Showing posts with label Irish competitiveness. Show all posts
Showing posts with label Irish competitiveness. Show all posts

Friday, December 13, 2019

13/12/19: World Bank and WEF reports highlight relatively poor competitiveness rankings for Ireland


The latest World Bank "Doing Business" report rankings and the WEF's "Global Competitiveness Report" rankings show Ireland in a mid-tier 1 position (24th ranked in both tables) in terms of competitiveness - hardly an enviable position.



Ireland's position marks a deterioration from 23rd rank in WEF table, driven by relatively poor performance in ICT adoption (hmmm... Silicon Docks economy is ranked 49th in the World), macroeconomic stability (ranked 34th), product markets competitiveness (35th), and financial system (42nd).

Full WEF report here: http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf and full WB report here: https://openknowledge.worldbank.org/bitstream/handle/10986/32436/9781464814402.pdf WB country profile for Ireland: https://www.doingbusiness.org/content/dam/doingBusiness/country/i/ireland/IRL.pdf.

A summary chart for Ireland from WB report:

Which, again shows poor performance in the area of credit supply, as well as trading across the border (correlated to the effective market size),  but also in access to electricity, registering property, dealing with construction permits, and enforcing contracts.




Wednesday, February 10, 2016

9/2/16: Currency Devaluation and Small Countries: Some Warning Shots for Ireland


In recent years, and especially since the start of the ECB QE programmes, euro depreciation vis-a-vis other key currencies, namely the USD, has been a major boost to Ireland, supporting (allegedly) exports growth and improving valuations of our exports. However, exports-led recovery has been rather problematic from the point of view of what has been happening on the ground, in the real economy. In part, this effect is down to the source of exports growth - the MNCs. But in part, it seems, the effect is also down to the very nature of our economy ex-MNCs.

Recent research from the IMF (see: Acevedo Mejia, Sebastian and Cebotari, Aliona and Greenidge, Kevin and Keim, Geoffrey N., External Devaluations: Are Small States Different? (November 2015). IMF Working Paper No. 15/240: http://ssrn.com/abstract=2727185) investigated “whether the macroeconomic effects of external devaluations have systematically different effects in small states, which are typically more open and less diversified than larger peers.”

Notice that this is about ‘external’ devaluations (via the exchange rate channel) as opposed to ‘internal’ devaluations (via real wages and costs channel). Also note, the data set for the study does not cover euro area or Ireland.

The study found “that the effects of devaluation on growth and external balances are not significantly different between small and large states, with both groups equally likely to experience expansionary [in case of devaluation] or contractionary [in case of appreciation] outcomes.” So far, so good.

But there is a kicker: “However, the transmission channels are different: devaluations in small states are more likely to affect demand through expenditure compression, rather than expenditure-switching channels. In particular, consumption tends to fall more sharply in small states due to adverse income effects, thereby reducing import demand.”

Which, per IMF team means that the governments of small open economies experiencing devaluation of their exchange rate (Ireland today) should do several things to minimise the adverse costs spillover from devaluation to households/consumers. These are:


  1. “Tight incomes policies after the devaluation ― such as tight monetary and government wage policies―are crucial for containing inflation and preventing the cost-push inflation from taking hold more permanently. …While tight wage policies are certainly important in the public sector as the largest employer in many small states, economy-wide consensus on the need for wage restraint is also desirable.” Let’s see: tight wages policies, including in public sector. Not in GE16 you won’t! So one responsive policy is out.
  2. “To avoid expenditure compression exacerbating poverty in the most vulnerable households, small countries should be particularly alert to these adverse effects and be ready to address them through appropriately targeted and efficient social safety nets.” Which means that you don’t quite slash and burn welfare system in times of devaluations. What’s the call on that for Ireland over the last few years? Not that great, in fairness.
  3. “With the pick-up in investment providing the strongest boost to growth in expansionary devaluations, structural reforms to remove bottlenecks and stimulate post-devaluation investment are important.” Investment? Why, sure we’d like to have some, but instead we are having continued boom in assets flipping by vultures and tax-shenanigans by MNCs paraded in our national accounts as ‘investment’. 
  4. “A favorable external environment is important in supporting growth following devaluations.” Good news, everyone - we’ve found one (so far) thing that Ireland does enjoy, courtesy of our links to the U.S. economy and courtesy of us having a huge base of MNCs ‘exporting’ to the U.S. and elsewhere around the world. Never mind this is all about tax optimisation. Exports are booming. 
  5. “The devaluation and supporting policies should be credible enough to stem market perceptions of any further devaluation or policy adjustments.” Why is it important to create strong market perception that further devaluations won’t take place? Because “…expectations of further devaluations or an increase in the sovereign risk premium would push domestic interest rates higher, imposing large costs in terms of investment, output contraction and financial instability.” Of course, we - as in Ireland - have zero control over both quantum of devaluation and its credibility, because devaluation is being driven by the ECB. But do note that, barring ‘sufficient’ devaluation, there will be costs in the form of higher cost of capital and government and real economic debt.It is worth noting that these costs will be spread not only onto Ireland, but across the entire euro area. Should we get ready for that eventuality? Or should we just continue to ignore the expected path of future interest rates, as we have been doing so far? 


I would ask your friendly GE16 candidates for their thoughts on the above… for the laughs…


Friday, May 16, 2014

16/5/2014: Competitive Sports of Competitiveness Gains

Yesterday I posted my Sunday Times article on unemployment and skills: http://trueeconomics.blogspot.ie/2014/05/1552014-jobs-employment-lot-done-more.html

Here is an interesting chart via BBVA Research on labour costs competitiveness gains across the euro 'periphery' and other euro states:



BBVA Research chart above is plotting changes in unit labour costs 2009-2013 and decomposing these gains in 'competitiveness' into productivity growth and earnings/wages cuts. Here Ireland is a shining exemplar of improved competitiveness.

Alas, there are some problems with this. Wages/earnings destruction is hardly a good way for regaining competitiveness, especially when this process is associated with sticky prices (real value of income declines). In Ireland's case, we had on top of the said reductions of the purchasing power of income, also higher taxation and extraction of rents by the public sectors and by the banks. All of this 'improved competitiveness' is, therefore, a wee-bit of pyrrhic victory for Ireland. 

And then, of course we have our fabled increases in productivity. What happened here? Have we suddenly discovered major technological breakthrough that allow us to produce more using fewer resources? Err… not really. We took down construction and retail and domestic services sectors and reduced them to ashes. Highly labour-intensive, these sectors employed many producing lower value added than other sectors where few produce huge value added (much of it of course is superficial and accruing to the MNCs, but who cares in this land of magic competitiveness?). When we destroyed domestic sectors, we ended up with an economy producing less, but with even fewer people working. All the social welfare rolls swelling also fuelled our productivity. Of course, were we to fire everyone and just leave around one tax arbitrage P.O. Box in IFSC open, we will have miraculously higher productivity than anyone else in the world.


So where are we, really, if we take out all these superficial and even potentially self-destructive 'efficiency gains'? Probably closer to Portugal - a net gain in competitiveness of around 3-4%. Not bad, but not as wonderful as our heroic 9.5% gain.

Sunday, December 8, 2013

8/12/2013: Forbes Claims v Reality


I wrote about Forbes' ludicrous 'rankings' relating to Ireland last week (here: http://trueeconomics.blogspot.ie/2013/12/5122013-that-forbes-folly-of-global.html). But there is more to it than what I covered in the first post.

Forbes makes an assertion that Irish labour costs have declined over time. Have they? Really?

Here's CSO latest data (through Q2 2013) based on occupation and sector of employment. Not perfect, but tells us two things:

  1. Have earnings declined?
  2. If yes, have they declined in areas that are of relevance to investors?
Here are some charts:


Key occupational level of skills, traditionally associated with foreign investment in Ireland (we are not a cheap manufacturing location, after all, and make a claim that we compete on high skills) are Managers, Professionals and Associated Professionals. Chart above shows that for all sectors in the economy, average weekly wages in this occupational category rose between Q2 2010 and Q2 2013. The rate of increase ranges from 11.1% for Business & Services, to 10.9% for Industry, to 10.4% for all sectors. Public Sector posted weakest increase of 5.2%.

So, Forbes: no, there was no relevant decrease in wages that investors can be concerned with in deciding that Ireland is Numero Uno...

But, may be investors reading Forbes are into lower skilled occupational categories? Call centres and generic sales? So, take a look at the Clerical, Sales and Service Employees category next:

 
Things are a bit volatile here, but trends are all up, with exception for Public Sector. Industry - up 7.6%, Business & Services up 1.7%, all economy: up 0.4%, as Public Sector is down 9.9%.

So, Forbes: no, there was no relevant decrease in wages that investors can be concerned with in deciding that Ireland is Numero Uno...

However, of course Forbes investors might look toward Ireland as a manual workers paradise? While I have no idea why they would do so, let's just entertain this possibility:


Forbes' investors won't be looking at employing Production, Transport, Craft and Other Manual Workers in Ireland in Industry were they concerned with wages inflation. In this category, Irish weekly wages rose, on average, 1.5% in Q2 2013 compared to Q2 2010. Across Business and Services sector, wages for this category of least-skilled workers fell over the last 36 months, but by only 0.6%. Not exactly spectacular 'gains in competitiveness'. And across all economy - these were down just 0.7%. In Public Sector we registered a significant decrease of 6.6% in this employment category, but it is unlikely to be a point worthy of consideration for Forbes' investors...

So can anyone from Forbes, perhaps, explain, how on earth can these trends suggest massive competitiveness gains?

Lastly, there is the actual claim made by Forbes: "Nominal wages fell 17% between 2008 and 2011, which helped keep labor costs in check." In Q1-Q3 2013, average weekly wage in Ireland stood at EUR687.87 against same for Q1-Q3 2008 of EUR702.34. In other words, average wages have declined (based on Q1-Q3 averages) only 2.06%. In Q3 2013 average weekly earnings were 3.04% lower than in Q3 2008. Where do 17% come from, one wonders?..

Thursday, December 5, 2013

5/12/2013: That Forbes Folly of Global Rankings...

So Forbes Magazine ranked Ireland 1st in the world as location for doing business (http://www.forbes.com/best-countries-for-business/list/#page:1_sort:0_direction:asc_search:). This is a bit of confidence builder for us as a nation looking out at the world, and a comical relief for everyone involved across the board.

Forbes does not release actual data, models and/or full methodologies, but their rationale can be glimpsed from here: http://www.forbes.com/sites/kurtbadenhausen/2013/12/04/ireland-heads-forbes-list-of-the-best-countries-for-business/

Basically, Forbes repackages other sources data and analysis to produce its own rankings.

What do these original (and other, occasionally more reputable) sources tell us about Ireland's position in global league tables?

World Bank Doing Business (2014) report ranks Ireland as follows (http://www.doingbusiness.org/Custom-Query/ireland and http://www.doingbusiness.org/data/exploreeconomies/~/media/giawb/doing%20business/documents/profiles/country/IRL.pdf?ver=2)

  • Overall Rank = 15th, unchanged on 2013 report.
  • Starting a Business: 12th in 2014, a deterioration on 2013 rank of 9th.
  • Dealing with Construction Permits: 115th, a deterioration on 2013 rank of 108th.
  • Getting Electricity: 100th, an improvement on 2013 rank of 101st.
  • Registering Property: 57th, a deterioration on 2013 rank of 51st.
  • Getting Credit (do not laugh): 13th, a deterioration on 2013 rank of 11th. Note: WB references here strength of legal rights, depth of credit information, public registry coverage and private bureau coverage, so these rankings are not reflective of whether the banks actually provide credit or whether the country has a banking system to speak of.
  • Protecting Investors: 6th, same as in 2013. Private pensions are not factored in, so expropriation / bail-in of pensions funds is not reflected.
  • Paying Taxes: 6th, unchanged on 2013. Note: these refer solely to corporate and labour taxes by employers, so our income tax 'competitiveness' is not reflected here, nor are rates and indirect taxes are factored in.
  • Trading Across Borders: 20th, same as in 2013. These relate to business transactions only, and do not reflect on-line trading & shipping to consumers.
  • Enforcing Contracts: ranked 62nd, same as in 2013.
  • Resolving Insolvency: ranked 8th in 2014, improvement on rank of 9th in 2013. This references solely business insolvency, neglecting to reflect the connection between personal insolvency (dysfunctional and outdated, even post-reforms) and business insolvency, and failing to reflect archaic professional fitness restrictions in the case of insolvency.

Summary: World Bank DB 2014 is nowhere near identifying Ireland as top country in the world for doing business. By DB rankings we are not in top-10 worldwide.


World Economic Forum (WEF) publishes a series of rankings for countries in terms of various aspects of doing business. Top of the line is The Global Competitiveness Report (GCR) http://www.weforum.org/reports/global-competitiveness-report-2013-2014

WEF's GCR 2013-2014 rankings for Ireland are:

  • Overall rank = 28th in 2013-2014, which reflects deterioration in our position from 27th in 2012-2013 report.
  • We rank 33rd in Basic Requirements for competitiveness;
  • The above include: Institutions (rank 16), Infrastructure (26), Macroeconomic Environment (134) and Health and Primary Education (6)
  • We rank 24th in Efficiency Enhancers; 
  • The above include: Higher Education & Training (rank 18), Goods Market efficiency (11), Labor Market Efficiency (16), Financial Market Development (85), Technological Readiness (13) and Market Size (57).
  • We rank 21st in Innovation and Sophistication Factors
  • The above include: Business sophistication (rank 18) and Innovation (20)

Full report is linked here: http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2013-14.pdf

Snapshot on Ireland from the above: "Ireland is ranked 28th this year with a relatively stable performance. The country continues to benefit from its excellent health and primary education system (6th) and strong higher education and training (18th), along with its well-functioning goods and labor markets, ranked 11th and 16th, respectively. These attributes have fostered a sophisticated and innovative business culture (ranked 18th for business sophistication and 20th for innovation), buttressed by excellent technological adoption in the country (13th). Yet the country’s macroeconomic environment continues to raise significant concern (134th), showing little improvement since last year. Of related and continuing concern is also Ireland’s financial market (85th), although this seems to be tentatively recovering since the trauma faced in recent years, and confidence is slowly being restored."

Summary: by WEF GCR we are not in top-10.


WEF also publishes The Global Enabling Trade Report (latest is for 2012). Here are Ireland's ranks in that assessment (see Table 1 http://www3.weforum.org/docs/GETR/2012/GlobalEnablingTrade_Report.pdf):

  • Overall rank of 22 in 2012, down from 21 in 2010.
  • Market Access sun-index rank: 67th in 2012;
  • Border Administration sub-index rank 10th in 2012;
  • Transport and communications infrastructure sub-index rank 29th;
  • Business environment sub-index rank 25th

Summary: by WEF GETR we are not in top-10.


WEF publishes The Global Information Technology Report (GITR), here are ranks for 2013 for Ireland:

  • Networked Readiness Index rank of 27th, deterioration from 25th place in 2012.
  • Environment sub-index rank 15th in 2013, composed of Political and regulatory environment (rank 16th) and Business & Innovation environment (rank 24th).
  • Readiness sub-index rank 16th in 2013, composed of Infrastructure and digital content (rank 16th), Affordability (rank 61st) and Skills (rank 12th).
  • Usage sub-index rank 28th, composed of Individual Usage (rank 21st), Business Usage (rank 22nd) and Government Usage (rank 43rd).
  • Impact sub-index rank 33rd, composed of Economic Impacts (rank 18th) and Social Impacts (rank 56th).

You can see the detailed results here: http://www3.weforum.org/docs/WEF_GITR_Report_2013.pdf

Summary: by WEF GITR we are not in top-10.


Forbes survey cites WSJ/Heritage Foundation Index of Economic Freedom as another source. This is linked here: http://www.heritage.org/index/country/ireland

WSJ/H 2013 Index of Economic Freedom ranks Ireland as 11th (not in top-10) and the index shows deterioration year/year in all sub-indices save one: Monetary Freedom (something that Ireland has no control over). There is a handy chart on the right on the linked page to show that Irish scores have declined in every year from 2009 through 2013.

But WSJ/H index is not the state-of-the-art index measuring economic freedom.

Instead, much stronger, methodologically and data-wise is the Economic Freedom of the World index published by Fraser Institute. Here's the link: http://www.freetheworld.com/release.html

Per EFN 2013,

  • Ireland's overall rank is 15th in the world, which on a comparable basis represents the worst year since 1990. In 2012 report (2010 data) we were ranked 14th.

Summary: no, per Economic Freedom rankings we are not in top-10.


And so on…

I recently wrote in the Sunday Times that Ireland ranks 7th in the OECD in terms of start-ups actually being registered in the country. And that this data might be skewed by the fact that some start-ups registered here during the crisis period are really re-launches of businesses shut down due to pressures of the costs of 'upward-only' rent contracts. Other start-ups are various tax shells created by the MNCs and IFSC etc.

There are many reasons to treat all of the above rankings with a grain of salt. But the key point is: we are a good location for doing business and we are a good destination for FDI. But we are not top 1, nor even top 5. Which means that instead of glowing the bizarre lights of Forbes-like PR, we should be getting down to the painful and dirty business of real reforms.


PS: As Jamie Smyth of FT pointed out, the first time Forbes had Ireland as Number 1 country in its rankings was in 2007 - the same year when Oliver Wyman had Anglo Irish Bank as its World's Best Bank. I must also add, that whilst Forbes today says that Ireland is number 1 country because of lower labor costs and business costs, plus excellent monetary environment, back in 2007 we had sky-high labor costs and business costs, and rotten monetary and fiscal environments. So, apparently, Forbes' 'methodology' delivers identical outcomes on foot of diametrically contradictory data... hmm... 

Saturday, September 28, 2013

28/9/2013: Real v Imputed Labour Cost Competitiveness Gains: Ireland v EA17

I wrote recently about the problems with Irish competitiveness and the thesis of significant gains in it since the onset of the crisis:

However, looking closer at Irish data, one discovers several troubling regularities:
  1. Given the rate of improvement in our labour cost competitiveness and the timing of gains achieved, most of the improvement is simply due to destruction of jobs in two domestic sectors. Per chart below: half of all competitiveness gains were completed by Q1 2010 and some 64% were completed by the end of Q4 2010 - in other words during the period of mass unemployment increases fuelled by jobs shut downs in domestic services and building & construction sectors. Since then the rate of improvements dropped dramatically.
  2. The gap in our competitiveness relative to EA17 when expressed relative to the base of the year 2000 is much more closely reflective of the gap between EA17 and Irish GDP and GDP per capita than for any other base, suggesting that use of any other base is misleading in capturing true relative competitiveness positions between Ireland and euro area average.
  3. Even with the 'gains' achieved, in Q1 2013 Irish economy was some 12 percentage points less competitive than the euro area average for EA17 states.

Controlling for the second point above, I rebased the data set from the Central Bank to two more bases: 2000 base, 2002 base, and compared this against Central Bank-reported 2005 base. Here are the details:



As the chart above clearly shows, the gains achieved in the unit labour cost metrics have been large. However, these gains do not mean that we are now significantly more competitive than Euro area 17 average. Instead, the metric is highly sensitive to the choice of the base year. In other words, if we assume that Irish economy costs were roughly on par with those in the euro area 17 in year 2005, then we are now 11.4 points more competitive than euro area 17. In contrast, if you assume that we were cost-wise on par with the euro area in 2002, then in Q1 2013 we were only 1.8 points more competitive than euro area. If we assume that the two economies were running at similar cost bases in 2000, Irish economy is still about 14 points behind the euro area in terms of competitiveness.

To make the right base choice, we have to look at the GDP and GDP per capita comparatives and these suggest that we were closer to euro area average around 2000 and ahead of the euro area in 2002 and 2005.

Long story short - do not be deceived by the claims of huge competitiveness gains in Ireland. Some 50%+ of these are probably due to jobs losses here, and the rest is due to base year choice and strong performance of Germany during the crisis... Oh, and that is before we start accounting for productivity 'gains' from transfer pricing by the ICT services exporters...

Friday, September 27, 2013

27/9/2013: Internal Devaluation: Picking a Right Target?

Conventional wisdom of the 'internal devaluation' theory goes as follows: if a country like Ireland were to experience a structural shock, the path of adjusting to this shock lies via reduction in the cost of doing business (improving efficiency). Since adjusting the cost of Government or quangoes or Social Partners in the economy is an impossible task to undertake in a corporatist economy, then the only two things that can adjust to effect the 'internal devaluation' are capital costs (interest rates) and labour costs. In reality, however, capital costs are no longer responsive to interest rates since Ireland is in a major asset bubble bust and banking sector collapse. So we are left with deflating labour costs.

Aside from the knock-on effects such policies might have on aggregate demand and household investment, there is a nagging question of: can they be effective in reducing functional costs faced by businesses? In other words, are reduced labour costs associated with economic efficiency gains?

Logic suggests that even if successful, reductions in labour costs can only be as effective as labour costs' share in total output of the economy. How so? Suppose labour costs fall 10% and labour costs share in the economy is 50%, then, assuming freed resources are used somewhere more efficiently, the output boost can be substantial. If, however, labour costs are only 10% of the economy, then the impact will be smaller.

Now, here's a chart from the Robert Schuman Foundation research paper on Labour Costs and Crisis Management in the Eurozone:

According to this chart, Ireland was the second / third (to Greece and Italy) worst candidate in the euro area to implement internal devaluation policies along the lines of labour costs adjustments. And today Ireland is the second worst candidate (after Greece - the unlabelled purple line).

Yes, Ireland was the best candidate to apply these policies as the place with the worst labour costs competitiveness during the pre-crisis period.


But the adjustments, even though only partially successful, may be not impacting significant enough proportion of the economy to make much of the real difference.

Thursday, September 26, 2013

26/9/2013: Sunday Times 15/9/2013: What About Irish Competitiveness?

This is an unedited version of my Sunday Times column from September 15.


Recent experiments in psychology have shown that people routinely distort their interpretation of objective evidence to fit their subjective political beliefs. More ominously, our propensity to ideologically colour evidence appears to be greater the better we are with data analysis.

This ability of humankind to see data through the tinted glasses of our biases is present all around us, including in the interpretation of economic data.
Take two examples.

Recently, the relatively ideology-free World Economic Forum published its annual report on global economic competitiveness rankings for 2013-2014. According to the report, Ireland now ranks 28th in the world in terms of competitiveness, down one place on a year ago. Back in 2005-2006 – at the height of the boom, and amidst rampant business costs inflation, we ranked 21st. Overall, Ireland's global competitiveness has deteriorated by 7 places over the last ten years, with this year's performance just one notch better than the absolute nadir reached in 2011. A more ideologically-informed Heritage Foundation / WSJ Index of Economic Freedom continues to rank Ireland highly in the 13th place in the world in 2013. However, tinted lasses aside, our overall competitiveness score in the latter index declined from around 82-83 in 2006-2009 to below 76 this year.

Meanwhile, Irish political and business elites continue to brag about the remarkable gains in the country competitiveness, brought about by the policies enacted since the beginning of the crisis or at the very least, by the reforms that took place since the last elections. Almost 6 months ago, seemingly unburdened by evidence, Taoiseach Enda Kenny has declared that the government is "making this the best small country in the world to do business in…" Never mind that Ireland ranks outside the top 10 countries in the world in every reasonably comprehensive and objective rankings produced so far. And never mind that our rankings have deteriorated, rather than improved, since the onset of the crisis. The government will still spin the evidence.

The truth, of course, is somewhere in between the two extremes of the opinion.

One core measure of competitiveness is the labour-related cost of the unit of output in the economy, the so-called unit labour costs (ULCs). Based on the ECB data, we  achieved substantial gains in this measure, with ULCs falling 18 percent peak-to-trough. However, since the trough was reached in Q2 2012, Ireland’s performance has deteriorated. In 2009-2010, Irish unit labour costs fell by over 7 percent compared to 2008. The rate of cost deflation declined to 2.4 percent over 2011-2012. So far, since the start of 2013, the ULCs are rising. This exposes the underlying causes of changes in the ULCs over the crisis period. Much of the recent gains in labour competitiveness were driven by a dramatic rate of jobs destruction back in 2009-2011. As the jobs market stabilised, competitiveness gains vanished.  Exactly the same story is being told by the broader harmonised competitiveness indicators published by the Central Bank of Ireland.

However, the data also shows that the key driver for the deterioration in our cost competitiveness in more recent months is government policy.

As the result of our non-meritocratic approach to labour markets, lack of reforms in core areas relating to business development and entrepreneurship, the use of tax policies to fund wasteful bank crisis resolution measures and public spending, Ireland finds itself in an absurd situation where we rank 12th in the world in capacity to attract talent and 40th in capacity to retain the talent we attract. As our openness to FDI is bringing scores of talented workers into the country, our internal markets policies are pushing talent out of the country. Having had their fill of "the best small country in the world to do business in", globally skilled workers tend to get out of Ireland.

As the result of our inability to keep key skills and talent in the country, labour costs are starting to creep up, even before we see serious uptick in new employment. In 2009-2010, according to the OECD,  labour costs accounted for 74 percent of the total inputs costs in production in Ireland. In 2011, the latest for which we have data, this rose above 77 percent. Labour productivity growth, having peaked with unemployment increases in 2009 has fallen back by almost two thirds by 2012.

The latest data from CSO shows that average hourly earnings are now up in eight out of thirteen sub-sectors year on year through H1 2013. Crucially, in the areas under direct Government control, earnings are now rising once again and at speeds exceeding those recorded for the overall economy. Public sector average weekly earnings were up 1.3 percent year on year in Q2 2013 and non-commercial semi-state earnings are up 2.7 percent.

With every new report, the IMF reiterates its advice to the Irish authorities to continue focusing on labour markets reforms. Despite this, the Government staunchly refuses to address the main factors holding back our labour competitiveness. These are flexibility of wage determination (with Ireland ranked 103rd globally), flexibility in hiring and firing (we rank 43rd here) and linking pay to productivity, especially in the public sector (our rank is 38th worldwide). According to the WEF, Ireland ranks 90th in the world in terms of the effect of taxation on incentives to work.


So labour competitiveness improvements of the past are neither a credit to the Government reforms, nor appear to be sustainable over time. Now, lets take a look at other policies-linked metrics.

World Economic Forum report lists the top 5 factors acting to depress our global competitiveness scores. In order of decreasing importance these are: access to financing, inefficient government bureaucracy, inadequate supply of infrastructure, insufficient capacity to innovate, and tax rates. The first two come under direct remit of public reforms aimed at dealing with the crisis. The fourth one, capacity to innovate, is linked a myriad of incentives and subsidies crafted by Irish governments in an attempt to shift the economy away from bricks and mortar toward innovation and exports. The third and the last factors arise from the Government policies since 2008 that saw higher tax burdens and shrinking public capital investment become the drivers of the state response to the fiscal crisis. Thus, by WEF metrics, Irish Government is responsible for dragging down Irish economy's competitiveness, rather than pushing it up.

These findings are broadly in line with the Heritage/WSJ index readings, which shows that we score poorly on Government policies, fiscal performance, and public spending efficiency.
Despite years of austerity and alleged reforms in public sector management since 2008, the WEF report ranks us 55th in the world in terms of wastefulness of government spending, and 29th in terms of burden of government regulation. When it comes to the transparency of Government policymaking, Ireland ranks below 24 other countries around the globe. The latter is a metric directly targeted by the Troika-led reforms and the one where the Irish Government has, allegedly, done most work to-date. We have revamped banks regulation and reporting, significantly altered macroeconomic risk monitoring, fiscal policies oversight, economic policy development mechanisms and more. Yet for all our successes in this arena, we are not even in top 20 worldwide when it comes to policies transparency.

Another obvious flash point of the crisis was the lack of robust audit and oversight over the operations of our banks and some companies. One would expect that 5 years into dealing with the crisis, Ireland would have delivered some serious improvements in these areas. Alas, we still rank 58th in the world in terms of the strength of our audit and reporting standards. In a business oversight metric, the World Bank Doing Business report ranks Ireland 63rd in the world in terms of the  enforcement of contracts, with average time to resolve a dispute of 650 days in Ireland, against 510 days for the OECD average.  As a legacy of the protected sectors inefficiencies, our legal system imposes average costs of 26.9 percent of the total volume of dispute-related claims on contracted parties, against the OECD average of 20.1 percent.

The current Government came into office with a clear promise to reform domestic sectors to breath in more competition into protected markets. This has not happened to-date. State-controlled sectors, such as professional services, health insurance and health services, energy, transport, education, and so on, remain shielded from real competition. As the result, Ireland ranks 42nd in the world in intensity of local competition, and 24th in effectiveness of anti-monopoly policies, even though much of this effectiveness comes via Brussels. Property regulations, planning and permissions systems are as atavistic as they were before the bust, meaning that the World Bank ranks Ireland 106th in the world when it comes to dealing with construction permits.


Ireland’s performance on the competitiveness side is worrying. In the long-run competitiveness metrics and rankings – imperfect as they may be – help global investors allocate capital investment and productive activities of their companies around the world. Even more significantly, these metrics expose structural problems in the economy and governance systems that are holding back Irish domestic entrepreneurship and innovation.

As economies and fiscal positions of governments around the world improve over time, the competition for FDI and new markets for goods and services exports will heat up, once again. Downward pressure on taxes – Ireland’s core competitive advantage to-date – will re-accelerate too. At the same time, capital investment will remain scarce and costly, while skills shortages worldwide will once again start driving up cost of doing business, including here. This means that global investment flows will tend to be concentrated on the markets with the greatest demand growth potential, and where the profit margins are the highest. The only way Ireland will be able to compete is by becoming a competitiveness haven for product innovation and development, advanced specialist manufacturing, distribution, marketing and sales. Being just a tax haven will not be enough.




Box-out:

A financial transaction tax (FTT) on derivatives trades came into power in Italy this week, as a follow on to March 2013 introduction of the FTT on equity transactions. Per new law, derivatives will be taxed at rates that vary with the volume and the type of the contracts traded. Equities transactions are taxed at 0.12% for shares traded on a regulated exchange or 0.22% for over the counter trades. Six months in, the FTT is having an effect. As a number of analysts, including myself have warned prior to the introduction of the tax, Italian trading volumes for equities are down significantly, compared to the rest of Europe. Since March, Italian equity market turnover dropped to EUR50 billion from EUR101 billion a year ago. French equity markets experienced exactly the same effect post FTT introduction. At the peak in 2011, French equity market accounted for 23 percent of the European equity markets turnover. Today, it is at around 13 percent. There is also some evidence that wealthier investors are moving their transactions out of FTT-impacted equity markets. Which means that more burden of the levy – popularly mislabeled as 'Robin Hood' tax – is falling onto the shoulders of smaller investors. Falling trading volumes are now expected to undercut significantly Italian and French estimates for the Government revenues that FTT was expected to raise. With projected funding already allocated in the budgets, any shortfall will have to be compensated for via other taxes or cuts elsewhere. Yet, undeterred by the evidence, the EU continues to press on for a cross-border FTT. John Maynard Keynes once said: "When my information changes, I alter my conclusions." Sadly, his otherwise enthusiastic students in Brussels have missed that lesson.

Thursday, May 30, 2013

30/5/2013: Irish Competitiveness Improves in 2013... but

IMD released its World Competitiveness Rankings yesterday (see link here: http://www.imd.org/news/World-Competitiveness-2013.cfm) and the results summary is:


Good news: Ireland's rank improved from 20th in 2012 to 17th in 2013 (we swapped places with Finland). Bad news: Ireland's ranking remains vastly below the 10th place back in 1997.

Here's the link to comparatives for Worst Ranking to Best Ranking by year: http://www.imd.org/uupload/imd.website/wcc/Perspective1997-2013.pdf

And here's 5 years data for Ireland:



As always, methodology is a 'black box', largely and GDP-based, which means it most likely overstates the true extent of Ireland's competitiveness.

Monday, April 15, 2013

15/4/2013: Irish Labour Costs: IDA spin and reality



IDA presentation claims loudly & boldly that Ireland is one of 3 countries where nominal wages have dropped (slide 5).

This raises two questions.


  1. An existential one: are dropping nominal wages a good thing? Well, not really. For a number of reasons. Firstly, declining wages = declining domestic demand and investment. Now, IDA - focused on MNCs and FDI - might not give a damn about these two aspects of the economy, but sadly they are more important to Ireland than IDA-sponsored multinationals, as the last 6 years of the Great Recession clearly show. Secondly, declining nominal wages = lower incentives to locate talent into Ireland and develop human capital here. Now, that is something IDA should care about, since this cuts the ability of its MNCs to continue creating the illusion of productivity here. Thirdly, declining nominal wages may mask loss of efficiency and productivity in some sectors and superficial gains in efficiency in other sectors. How so? Ok, suppose wages in a less productive sector, like construction or retail fall, while wages in more productive sector, like ICT rise. Average or median wages across economy might fall, but competitiveness might also decline where it matters - in higher growth sectors. Sadly, IDA seem to have no clue that this is what appears to have been happening in the economy, presumably because it would put a bit of a brake on the IDA spin. But see table below to verify that the above factor 3 does indeed apply to Irish data.
  2. A factual one: is this claim true. Now, here's Paul Krugman's article saying it is not true: http://krugman.blogs.nytimes.com/2013/04/13/dnwr-in-the-ea/ . But what about raw, direct data from Ireland? CSO provides: http://cso.ie/en/media/csoie/releasespublications/documents/earnings/2012/earnlabcosts_q42012.pdf and the end game is: average hourly earnings in Ireland in Q4 2012 were +0.6% y/y and +0.7% q/q in the private sector, and down -0.4% y/y and +0.6% q/q in public sector. So unless IDA cares about labour costs in the public sector (presumably because IDA have discovered a treasure cave full of MNCs in Irish public sector), Irish nominal earnings are up, not down.



There are other problems with claims IDA makes. Wages might fall, but cost of labour might still go up due to increased cost of Government related to payroll and income taxes. Conveniently, CSO provides raw data on this too. Total labour costs in Ireland as of Q4 2012:

  • Increased in the private sector +2.6% q/q and +1.3% y/y
  • Compared to 2008, these were down from EUR23.51/hour to EUR23.31/hour - a massive decline of 0.86% in 4 years, cumulative.

Judge for yourselves as to what the dynamics in Irish wages (earnings and total labour costs, to be more precise) are (for all sectors reported by CSO):

















No comment needed.

Friday, September 7, 2012

7/9/2012: Ireland is not exactly shining in Global Competitiveness terms


Spot that Highly Competitive economy called Ireland?


Yep, that's right:

  • Ireland ranks 27th in the Global Competitiveness Index 2012-2013 a great improvement in rankings from 29th place in 2011-2012 won by the massive internal devaluation on the sacrificial fields of defending the overvalued euro.
  • Ireland rnaked 35th in Basic Requirements sub-index, 25th in Efficiency Enhancers sub-index and 20th in Innovation and Sophistication Factors sub-index
  • Ireland ranks 131st in the world in Macroeconomic Environment,
  • 108th in the world in Financial Markets Development,
  • 20th in the world in quality of higher education and training,
  • 18th in the world in business sophistication, and
  • 21st in business innovation.
All results are, of course, skewed positively by the MNCs operating here. 

Sunday, July 29, 2012

29/7/2012: Irish Competitiveness



Unedited version of my Sunday Times article from July 22.



These days, with nearly 15 percent unemployment, and almost 530,000 currently in receipt of some unemployment supports, the minds of Irish policymakers and analysts are rightly preoccupied with jobs creation. Every euro of new investment is paraded through the media as the evidence of regained confidence in the economy. This week, even the insolvent Irish Government got into the game of ‘creating jobs’ with an ‘investment stimulus’.

Alas, economics of jobs creation is an entirely different discipline from the political PR accompanying it. In the real world, some private and public jobs are created on the basis of sustainable long-term demand for skills. Others are generated on the foot of tax advantages and subsidies, including stimulus. In the short run, the latter types of jobs can still yield a positive boost to economic activity. But in the longer run, they are not sustainable and drain resources that can be better allocated to other areas. The ultimate difference between the two types is found in productivity growth associated, or the competitiveness gain or loss generated in the economy.

The prospects of Irish economic recovery have been rhetorically coupled with the improvements in our cost competitiveness since early 2008. And for a good reason. Rapid deterioration in competitiveness in years before the crisis is what got us into the situation where structural collapse of the economy was inevitable.

During the Celtic Garfield era of 2001-2007, Irish Harmonized Competitiveness Indicators (HCIs) have deteriorated by some 26%. Our productivity growth, stripping out effects of MNCs transfer pricing and tax arbitrage, has been running well below the rate of the advanced economies average. In years of the property bubble, Ireland was the least competitive economy in the entire euro area.

Structurally, our lack of competitiveness was underpinned by the labour costs inflation in relation to producer and consumer prices. Consumer costs-related competitiveness indicator for Ireland deteriorated by 38 percent between the end of 2001 and mid-2008, more than one-and-a-half times the rate of deterioration in producer costs-linked measure. Another, even more pervasive and long-term force at play was creation of hundreds of thousands of jobs in the sectors, like building and construction, domestic retail and finance that lagged in value-added well behind the exporting sectors.

This was not a model of sustainable jobs creation. Instead of incentivising investment in real skills and aptitude to work and entrepreneurship, we taught our younger generation to expect a €40-45,000 starting gig in a ‘professional’ occupation or laying bricks at a construction site. Not surprisingly, uptake of degrees in harder sciences and more mathematically intensive fields of business studies slumped, while degrees in ‘softer’ social and cultural studies were booming. The workforce we were producing had a rapidly expanding mismatch between pay expectations, career prospects, and reality of an internationally competitive economy.

Placated by the opportunity to locate in the corporate tax haven, our MNCs were drumming up the myth of the superior workforce with great skills and education. The Government and its quasi-official mouthpieces of economic analysis in academia, banks, and financial and professional services were only happy to repeat the same line.

The crisis laid bare the truths about our fabled competitiveness outside the corporate tax arbitrage opportunities.

Since then, the focus of the Government labour market reforms, in rhetoric, if not in real terms, has been on regaining cost competitiveness. Sadly, this process so far replicates, rather than corrects the very same errors of judgement we pursued before the crisis erupted.

In terms of headline metrics, things are looking up. Our harmonised competitiveness indicator (HCI) has improved by 5% between January 2009 and April 2012 – the latest data available. However, these gains are accounted for by two drivers. Firstly, jobs destruction in the construction and retail sectors has led to rapid elimination of less productive – from economic value-added point of view – activities. Secondly, domestic business activity collapse added price deflation to the equation, distorting gains from any real productivity improvements. Thus, our HCI deflated by producer prices has fallen 7.7% over the above period of time, while consumer prices-deflated HCI dropped 12.5%.

Thus, much still remains to be done on the competitiveness front, especially since deflationary pressures in the economy are no longer rampant. The momentum of gains in competitiveness experienced in 2008-2010 has slowed dramatically and is likely to continue declining.

On the one hand, jobs destruction has moderated markedly, while across the economy overall earnings are rising. Wages inflation in several sectors where skills shortages are present, such as ICT and internationally traded services, now complements declining competitiveness of individual tax policies.

Year on year, Q1 2012 saw average weekly earnings rising in Ireland by 0.7%. Weekly earnings in the private sector went up 1.5% annually, while there was an increase of 2.0% in the public sector over the year. Between Q1 2008 and Q1 2012, average weekly earnings fell 3.5% in the private sector and rose 0.8% in the public sector.

The skills crunch is evident both via the earnings inflation within the larger size enterprises and by occupational categories. earnings of Managers, professional and associated professionals rose 5.7% y/y in Q1 2012 and are now 1.1% ahead of where they were in Q1 2009. Earnings for clerical, sales and service employees are up 2.4% y/y and down almost 2% on 2009.

The real problem with our labour costs competitiveness is that with rising tax burdens it is becoming increasingly difficult to import skills and our system of training and education simply cannot deliver on the growing demand for specialist knowledge. The former problem has been repeatedly highlighted by the indigenous exporters. The latter has been a major talking point for the larger MNCs. The latest example of this is PayPal, whose global operations vice-president Louise Phelan warned this week that Ireland needs to focus on language skills, especially in German, Dutch and Nordic languages “to protect our status as a European gateway”.

Sadly, the Government is listening to the latter more than to the indigenous entrepreneurs.

Reforming education system is a long-term process and should not be tailored to the current demand for narrow skills. Instead, it should aim to provide broad and diversified education base, including leading (not obscure) modern languages, proper teaching of core subjects, such as history, philosophy, arts and sciences.

Such reforms will not have a direct impact on the likes of PayPal’s ability to hire people with very narrow skill sets. Which means that Ireland will have to systemically reduce the costs of importing human capital.

To derive real competitive advantage anchored in sustainable jobs creation and productivity growth, we need to focus on creating the right mix of tax incentives, educational supports and immigration regulations to lower the cost of employing highly skilled workers and increase returns to individual investments in education and training. Let us then leave the job of selecting which areas of study should be pursued to those who intend to succeed in the market place.






Box-out
The CMA Global Sovereign Credit Risk Report for the second quarter 2012 shows Ireland improving its ranking position from the 7th highest risk sovereign debt issuer in the world in Q1 2012 to the 8th – a gain that is, on the surface, should signal that the country Credit Default Spreads (CDS) were improving compared to its peers. While Ireland’s CDS have indeed improved during the quarter falling below 600 basis points (bps) in the last two days of June for the first time since the first week of May, in effect Ireland ended Q2 2012 pretty much where it started it in terms of CDS levels. What really propelled Irish rankings gain was the return of Greece to the CDS markets few weeks after the country ‘selective default’. In fact, Ireland’s rate of improvement (by 1 notch) is identical to that of Cyprus and marks below average performance for the group of the highest risk sovereigns. Perhaps even more revealing is the comparative between Ireland and Iceland. The latter is ranked 20th in the risk league table, improving in Q2 2012 by two ranks. At the end of June, Icelandic 5 year CDS were trading at 290 bps, with implied cumulative probability of country default over the 5 years horizon of 22.9%. Ireland’s CDS were trading at 554 bps with implied cumulative probability of default of 38.6%.