Friday, 27 February 2009

Trichet's narrow notions of competitiveness

Paul Sweeney: Yesterday, I got to shake the hand of the 5th most powerful man in the world - reluctantly!

Yesterday, JC Trichet, the President of the European Central Bank, said by Newsweek magazine to the 5th most powerful man in the world, made a speech in Dublin. As he left the meeting, I was introduced to him, and I shook his hand, but reluctantly. I suspect that he was somewhat reluctant to shake my hand too, as he heard I was with the Irish Congress of Trade Unions.

Here was a very powerful man in a world economy which is in deep crisis, who had just given a speech on Competitiveness which was straight from the 1980s. It was not economics but pure political economy, serving the interests of the Irish employers and government in their attempts to cut wages. His main message was that we must keep labour costs down.

It was straight from the 1980s understanding of competitiveness because it was the kind economics that Ireland left well behind, back then. It focused largely on cost competitiveness and then on wages, with some reference to unit labour costs. “I believe there should be more public awareness that insufficient attention of wage setting to current and expected productivity developments makes any correction to previous losses of competitiveness more painful in terms of output and employment losses,” he said. He also said “As I mentioned before, wage restraint would help a lot.”

M Trichet did not, however, advocate cuts, like some indigenous economists. He called for “wage setting to take account of the competitiveness and labour market conditions” (not unreasonable) in a what he termed a “responsible and timely manner”. And he said that “national authorities should pursue courageous policies of spending restraint especially in the case of public wages.”

So the government that messed up the economy with light regulation and pro-cyclical policies during the boom is now courageous?

He pointed out that many of Ireland’s fundamental economic strengths have not gone away and the economy is well placed when the international recovery occurs. But he said our success was due to a number of factors, including “a business-friendly regulatory environment.” I thought, reading the papers and listening to the radio, that our business-friendly regulatory environment was the reason Ireland is in deep trouble! Clearly, I was misled! It’s the overpaid workers!

Ireland, fortunately, developed a comprehensive view of what makes a country competitive, in the late 1980s - and Ireland moved on. For a while it became the Celtic Tiger, basing its economics on a whole world view of this complex issue. With a shared view of the total complexity of competitiveness, employers and unions and politicians worked together in a form of Social Partnership to push up employment massively, together with profits and real wages.

Back in 1982, in reaction to a government sponsored report on Competitiveness, by the Three Wise Men, I, with a group of other economists, the Socialist Economists, published Jobs and Wages: the True Story of Competitiveness. In a booklet, we set out the framework for a real comprehensive understanding of what makes a country competitive, from productivity, a functioning banking and insurance systems, good roads and interconnectedness, education and even advocated social partnership! The Irish government later actually set up a social partnership body called the National Competitiveness Council, as the behest of the employers, to analyse the issues on a continuous basis. It has produced excellent work in the area for many years.

However, in recent weeks, some Irish economists, who, believe it or not, avoided the area, (except to pepper reports with the word, 'competitiveness') have come back into it, but like M Trichet, have taken up where the so-called Three Wise Men left off – back 30 years ago.

For a group of economists, the panacea for all our problems appears to be wage cuts (for employees only; only occasionally for others). Now this is understandable because they can measure movements in wages. Economists love to measure things! They hate the impact of institutional and political factors on economies as they cant measure them. Wages are very measurable. One economist just sticks up a graph on total costs, which as we all know have been rising fast and concludes, without blushing, that Ireland’s competitiveness is heading south and wages should be cut (consumer costs are way above the EU average here – 14% above for goods and 21% for services in the EU27 or as high as 33% for consumer services).

Irish costs are way above the EU average, but the reasons are, much more complex than wages. On the other hand, wages have risen faster here than in other EU countries, but in a later blog, I will address this issue in some depth.

The emphasis on wages by economists and by M Trichet is worrying. If we, as a country, are to redefine competitiveness simply as wages, or even unit labour costs or even total costs, we will have lost our shared understanding of an important and real issue which makes our economy work.

It is the naked class nature of their analysis which is worrying. Will we soon stop shaking hands?
Paul Sweeney is Economic Advisor to ICTU


Tomaltach said...

The focus on wages is surely misplaced and there are far wider issues to competitiveness as you point out.

The only issue I have with wages - and it is global, particularly driven by the Us - is that enormous gap has opened up between what might be termed ordinary workers - be they factory workers, engineers, journalists - and senior management. I mean the multiplier has just doubled and redouble itself and has created an inherently nasty unfairness. I know this is not the main issue, but I think in the context of long term adjustment of the capitalist system, this should be a factor (as part of the whole discussion on incentives, bonuses, and tying executive pay to real achievements over a longer period).

You made one comment with which I didn't particularly agree although perhaps you meant it in a more limited way. It was that "that our business-friendly regulatory environment was the reason Ireland is in deep trouble".

I think there a few issues in there. First, there is nothing wrong with a business friendly environment and it is something we must preserve. For example, in recent years setting up a business legally, or getting funding, and so on in Ireland has been much easier than say France.

On the regulatory side we don't need to be excessive either. The trouble was largely in the banks which occupied a particularly privileged and let's face it, important, place in Irish economic life. But this is not to say that regulation in other sectors is similarly deficient and requires an overhaul.

What does need an overhaul across the board is corporate governance. The problems here are certainly not confined to Banking. Think Fyffes. There is a legal element here to be addressed but also probably a cultural issue. The small number of board members who seem to run each others companies and so on.

I think the current environment provides impetus to do some great work in the area of corporate governance in Ireland and since it will have our attention for some time it is something the government ought to take on.

Yet there again it would need to be well though out - not rushed nor simply populist. Given the current governments record at getting thinks worked through properly, I wouldn't hold my breath.

96cambridge said...

Good article, but as Michael taft is saying it appears we are loosing the battle on the issue of what to do now, and the debate is being framed by the right. How can we address this? Is there no way that the major economic thinkers of the left in Ireland can call a conference and invite the main parties of the left to attend in order to get our analysis off the ground. It would hopefully attract some media attention and allow us a greater level of access to the people of Ireland.

Paul Sweeney said...

I stand corrected by Tomaltach on my comment that "our business-friendly regulatory environment was the reason Ireland is in deep trouble". What I should have said was that the balance in favour of what was seen to be pro-business went too far. We are suffering deeply now for this fawning but naive attitude and many businesses are also in trouble today because of it. It is important that policy is pro-business in the sense of reducing bureaucracy and unnecessary red tape, but some top Irish public officials went too far, in failing to enforce regulation, company law etc. The govt Plan to get Ireland out of the crisis, the Smart Economy, is still peppered with what I should have defined as an attitude that is so uncritically pro-business, that it neglects the wider public interest, including that of other businesses, as well as citizens

OP said...

Seeing Through

Jose Saramago’s ‘Seeing’ deserves a reading (or re-reading) right now. It may be fiction but I promise you you will find it considerably more illuminating than the current media non-debate, where the privileged few (and I am especially including journalists and media commentators here) claim to see things objectively, rationally, while the rest of us just don’t get it.

Oh, but we get it alright … we’re all economists now. Life is to be understood in market terms. Our labour is a commodity but unlike oil it can’t get too high. It has to be contained, and is contained by appeals to ‘reason’. (You just can’t reason with oil!) So the discourse becomes one of co-option – ‘we’re all in this together’, ‘we’ve all got to play our part’ etc. etc. Politicians say they are making ‘hard decisions’ for the good of the economy, but it is not too difficult to see through the rhetoric and read ‘easy’ for ‘hard’ and know that it is the money-men (and women) who are dictating the terms of the ‘debate’.

In these days we might well wonder how and when we became colonised by economy and economists. It has been a slow drip-drip, not unlike the trickle-down that failed to rise all boats. All areas of our life have been opened up the market – even and increasingly in the last bastions of universal provision, health and education. Forget citizenship, we are all consumers – and some of us have higher spending power than others.

To a degree the re-education process has been successful, but 120,000 people marching last Saturday suggest that some are beginning to see things a little differently. So perhaps Fukuyama was a bit previous and the old battle lines are being re-drawn. Well folks, is it to be Boston or Berlin? Carlsberg got it wrong – there is no ‘Third Way’.