Competitiveness driving economic success

National Competitiveness Council Chairman

Don Thornhill outlines his belief that competitiveness is absolutely vital for economic success.

Competiveness, as defined by the National Competitiveness Council (NCC), is “the capacity to export goods and services abroad or indeed trade on international markets; both abroad and in Ireland and to do so profitably.”

In three main ways, the council is tasked with advising the Government on how the economy should be more competitive. Firstly, the NCC produces an annual benchmarking report comparing the performance of the Irish economy across a number of competitive indicators with a sample of 19 other economies. Secondly, it produces an annual Competitiveness Challenge report, which was last published in early December. Finally, the NCC contributes to the Government’s Action Plan for Jobs by recommending targets to assist with job creation and competiveness.

However, Chairman Don Thornhill stresses the separation of the NCC from the Government stating that, while “we’re established by government … we publish our own reports. We report to government”. He adds: “It does not mean that our reports are edited by government; they’re not.”

Thornhill asserted that while competitiveness is “important for all economies that participate in the international economy,” it is particularly important to Ireland as “one of the most open economies in the world” and “with a huge importance attached to the performance of the foreign sector of exports and imports in our economy.”

The NCC takes analysis produced by three main organisations into account: the International Institute for Management Development (IMD), the World Economic Forum (WEF) and more recently, the World Bank. According to Thornhill, the main strength of these indicators is that “they consist of one number or one ranking so people seize on them.” However, he warns that “if you try to collapse a range of indicators into one single number, you eventually do end up with an apples and oranges problem … comparing situations and economies that are not very similar.”

Challenges

While Thornhill recognises that Irish economic competiveness has improved since 2008, he notes that “there is a danger of losing that competitive edge” and the NCC has identified a number of challenges.

“Cost is one hugely important factor in competiveness, but not, of course, the only one,” Thornhill comments. “The need for continued steady fiscal consolidation. The need to address the essential skills gaps which there are in the economy. And to create a more sustainable enterprise base. And to deal with the access to finance for business.”

These are not new challenges but more rigorous action is required.

Within the context of restrained economic recovery, cost pressures are emerging across a range of sectors, particularly within the legal field and areas of energy and health. The NCC contends that “adverse cost developments have the potential to put the hard-won competiveness gains and the price paid by many of our population during the downturn period at risk.” Although costs are rising a relatively slow rate, Ireland remains an expensive country to live in, to work in and to do business in.

For instance, labour costs are on the rise again and, while the council maintains that it is not opposed to a rise in living standards for employees, it is “concerned about pay increases which are not matched by productivity gains.” Furthermore, there is a continued surge in electricity prices and in other areas such as transport, warehousing, advertising and legal costs.

Therefore, while the NCC acknowledges that that the worst is over, there is still an adjustment to be made. For example, the public debt remains at a significant and, in the event of another international economic downturn, potentially harmful level. Thus, Thornhill maintains that “further consolidation is needed and there need to be further improvements in the efficiency and effectiveness of public expenditure.”

He reflects: “So, what we’re saying is that stable and sustainable public finances are absolutely necessary for competiveness. When the capital markets return to normal, the sustainability of our public finances will affect our capacity, both as a government and as businesses, to borrow on international markets and high levels of private and public debt damage investor confidence.”

The high level of youth unemployment continues to be a major problem, especially long-term unemployment amongst this demographic. The council has also called into question the efficiency of public expenditure. While income maintenance is hugely important to the unemployed, other aspects of labour market policy (e.g. public employment services, training and activation programmes) are relatively neglected. Although the NCC accepts that the Government is moving towards more coherent and effective labour market activation solutions, it has been a tedious process. Thornhill highlights this as having repeatedly provoked disquiet within the council and states that “developing the skills base here in the education and training system is hugely important.”

Emigration too functions as an indicator of a drain of essential skills from the economy. On behalf of the council, Thornhill asserts: “Until we get to the point where there is a substantially reduced outflow of people from the economy, we should not become complacent about our economic policy position and about our economic policies indeed.”

Enterprise

On the other hand, Ireland remains an attractive investment location and retains a strong productivity performance. Although, the NCC emphasises the fact that Ireland continues to be extraordinarily dependent upon foreign direct investment.

While “productive FDI has done wonders for the Irish economy,” he adds: “We would feel better if the bird was flying two wings. If we had a larger and more sustainable domestic sector or sectors of production which were more like, for example, our big agri-companies with a very clear Irish identity and Irish productive base.”

Thornhill emphasises access to finance as a difficulty, stressing that business loans cost more in Ireland than they do across the EU, while private equity investment is low.

Among Irish businesses there is a low demand for credit. However, at the same time there is a worrying trend of very high level of non-performing loans in the Irish economy, with much of these being concentrated in the small and medium enterprise sector.

The NCC therefore insists that while the enhancement of access to finance is hugely important; there is a need to address mortgage arrears and to complete the bank repairs. Consequently, Thornhill suggests that the “right sizing and right positioning of the banking sector is absolutely necessary to encourage the flow of investment so the firms can improve their productivity, expand their operations and indeed grow the economy.”