Slí Eile: So runs the recent ESRI Quarterly Economic Commentary (page 50).
A lot of the debate on competition and competitiveness is narrowly constrained to a view of the world that looks something like the world of ‘perfect competition’ learned for Leaving Certificate Economics: product homogeneity, perfect information, no barriers to industry entry or exit, costless transport etc. One of the features of the economy in the South of Ireland is not only its small size and trade openness but the fact that it operates with relatively diverse sub-economies.
Some recent posts and discussions on this Site have brought out the nature of these sub-economies:
* A heavily export-orientated multinational sectors specialising in certain market niches – pharma, chemicals, ICT etc, operating price transferring and profit displacement and with relatively lower labour cost input
* Some industries geared towards particular markets susceptible to currency movements (especially Sterling)
* A significant non-traded sector here wages, rents and profits are set domestically.
In discussing and measuring ‘competitiveness’ or any other macro-level phenomenon it is necessary to disaggregate somewhat. This is not to deny:
- The importance of labour costs in the total cost schedule facing enterprises
- The inter-connectedness between costs in the non-trade sector and the traded sectors
Has Ireland been losing competitiveness over the last decade? This turns out to be not so straight forward. As other posts have shown, the National Council for Competitiveness does not focus on wage cost competitiveness to anything like the extent that some commentators and media people do. The NCC Annual Competitiveness Report 2009 Volume 1: Benchmarking Ireland's Performance published last year devotes 130 pages including copious indicators and graphs to measure competitiveness (Volume 1 has the data – the recent Volume 2 published earlier this month focuses more on policy implications).
Labour costs feature in the NCC data and discourse – but very much as only one part
See page 65. There is a nice colour-coded display of green (good), orange (risky) and red (problematic) warning ‘indicators’. Unit costs in manufacturing industry is coded orange. However, on ‘non-pay’ costs the indicators are mostly red. They are:
It argues that (p11)
In order for the economy to make the necessary transition from a reliance on domestic demand to sustainable export-led growth in the medium term, policies need to facilitate the convergence of Irish costs, charges, professional fees, rents and incomes/wages towards the levels of our trading partners.
Productivity and not just wage levels are important. Growth in productivity has been poor in the 2004-2008 period but there is evidence that the position has improved since 2008. For many exporting firms, labour costs account for over half of their input costs. While Irish pay and income levels are moderate when compared to other developed high income economies, wage inflation in Ireland was running at up to 50 percent higher than the Eurozone average during the 2004-2007 period. However, growth in labour costs slowed significantly in 2008 in Ireland relative to the Eurozone.
One way of calculating an overall measure of price competitiveness is to use the the Central Bank Harmonised Competitiveness Indictor (HCI). The value for HCI is determined by changes in consumer and producer prices relative to the main trading partners for this State and adjusted for change in the value of the Euro relative to other major currencies. The value of HCI (deflated for consumer prices) rose from 100 in 1999 to a peak value of 126 in mid-2008 and has fallen back to 121 in December 2009. By contrast, the value was just under 100 in December 2009 for the Eurozone countries (ECB Statistical Data Warehouse).
However, much of the increase in this Indicator from mid-2006 to mid-2008 was driven by the strong appreciation in the value of the Euro against both Sterling and the US Dollar.
See Box B in the CBI Quarterly Bulletin 2007 (2)
The US Bureau of Labor Statistics regularly publishes comparative data on pay rates. Hourly compensation rates here were, in 2007, above US values (Ireland = 117 and US = 100). However, the Eurozone average was 133. (Source: All Employees: Indexes of hourly compensation costs in U.S. dollars in manufacturing, 32 countries or areas and selected economic groups, 1996-2007)
Garret Fitzgerald’s claims that Ireland has been losing competitiveness in the last decade as signalled by loss of world market share in goods industries. However, he concedes that Services have been winning out as goods industries have been displaced. Overall, the fall in exports in 2008 was surprisingly small, here (2.75% according to the ESRI), compared to other economies in the midst of a world depression. Not grounds for complacency – but surely not indicative of a sharp deterioration in competitiveness driven by rising costs in the non-traded sector?
The picture on exports is very mixed as the ESRI has pointed out in his recent Quarterly:Exports of chemicals and related products increased by 12 per cent, driven by strong growth in pharmaceutical products and organic chemicals. Across the other broad categories, there were significant declines in the exports of electrical machinery and computer equipment; the latter is likely in part to reflect the relocation of Dell to Poland. Furthermore, there has been a fall in exports to the UK of over 16 per cent over the same period, this is most likely driven by the recent weakness in Sterling together with the weak performance of the UK economy.
At least a significant part of inflation in wage costs in the 1997-2007 period was driven by the property bubble – and that gives another story.
but, the ESRI give the show away on page 32 of the Winter QEC (Table 11)Finally, the last line in the table can be viewed as an indicator of competitiveness. While it is not the case that there is some target level for labour’s share of output, the increase in the value of the variable into 2009 points to declining competitiveness. If our forecasts are correct, and in particular if wages fall by 2½ per cent in 2010, there will be a significant improvement in competitiveness and this is reflected in the fall in labour’s share in 2010 relative to 2009.
[The Table shows the share of labour in GNP rising from 47.7% in 2005 to 54.5% in 2009 and then falling back to 52.5% in 2010.]
This only goes to show that some things never change:
Profits drive economic activity
Profits decline in some sectors (like banking) and can trigger crises over in the real economy
Crises lower profits
To restore profits wages must be cut
This is the key to being competitive
Cutting wages, restoring profit levels.
Lets not mince words here. We are in the middle of a calculated competitive devaluation where wage labour and people on social welfare are seeing adjustments to restore profit levels and reassure the markets and raise confidence of investors and the ubiquitous god ‘consumer’. All the talk about pricing ourselves back into world markets is a proxy for shifting the share of national income towards profits as the banking and property bubbles burst and the real economy adjusts.
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