Can Ireland Secure its Competitive Edge?

Don Thornhill, Chair National Competitiveness Council ISME Conference 19th - 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 Irelands 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

12% Ireland (GDP) 10% Ireland (GNP) OECD (GDP) 8%

6%

4%

2%

0% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Levels of GDP per Capita, Ireland and Selected Economies, 2000-2006 (Euro 000 PPPs)
40 35

30

Euro 000 PPPs

25

20

15

10 2000 2001 Ireland (GDP) 2002 Ireland (GNP) 2003 N.Ireland 2004 OECD NEU 12 2005 EU 15 US 2006

Better Ranking
10 15 20 25 30 35 40 45 0 5

Worse ranking

Ireland Sweden
2004

Japan US

2000

Switzerland Netherlands Finland Denmark France Italy UK Spain New Zealand Germany South Korea Hungary Poland

Ranking in the United Nations Human Development Index, 2000-2004

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

8%

Consumption
7% 6% 5% 4% 3% 2% 1% 0% -1% -2% 2001 2002 2003 2004

Investment

Government

Net Exports

2005

2006

2007p

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

Manufacturing
160 140 120 100 80 60 40 20 0 -20 -40

Agriculture International Services Domestic Market Services Construction Public Services

Productivity levels are high

Per Hour Output, Ireland and Selected Economies, 2000-2006 ( value added)
60 55 50 45 40 35 30 25 20 15 10
2000 2001 2002 2003 2004 2005 2006

Ireland (GDP) OECD NEU 12

Ireland (GNP) EU 15

N.Ireland US

But productivity growth rates are falling

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

5% 2003-2006 4% 2000-2003

3%

2%

1%

0% NEU 10 N.Ireland US OECD Ireland (GNP) EU-15 Ireland (GDP)

-1%

Prices and household indebtedness are increasing!

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

3.5% Low Cost, Rising Quickly 3.0% Spain Luxembourg High Cost, Rising Quickly

Inflation (Change in Price Level)

2.5% Poland 2.0%

Portugal
Eurozone Inflation (2.0%)

Ireland Belgium France Netherlands Sweden Denmark

Austria 1.5%

1.0% Low Cost, Rising Slowly 0.5% 50 60

Less expensive

High Cost, Rising Slowly 80 90 100 110 120 130

More Expensive

70

140

Price Level, Eurozone = 100

Household Borrowing per Capita (2003-2006)

35,000 2006 30,000 2003

25,000

20,000

15,000

10,000

5,000

Italy

Portugal

Belgium

Germany

Greece

France

Austria

Finland

Spain

Netherlands

Euro area

Ireland

Irelands 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

Irelands Weaknesses
Irelands international trade performance is weakening Ireland is losing employment in manufacturing over 32,000 job losses since 2000 Erosion of Irelands 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
Irelands national competitiveness has been central to Irelands 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 Dnal de Buitlir

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

2010 Budget Day - in December 2009. Actions 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 Minster for Finance makes payment to statutory Growth Fund based on latest GNP and labour force estimates for 2009 Payments of the Growth Dividend made to individual employees in line with negotiated agreements

Late - 2010

2011

Illustration of the Pay Formation Model continued

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 Minster for Finance makes payment to statutory Growth Fund based on latest GNP and labour force estimates for 2010 Payments of the Growth Dividend made to individual employees in line with negotiated agreements

End - 2011

2012

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