Can Ireland Secure its Competitive Edge?

Don Thornhill, ChairNational Competitiveness Council

ISME Conference19th - October 2007

Who are the National Competitiveness Council

The National Competitiveness Council was established in 1997 as a Social Partnership body. It reports to An Taoiseach on key competitiveness issues facing the Irish economy, together with recommendations on policy actions required to enhance Ireland’s competitive position.

What is Competitiveness?

‘…all those factors which impact on the ability of firms in Ireland to compete on international markets in a way which provides our people with the opportunity to improve their quality of life’

What is Competitiveness? (continued)

• Competitiveness is partly about costs, prices and wages…

• …but more about better business performance through innovation and productivity

• Competitiveness remains a foundation for national economic and social progress

Recent Economic History

Growth in GDP & GNP in Ireland, Compared to OECD Average, 1990-2005

0%

2%

4%

6%

8%

10%

12%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Ireland (GDP)

Ireland (GNP)

OECD (GDP)

Levels of GDP per Capita, Ireland and Selected Economies, 2000-2006 (Euro 000 PPPs)

10

15

20

25

30

35

40

2000 2001 2002 2003 2004 2005 2006

Eu

ro 0

00

PP

Ps

Ireland (GDP) Ireland (GNP) N.Ireland OECD NEU 12 EU 15 US

Ranking in the United Nation’s Human Development Index, 2000-2004

0

5

10

15

20

25

30

35

40

45

Ire

lan

d

Sw

ed

en

Jap

an

US

Sw

itze

rla

nd

Ne

the

rla

nd

s

Fin

lan

d

De

nm

ark

Fra

nce

Ita

ly

UK

Sp

ain

Ne

w Z

ea

lan

d

Ge

rma

ny

So

uth

Ko

rea

Hu

ng

ary

Po

lan

d

2004 2000

Be

tte

r R

an

kin

gW

ors

e r

an

kin

g

Contribution of Growth in Net Exports to Irish Economic Growth, 2001-2007

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

2001 2002 2003 2004 2005 2006 2007p

Consumption Investment Government Net Exports

Sources of employment growth (000s jobs), Ireland, 2000-2006

-40

-20

0

20

40

60

80

100

120

140

160Manufacturing

Agriculture

International Services

Domestic MarketServices

Construction

Public Services

Productivity levels are high

Per Hour Output, Ireland and Selected Economies, 2000-2006 (€ value added)

10

15

20

25

30

35

40

45

50

55

60

2000 2001 2002 2003 2004 2005 2006

Ireland (GDP) Ireland (GNP) N.IrelandOECD EU 15 USNEU 12

But productivity growth rates are falling

Annual Average Growth in Output per Hour Worked, 2000-2006

-1%

0%

1%

2%

3%

4%

5%

NEU 10 N.Ireland US OECD Ireland (GNP) EU-15 Ireland (GDP)

2003-2006 2000-2003

Prices and household indebtedness are increasing!

Price Level 2006, and Inflation 2003 to 2007, EU Member States

Ireland

France

Netherlands

Poland

Sweden

Spain Luxembourg

Portugal

Belgium

Denmark

Austria

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

50 60 70 80 90 100 110 120 130 140

Price Level, Eurozone = 100

Inflation (

Change

in

Price L

evel)

Less expensive More Expensive

Eurozone Inflation (2.0%)

Low Cost, Rising Quickly High Cost, Rising Quickly

Low Cost, Rising Slowly High Cost, Rising Slowly

Household Borrowing per Capita (2003-2006)

€0

€5,000

€10,000

€15,000

€20,000

€25,000

€30,000

€35,000G

ree

ce

Ita

ly

Po

rtu

ga

l

Fra

nce

Be

lgiu

m

Au

stria

Fin

lan

d

Eu

ro a

rea

Sp

ain

Ge

rma

ny

Ne

the

rla

nd

s

Ire

lan

d

2006 2003

Ireland’s Strengths• Ireland continues to attract high levels of overseas investment• Strong labour force growth, reflecting both natural growth

and immigration• Competitive personal and corporate tax rates• Relatively low levels of regulation (although perceived to be

increasing) • High levels of public investment• Improving school completion and third level participation

rates• Productivity levels in ‘modern’, export-oriented,

manufacturing and services sectors are high by global standards

Ireland’s Weaknesses

• Ireland’s international trade performance is weakening• Ireland is losing employment in manufacturing – over 32,000

job losses since 2000• Erosion of Ireland’s cost competitiveness• Poor (but improving) infrastructure - road, air, seaports, waste

and energy• Low levels of domestic competition and productivity in many

domestically trading sectors• Young and undifferentiated R&D system

Back to the future?

• We need to shift back from the current domestic driven phase of economic growth to export-led growth?

• Also need to be aware of external risks, such as:– Rises in oil and energy prices– House price volatility throughout the OECD– Weakening of the dollar, which will affect the cost

competitiveness of Irish exporters

Five Key Policy Challenges

1. Need for enhanced productivity growth across all sectors of the economy

• Investment required in all levels of education system

• Investment in infrastructure - including broadband

• Cost reduction

2. Promotion of competition• Nationally – removal of government and sectoral restrictions

on competition

• Internationally – promotion of free trade and work with others to get Doha back on the rails

Five Key Policy Challenges

3. Securing the competitiveness of the tax system• Broadening of the tax base

• Efficiency of public services

4. Improving the capabilities of our companies to move up the value chain

• Pursue with relentless determination the implementation of the strategy for science, technology and innovation, and initiatives to enhance management capabilities

Five Key Policy Challenges

5. Support for Internationally Trading Firms• Importance of internationally trading firms to our long term

success

• Shift tax incentives from property related investments towards investments in externally trading firms

Conclusions

• Ireland’s national competitiveness has been central to Ireland’s success

• Ireland needs to recover some its lost export competitiveness

• …requiring a more supportive environment for exporters based in Ireland

• This is in the interests of all small/medium firms – those that export directly and those that sell to exporters.

END

On a personal note

Presentation given to the Dublin Economic Workshop

Kenmare 12 October, 2007

Competitiveness and Pay Formation

Don Thornhill and

Dónal de Buitléir

Disclaimer!

Three informing guidelines

1. Foreign earnings the only long run, sustainable driver of economic growth

2. We must recover and enhance competitiveness

3. Pay formation should reflect these two requirements

Necessary but not sufficient

The policy intent to move production of goods and services up the so- called value added chain is correct …but costs remain important!

…and some further guidelines!

1. Compensating ourselves for domestic cost increases which are higher than those prevailing in our markets is counterproductive

2. Real pay increases which are in line with productivity increases allow us to maintain competitiveness

The way forward?

Two elements in pay increases

1. Annual “platform” increase related to a trade weighted measure of inflation for internationally traded goods and services in our trading partners

2. A growth related payment related to increases in productivity per person at work

Illustration of the Pay Formation Model Actions 2010 Budget Day - in December 2009.

Minister for Finance makes provision For public service pay for 2010

1. Determines inflation related “platform” increase

2. Determines “Growth related” pay increase as per changes in individual productivity across the economy in 2009

Late - 2010 Minster for Finance makes payment to statutory “Growth Fund” based on latest GNP and labour force estimates for 2009

2011 Payments of the “Growth Dividend” made to individual employees in line with negotiated agreements

2011 Budget Day – December 2010 Minister for Finance makes provision For public service pay for 2011

1. Determines inflation related “platform” increase

2. Determines “Growth related” pay increase as per changes in individual productivity across the economy in 2010

End - 2011 Minster for Finance makes payment to statutory “Growth Fund” based on latest GNP and labour force estimates for 2010

2012 Payments of the “Growth Dividend” made to individual employees in line with negotiated agreements

Illustration of the Pay Formation Model continued

The devil is in the detail!

Questions – room for debate?

1. Should there be a “platform” increase?

2. Why use GNP per person at work?

3. Should there be a one to one relationship between productivity growth and pay increases?

4. Can the model be extended to the private sector?

More questions

5. Tax reliefs?

6. Extension to public service pensioners and social welfare beneficiaries?

7. Applicable if no social partnership framework?

8. Would payments be automatic?

9. Benchmarking?

10. Governance and trust