Economics: The concept of competitiveness has always been complex, elusive and 'notoriously slippery', writes Jim O'Leary

Back in the mid-1980s, in pre-Celtic Tiger Ireland, I remember a colleague opening a dissertation on the economic problems of the day with the words: "competitiveness is a complex and elusive concept". The rest of us, hard-nosed analytical types, were somewhat taken aback. Whatever about complex, it was not the custom of the time to allow that a concept might be elusive. It suggested that one was creating an alibi for intellectual capitulation.

Despite the passage of time, it seems that the intellectual challenge has not in any way diminished. The seventh annual report of the National Competitiveness Council (NCC), just published, introduces the eponymous topic with the words: the term competitiveness is a notoriously slippery concept. In fairness to the NCC, its subsequent analysis displays an impressive grasp of the issues and its report is well organised, lucidly written and provides a valuable resource for policymakers.

What is it about this concept that makes it complex, elusive and notoriously slippery? Well, its complexity had to do with the fact that it is multi-faceted. Competitiveness is not just a matter of costs and prices. It is, as the NCC correctly argues, ultimately a matter of productivity - that is the efficiency with which inputs into the productive process (like land, labour and physical capital) are transformed into outputs (goods and services). Those economies that are most efficient in this sense are those that enjoy the highest living standards; those economies that raise their efficiency most quickly are those that enjoy the highest rates of economic growth.

These are simple propositions. The complexity lies in the fact that efficiency (or what economists call total factor productivity) is determined by a myriad of factors: the quality of government institutions; the standards of education and training; the adequacy of physical infrastructure; the degree of openness to international trade; the volume of innovation; cultural and political attitudes towards enterprise; and lots more besides. Anything that shapes these factors is relevant to the determination of an economy's efficiency, and so comes within the very broad church of competitiveness (or its notoriously slippery embrace, if you will).

The complexity of competitiveness leads to its elusiveness. There are different dimensions here. One relates to quantification: how can it be measured? Sometimes economists give the impression that competitiveness can be adequately measured by constructing ratios of wage costs at home to wage costs abroad (currency-adjusted, of course). Such calculations may provide useful information about pressures on competitiveness in the short run, but are far too narrow to serve as measures of the competitiveness that ultimately matters.

Competitiveness is also elusive in the sense that it cannot be captured or formulated. How do you bottle it or replicate it? Well, you can't. Trying to do so is like trying to capture and formulate the reasons for the State's remarkable economic success of the past decade or so. We know that this success could only have happened if the economy was competitive - the growth in productivity that occurred over the period is testament to that. But we cannot provide a neat and comprehensive answer to the question: why did it happen? I don't mean to suggest that we haven't a clue why it happened. We do, and we've probably identified most of the key elements in the story, but our knowledge of the economic growth process is still incomplete and evolving. This is true not only of the Republic but of the rest of the world too.

Actually, there are some parallels with health. We can put together very precise measures of health outcomes such as life expectancy, infant mortality rates, morbidity rates and so on, in the same way as we can measure economic outcomes such as employment, consumer spending and GNP. But it is impossible to measure, capture or formulate the "well-being" from which these health outcomes derive. Our knowledge of the complex and elusive mix of environmental, physical, psychological and spiritual influences that shapes well-being, however advanced, is also incomplete and evolving.

Back to competitiveness. The recent performance of the Irish economy (its performance over the past year or so) presents a conundrum. On the one hand, robust output and employment growth has resumed; on the other, there has been a sharp deterioration in some aspects of competitiveness, and there has been no improvement in other aspects that have long been objects of chronic concern. Costs and prices have risen steeply relative to our trading partners, Ireland has sunk towards the bottom of the international league in terms of infrastructure and continues to achieve a very low rating in terms of innovation and creativity, and so on. Perhaps it is because of this apparent disjunction between performance and competitiveness that the NCC describes competitiveness as notoriously slippery.

The concern here must be that the economy is now "travelling on empty", impelled by an internal dynamic that cannot be sustained for long. In this connection it is worth noting, as the NCC does, that most of the recent employment growth has been generated by the public sector and construction, and that manufacturing industry (and perhaps other internationally traded sectors) has been shedding jobs. Another cautionary note, validly sounded by the NCC, is that many Irish firms - those that have not been shedding jobs - may have been prepared to absorb heavy cost pressures over the past couple of years, but may not be prepared to continue doing so, especially if confronted with unfavourable currency movements.

An image from the health sphere comes to mind. It is of the overweight middle-aged guy who smokes like a trooper, drinks like a fish, eats without restraint and takes no exercise, but whose rude good health is the envy of his neighbours and a rebuke to the medical profession. Can he keep going or is he just about to experience what the NCC secretariat would call a "point of inflection"?

Jim O'Leary lectures in economics at NUI-Maynooth. He can be contacted at jim.oleary@may.ie