Ireland's Competitiveness Challenge: Restoring Stability, Improving Cost Competitiveness, Increasing Productivity Growth

1. Ireland’s Competitiveness ChallengeAdrian DevittCompetitiveness Department, Forfás

2. Annual Competitiveness Reports • Volume 1:Benchmarking Ireland’s Performance • Volume 2:Ireland’s Competitiveness Challenge

3. How are we performing? Contribution of Net Exports to Irish Economic Growth Source: Forfás Calculations; Central Statistics Office, Annual National Accounts

4. How are we performing? Average Annual Growth in Exports of Goods and Services Source: OECD, IMF, ESRI 2009

5. Our Manufacturing Base has Changed Dramatically Percentage of Manufactured Exports 2000Total manufactured exports €65,353 million 2008Total manufactured exports €86,218 million Source: CSO, External Trade

6. Services Exports have Grown Exponentially Percentage of Services Exports 2000Total services exports €12,939 million 2008Total services exports €67,589 million Source: CSO, Balance of Payments

7. Ireland’s Competitiveness Challenge • Macro Issues: • Restoring stability of public finances • Ensuring the banks are channelling credit to viable businesses • Improving Cost Competitiveness • Incomes and prices • Property • Energy • Waste • Local authority charges • Increasing Productivity Growth • Restructuring the economy • Skills • R&D and innovation • Capital and technology deepening • Infrastructure • Competition and regulation • State supports • Workplace development

8. Macro Issues Improving Cost Competitiveness Increasing Productivity Growth 1. A Stable Macro-Economic Environment is a Perquisite • 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. • 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.

9. Macro Issues Improving Cost Competitiveness Increasing Productivity Growth Harmonised Competitiveness Indicator 2. Improving Cost Competitiveness • 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. Source: Central Bank, October, 2009

10. 2. Improving Cost Competitiveness Annual Changes in Average Hourly EarningsQ2 2008 – Q2 2009 • 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. Source: CSO 2009

11. 2. Improving Cost Competitiveness • Reduce property costs Significant 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 Prices Costs 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.

12. 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.

13. Macro Issues Improving Cost Competitiveness Increasing Productivity Growth Average Annual Growth in Output per Hour Worked Productivity Levels Per Hour Output, 2008 OECD-28 Ranking: GDP:9 (↑4) GNP: 18 (-) Productivity Growth Average Annual Growth in Output per Hour Worked, 2000-2008 OECD-28 Ranking: GDP: 13 (↓7) GNP: 26 (↓17) (change since 2000) 3. Increasing Productivity Growth 3. Increasing Productivity Growth Source: Groningen Growth & Development Centre, Total Economy Database, Jan. 2009

14. 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.

15. Unemployment (%) by Age Cohort Q3, 2009 3.2 Funding and reforming the delivery of training to the unemployed • 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. Source: CSO, QNHS, Q3 2009

16. 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.

17. 3.3 Prioritise Infrastructure Investment to Support Enterprise 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.

18. 3.4 Promoting Investment in Technology Deepening, R&D and Innovation Investment 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.

19. Conclusions • 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.

20. Thank you ncc@forfas.ie