Monday, 11 June 2012

Guest post by Suzanne Rosselet-McCauley and Adrian Devitt: Restoring sustainable competitiveness

Suzanne Rosselet-McCauley and Adrian Devitt: Competitiveness is one of the most abused terms in modern economics, meaning many different things to different people. Ireland, perceived during its Celtic Tiger years as a star performer in international competitiveness rankings, rose to a peak of 5th place in IMD’s World Competitiveness Yearbook (WCY) in 2000. Considered one of the world’s most prominent indices of global competitiveness, Ireland’s ranking began to fade during the years preceding the financial and economic crisis of 2008-2009.

In our research on national competitiveness, it has become apparent that there exist many different roads to competitiveness and that a “one-size-fits-all” recipe cannot be applied to all countries. It is not only a question of how “competitive” countries are, but rather how they are sustaining national competitive advantages and achieving greater prosperity for their populations, in terms of increasing living standards and human development (health, education, training). Researched by Forfás, the NCC’s Competitiveness Scorecard has reported on these factors over the past decade.

Unfortunately, the drive for competitiveness is often misunderstood as a win-lose battle between firms to gain market share or between nations for export dominance. But for any company or nation, narrowly looking at cost, price or export competiveness will not be enough to deeply impact sustainable profitability or economic development.

So what happened to Ireland’s competitiveness as the country’s ranking declined in the WCY year after year to an historical low of 24th last year? Clearly, as prices and wages climbed during the boom years, Ireland’s price and cost-competitiveness eroded. Infrastructure constraints also grew. But as the boom continued and as debt was built up and property prices skyrocketed, a sense of invulnerability seemed to take over during these “miracle years”. Since 2008, while Ireland’s competitiveness potential has improved as cost competitiveness improved and capacity constraints eased, indicators tracking current economic performance (e.g. unemployment, debt rates) continued to lower Ireland’s overall ranking.

This year, the tide appears to be turning and Ireland’s ranking has improved to 20th place (out of 59 countries). Over the past year, Ireland has benefited from booming exports and sustained inward investment, retaining its place as one of the most attractive locations for multinationals. The improved ranking is also testament to Ireland’s business-friendly environment, in terms of investment incentives, a competitive tax regime, a high availability of skilled workers who are also English speaking and IT competent. For example, in the IMD 2012 WCY, Ireland ranks:

• 1st for the availability of skilled labour
• 1st for the flexibility and adaptability of the population
• 1st for positive attitudes towards globalization
• 1st for investment incentives
• 1st for understanding the need for economic & social reform
• 2nd for a lack of discrimination towards foreign investors
• 2nd for lack of protectionism
• 3rd for patents in force

But what about the future? Will the global crisis be seen as an opportunity to move towards a more sustainable path of competitiveness? Notwithstanding the legacy of the property bubble, Ireland has significant strengths to build on. For example, a significant proportion of Ireland’s exports are classified as complex goods or services (i.e. high value added). The degree of complexity apparent in Ireland’s export profile differentiates Ireland from other peripheral EU economies. While it is essential for Irish competitiveness to continue to pursue cost efficiencies in all sectors of the economy, it is also vital to continue to develop the exporting capabilities of high value, complex sectors and their supply base. The key challenge is to strengthen the foundations for long-term sustainable growth and Ireland’s potential for future competitiveness.

To really get ahead, sustainable competitiveness must be the ultimate objective of a business or national development strategy. This implies the following:

• Improved performance in education, worker training, and retaining talent
• A long-term view towards business and capital investment
• Building innovative capacity by fostering an environment of creativity and knowledge transfer
• Spurring indigenous technology to develop domestic global brands
• Finding an equilibrium between economic gains and societal well-being

Building Ireland’s potential for future competitiveness will require addressing three major challenges: macro economic and fiscal stability, R&D and innovation, and infrastructure. First, a continuing focus on stabilising the banking system and public finances, thereby reducing volatility and uncertainty. It is only in a predictable environment that investors will take a long-term view and seek to improve productivity.

Second, Ireland’s companies need to constantly upgrade and innovate to stay ahead. This requires a continued focus on R&D by boosting expenditure and supporting the transfer of people and knowledge between research and academic institutions and the private sector, as well as the dissemination of this knowledge into innovative goods and services.

And the third bottleneck for sustaining competitiveness is infrastructure. Not only continued investment in basic, physical and digital infrastructure, where Ireland has made good progress, but also addressing the constraints in financial infrastructure, for example by improving access to credit, venture capital for start-ups, and supporting entrepreneurship and small- and medium-sized enterprises.

Lastly, while attempting to tackle the above challenges, it is important not to neglect the country’s social infrastructure in terms of education, healthcare and pensions, while ensuring that the benefits of growth are shared equitably across the population.

If the improved IMD ranking is any indication of Ireland’s comeback, then the competitiveness horizon looks brighter. Having improved four places to 20th – the strongest improvement in a decade - potential exists to improve further. There is also evidence that the Irish have a strong capacity to adapt to difficult and troubling times, as seen in the high rankings (1st) for “understanding the need for economic and social reform” and for the population’s “flexibility and adaptability”. A difficult road still lies ahead but Ireland possesses many of the prerequisites for competitiveness that will help ensure a better future for the next generation.
Authors: Dr. Suzanne Rosselet-McCauley, IMD Fellow, former co-author of the IMD World Competitiveness Yearbook, IMD. Adrian Devitt, Head of the Economic Analysis and Competitiveness, Forfás


Paul Hunt said...

This sort of non-rigorous, business school-speak bumph would make for entertaining fictional reading if it were not taken so seriously by many politcians, policy-makers and regulators.

Ireland has all the trappings of proper representative democratic governance and ecentralised local governance but very little of the substance. The reality is highly cntralised governance, ineffective and under-resourced local governance and an expansive, and largely unaccountable, state apparatus. The combined fiscal, property and banking fiasco emerged in this huge gap between this optical illusion and the reality. And there is no real prospect of a sutainable recovery until this huge gap is closed - because the dysfunction that was so brutally exposed in the fiscal, property and banking arenas (and which is being slowly and painfully addressed in these areas) reamins endemic in all other sectors subject to varying degress of state ownership, control or direction.

The high value-added and complex sectors are primarily in the 'MNC xport enclave' and the high value and complexity has more to do with accounting and financial engineering to minimise international taxation liabilities than it has to do with the nature of the underlying manufacturing or service processes. And it hugely distorts aggratgate Irish productivity metrics.

However, the indigenous tradable sectors have demonstrated considerable resilience and made major adjustments, but the ability to develop global brands in a small regional economy is very limited. And they are burdened by glaring inefficiencies, monopoly profit-gouging and rent-seeking in the sheltered sectors - private, public and semi-state.

Yes, I'm sure Ireland is top of class in terms of understanding the need for economic and social reform. Indeed, everybody is unambiguously in favour, in principle, of reform - once it is done to somebody else. And this is where the continuing failures of democratic governance impact seriously.

But while bumph like this is produced - with Irish quangos expending valuable time, effort and resource feeding it - and it absorbs the attention of politcians, policy-makers and regulators - and provides them with acres of material for 'spin' - there is alittle chance of anything sensible being done to ensure a sustainable economic recovery.

Anonymous said...

This is a very interesting and welcome post on the real meaning of competiveness. It adds to and enhances the views expressed by several other bloggers on the site. The serial negative commentator, Hunt, is as is the case too often, wide of the mark.

Paul Hunt said...

It's probably too much to expect that some attempt would be made to try and refute the points I make in my critique before summarily dimissing it. It seems to be par for the course here.

Bert McCann said...

What is being pput forward here is a prescription for competitive superiority not sustainabilty. If nothing else has been demonstrated through the experience of the last few years is that competitiveness is toxic. It excludes co-operation, real environmental and social planning and encourages and approves of rapacious greed. the following paragraph seems to have been inserted as a footnote and indicates where these provisions are placed in the authors' priorities.
'Lastly, while attempting to tackle the above challenges, it is important not to neglect the country’s social infrastructure in terms of education, healthcare and pensions, while ensuring that the benefits of growth are shared equitably across the population'.
Competition has nothing to offer future generations other than more crookery, more debt and more uncertainty.

Paul Hunt said...

This is an interesting thread. I critiqued the initial post from a liberal, centrist, progressive, essentially Keynesian perspective. (That is most certainly not the Keynes whose policy prescriptions have been reduced to 'raid, tax and spend' and which, while they were very necessary in the context of '30s, are wholly inappropiate now.)

'Anonymous', I'm sure it's the usual 'anonymous', simply rejected my critique with his or her usual sour dismissiveness and lack of evidence.

And Bert McCann has critiqued the post from a conventional left-wing perspective which appears to be based on an abhorrence of markets and competition - and presumably on the assumed benificence, omniscience and omnipotence of the state.

Since the post has been critqued from the left and the centre (and ignoring 'anonymous's' sour intervention), the only conclusion I can come to is that the post advances the politcial and economic stance of the right and centre-right.

And the evidence is clear. The entire thrust of the argument is based on the contention that only a vibrant private sector generates economic value. The state is relagated to being a facilitator and gap-filler - and presumably to stand ready to clean up the mess when an under-restrained private sector screws up big time.

What is of economic value in an advanced mixed economy is determined both by how and on what citizens choose to expend their income and by the level and composition of public expenditure they democratically, via their elected representatives, decide – and on how this expenditure is funded. These decisions are both determined and constrained by the joint exercise of economic and political power.

The right and centre-right abhor any effective democratic governance of the exercise of this political and economic power by the private sector and this post simply oozes this abhorrence.