Competitiveness once more

A while ago, I pointed out on this site that a season ticket to Shamrock Rovers offered remarkably good value for money. Any of you who acted on my advice will now be in the happy position of being able to buy tickets for the Juventus game on Thursday.

Just saying.

36 thoughts on “Competitiveness once more”

  1. Kicking myself I wasn’t able to afford a season ticket at the start of the year. I’ll have to settle for the telly!

  2. The John Delaney Distinguished Chair in International Football Economics!
    Didnt know that was in the Genesis report.

  3. @Kevin

    On a more serious note, Forfas published their Cost of Business Survey a couple of days back. This is a very important document, as it fills an important gap in understanding our competitiveness.

    The most widely used measure of costs – the CPI – relates to the prices faced by households, not businesses. We all know how it is calculated – how much rashers, holidays, soap etc does the average family buy, and what are the price of these rashers, holidays etc. Using this as a measure of how likely or otherwise Intel, Pfizer or anyone else is to invest in Ireland is a nonsense. However that hasn’t stopped most Irish economists claiming that because Ireland is expensive for consumers, it must also be for computer chip maufacturers.

    The Forfas report does two things. It measures the structure of “location sensitive” input costs (i.e. ignoring the cost of importing a new Airbus – it doesn’t matter where you set up for this cost). It concludes that the bulk of input costs are labour. As such, understanding labour costs is crucial.

    They then look at various costs, including labour. With labour they take a number of export-related occupations, and contrast them across countries. They conclude for all of these occupations that Ireland is around the eurozone average. In other words, we are somewhere between the wages of rich northern europe and poor southern europe.

    This, to me, is about where we should be. Ireland has a large, high productivity export sector. However we have problems with non-tradable productivity (and a spatial distribution) which is more meditteranean. The report picks out examples of public sector wages that are very high, and if it ever looked at other sheltered sectors it miht find something similar.

    However the punch line is that this “Business Price Index” suggests that Ireland is far more cost competitive than the CPI would suggest. This would also explain why UNCTAD data shows us to be one of the most attractive countries in the world for FDI, and why our export performance has been one of the best in the world over the last two years.

    Oh, and Up Rovers

  4. Kevin the embedded option value of Rovers beating Juventus in the price appears to be zero.

  5. Colm
    “Kevin the embedded option value of Rovers beating Juventus in the price appears to be zero.” is true under Gaussian option pricing but under levy processes…who knows?

  6. @Ronnie:
    “Forfas published their Cost of Business Survey a couple of days back”

    Is it online? I haven’t found it so far.

    Their procedures and results will make for an interesting read.

  7. @ Ronnie O’Toole

    “This would also explain why UNCTAD data shows us to be one of the most attractive countries in the world for FDI, and why our export performance has been one of the best in the world over the last two years.”

    As regards, export performance, this is the type of sweeping statement beloved of political spinmeisters and their cheerleaders in the enterprise agencies!

    The National Competitiveness Council (NCC) report says the Central Bank found compensation across the economy on a per hourly basis was 12.8% higher in Ireland than the euro area average in 2008. Looking specifically at the industrial sector, however, labour costs on a per hourly basis were 13.4% below the euro area average in 2008.

    Are we sure that loss of competitiveness has been an issue for the capital intensive big FDI employers over the past decade?

    We do know that PC production costs in Western Europe are way above costs in China but what do we know about the pharma/medical device sector which is responsible for more than 50% of goods exports and the driver of the recent impressive export performance?

    Wage costs are not significant in this sector and with political help, these big forms have been able to whittle down the electricity cost margin that existed with other EU countries.

    Because there has been a rise in exports without a significant change in payroll, manufacturing productivity has rocketed.

    However, Pfizer, the world’s biggest pharma co., has made big Irish job cut announcements in the past 2 years and the world’s No. 2, GSK, which employs 1,400 people in Cork, Waterford and Dublin, is currently undertaking a “business review” of its operations in Ireland.

    This isn’t happening because costs are falling; neither have exports risen because of that factor.

    As regards the UNCTAD FDI data, Ireland had inflows of $25bn in 2009 and outflows of $21bn. The report puts Ireland’s inward stock at $193bn in 2009 and outward stock at $192bn.

    Is there an MNC element in the outflows?

    The outward stock at $192bn seems rather high.

    @ OAC

    Access to NCC report:

    http://www.finfacts.ie/irishfinancenews/article_1020208.shtml

  8. @Michael,

    I have just used the Competitivene Report’s Graph numbers as references for brevity:

    Is Ireland still competitive? Yes. Whether measured as the # of greefield profjects Ireland is still attracting at a very srtong rate (4.03), or in € terms (UNTAD WIR reprot), Ireland is far ahead of the vast majority of other countries. For example, in terms of greenfield projects per capita, we are second only to Singapore.

    You then go on to talk about Pharma and and ask if it is still competitive. Quite apart from anything, it is not clear how many of the 785 jobs have actually been lost, with specific plants up for sale. Further, Pfizer’s restructuring was part of 6,000 job losses in its operations worldwide, so was as much a Pfizer issue rather an Ireland issue. BTW, the forfas report shows that 50% of locations enstive costs in pharma are labour costs.

    Of course we know that a number of pharma companies are set to lose patent revenue sources in the coming years. For a country which has 9 of the 10 top pharma companies, this is a risk, as restructuring is inevitable. The other side of this patent story is of course the likely growth of generic producers, and what will be of interest is our success or otherwise in winning a share of this.

    As for wage costs, Forfas produces a number of sources. 4.24 (from OECD)suggests that average total labour costs of $66k as against euro $58k. They then produce two occupations specific wages, which show us around the eurozone average (4.28 and 4.29). More of these examples can be seen in their business cost publicaiton, and all show that Irish wages are very close to the Eurozone average.

    The conclusion of the NCC was as follows: “Irish salary levels across a range of job categories of relevance to internationally trading firms
    are broadly similar to the euro area average”.

    There is some inconsistency with the occuapation by occupation data the NCC uses with the OECD data you reference, which can partially be explained by public sector wages, which as of 2009 were 25% higher than private sector. A useful paper would be someone examining the source and quality of all wage and salary data, and trying to explain where the differences lie.

  9. What I find striking in the Forfas Cost of Doing Business report is the very low share of costs accounted for by Utilities. Utilities in the report includes energy, communications, water treatment and waste disposal. In the summary cost profiles graph (fig 2.1) they appear to be 2 – 3% at most. Admittedly, they are a little higher in some of the individual manufacturing sectors profile but no more than 5 – 6% in the highest.

    Given that energy is only one component of this cost, I find it interesting that whenever the competitiveness of Irish industry is talked about, energy is usually the number one issue that’s cited as affecting our competitiveness. Judging by the figures presented in the Forfas report, energy, and the other utilities, have an insignificant effect on our competitiveness. Labour cost is ‘the’ big issue.

  10. Ronnie,

    The Annex Table 18 (Excel) has 176 greenfield projects for 2009.

    IDA Ireland says the number was 39.

    It supported 24 expansions and 62 R&D projects within companies.

    I didn’t bother checking Shannon Development but it’s not likely to be significant.

    An UNCTAD glossary says a greenfield investment is: “A form of foreign direct investment where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up. In addition to building new facilities, most parent companies also create new long-term jobs in the foreign country by hiring new employees.”

  11. @Bigend

    Absolutely right.

    To the credit of the NCC, their job is to highlight areas where we do have problems, and to try and push the authorities to resolve them. Two issues they identified some time back is energy and waste. The fact that these are cited the most reflects the quiet success the NCC has had in guiding the debate in Ireland.

    However I do wonder that in raising genuine concerns in this area, they have given too negative a perception. While for a domestic audience this probably doesn’t matter (and it is good that we are constantly a little on edge when it comes to competitiveness) though when it comes to an external audience it could matter a lot.

  12. @Michael,

    Not sure I can help much with the definitional issue. Where did you get the 39 number? The number of projects announced in Ireland in 2008 was 130, which might be closer to the UNCTAD definition. The UNCTAD number could also include some sectors which are FDI, but which are not export orientated. For example, retail, mining, tourism and banking. Such investments would not be in the IDA portfolio. As long as these are included in all countries, then this is ok for comparison purposes.

  13. @ Ronnie O’Toole

    The 39 figure comes from the IDA’s 2009 report.

    I have asked UNCTAD for information on their data.

    The number is 49 for Jan-Apr 2010.

    It may include company formations at the IFSC and the grant-aided R&D projects.

    It appears some of the projects in the greenfield total involve insignificant job creation or none.

    We also know that employment in the FDI sector fell below the 1998 level in 2009.

  14. @MH

    thanks for link to the Nat’l Competitiveness Council report on Finfacts

    I’m not convinced that looking at the % going towards different kinds of expense is a good way of inferring the impact of that category of expense on the bottom line (profitability).

    As mentioned by others, situations may be very different for MNCs and the largest Irish companies, compared to SMEs. (e.g. ESB rates)

    These expenses say nothing about the *quality* of the goods & services received for the amounts paid. (e.g. think internet & mobile phone if outside a city/town, or transport).

    Poor value for money is an issue. (Bad service, poor quality, long wait times–whether for phones, internet, lack of suitable rail networks, inefficient transport to Dublin airport from various parts of the country. . .) Just comparing the costs doesn’t tell the whole story. Compare public transport in Sweden or Germany or Spain with Ireland, for example.

    Rates are punishingly high, and haven’t been reset even though rents are falling in some places.

    One must consider the purpose of this report. Is it meant to explore the issues and direct policy change? Is it primarily a marketing tool to attract FDI?

    There is wide regional variance (as well as distance from nearest city centre) and this skews the results. The averages might look ok, but I doubt the raw data form a nice bell curve–particularly when correlated to size of business and population density.

    Regional development is not yet being addressed in any kind of useful way (as in “decentralization”). The cost to the economy of these inefficiencies is ignored by government, but affects businesses in ways not revealed by the Competitiveness Council report.

  15. @ OAC

    On quality and price, Anne Marie Hourihane has an interesting article in the IT today:

    http://www.irishtimes.com/newspaper/opinion/2010/0726/1224275466163.html

    The standard of restaurant and pub food is generally very poor; the large number of medicines requiring prescriptions is a gravy train for GPs at €45 a pop.

    As for the biggest customer of the so-called sheltered sector, the government, it refuses to entertain public transparceny as infringing ‘commercial confidentiality’ would not be in the public interest! – – i.e it would not be in the public interest to promote competition.

    Annaul public procurement is worth about €16bn.

  16. “The standard of restaurant and pub food is generally very poor”

    Anne-Marie would want to start reading the reviews in her own paper. The quality of pub food in Ireland is fantastic compared to what it used to be.

  17. Zhou
    Im just back from two and a half weeks in Italy. Lets me be clear – the standard of accom, food, transport infrastructure, the whole tourist sthick, is unquantifiably higher than here. And I come from a tourist background. 17.95 for a (quite nice) pizza in a country pub, even a gastropub? Come off it lads.

  18. (Good) Fellas,

    I think this discussion about consumer prices is actually one of the big problems. All economists, jounalists and commentators are, first and foremost, consumers, so a high CPI makes Ireland ‘feel’ expensive. I think this has undoubtedly coloured peoples views on our competitiveness for businesses.

    What the Forfas study does is suggest that we are not as expensive as the CPI would suggest. So not wishing to be a killjoy, but comments on different elements of consumer costs should be actively discouraged when discussing business competitiveness.

  19. @BigEnd
    This is a persistent myth in Irish business. Energy etc are surely more expensive in Ireland than elsewhere, but this is largely irrelevant as the costs of doing business lie in labour and capital.

  20. Wages is a big issue for labour intensive industries & that makes it interesting to investigate:
    Which export industries in Ireland are labour intensive?
    Tourism, call-centers dealing with US & Europe, and?

    True, the previously tax-break sponsored salaries and jobs in the labour intensive construction sector are mostly gone & now the difficulty is to manage to create jobs without similar tax-breaks. Low salaries are to be expected in any newly created job.

    EU rules are stopping countries from competing with each other using tax breaks but nothing stopped Ireland from creating a competitive advantage for construction firms compared to other industries within Ireland.

    Competing by offering low wages while having a tax payer sponsored cost of living floor might seem attractive for some. However, I do not think Ireland can afford to do it without raising taxes & even with raised taxes I don’t think it is possible.

    Low salaries and low taxes for low salaried could in theory allow for high cost of living (rent or mortgage). The situation: Rents are to be kept high, salaries low but taxes are supposed to go up……

    Previously Ireland competed by leaving a higher proportion of salary left for saving or spending after tax and cost of living. Now, the story is different.

  21. It should be recognised that Irish labour social security costs are very low but that comes at the cost of private sector pensioner impoverishment while:

    1) the political system only seriously responds to collective power – – in the clientism system the individual has the illusion of access to power but is effectively powerless.

    2) the politicains have created a lifetime gilt-edge meal ticket for themselves and the rest of the public sector.

  22. @Jesper
    If you reduce labour costs in a monetary system that has a very limited capital requirement then the surplus created by the labour force if they forgo consumption is transferred into profit and that profit is expressed in consumption elsewhere.
    The funny thing about this supposedly capitalistic system is that it has virtually no capital as the global system that we have tapped into is leveraged way beyond 10 to 1 and is probably many hundreds to one.

    The capital requirements of banks need to be one to one and the shadow banking system needs to be eliminated.
    Don’t ask me to make sacrifices in my lifestyle to service some bankers retirement in Nice.

  23. @Ronnie O’Toole,

    “…comments on different elements of consumer costs should be actively discouraged when discussing business competitiveness.”

    I agree. For international players the decisions to set up here, or, if here, how to ensure continued efficient operation or whether or not, or how to, expand or retrench are based on a consideration of a huge number of factors. Many are not directly observable – and even for those that are each frm will have its own take based on its specific circumstances. Many are happy to pay going EZ average wages and salaries as they get a staff quality as good as, and probably more often better than, the EZ average. And these wages and salaries probably more than compensate for any worker perception of Ireland’s ‘expensiveness’.

    I think consumer price levels and final prices for certain goods and services may have more of an impact on the demand side of wage formation in sheltered and non-traded sectors. Stripping out excessive costs and ineffciencies in these sectors could increase real wages and boost consumer demand leading to economic growth and employment generation, but this relates more to the domestic economy and not exclusively to any consideration of international competitivenenss.

  24. The problem with the world economy is not effiency as this has improved exponentially over the years and is close to its limits but one of stagnant productivity artificially imposed by bankers who deprive systems of capital needed for production growth.
    Marx was wrong – this is not a battle between capital and labour but one of capital/labour vs the bankers who are taking the remaining surplus in this broken world economy and consuming it rather then investing it in capital creation.

  25. @Paul Hunt,

    I’ve received a couple of e-mails about jobs in eastern europe. Their selling point – although the salary is lower they claim cost of living is so low that a very good life can be had. It may or may not be true. Anyway, Ireland used to be like that but high rents took it away and now I’m expecting taxes to rise to compensate for the gain in lower rents.

    The ‘above average’ workforce in Ireland is mostly mobile and it is not impossible that some will go for it and move to a job rather than be unemployed in Ireland.

  26. @Ronnie (and others),

    I think you are right to caution against the use of the CPI as a competitiveness metric.

    However, I think you should be equally cautious in using wages, however sectorally refined) as a proxy for competitiveness.

    Like so many proxy variables, it suffers from endogenity problems: German workers are expensive precisely because they are more productive.

    Thus, we are not so much interested in labour costs, rather ‘real’ labour costs (i.e. per value of output). This of course is almost impossible to measure. Not only that, but even if we could measure it, there is not much to do about it: Productivity-related determinants of real labour cost are also beyond our control.

    So what can we say about Irish competitiveness?

    One thing, really:
    Whatever the (unknown and unmeasurable) level of real Irish labour costs, there is one major determinant over which policymakers have considerable control, and that is housing costs and land value.

    Housing is really expensive in Ireland, and though there has been some welcome downwards adjustment in rents, many of the governments current policies are acting to stall the market’s slide. A four-letter acronym comes to mind here.

  27. Here we go again with the Irish elites plan to banish the rednecks into some British Penal colony somewhere on this little planet of ours.

    What strikes me is how ordinary the ambitions of you guys are – at least the great and the good of London and New York have some class.

  28. @ Keith

    Most people in this country are only a generation or two away from rural poverty. So what. It is possible to succeed without wanting to deny one’s origins. Bad and all as the current situation is, we have a lot more resources that we had we were in the 50s, or even the 80s.

    We can’t all be economists, but it’s very helpful for the rest of us to know how economists think. They say there’s no such thing as a free lunch, but this blog seems pretty good value to me.

Comments are closed.