Misplaced views on the keys to competitiveness

Proinnsias Breathnach: A key topic on Ireland’s radio airwaves this morning was the publication of the National Competitiveness Council’s annual “Cost of doing business in Ireland” report. The report featured prominently on both Morning Ireland and the Seán O’Rourke programme on RTE.

Most Irish economists and business journalists have a fixation on production costs, and particularly labour costs, as the key to Ireland’s international competitiveness. This has the nature of a religious mantra about it, based on blind faith rather than the available evidence.

To give it its due, the National Competitiveness Council (NCC) does acknowledge that there is more to competitiveness than production costs (e.g. skills and productivity) in its major annual publications, Ireland’s Competitiveness Scorecard and Ireland’s Competitiveness Challenge. However, the fact that it produces a separate annual report on business costs is perhaps an indication of what it sees as the key ingredient contributing to Ireland’s competitiveness. This is reflected in the following excerpt from the Press Release accompanying the report:

“To protect the gains achieved to date, to further embed and sustain the recovery, and to ultimately spread the benefits of economic growth to all, we must continue to enhance all aspects of our competitiveness…In this regard, costs are paramount: a competitive cost base helps to create a virtuous circle between inflation, wage expectations and cost competitiveness. On the other hand, high business costs make Ireland less attractive for foreign direct investment and reduce the competitiveness of Irish enterprises’ goods and services trading in both the domestic and international markets” (emphasis added).

On this occasion the report prioritises cost issues other than labour costs, highlighting property costs (both commercial and residential), cost of business services (especially legal services and commercial insurance) and the cost of credit for enterprise before addressing labour cost issues. Interestingly, however, this order of priority is not maintained in the summary listing of key points at the end of the Press Release (which is what journalists tend to fix on). Here, labour cost considerations are listed first, followed by property, transport, utilities, credit and (last) business service costs.

It is also interesting that the RTE website coverage of the report reproduces one graphic from the main report, showing Ireland’s rising wage costs relative to the rest of the EU, even though both the report and the accompanying press release prioritise other cost factors. This may explain why the segment of the Seán O’Rourke programme dealing with the report (the first item in the programme) focused exclusively on the labour costs issue.

The press release does acknowledge the importance of productivity growth to Ireland’s long-term
competitiveness, although the following excerpt reveals a lack of joined-up thinking: “…our relative competitive position will be negatively affected if wage growth outpaces that in competitor countries. Therefore, to ensure that wages are sustainable, wage growth should not outpace productivity growth.” Despite the “therefore”, there is no logical connection between the separate parts of this passage i.e. there is no reason why wage growth should not outpace that in competitor countries if Ireland’s productivity growth is superior to that in these other countries.

An interesting perspective on Ireland’s fixation with production costs as the key to competitiveness was provided in a public lecture delivered in the Royal Irish Academy on Tuesday afternoon. Organised by the UCD Geography Department, the lecture was delivered by Michael Storper, an American geographer who has achieved some celebrity through his work on the role of institutions and networks in influencing regional economic success.

In his lecture, Storper reported on an in-depth study which he led which sought to explain the very
different economic performances of the Los Angeles and San Francisco Bay areas in the period 1970-2010. In 1970, the Los Angeles metropolitan region had one of the highest levels of per capita income in the USA, based not so much on the region’s movie industry (which in general does not provide high-quality jobs) but on its largely government-funded defence industries, especially aerospace and communications systems. By 2010 Los Angeles had fallen well down the pecking order of US metropolitan regions in per capita income terms, with the San Francisco Bay Area (including Silicon Valley) having moved in the opposite direction and by then vying with New York for the Number 1 spot, due mainly to the meteoric growth of (initially) electronics hardware followed by software and Internet services.

One part of the research exercise involved looking at the publications of business associations,
roundtables and networking forums in both regions over a 30-year period, with a view to identifying whether there were key differences between them in term of policy emphases. He found that in Los Angeles the main emphasis was on cost reductions, principally in terms of labour, property and taxation. In San Francisco, by contrast, the emphasis was on promoting skills, productivity and innovation.

Storper showed that pay levels, property prices and the general cost of living were significantly higher in the San Franscisco Bay Area. However, high pay levels were a reflection of the much higher productivity of workers in the latter area. This is seen as a major attraction of the region for investors, rather than an investment deterrent, as it would typically be regarded by economic commentators in Ireland. High pay levels also make the region a magnet for highly-skilled workers moving from elsewhere, which further enhances the region’s attractiveness for investors. The high pay levels mean that high property prices and living costs are tolerable. More importantly, the latter are seen as a consequence of, rather than a threat to, success.

Storper also showed how social institutions play a crucial role in the success of the San Francisco region. He found a much stronger orientation to business networking there compared with Los Angeles. This included networking between firms and individuals both within and between sectors, entrepreneur networks, innovation networks and general civil society networks (the latter in particular conducive to collaboration between actor groups around shared goals). As Storper put it, San Francisco has a much denser “relational infrastructure” than Los Angeles. Network density means a much stronger probability of synergistic connections being made, opportunities being seized, new ideas getting traction and especially of combinations of different kinds of ideas being fashioned and realised.

By contrast, Los Angeles had become locked in to established ways of doing things which led to limited innovation and relative stagnation. Storper instanced the tendency for management structures in Los Angeles to be hierarchical which is not only less conducive to innovation but off-putting to go-getters and innovators who are inclined to move to San Francisco instead.

This case study points to the need for Ireland’s economic policy-makers to move away from a preoccupation with cost reduction and to place the emphasis instead on enhancing skills and innovation. This points to the folly – if not lunacy – of cutbacks in educational spending at all levels, but especially in higher education. Storper also shows that social structures and institutions can be as important for economic success as science and technology. The last government was becoming increasingly fixated with inculcating the so-called STEM subjects (science, technology, engineering and mathematics) in the nation’s children. Storper shows that the potential of capabilities in these areas is unlikely to be fully realised without parallel capabilities in social organisation which are the realm of the social sciences. Starving these of funding in order to promote technology is likely to be self-defeating.

Proinnsias Breathnach, Department of Geography, Maynooth University.

Dr Proinnsias Breathnach

Proinnsias Breathnach joined the Geography Department at Maynooth University as its second member in 1972. Officially retired 2010, he remains research active with Emeritus status.

His research interests are economic geography, national and regional economic development, transnational investment, informational economy and dairy cooperatives.