National Competitiveness Council report: Analysis:Report shows that Ireland must address high costs and invest more in capital, writes Jim O'Leary
THE NATIONAL Competitiveness Council has been in existence since 1997, and yesterday it published its eleventh annual report. Like so many other reports on Ireland's present economic situation, it makes for grim reading in its analysis of the sharp decline in competitiveness of recent years and its portrayal of the enormous challenges that the country must surmount in order to recover lost ground.
Had previous reports from the council been taken seriously by policymakers, we might be faced with a less forbidding set of economic circumstances than currently prevail.
There is an aptness in the fact that the council's latest report was released on the same day as Dell announced its intention to close its Irish manufacturing operation.
Dell, so long a jewel in the crown of Ireland's success as a location for foreign direct investment, has now become a painful reminder of our vulnerability and a symbol of decline. Of course, there have been other Dells in the past and job losses, even large-scale job losses, occur in good times as well as bad. What matters ultimately is whether job gains outweigh losses, whether declining sectors are replaced by new industries.
On this question it is worth quoting directly from the council's report: "When the global economy recovers, there is no guarantee that the Irish economy will automatically return to either the high growth rates of the past or the more moderate growth rates of other developed countries. While the experience of some large national economies has been that declining sectors [eg the auto industry in Detroit, coal and steel in the UK midlands] are replaced with new industries [eg, software in San José, financial services in London], the experience of smaller, regional economies like Ireland has often been very different. When key sectors in regional economies go into decline, there is no guarantee that they will be replaced by other economic activities that offer the same opportunities for productivity growth and wealth creation. Many regions have entered a prolonged period of decline following a negative shock to their export base."
How to avert this bleak prospect? The answer, as every self-respecting talking head knows, has to do with "the fundamentals". Perhaps not so widespread is a clear and coherent idea of what "the fundamentals" actually are. A useful way of approaching this question is to consider what it is that will make this country an attractive or unattractive place in which to live, work and do business when the froth of the property bubble has been well and truly blown away. I think there are two main elements in the answer.
One is the cost structure, where we know we have a big problem and require a corresponding amount of painful surgery to resolve. The council points out that our price competitiveness has deteriorated by 32 per cent since 2000, a phenomenon obscured for most of this period by the construction boom. Turning this around is not just a matter of reducing labour costs, an issue on which the council as a social partnership body is understandably coy, but also means taking a scalpel to utility prices and professional fees.
Yesterday's report presents an impressive body of evidence that shows Irish locations consistently positioned towards the wrong end of international league tables on electricity prices, telephone costs, waste disposal costs, accountancy fees, IT service charges and so on.
The other element is capital, or more specifically the quality and quantum of human, physical and social capital. In this dimension of the fundamentals too there is a great deal of progress to be made.
The public capital stock per person here is little more than half the OECD average, reflecting underinvestment in the past and the strong population growth of recent years, while business executives' perceptions of the quality of infrastructure place Ireland near the bottom of the pile. In terms of human capital, there is plenty of room for improving our educational attainment levels and an urgent requirement to do so in some areas like scientific and mathematical literacy, life-long learning and RD expenditure.
Designing and executing the investments that are needed in physical and human capital is an especially formidable challenge in the current fiscal climate. It must be met, according to the council, without compromising Ireland's competitive tax regime in relation to labour income and corporate profits. Instead, it argues that the tax base should be broadened by introducing a recurring tax on property, an old idea to which it looks like policymakers are being inexorably driven back to.
