Making Ireland Competitive Again
Brian Cowan assumes national leadership at an unenviable time: unemployment and consumer confidence are heading for heights and depths not seen since the bad old days. Ireland’s competitive position has been on a downward trajectory for some years and this is likely to make matters worse as the months of 2008 tick by. Shrinking exchequer revenues, aggravated by increasing social welfare costs threaten to move the budget into serious deficit. Prompt and stern action will be called for when Brian Cowan assumes office if the ship of state is to be put back on course and prepared for the challenging times ahead.
The writing has been on the wall (though in small print) for the past 6 years. Economic growth has steadily shifted from the productive and rational to the unproductive and irrational: from making things we export to making more houses that we do not really need. Jobs have been leaking out of the economy as plants have closed and moved elsewhere. Job losses were masked as house building and all the associated activity absorbed the lay offs.
The Irish house-building bubble was funded largely by international borrowing and much of the associated tax revenues that swelled the public coffers came from the same source. In the 1980s, when the country was on its knees, Ireland had the highest public per capita debt in Europe. Now, while public debt is one of the lowest, private debt is the highest. In a decade Irish household debt has grown from €40 billion to €300 billion: close to €35,000 per capita. In the 80s the problem was finding a job. Now many of those who are made redundant have to cope in addition with large mortgages. Unemployment combined with debt make harrowing partners.
What should Brian Cowan do?
Simple but challenging. Move on the many fronts open to him to regain Ireland’s lost high competitiveness ranking. Demonstrate to prospective investors and those companies considering moving out of Ireland that the government is determined to take the difficult and radical decisions necessary to make Ireland once more an attractive place in which to do business.
High commodity prices, the credit crunch, turbulence in international markets, and the weak dollar are a disturbing global backdrop but should not be blamed for causing Ireland’s competitive ranking to plummet from 4th to 14th during recent years. Finland, a country of similar size, has managed to move its ranking in the opposite direction and is now the most competitive country in the world.
The dramatic fall in Ireland’s competitiveness is caused primarily by internal factors over which we have considerable control.
Costs in Ireland have increased faster than productivity in many sectors. Each national pay agreement during the past decade has pushed Irish wages upwards at the highest rate in the EU15: at twice the rate of our competitors. The resultant higher inflation levels have pushed up prices and further reduced competitiveness. Linking wage increases to inflation is the irrational formula that helped bring Ireland to its knees in the 1980s: linking wage increases to improved productivity and competitiveness is the rational approach. The pay talks should concentrate on competitiveness and catching up with our competitors, rather than chasing our tails and attempting to catch up with our own inflation. If the social partners are serious about stemming the flow of jobs out of the country and regaining Ireland’s competitive position a pay-freeze, or something close to it, should be the logical outcome.
Professional service fees are particularly expensive in Ireland. Legal fees in Dublin, at over €270 per hour, are the highest benchmarked by the National Competitiveness Council and exceed those in London or Boston. There is good reason to pursue the matter and identify how professional services in Ireland can be freed of restrictive practices and fully exposed to market forces.
While wage and fee levels play a key role in determining Ireland’s competitive position they represent only one of several issues that must be tackled. During the past eight years, as Ireland’s competitive position has plummeted, public sector expenditure has more than doubled from €26 billion in 2000 to €57 billion this year. During the past decade Ireland’s public expenditure was growing at the fastest rate in the EU15; at over 9 percent per annum, compared to 3.5 percent in Finland or 1.6 percent in Germany. Policies such as the ill-conceived and politically blatant decentralisation programme have not only been wasteful of financial resources but have been disruptive and distracting to public-sector leadership at a time when dark clouds were gathering and energies should have been directed towards preparing for the current difficulties. The recent OECD report provides Brian Cowen with a strong mandate to reform the public sector, making it leaner (if not meaner) and backtrack on some of the unwise and costly excursions of the spendthrift years.
Industrial electricity prices make Ireland unattractive. In seven years prices have moved from average to being, with Italy, the most expensive in the EU15. Ireland’s energy white paper makes a major and apparently quite admirable commitment to renewables, but pays scant attention to the resultant cost and competitiveness implications. Presumably for ideological reasons consideration of nuclear power as a future energy option was perfunctory. The economic arguments for giving nuclear more than cursory attention should have been quite evident. France generates almost all its electricity and runs much of its public transport from the energy of 59 nuclear reactors that offer the added bonus of releasing no greenhouse gasses. Finland is now building its fifth nuclear reactor. France and Finland have the lowest electricity costs in the EU15. In the 2001-07 period industrial electricity prices rose by only 5.4 percent in France, compared to 70 percent in Ireland. Electricity prices in Ireland have contributed to decisions that motivated companies such as Proctor and Gamble to close and leave the country and Coca-Cola to defer a planned €100 million investment in Wexford. Having the highest electricity prices in Europe is not helpful when attempting to attract investment, but it is even worse if one is lumbered with government policy that will inevitably make the situation worse rather than better during the years ahead. Brian Cowen would be well advised to have our current energy policy reviewed; taking into account the reasons why mature countries such as Finland and France are building new nuclear power plants and why a small country like Lithuania has decided to do likewise.
While wage costs and electricity prices play an obvious role in influencing competitiveness a wide range of other factors determine why an investor should chose to locate in one country or move operations to another. Rigidity of employment regulation is an important factor. During the past decade employment regulation has become increasingly restrictive in Ireland. Over the years the 25 pieces of employment legislation that have been enacted combined with the eight enforcement bodies make Ireland, in the view of John Horgan a former Chairman of the Labour Court, ‘perhaps the most regulated system in Europe’. The Word Bank would tend to concur. Ireland, along with countries such as Poland and Hungary are ranked badly in terms of rigidity of employment regulation compared to the US, New Zealand or the UK. Getting our employment regulation right and improving our competitiveness does not involve expenditure but it does require strong leadership. As a first step Brian Cowen should ask that the long awaited consolidated Labour Bill be brought forward so that prospective investors are not deterred by Ireland’s notorious labyrinth legislation and the regulation of its eight enforcement bodies (the eight, the National Employment Rights Authority has been established recently in Carlow). Most notorious is Ireland’s union recognition legislation which lays open the management of non-unionised enterprise to the kind of harassment that helps precipitate decisions to move operations elsewhere. This piece of legislation needs amendment to bring in into line with that in the UK or US.
Brian Cowen has proved himself a shrewd and capable member of government. His many talents, and especially his leadership courage, will be robustly tested during the difficult period ahead. He deserves our support in driving through necessary change and facing down the proponents of the ‘status quo’.
Charles Darwin’s observation is relevant to Ireland just now:
It’s neither the strongest nor most intelligent of the species that survive: it is the ones most adaptable to change.
Dr Edward Walsh is Founding President of the University of Limerick
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1 May 2008