Ireland’s Competitiveness Challenge

Adrian DevittCompetitiveness Department, Forfás

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Annual Competitiveness Reports

►Volume 1: Benchmarking Ireland’s Performance

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►Volume 2: Ireland’s Competitiveness Challenge

-15%

-10%

-5%

0%

5%

2001 2002 2003 2004 2005 2006 2007 2008 2009 H1

Net Exports Investment Government Consumption

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Contribution of Net Exports to Irish Economic Growth

Source: Forfás Calculations; Central Statistics Office, Annual National Accounts

How are we performing?

Average Annual Growth in Exports of Goods

and Services

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Source: OECD, IMF, ESRI 2009

How are we performing?

Percentage of Manufactured Exports

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2000Total manufactured exports

€65,353 million

2008Total manufactured exports

€86,218 million

Source: CSO, External Trade

Our Manufacturing Base has Changed Dramatically

Percentage of Services Exports

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2000Total services exports

€12,939 million

2008Total services exports

€67,589 million

Source: CSO, Balance of Payments

Services Exports have GrownExponentially

Ireland’s Competitiveness Challenge

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Macro Issues: Restoring stability of public finances

Ensuring the banks are channelling credit to viable businesses

Macro Issues: Restoring stability of public finances

Ensuring the banks are channelling credit to viable businesses

Improving Cost Competitiveness

Incomes and pricesPropertyEnergyWasteLocal authority charges

Increasing Productivity Growth

Restructuring the economySkillsR&D and innovationCapital and technology deepeningInfrastructure Competition and regulationState supportsWorkplace development

1. A Stable Macro-Economic Environment is a Perquisite

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1. Restore stability of public finances

► Raising revenue: Broadening the tax base is central to repairing the public finances and maintaining relatively low direct taxes. Introduce a value based property tax and user charges, and remove remaining tax exemptions.

► Reducing expenditure – while painful, targeted cuts must be central to restoring the public finances.

► Reforming the public sector if service levels are to be maintained with fewer resources.

► We must improve the fiscal planning framework.

2. Ensure the banks are channelling credit to viable businesses

► Monitor measures put in place to ensure they are meeting their objectives.

► We must decide what type of banking system we want after the current crises. Fewer banks and potentially weaker competition must not restrict credit or result in higher credit costs.

► Take steps to limit the risks of future property bubbles – we need strong banking supervision and further changes to the taxation of property.

Macro Issues Macro Issues

Improving Cost Competitivenes

s

Increasing Productivity

Growth

2. Improving Cost Competitiveness

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Source: Central Bank, October, 2009

Harmonised Competitiveness Indicator

► A high cost base is a damaging legacy of the boom, particularly for many indigenous exporters who are focused on the UK market (€/Stg.)

► Prices are now moderating, but we believe that this is largely a result of the current recession (cyclical factors) rather than a response to structural issues in the economy.

► A quick adjustment is essential to achieving a swift improvement in competitiveness.

Macro Issues Macro Issues

Improving Cost Competitivenes

s

Increasing Productivity

Growth

► Key cost category for many firms.

► Annual average hourly earning increased 1.8% in the year to Q2 2009.

► Between Q1 and Q2 2009 average hourly earnings decreased by 1.8 %

► Overall employment down 8.8% or 184,700 jobs in the year to Q3 2009.

► Unit labor costs improving relative to Eurozone and US.

2. Improving Cost Competitiveness

Annual Changes in Average Hourly EarningsQ2 2008 – Q2 2009

Source: CSO 2009

2. Improving Cost Competitiveness

► Reduce property costsSignificant improvements in property cost competitiveness to date Vital that the price of land, offices, housing is left to adjust. Implement changes in land use policy to increase availability of

competitively priced properties.

► Tackle Non-Traded Services PricesCosts continue to increase across a range of locally traded sectors. These higher costs and the factors that drive them must be addressed

in a systematic fashion – start with the implementation of key Competition Authority recommendations.

The State should use its purchasing power to exert downward pressure on professional fees.

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2. Improving Cost Competitiveness

► Reduce high cost of utilities and local authority charges

Energy: Ensure that we are driving efficiencies across energy markets. Renewables price supports should be transitional and decrease over time

as the technologies mature and deployment grows.

Waste: Planned increases in landfill levy should be postponed until alternative

waste options are in place. Provide clarity on the future regulatory structure of waste market.

Local Authority Charges: Freeze and where possible reduce local authority charges.

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3. INCREASING PRODUCTIVITY GROWTH

3. Increasing Productivity Growth

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2004-2008 2000-2004

Source: Groningen Growth & Development Centre, Total Economy Database, Jan. 2009

Average Annual Growth in Output per Hour Worked

Productivity LevelsPer Hour Output, 2008OECD-28 Ranking: GDP: 9 (↑4)GNP: 18 (-)

Productivity GrowthAverage Annual Growth in Output per Hour Worked, 2000-2008OECD-28 Ranking: GDP: 13 (↓7)GNP: 26 (↓17)

(change since 2000)

Macro Issues Macro Issues

Improving Cost Competitivenes

s

Increasing Productivity

Growth

3.1 We must continue to focus on the skills needs of those in employment

Enhancing the skills of those in employment is critical to improving the competitiveness of existing firms and driving productivity growth.

►Retain funding for training those in employment, particularly those with low skills in low productivity or vulnerable sectors. Recent funding cuts are disappointing.

►Our exporters still have skills deficits: Target education and training funding to meet the skills needs of our growth sectors.

►Monitor and reform labour market interventions. While emergency subsidy schemes (e.g., employment subsidy) can play an important role in supporting firms facing short term difficulties, interventions should be linked to improving productivity through skills development or technology deepening.

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3.2 Funding and reforming the delivery of training to the unemployed

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Unemployment (%) by Age Cohort Q3, 2009

Source: CSO, QNHS, Q3 2009

► Unemployment is forecast to reach 13.8% in 2010.

► While the unemployed are a diverse group, the young and lower skilled are particularly exposed.

► Resources dedicated to labour market activation in Ireland are relatively low.

► At the same time, we have experienced the second sharpest increase in unemployment in the OECD.

3.2 Funding and reforming the delivery of training to the unemployed

Recent increases in resources are welcome.

► Given the changed and diverse needs of the unemployed, programmes should be reviewed to ensure that they are effectively improving the employability of those who have lost their jobs.

► The Community Employment Scheme should be reformed to support labour market activation.

► Consideration should also be given to streamlining the number of agencies that assist the unemployed.

► Our third level education system needs to play a more central role in upgrading the skills of the unemployed.

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Cuts in NDP investment in infrastructure need not result in delays to improvements in our competitiveness

►Prioritise projects likely to have greatest impact in making Irish exporters more competitive:

Particular focus on Dublin and other major cities. Next generation broadband services where Ireland is 3 to 5 years behind

leading countries. In Ireland 5 percent of broadband connections are above 10 MB/s – a much lower proportion than leading EU countries such as Portugal (47 percent), Belgium (45 percent) or Sweden (34.5 percent).

►Consider the potential to enhance the coordination of infrastructure rollout (e.g. broadband, water, electricity and gas). For example, civil costs account for 80% of the costs of rolling out advanced broadband services.

►Significant scope for Government to improve infrastructure capacity and services without the need for Exchequer investment by addressing policy and regulatory barriers in energy, transport, waste and water.

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3.3 Prioritise Infrastructure Investment to Support Enterprise

3.4 Promoting Investment in Technology Deepening, R&D and InnovationInvestment in technology can play a key role in reducing costs and improving productivity.►Review tax incentives to promote investment in productive sectors (and away from property).►Develop an environment to support the effective use of ICT – including access to advanced broadband services.

The result of investments in R&D is one important driver of innovation. In light of cuts to public R&D spend: ►Prioritise public R&D spending on programmes with strong industry relevance and participation - but not at the cost of damaging our capacity in high quality, world class knowledge frontier research.►Develop a funding stream which encompasses a statutorily guaranteed, multi-annual funding packing cover all State funded research.►Review the R&D tax credit.►Develop the skills to manage and exploit intellectual property.

► Irish exporters are weathering the international recession relatively well, but the international outlook remains difficult.

► While Ireland’s competitiveness has improved, this is largely due to the sharpness of the domestic recession rather than competitive advantages arising from structural change.

► Continued action is required to develop an enduring competitive operating environment for business and enable exporters to trade successfully in difficult international markets. In addition to stabilising the macro environment (public finances and credit), greater focus is required to:► Reduce the continuing high cost of doing business in Ireland.► Enhance the skills needs of both the employed and unemployed.► Ensure that our investments in infrastructure and R&D are addressing

competitiveness challenges and are efficiently delivered.

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Conclusions

Thank youncc@forfas.ie

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