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