 2011). As I’m busy at work now, I will try to elaborate for Conchubar this evening. This table (showing comparative price levels for final consumption by private households – incl. indirect taxes) supports the evidence presented by Michael H: http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode=tsier010&plugin=1 It also shows comparable data for the US and Japan. There is no reason to suppose that businesses are not being confronted with a similar price level – and, in so far as they can, are passing higher costs onto final consumers. Granted that deflation may have been greater in Ireland during 2009 than in many other countries, there is still a considerable gap to be closed. Since much of this gap arises, directly or indirectly, from Government policies or “non-policies” – and the NCC’s advisors comprise seven departmental assistant secretaries and the CE of Intertrade Ireland – one, perhaps, should not be surprised that the NCC’s reports lack the analysis and crunchy recommendations required to have any impact. But the question remains: what is it for? Are there not two competitiveness challenges? One for the internationally traded sector and one for the domestic one? On the domestic side, the rise of distant selling and decent motorways to the north mean that many ‘domestic’ goods and services can be purchased internationally, bypassing the domestic economy. So it is possible that Ireland is becoming increasingly competitive for FDI, but at the same time internal ‘cost of living’ competitiveness has a big gap to be bridged. I suppose in theory, this shouldn’t happen, as labour costs to MNCs should rise to uncompetitive levels? @ym I think you are right. Remember, the consumers basket of goods/services is different from the exporters basket of goods/services. In particular, over half of the cost of business is labour, while households employ virtually no labour. Given the moderate level of Irish private sector wages, average business costs are not out of line with those in opther Northern European economies in the way households costs are. Of course, and not wishing to get involved with the debate above, cost competitiveness is only one element of competitiveness alongside currencies, productivity, infrastructure, busines regulation, taxation etc etc. Unfortuantely, the only two factors that are easily measured (prices + exchange rates) are the ones that are working aganist us now, which gives rise to the dramatic ‘loss of competitiveness’ graphs of 20% and 30% that are the beginning, middle and end of most prople’s views of competitiveness. Finally, people should distinguish between saying “Ireland is uncompetitive” and “Ireland has lost competitiveness”. They are two very different beasts, as Ireland is widely accepted to have been hyper-competitive in 2000 as we were in the right place at the right time to benefit massively disproporationately from the ICT bubble. @YM, Good question. My sense is that the MNCs are not big employers – despite their dominant position in the traded sector. As Ronnie O’Toole frequently points out on this blog, high electricity prices and a higher cost of living are not “show-stoppers” for them. Yes, many of them were lured here when electricity prices were below the EU average and Ireland was ultra-competitive, but they have many other reasons for location and operation in Ireland and these higher domestic prices and costs are a nuisance, but probably manageable. They have to weigh the present value of the expected stream of net benefits from a re-location to a lower cost country against the immediate costs of doing so. I think the NPV is still negative (and in Ireland’s favour) for most of them, but it would be unwise to test this calculation to destruction. And the metrics may be much tighter for prospective new entrants. Higher domestic costs and prices do much more damage to indigenous firms who operate in the traded sector. @Ronnie, Thank you. Right on cue. I suspect we were composing our posts around the same time. @Paul & Ronnie (I resisted the temptation to put you the other way around… Fed the Audit). “As Ronnie O’Toole frequently points out on this blog, high electricity prices and a higher cost of living are not “show-stoppers” for them.” I think higher cost of living is becoming a problem, though, not so much in terms of salaries, since salaries are internationally set regardless of location, but in terms of employee satisfaction. Some companies take it seriously, because it has an effect on productivity and particularly on quality. So while it is not a direct impact cost, cost of living has an impact in terms of employment. It is analagous to site issues – the reason Roscommon attracts low levels of MNC investment is not because workers are expensive or unavailable, but because it is Roscommon… I go back again to my point about continuing education in complement to this. Even without a direct increase in productivity, continuing education that is cheap, flexible and accredited, offers the prospect of productivity through satisfaction and confidence. We should I suppose pay some attention to the views of Intel’s ex-CEO Craig Barrett who said in September 2009, that there were about 14 reasons why Intel came to Ireland in 1989 but that only one remained: the tax rate. Without reform, the current easing in costs will only be temporary. Apart from the high property costs feeding into so many other business sectors, politicians and others paying themselves world ranking salaries and benefits, and so on, one didn’t have to have a degree in economics to see that this was unsustainable. With bubble tax receipts, allowing for low income taxes, it made for example high charges for mediocre restaurant food palatable as well as much more but that period is past. @Michael, Ireland is a very different economy than in 1989, true. However there are many, many advantages that Ireland can use to attract FDI in 2010 that it could not boast of in 1989. Thanks for the analysis gents-much appreciated. @Ronnie, You run the risk of being accused of trying to steal John the Optimist’s “half-full glass”. But I broadly agree. There have been huge advances in physical and human capital and in the way these are deployed. And the residue of a sensible economic policy stance from the ’90s remains intact. However, the primary problem is the wrong-headed, and frequently sclerotic, process of policy formulation and implementation since then. The NCC is a symptom of this. There is description and illustration of the problems in technicolour glory in glossy reports, but the analysis is constrained and the recommendations anaemic. And very little, if anything, happens. Yet everyone seems happy because the problems have been “addressed”. And this sub-contracting of consideration of poicy or regulatory matters to largely powerless quangos is widespread. There is no prospect of any change until this Government is removed, but there is no guarantee that any alternative would be much better. @Concubhar O’Caolai “Can somebody please explain the gulf in opinion between FinFacts and JTO on this point? I’m confused” Concubhar, there isn’t as wide a gulf as might be thought from the heated exchanges. It is mainly to do with the time periods each of us is focusing on. Finfacts and Paul Hunt are focusing mainly on the deterioration in price competitiveness in Ireland compared with the Eurozone up to mid 2007, and compared with the UK up to early 2009. I’m focusing mainly on the improvement in price competitiveness in Ireland that has occurred since those two dates. The title of the thread is “Ireland’s competitiveness challenge”. So, it is primarily about whether Ireland can regain the price competitiveness lost after 1998. The point I’m making is that Ireland can indeed do that and, moreover, is allready doing it, and that the process of doing it is much further advanced than most people think. I’m not disputing Finfacts’ and Paul Hunt’s claims that there was indeed a deterioration in price competitiveness in Ireland up to those two dates, and they are not disputing my claims that there has been an improvement in price competitiveness in Ireland since those two dates. It is a matter of putting up-to-date figures on both these trends and comparing them. The link that Paul Hunt gave only has figures up to 2008 and so misses out the major improvements that have occurred since then. I’ve compiled some bang up-to-date figures for the tables below. If I was clever enough (which I’m not) to post them in the form of a graph, they would be much clearer. But, hopefully they illustrate the point. First, let’s compare Ireland with the Eurozone. The first table shows the HICP price indices to base Dec 1998 = 100.0 at six-monthly intervals since that date. The first column gives the indices for Ireland, the second column for the Eurozone, and the third column is for Ireland relative to the Eurozone. The figures in the third column are derived from the figures in the first two. The figures in the third column are the most important ones, as far as competitiveness is concerned. They show the extent to which prices increased in Ireland since December 1998 over and above the increase in the Eurozone. Dec 1998: Ire: 100.0 , Eurozone: 100.0 , Ire rel to Eurozone: 100.0 Jun 1999: Ire: 101.6 , Eurozone: 100.9 , Ire rel to Eurozone: 100.8 Dec 1999: Ire: 103.9 , Eurozone: 101.7 , Ire rel to Eurozone: 102.1 Jun 2000: Ire: 107,1 , Eurozone: 103.0 , Ire rel to Eurozone: 104.0 Dec 2000: Ire: 108.7 , Eurozone: 103.9 , Ire rel to Eurozone: 104.7 Jun 2001: Ire: 111.8 , Eurozone: 106.0 , Ire rel to Eurozone: 105.4 Dec 2001: Ire: 113.4 , Eurozone: 106.4 , Ire rel to Eurozone: 106.6 Jun 2002: Ire: 116.7 , Eurozone: 107.9 , Ire rel to Eurozone: 108.1 Dec 2002: Ire: 118.6 , Eurozone: 108.9 , Ire rel to Eurozone: 108.9 Jun 2003: Ire: 121.1 , Eurozone: 110.1 , Ire rel to Eurozone: 110.0 Dec 2003: Ire: 122.1 , Eurozone: 111.1 , Ire rel to Eurozone: 110.0 Jun 2004: Ire: 124.1 , Eurozone: 112.7 , Ire rel to Eurozone: 110.2 Dec 2004: Ire: 125.0 , Eurozone: 113.6 , Ire rel to Eurozone: 110.1 Jun 2005: Ire: 126.5 , Eurozone: 115.0 , Ire rel to Eurozone: 110.0 Dec 2005: Ire: 127.4 , Eurozone: 116.2 , Ire rel to Eurozone: 109.7 Jun 2006: Ire: 130.2 , Eurozone: 117.8 , Ire rel to Eurozone: 110.5 Dec 2006: Ire: 131.2 , Eurozone: 118.4 , Ire rel to Eurozone: 110.9 Jun 2007: Ire: 133.9 , Eurozone: 120.0 , Ire rel to Eurozone: 111.5 Dec 2007: Ire: 135.4 , Eurozone: 122.0 , Ire rel to Eurozone: 111.0 Jun 2008: Ire: 139.1 , Eurozone: 124.8 , Ire rel to Eurozone: 111.4 Dec 2008: Ire: 137.2 , Eurozone: 123.9 , Ire rel to Eurozone: 110.7 Jun 2009: Ire: 136.0 , Eurozone: 124.6 , Ire rel to Eurozone: 109.2 Dec 2009: Ire: 133.6 , Eurozone: 125.1 , Ire rel to Eurozone: 106.8 As can be seen, from December 1998 onwards prices increased faster in Ireland than in the Eurozone. By June 2007, compared with December 1998 prices had increased in Ireland by 11.5% more than in the Eurozone. But, that was the peak. Since June 2007 prices have been rising less fast in Ireland than in the Eurozone (in fact they’ve fallen in Ireland in that time). As a result, the increase since December 1998 in Ireland relative to the Eurozone has fallen from 11.5% in June 2007 to 6.8% in December 2009. As the table shows, this trend of improving competitiveness is accelerating. The index fell from 109.2 to 106.8 between June 2009 and December 2009, an improvement in price competitiveness of 2.2% in just six months. If this trend continues, all the loss in price competitiveness in Ireland relative to the Eurozone, that occurred between December 1998 and June 2007, will be regained by mid 2011. Next, let’s compare Ireland with the UK. Here the comparison is complicated by the exchange rate movements. Between Ireland joining the Euro and mid 2007, the exchange rate between the Euro and the Pound sterling hardly changed. It was steady at around 1 Euro = 68 pence. But then, between mid 2007 and early 2009 the Pound sterling slumped, as we can see from the following table. Jun 2007: 1 euro = 67.6 pence sterling Sep 2007: 1 euro = 68.9 pence sterling Dec 2007: 1 euro = 72.1 pence sterling Mar 2008: 1 euro = 77.5 pence sterling Jun 2008: 1 euro = 79.2 pence sterling Sep 2008: 1 euro = 79.9 pence sterling Dec 2008: 1 euro = 90.4 pence sterling Mar 2009: 1 euro = 92.0 pence sterling Jun 2009: 1 euro = 85.7 pence sterling Sep 2009: 1 euro = 89.1 pence sterling Dec 2009: 1 euro = 90.0 pence sterling Jan 2010: 1 euro = 88.1 pence sterling (as of yesterday) The next table is similar to the one above which compared the cumulative inflation rates in Ireland and the Eurozonce since December 1998, except that this one compares Ireland and the UK since June 2007, the date at which the Pound sterling started to collapse. The first column gives the HICP indices to base June 2007 = 100.0 for Ireland, the second column for the UK, and the third column is for Ireland relative to the UK. The figures in the third column are the most important ones, as far as competitiveness is concerned. They show the extent to which prices increased in Ireland since June 2007 over and above the increase in the UK. Obviously, a major difference between this table and the earlier one is that, in this one, the figures in the first two columns have had to be adjusted for the exchange rate changes to derive the figures in the third column. Jun 2007: Ire: 100.0 , UK: 100.0 , Ire rel to UK: 100.0 Sep 2007: Ire: 100.4 , UK: 99.8 , Ire rel to UK: 102.6 Dec 2007: Ire: 101.1 , UK: 101.1 , Ire rel to UK: 106.7 Mar 2008: Ire: 102.6 , UK: 101.6 , Ire rel to UK: 115.9 Jun 2008: Ire: 103.9 , UK: 103.8 , Ire rel to UK: 117.2 Sep 2008: Ire: 103.7 , UK: 105.0 , Ire rel to UK: 116.8 Dec 2008: Ire: 102.5 , UK: 104.3 , Ire rel to UK: 131.5 Mar 2009: Ire: 101.9 , UK: 104.6 , Ire rel to UK: 132.6 Jun 2009: Ire: 101.6 , UK: 105.7 , Ire rel to UK: 121.9 Sep 2009: Ire: 100.6 , UK: 106.2 , Ire rel to UK: 124.9 Dec 2009: Ire: 99.8 , UK: 107.0 , Ire rel to UK: 124.2 Jan 2010: Ire: 99.3 , UK: 108.0 , Ire rel to UK: 119.9 note: as Jan 2010 official figures have not been published yet, the Jan 2010 figures above are media estimates – the figures for the other months are the official figures – as the UK VAT rate increased by 2.5% on 1 January 2010, it is important to include the Jan 2010 estimates to get an up-to-date picture As can be seen, from June 2007 onwards exchange-rate-adjusted prices increased much faster in Ireland than in the UK. It is important to note that this wasn’t because prices were increasing faster in Ireland than in the UK, but because of the exchange rate changes. By March 2009, exchange-rate-adjusted prices had increased in Ireland by 32.6% more than in the UK. Hence the upsurge in cross-border shopping. But, March 2009 was the peak. Since March 2009 prices have been falling in Ireland while rising in the UK and, equally importantly, the exchange rate has been stable or even showing a small rebound for the Pound sterling. As a result, the increase since June 2007 in Ireland relative to the UK has fallen from 32.6% in March 2009 to 19.9% in January 2010. Barring a further major fall in the value of the Pound sterling against the Euro, this trend is likely to accelerate throughout 2010. Something that Robert Merton at MIT spoke about in March ’09 was a ‘right way’ swap contract. In the lecture he uses the example of Taiwan and it’s exposure to risk because of its concentration on the chip industry. I think that some of the contributors at IE blog have spoken in favour of derivatives from time to time, which Merton also does in his lecture. But since I have commented about the dis-proportionate amount of risk Ireland is exposed to, because of its over-concentration on one kind of industry – I often wonder if there is anyone out there willing or able to entry into a swap contract with the National Asset Management Agency? http://mitworld.mit.edu/video/659 The swap contract might be a way for small countries to trade away some of the risk, from which it derives no value whatsoever. Merton also points out the advantage of a swap contract, being non-invasive and reverse-able. Reverseable, because you simply make a contract in the opposite direction, and it cancels out the previous arrangement, thereby re-setting the system. There is no movement of principle between two parties. Given the way that the national incinerator project at Poolbeg in Dublin was handled with the US partner in the PPP, I wonder could Ireland be a little bit more innovative in how it manages its risks? @JtO, Many thanks for maintaining the civilised nature of this exchange. I think you may be undersestimating the extent to which Irish price levels previously deviated from Eurozone averages, but there can be no argument that the gap is closing – largely as a result of the downturn. But I think it would be unwise to conclude that, because this improvement is taking place, there is no requirement for significant structural reform of competition policy and regulation. My contention is that Irish price levels deviated from Eurozone levels primarily because successive governments pursued a policy approach based on high “point-of-use” charges for state and semi-state services combined with low rates of nominal taxation. The high “point-of-use” charges for utility services included implicit taxes on consumers. These comprised both inefficiencies in financing investment and in the provision and the expansion of service provision, but they allowed governments to avoid direct financing and, thereby, to reduce the burden of direct taxation. These imposed real economic costs on consumers by overcharging for the services provided or by restricting the provision of service required by consumers. This was matched by rampant price-gouging in the private sheltered sectors. (I have done some work to quantify the additional cost burden on consumers in the gas and electricity sectors. Some preliminary analysis suggests that this type of analysis could be extended to the other semi-state and private sheltered sectors, but I simply don’t have the time to do this. And even if I were to do it, I doubt it would have any impact in the light of the apparent establishment desire to avert its gaze from these issues.) The priced reductions that have emerged have been largely in the traded sectors. Significant policy and regulatory reform is required to extend this into the state, semi-state and private sheltered sectors. But this appears to be too difficult to contemplate. […] comment online questions whether the recommendations of this latest report will be implemented. The […] I have been following the debate on this thread with some interest, and have some questions to put to the participants. Given the detailed treatment here of Ireland’s relative performance in the ECB’s Harmonised Index of Consumer Prices (HICP), what is the significance of the fact that only a relatively small proportion of Ireland’s foreign trade consists of consumer goods and services? According to CSO data, 70% of Ireland’s merchandise imports in 2008 consisted of capital goods and “materials for further production”. Yoganmahew’s observation that imports “are the stuff of shopping baskets” is clearly wide of the mark. There is no similar breakdown of Ireland’s merchandise exports or of services trade. However, perusal of the detailed 4-digit breakdown of merchandise exports suggests that around one half consist of intermediate goods (mainly chemicals/pharmaceuticals and electronic components), while examination of the composition of services trade suggests that around 85% of imports consist of producer services (services provided to firms) with the figure for exports being at least 75% (assuming that Irish software exports follow the global trend where 70% of sales go to the corporate market). This means that around 70% of Ireland’s total foreign trade consists of capital and intermediate goods and services sold to firms rather than consumers. None of these are embraced by the HICP. Why is there so much emphasis on labour costs in discussion of Ireland’s export competitiveness when labour costs account for a relatively minor component of the total costs of exporting firms? According to Forfás data, in 2008 payroll costs accounted for just 11.1% of total costs of foreign manufacturing firms and 9.9% of foreign firms engaged in service exports (foreign firms export the great bulk of their output and account for the great bulk of total exports). Ronnie O’Toole’s assertion that “over half of the cost of business is labour” certainly does not apply in our key export sectors. The payroll share of total costs was as low as 7.2% in the computers and electronic products sector which, ironically, is the sector which has been most affected by foreign competition in the last decade. Why do Irish economists make broad generalisations about Ireland losing competitiveness when the competitiveness performance is highly variable between sectors? According to UN data, of the top ten 4-digit merchandise sectors which accounted for 58% of Ireland’s total merchandise exports in 2007, six experienced a fall in their share of global exports between 2003-2007 while four experienced an increase. Of the top five service export sectors (which accounted for 92% of total service exports in 2007), one experienced a fall in its share of global exports between 2003-2007, one experienced no change in its share and three experienced an increase in their share. Thus, of Ireland’s 15 top export sectors, one half managed to increase their share of global exports during the period. Ireland’s overall loss of market share was largely due to major decline in a single sector i.e. electronics hardware – an experience which was shared by most other western economies in the face of the emergence of China as a major producer in this sector. Why do Irish economists assume that trends in the unit labour cost average for all workers in the Irish economy also apply to the export sector? Even among the main export sectors, there were major variations in unit labour cost trends between 2000-2008. According to Forfás data, in this period nominal value added per payroll unit grew by 85% in the food sector, 50% in the machinery sector and 36% in the export services sector and fell by 20% in the chemicals/ pharmaceuticals sector and by 23% in the medical devices sector. What are the implications for Irish competitiveness of the fact that a very large proportion of Irish exports goes into non-competitive markets? Over half of our merchandise exports arise in the chemicals and pharmaceuticals sector, a sector which is highly oligopolised globally. This is reflected in the fact that profits as a percentage of revenues for pharmaceuticals firms in the US Fortune 500, on average, are typically 4-5 times greater than for other firms (expenditure on R&D goes nowhere near explaining the difference). This high profitabilitty, of course, makes Ireland’s low corporation tax rate very attractive while making the firms in question less concerned about costs than in more competitive sectors. Oligopoly (or even virtual monopoly) is also a feature of other Irish export sectors. Microsoft is an obvious example, with profits amounting to 30% of revenues in 2008, over six times the average for Fortune 500 firms (the profit margin on Windows and Microsoft Office is reputedly of the order of 80%). Google’s profit rate was only slightly less than this. Apart from oligopolised markets, a large proportion of foreign-owned operations in Ireland are largely involved in providing services to other units of their parent companies – they are not selling in open markets. This applies to units providing back-office, software development and R&D services for affiliate firms, and to IFSC operations providing insurance and treasury management services to affiliates. It is impossible to quantify the extent of such activities, but they certainly make up a substantial proportion of service exports which in 2008 accounted for 42% of total exports. This is not to say that the firms in question are unconcerned about the efficiency of their Irish operations. If this is measured in terms of return on investment, then it is no doubt instructive that the rate of return on US investment in Ireland rose from 19% to 22.5% (twice the EU average and surpassed only by China, Singapore and India) between 2000-2007 and that, according to the IBM Global Location Annual Report, Ireland was the most successful country in the world for attracting foreign investment in 2008 when measured by jobs per 100,000 population. And this was a period during which, according to Morgan Kelly, Ireland’s competitiveness “collapsed”. Finally, in relation to the reasons why Intel decided to come to Ireland in 1989, according to a company spokesman quoted in the Irish Times on October 4, 1989, Intel’s location decision was attributed to the availability of a well educated work force, attractive taxation and incentives, the availability of suitable land, good infrastructural services and the quality of life in Ireland. Reflecting some years later on the decision to come to Ireland, Intel Ireland General Manager Frank McCabe (quoted in the Irish Times issue of May 24, 1995) stated that, having decided to locate somewhere in Europe, the main considerations in choosing a European country in which to locate were the calibre of the work force, infrastructure, governmental and communal attitudes to inward investment, the availability of incentives, the prospect of reaching full production as quickly as possible, given the massive capital investment involved, and the ability to recruit experienced high-level technologists from abroad. The fact that there was no other wafer-producing plant in Ireland with which Intel might have had to compete in terms of skilled labour is also understood to have influenced the decision to locate in Ireland. I reckon there are eleven different factors identified here. I will let it up to readers to decide how many of these still apply. @Proinnsias Breathnach “Apart from oligopolised markets, a large proportion of foreign-owned operations in Ireland are largely involved in providing services to other units of their parent companies – they are not selling in open markets. This applies to units providing back-office, software development and R&D services for affiliate firms, and to IFSC operations providing insurance and treasury management services to affiliates. It is impossible to quantify the extent of such activities, but they certainly make up a substantial proportion of service exports which in 2008 accounted for 42% of total exports.” I can add some information to this which might be of interest. The american multinationals that I have worked with have all had matrix organisations. That is, country organisations and organisations based around functions. I.e. employees of xxx Ireland Inc was also part of xxx Services Inc. Both have P&L targets and P&L responsibility. xxx Ireland has held down costs as much as possible and from my experience the lower level employees have gotten less than inflation salary increases for many years. Services industries are usually labour intensive leading to high importance in cost control in that area. xxx Services Inc benefited by the xxx Ireland cost control but has also looked at cutting costs even more. xxx Services found out that growth was cheaper in Poland, Czech Republic, Slovakia, Bulgaria, Hungary, Romania etc so the growth that could have taken place in Ireland took place somewhere else. Can it be said that Ireland lost in not winning the growth? If it can be said that Ireland lost, then I believe it can be said that Ireland lost because of not being competitive enough. As is, if english speaking workforce is required then some might think it is better to invest in UK or in the US (their currencies seem to becoming worth less & less). If skilled workforce is needed, then based on my experience, the Irish are not better nor worse than any of its competitors. My personal opinion is that there is a real risk that Ireland might have stabilised in the number of jobs in the multinationals. I also believe that a jobless recovery leads to a double dip recession. I don’t see domestic spending in Ireland picking up until the number in employment increases. & another comment: If IBM truly believed that Ireland was so good, why did they grow in Poland, Slovakia etc instead of in Ireland? Comments are closed.