Paul Sweeney: The CSO has published a useful paper on what the exit of the United Kingdom from the European Union will mean for Ireland. We have seen that there will be some advantages with the exit of the British in a recent blog by Prof James Wickham, though overall the impact will be negative on the economy.
Showing posts with label exports. Show all posts
Showing posts with label exports. Show all posts
Wednesday, 7 December 2016
Thursday, 9 August 2012
Internal devaluation in the Eurozone
Tom McDonnell: Ronald Janssen explores the impact of falling wage costs in the Eurozone periphery here. He argues that export revival has not been enough to prevent the collapse in domestic demand that accompanies the cuts in public budgets and real wages and that the net outcome has been recessionary.
Friday, 21 October 2011
Ireland: export boom or import bust?
Merijn Knibbe has an interesting post here on the Real World Economics Review blog - thanks to Michael Burke for the hat-tip.
Wednesday, 20 July 2011
Enclave-led recovery
Michael Taft:The Enterprise Minister was extremely upbeat about the recent CSO report that the trade surplus had grown. Mind you, it was not due to rising exports – in value terms they fell back slightly over the previous month; rather, it was the reduced imports which could indicate depressed domestic activity (machinery and transport made up approximately 50 percent of the fall in imports). Still, with the growth in service exports in the first quarter, the Minister believes we are back on the path of export-led recovery. Let’s examine the first quarter numbers and see what this growth is likely to mean for the economy.
When we combine two different CSO reports (not always the most satisfactory) we find that combined goods and service exports increased by €3.4 billion in the first quarter this year over the first quarter in 2010 – a healthy 9 percent. For a small open economy this is good news. However, this good news is somewhat tempered when we go into the details.
On the goods side, the Chemical/Pharmaceutical sector was the main driver of exports. It increased by €1.7 billion out of a total goods increase of €1.8 billion. There were still other sectors that gained – notably the Food sector – with the main decline coming from ‘unclassified commodities’. The point is that the multi-national dominated Chemical sector was responsible for most of the growth.
It is commonly accepted that export growth in this sector will have little impact on the domestic economy. There is the benefit of high-skilled, well-paying jobs – and continued growth will help. However, this sector imports nearly all its inputs – the goods and services it needs to produce their products. And the direct employment gain will be minimal – according to Forfas, Chemical exports increased by 69 percent between 2000 and 2008. However, there was no direct employment increase. This is not surprising – it is a highly capital-intensive sector. So we shouldn’t expect much of a knock-on benefit to the domestic economy – nor a tax gain, given our ultra-low corporate tax rates.
On the services side, growth is less concentrated. Nonetheless, the computer services sector, which grew by 14 percent, accounted for 56 percent of all service export growth. The computer services sector is a key service export sector – making up 40 percent of all service exports. So how connected is this sector with the domestic economy?
First, among Forfas-clients, computer services exports are dominated by multi-nationals – over 97 percent. In the period of 2000-2008, total exports from this sector grew by 62 percent, or €14.6 billion. However, employment – in both the foreign and Irish sector – actually fell by 4,800 or 9 percent. This was due to substantially increased productivity – as measured by employees per sales.
Second, the amount of inputs sourced from Ireland is falling in both nominal and percentage terms. In 2000, Irish companies supplied over half (52 percent), providing €9.2 billion in goods and services. By 2008, this had fallen to a third, falling to €7.6 billion. More and more of the inputs into the computer services sector are being imported.
So we have a problem: as our export sector increases their sales, we may not expect either a direct employment gain in the medium-term (though there may be a short-term post-recession increase) or increased activity from downstream Irish companies supplying these export companies. Our GDP will rise, of course; but the increase in exports may, ironically, increase employment in other countries – from companies that are supplying ‘our’ export sector.
This is not to dismiss the value of growing our export sector. But just as every industrial/enterprise strategy report has highlighted – since the Telesis report in the early 1980s: if it is not rooted in the indigenous sector, the gains to the domestic economy will be limited.
Just take one example: for the service export sector as a whole, Irish firms purchased 65.3 percent of their inputs domestically; multi-nationals purchase only 30.1 percent. And while this percentage has remained the same for Irish firms since 2000, foreign firms used to purchase over 50 percent of their inputs domestically in 2000.
This is not to dismiss the role of multi-nationals – their size alone dwarfs the Irish sector and, so, while the percentage is smaller, the total amount is much higher. We need the IDA and other public agencies to succeed in bringing multi-nationals to Ireland, of only because there’s not much happening domestically.
However, we should appreciate that we get a bigger employment and domestic benefit from indigenous companies. This where the real gains can be made but promoting indigenous start-ups and expansion requires considerably more work and will take much longer to bring on stream.
If we’re not careful, we’ll be wondering why export growth is not translating into an equivalent amount jobs and domestic activity. And the last thing you’ll get from official sources is the reality – that instead of export-led growth, what we’re mostly getting is, as described by the IMF, enclave-led growth.
[For an incisive historical survey of our distorted industrial and enterprise strategy, read Conor McCabe’s recently published ‘Sins of the Father’. If we repeat the past, we shouldn’t be surprised that the future is no different.]
When we combine two different CSO reports (not always the most satisfactory) we find that combined goods and service exports increased by €3.4 billion in the first quarter this year over the first quarter in 2010 – a healthy 9 percent. For a small open economy this is good news. However, this good news is somewhat tempered when we go into the details.
On the goods side, the Chemical/Pharmaceutical sector was the main driver of exports. It increased by €1.7 billion out of a total goods increase of €1.8 billion. There were still other sectors that gained – notably the Food sector – with the main decline coming from ‘unclassified commodities’. The point is that the multi-national dominated Chemical sector was responsible for most of the growth.
It is commonly accepted that export growth in this sector will have little impact on the domestic economy. There is the benefit of high-skilled, well-paying jobs – and continued growth will help. However, this sector imports nearly all its inputs – the goods and services it needs to produce their products. And the direct employment gain will be minimal – according to Forfas, Chemical exports increased by 69 percent between 2000 and 2008. However, there was no direct employment increase. This is not surprising – it is a highly capital-intensive sector. So we shouldn’t expect much of a knock-on benefit to the domestic economy – nor a tax gain, given our ultra-low corporate tax rates.
On the services side, growth is less concentrated. Nonetheless, the computer services sector, which grew by 14 percent, accounted for 56 percent of all service export growth. The computer services sector is a key service export sector – making up 40 percent of all service exports. So how connected is this sector with the domestic economy?
First, among Forfas-clients, computer services exports are dominated by multi-nationals – over 97 percent. In the period of 2000-2008, total exports from this sector grew by 62 percent, or €14.6 billion. However, employment – in both the foreign and Irish sector – actually fell by 4,800 or 9 percent. This was due to substantially increased productivity – as measured by employees per sales.
Second, the amount of inputs sourced from Ireland is falling in both nominal and percentage terms. In 2000, Irish companies supplied over half (52 percent), providing €9.2 billion in goods and services. By 2008, this had fallen to a third, falling to €7.6 billion. More and more of the inputs into the computer services sector are being imported.
So we have a problem: as our export sector increases their sales, we may not expect either a direct employment gain in the medium-term (though there may be a short-term post-recession increase) or increased activity from downstream Irish companies supplying these export companies. Our GDP will rise, of course; but the increase in exports may, ironically, increase employment in other countries – from companies that are supplying ‘our’ export sector.
This is not to dismiss the value of growing our export sector. But just as every industrial/enterprise strategy report has highlighted – since the Telesis report in the early 1980s: if it is not rooted in the indigenous sector, the gains to the domestic economy will be limited.
Just take one example: for the service export sector as a whole, Irish firms purchased 65.3 percent of their inputs domestically; multi-nationals purchase only 30.1 percent. And while this percentage has remained the same for Irish firms since 2000, foreign firms used to purchase over 50 percent of their inputs domestically in 2000.
This is not to dismiss the role of multi-nationals – their size alone dwarfs the Irish sector and, so, while the percentage is smaller, the total amount is much higher. We need the IDA and other public agencies to succeed in bringing multi-nationals to Ireland, of only because there’s not much happening domestically.
However, we should appreciate that we get a bigger employment and domestic benefit from indigenous companies. This where the real gains can be made but promoting indigenous start-ups and expansion requires considerably more work and will take much longer to bring on stream.
If we’re not careful, we’ll be wondering why export growth is not translating into an equivalent amount jobs and domestic activity. And the last thing you’ll get from official sources is the reality – that instead of export-led growth, what we’re mostly getting is, as described by the IMF, enclave-led growth.
[For an incisive historical survey of our distorted industrial and enterprise strategy, read Conor McCabe’s recently published ‘Sins of the Father’. If we repeat the past, we shouldn’t be surprised that the future is no different.]
Wednesday, 16 February 2011
Economists on Ireland's export performance - more sad stories
Proinnsias Breathnach: One thing that has always struck me about Irish economists is that, despite the importance of foreign direct investment and international trade to Ireland’s economy, they actually know very little about the activities of the transnational firms in question, or the structure of Ireland’s foreign trade and, above all, about the factors which attract foreign firms to Ireland and allow them to use Ireland as a base for serving external markets.
Rather than conducting real research in these areas, most economists who write on these topics appear to draw on undergraduate textbook models of how markets operate – models which in turn were originally devised to explain the kinds of competitive markets for commodity-type products (clothing, food, furniture) which were fairly typical of the British and US economies in the 19th century. Subsequent developments, such as industrial concentration, globalisation, rising living and educational standards, advertising and marketing and technological change, appear to have bypassed many of these people entirely.
Thus, a few weeks ago, we had Anthony Leddin of the University of Limerick (writing in The Irish Times) postulating trends in Ireland’s foreign trade which anyone with knowledge of this area would have realised right away were completely wrong. More recently (January 28), and again writing in The Irish Times, former Central Bank Chief Economist Michael Casey wrote: “At present the only bright spot in the economy is the output and exportation of pharmaceutical products”. This is an extraordinarily uninformed statement for a person of this status to make. Of the nine broad product categories into which the CSO divides Ireland’s merchandise exports, eight experienced growth in nominal export value in the first ten months of 2010 compared with the same period in 2009. Of the total growth in these eight categories, pharmaceutical products accounted for less than half (46.5%).
The growth in total merchandise exports, in turn, accounted for only one half of the overall growth in exports (including services) in the first three quarters of 2010. The growth in exports of computer services in this period exceeded that in pharmaceutical products by 24 per cent. Many economists have been unable to internalise the fact that services exports exist at all, never mind that they have been the main growth sector in Irish exports for many years and, in 2009, accounted for 46.5% of total exports. In the five years to 2009, exports of both computer services and business services grew much more strongly than exports of pharmaceuticals. In 2009, exports of both computer services and business services exceeded exports of pharmaceutical products in value terms.
In that year, these three sectors, along with organic chemicals, accounted for over half of Ireland’s total exports. If we throw in insurance & financial services, food & beverages and office & data processing machinery, the proportion rises to almost three quarters. If one were seeking the key to Ireland’s international competitiveness, one should be looking at why these seven very disparate sectors are able to use Ireland as a successful base for serving external markets.
But this would require some real research. Instead, our economists reach for simplistic and largely irrelevant statistics which are both readily available and tend to confirm deeply-entrenched prejudices. We got a good example of this in an article on Ireland’s competitiveness by The Irish Times’s chief economics journalist, Dan O’Brien, in the issue of February 4 last. While acknowledging that there are many ways of measuring competitiveness and that the National Competitiveness Council employs more than 100 competitiveness indicators in its annual reports,O’Brien then devotes most of the rest of his article to the old diehards – prices and labour costs.
Irish economists have an extraordinary tendency to rely on the EU’s harmonised index of consumer prices (HICP) as a measure of competitiveness, even though its relevance to Ireland’s export competitiveness is not immediately obvious – it is hard to see what bearing the price of a meal or a CD player has on the competitiveness of the organic chemicals or software sectors. Nevertheless, O’Brien regards the fact that Ireland’s HICP fell relative to the rest of the EU between late 2008 and early 2010 as evidence of Ireland “regaining” competitiveness.
O’Brien then suggests that trends in economy-wide unit labour costs (the ratio of wages to net output) are a better indication of Ireland’s improved competitiveness. However, the fact is that the vast majority of the Irish workforce are not engaged in export activity and, again, it is hard to see how the unit labour costs of a waitress or CD player salesperson have a bearing on the competitiveness of the main export sectors identified above. While Ireland’s economy-wide unit labour costs have tended to rise relative to the rest of the EU over the last ten years, the opposite has been the case in unit labour costs in manufacturing, the great bulk of whose output is exported. Yet, while the latter are to be found in the same page in the OECD website as the former, they are rarely, if ever, quoted by Irish economists.
There are no comparable data for export services, but the Forfás Economic Impact surveys indicate that payroll costs as a proportion of value added in foreign-owned export services (which account for 95% of the total) fell from 19% in 2000 to 9% in 2008 – a fall of over 50% in unit labour costs.
This is not to say that labour costs are important (never mind crucial) in the competitiveness of Ireland’s main export sectors. If general labour costs were a key determinant of competitiveness, then one should expect exports in all sectors to be influenced by labour cost trends. However, Ireland’s main export sectors have been very variable in their export performance, and there is no evidence that this variability has been influenced in any way by labour cost trends. Between 2000-2006 (the last year for which the relevant data are available), the chemicals & pharmaceuticals sector experienced volume output growth of 50%, despite a rise of 50% in the share of costs accounted for by pay (up from 12.6% to 18%). In the electronic components sector, there was a more modest rise in the labour share of costs from a lower base (up from 13.1% to 16.4%) yet production volume fell by 7%. In the office machines and computers sector, a fall in labour’s already very low share of total costs (down from 4.1% to 3.5%) produced volume growth of 22% - much more modest than that experienced by chemicals & pharmaceuticals.
The key point is that the idea of Ireland Inc. gaining or losing competitiveness is meaningless. Ireland’s exports are dominated by a small number of sectors whose characteristics are extremely varied and whose export performances are equally varied. Adding up these performances and then concluding from the total that Ireland is becoming more or less competitive is pointless. Over the last ten years Ireland has experienced strong export growth in a range of export services, and in pharmaceuticals and medical devices, modest growth in chemicals, and, overall, a sharp fall in exports of electronics hardware. A wide range of factors account for this export variability, of which labour costs play, at most, a minor role. In compiling its Global Competitiveness Index, the World Economic Forum employes no less than 113 quantitative criteria; in Ireland’s case labour cost factors account for less than two per cent of the total value of the competitiveness index.
The economists’ disconnect from the real world is nicely demonstrated from a passage towards the end of Dan O’Brien’s article. Referring to evidence that average productivity in Ireland has been raised by the collapse of the low-productivity construction sector, he suggested as an example that “a bricklayer produces less than the average assembly-line worker or office drone (sic)”. Productivity in the construction industry is indeed low when compared with manufacturing or business services, but O’Brien’s choice of bricklayers for his example was surely unfortunate. Assuming that earnings bear some relationship to productivity, in 2006, when industrial production workers were earning €601 per week, clerical and secretarial workers €540 and administrative civil servants €819, the average weekly earnings of all skilled construction workers came to €877 and there was one report of bricklayers at that stage earning over €3000 per week! The company making these payments was also reportedly paying its Turkish labourers €2.50 per hour. They might have been a better choice for O’Brien’s example.
Rather than conducting real research in these areas, most economists who write on these topics appear to draw on undergraduate textbook models of how markets operate – models which in turn were originally devised to explain the kinds of competitive markets for commodity-type products (clothing, food, furniture) which were fairly typical of the British and US economies in the 19th century. Subsequent developments, such as industrial concentration, globalisation, rising living and educational standards, advertising and marketing and technological change, appear to have bypassed many of these people entirely.
Thus, a few weeks ago, we had Anthony Leddin of the University of Limerick (writing in The Irish Times) postulating trends in Ireland’s foreign trade which anyone with knowledge of this area would have realised right away were completely wrong. More recently (January 28), and again writing in The Irish Times, former Central Bank Chief Economist Michael Casey wrote: “At present the only bright spot in the economy is the output and exportation of pharmaceutical products”. This is an extraordinarily uninformed statement for a person of this status to make. Of the nine broad product categories into which the CSO divides Ireland’s merchandise exports, eight experienced growth in nominal export value in the first ten months of 2010 compared with the same period in 2009. Of the total growth in these eight categories, pharmaceutical products accounted for less than half (46.5%).
The growth in total merchandise exports, in turn, accounted for only one half of the overall growth in exports (including services) in the first three quarters of 2010. The growth in exports of computer services in this period exceeded that in pharmaceutical products by 24 per cent. Many economists have been unable to internalise the fact that services exports exist at all, never mind that they have been the main growth sector in Irish exports for many years and, in 2009, accounted for 46.5% of total exports. In the five years to 2009, exports of both computer services and business services grew much more strongly than exports of pharmaceuticals. In 2009, exports of both computer services and business services exceeded exports of pharmaceutical products in value terms.
In that year, these three sectors, along with organic chemicals, accounted for over half of Ireland’s total exports. If we throw in insurance & financial services, food & beverages and office & data processing machinery, the proportion rises to almost three quarters. If one were seeking the key to Ireland’s international competitiveness, one should be looking at why these seven very disparate sectors are able to use Ireland as a successful base for serving external markets.
But this would require some real research. Instead, our economists reach for simplistic and largely irrelevant statistics which are both readily available and tend to confirm deeply-entrenched prejudices. We got a good example of this in an article on Ireland’s competitiveness by The Irish Times’s chief economics journalist, Dan O’Brien, in the issue of February 4 last. While acknowledging that there are many ways of measuring competitiveness and that the National Competitiveness Council employs more than 100 competitiveness indicators in its annual reports,O’Brien then devotes most of the rest of his article to the old diehards – prices and labour costs.
Irish economists have an extraordinary tendency to rely on the EU’s harmonised index of consumer prices (HICP) as a measure of competitiveness, even though its relevance to Ireland’s export competitiveness is not immediately obvious – it is hard to see what bearing the price of a meal or a CD player has on the competitiveness of the organic chemicals or software sectors. Nevertheless, O’Brien regards the fact that Ireland’s HICP fell relative to the rest of the EU between late 2008 and early 2010 as evidence of Ireland “regaining” competitiveness.
O’Brien then suggests that trends in economy-wide unit labour costs (the ratio of wages to net output) are a better indication of Ireland’s improved competitiveness. However, the fact is that the vast majority of the Irish workforce are not engaged in export activity and, again, it is hard to see how the unit labour costs of a waitress or CD player salesperson have a bearing on the competitiveness of the main export sectors identified above. While Ireland’s economy-wide unit labour costs have tended to rise relative to the rest of the EU over the last ten years, the opposite has been the case in unit labour costs in manufacturing, the great bulk of whose output is exported. Yet, while the latter are to be found in the same page in the OECD website as the former, they are rarely, if ever, quoted by Irish economists.
There are no comparable data for export services, but the Forfás Economic Impact surveys indicate that payroll costs as a proportion of value added in foreign-owned export services (which account for 95% of the total) fell from 19% in 2000 to 9% in 2008 – a fall of over 50% in unit labour costs.
This is not to say that labour costs are important (never mind crucial) in the competitiveness of Ireland’s main export sectors. If general labour costs were a key determinant of competitiveness, then one should expect exports in all sectors to be influenced by labour cost trends. However, Ireland’s main export sectors have been very variable in their export performance, and there is no evidence that this variability has been influenced in any way by labour cost trends. Between 2000-2006 (the last year for which the relevant data are available), the chemicals & pharmaceuticals sector experienced volume output growth of 50%, despite a rise of 50% in the share of costs accounted for by pay (up from 12.6% to 18%). In the electronic components sector, there was a more modest rise in the labour share of costs from a lower base (up from 13.1% to 16.4%) yet production volume fell by 7%. In the office machines and computers sector, a fall in labour’s already very low share of total costs (down from 4.1% to 3.5%) produced volume growth of 22% - much more modest than that experienced by chemicals & pharmaceuticals.
The key point is that the idea of Ireland Inc. gaining or losing competitiveness is meaningless. Ireland’s exports are dominated by a small number of sectors whose characteristics are extremely varied and whose export performances are equally varied. Adding up these performances and then concluding from the total that Ireland is becoming more or less competitive is pointless. Over the last ten years Ireland has experienced strong export growth in a range of export services, and in pharmaceuticals and medical devices, modest growth in chemicals, and, overall, a sharp fall in exports of electronics hardware. A wide range of factors account for this export variability, of which labour costs play, at most, a minor role. In compiling its Global Competitiveness Index, the World Economic Forum employes no less than 113 quantitative criteria; in Ireland’s case labour cost factors account for less than two per cent of the total value of the competitiveness index.
The economists’ disconnect from the real world is nicely demonstrated from a passage towards the end of Dan O’Brien’s article. Referring to evidence that average productivity in Ireland has been raised by the collapse of the low-productivity construction sector, he suggested as an example that “a bricklayer produces less than the average assembly-line worker or office drone (sic)”. Productivity in the construction industry is indeed low when compared with manufacturing or business services, but O’Brien’s choice of bricklayers for his example was surely unfortunate. Assuming that earnings bear some relationship to productivity, in 2006, when industrial production workers were earning €601 per week, clerical and secretarial workers €540 and administrative civil servants €819, the average weekly earnings of all skilled construction workers came to €877 and there was one report of bricklayers at that stage earning over €3000 per week! The company making these payments was also reportedly paying its Turkish labourers €2.50 per hour. They might have been a better choice for O’Brien’s example.
Thursday, 6 January 2011
Breaking our arms
Michael Taft: Before we break our arms from patting ourselves on the back over our export growth, let’s take a fact break. Clearly, Irish exports grew by a greater amount than the Government expected. In December 2009, they predicted exports would grow by only 0.4 per cent. It looks like they will come in at a growth of around 6 per cent or so. Words like ‘strong’, ‘robust’, ‘resilient’, etc. have been thrown around with abandon.
Well, in comparison with previous projections it is all those things. But let’s leave our little island world and the associated little island commentary for a moment and look at the wider European landscape. Irish export growth is hardly anything to talk about – indeed, it looks rather anaemic (and credit to Rory O’Farrell for spotting this).
Eurostat has recently published the latest data on EU goods exports. It compares non-seasonally adjusted, export growth between the first three quarters of 2009 and 2010. What does it find?
• Ireland: 2 per cent
• EU-27 average: 18 per cent
• EU-15 average: 13 per cent
In the first three quarters of this year, average goods export growth in the EU greatly outstripped Irish growth.
Of course, this could be a result of bounce-back. For in 2009 most EU countries took a severe export hit as a result of the fall in global demand. Ireland didn’t. However, if we take a longer perspective – from the eve of recession to the present - Irish goods exports don’t look especially resilient. Comparing the three-year period from the first three quarters in 2007 to 2010 we find:
• Ireland: - 1.6 per cent
• EU-27 average: -1.2 per cent
• EU-15 average: - 4.6 per cent
While Ireland held up better than most other EU-15 countries, for the EU as a whole we came in about average. And if current trends continue, we may find ourselves falling behind our EU partners – only just hanging in there courtesy of a modern multinational sector which is only tangentially connected to the rest of the economy.
None of this is to gainsay the benefits of export growth. However, it is about ensuring that we put things into perspective – a pre-condition to the next step which is to more closely examine what is going in our export markets and determine how beneficial it will be to the Irish economy.
Well, in comparison with previous projections it is all those things. But let’s leave our little island world and the associated little island commentary for a moment and look at the wider European landscape. Irish export growth is hardly anything to talk about – indeed, it looks rather anaemic (and credit to Rory O’Farrell for spotting this).
Eurostat has recently published the latest data on EU goods exports. It compares non-seasonally adjusted, export growth between the first three quarters of 2009 and 2010. What does it find?
• Ireland: 2 per cent
• EU-27 average: 18 per cent
• EU-15 average: 13 per cent
In the first three quarters of this year, average goods export growth in the EU greatly outstripped Irish growth.
Of course, this could be a result of bounce-back. For in 2009 most EU countries took a severe export hit as a result of the fall in global demand. Ireland didn’t. However, if we take a longer perspective – from the eve of recession to the present - Irish goods exports don’t look especially resilient. Comparing the three-year period from the first three quarters in 2007 to 2010 we find:
• Ireland: - 1.6 per cent
• EU-27 average: -1.2 per cent
• EU-15 average: - 4.6 per cent
While Ireland held up better than most other EU-15 countries, for the EU as a whole we came in about average. And if current trends continue, we may find ourselves falling behind our EU partners – only just hanging in there courtesy of a modern multinational sector which is only tangentially connected to the rest of the economy.
None of this is to gainsay the benefits of export growth. However, it is about ensuring that we put things into perspective – a pre-condition to the next step which is to more closely examine what is going in our export markets and determine how beneficial it will be to the Irish economy.
Thursday, 23 December 2010
How good is our export performance?
Rory O'Farrell: The government's policy (its probably overly generous to call it a policy, more the rationale give for their various mistakes) is to increase employment through exports. The government is going all out to promote the idea that exports are booming, (for example, look here).
Unfortunately, the truth is different.
The latest data from the CSO (available here) shows an improvement in our trade surplus. This is necessary to repay all the debt the country has borrowed (public and private). I previously explained the importance of the current account here. However the latest figures show the improvement is purely due to a drop in imports. This isn't necessarily a bad thing. For example substituting Belgian Leonidas chocolates with much tastier Gallweys' chocolates from Waterford will reduce imports and increase employment. What is a bad thing however is that (seasonally adjusted) exports have dropped 2% in October. Exports peaked in July, and have not recovered.
Exports in other countries decreased by more than ours during the recession, so the 'resilience' of our exports is an achievement. Also, there was a bounce as exports recovered from their decrease following the financial crisis. However, if we are really gaining competitiveness one would expect exports to grow along with the economies of our trading partners. Also (seasonally adjusted) exports were actually higher in March 2007, despite prices being far higher then.
The folly of cutting infrastructure spending is shown by the stagnation of our exports. Even if wages are cut, firms will not be attracted to one of the wettest countries in Europe where they turn off the water supply at 7pm. Why pay someone €7.65 to mop the floors when they can't get a bucket of water?
UPDATE: I've come across some new data from Eurostat (available here). It compares the growth in exports between the periods Jan-Sept 2009 and Jan-Sept 2010. Worryingly, with the exception of Luxembourg, Ireland is the worst performer.
Unfortunately, the truth is different.
The latest data from the CSO (available here) shows an improvement in our trade surplus. This is necessary to repay all the debt the country has borrowed (public and private). I previously explained the importance of the current account here. However the latest figures show the improvement is purely due to a drop in imports. This isn't necessarily a bad thing. For example substituting Belgian Leonidas chocolates with much tastier Gallweys' chocolates from Waterford will reduce imports and increase employment. What is a bad thing however is that (seasonally adjusted) exports have dropped 2% in October. Exports peaked in July, and have not recovered.
Exports in other countries decreased by more than ours during the recession, so the 'resilience' of our exports is an achievement. Also, there was a bounce as exports recovered from their decrease following the financial crisis. However, if we are really gaining competitiveness one would expect exports to grow along with the economies of our trading partners. Also (seasonally adjusted) exports were actually higher in March 2007, despite prices being far higher then.
The folly of cutting infrastructure spending is shown by the stagnation of our exports. Even if wages are cut, firms will not be attracted to one of the wettest countries in Europe where they turn off the water supply at 7pm. Why pay someone €7.65 to mop the floors when they can't get a bucket of water?
UPDATE: I've come across some new data from Eurostat (available here). It compares the growth in exports between the periods Jan-Sept 2009 and Jan-Sept 2010. Worryingly, with the exception of Luxembourg, Ireland is the worst performer.
Tuesday, 16 November 2010
Anthony Leddin on Ireland's export competitiveness
Proinnsias Breathnach: Last Friday’s Irish Times (November 12) contained an article by Dr Anthony Leddin, Head of the Department of Economics at the University of Limerick, which raises further serious questions about the quality of advice on economic policy emanating from Irish academic economists.
The basic thrust of the article was that Ireland’s international competitiveness declined seriously for most of the 2000s due mainly to rising costs, but that a fall in costs and wage restraint since 2007 helped reverse this trend. Leddin concludes that a deflationary budget, through further containing wage and other costs, will work to Ireland’s long-term advantage by enhancing competitiveness.
Leddin cites trends in what he terms net exports (i.e. exports minus imports) in support of his argument. He states that net exports fell from a surplus of €226 millions in 1999 to a deficit of €10.124 billions in 2007 (reflecting falling competitiveness) but then recovered to a deficit of €4.85 billions in 2009 (indicating improving competitiveness).
Even if these data were accurate, they would indicate a highly unlikely speed of response on the part of trade volumes to changes in costs. However, much more seriously, not only are the data inaccurate, but the trends derived from the data are the opposite of actual trends in net exports. In 1999, according to CSO Balance of International Payments data, total exports of goods and services exceeded imports by €12 billions, not the €226 millions claimed by Leddin. Between 1999 and 2007, the excess of exports over imports increased by €6.7 billions (to €18.7 billions), directly contrary to the fall of €10.3 billions postulated by Leddin.
Over the next two years Ireland’s trade surplus grew by a further €9 billions to €27.7 billions (according to Leddin there was a deficit of €4.85 billions in 2009).
The data cited by Leddin refer, not to net exports, but the so-called “balance on current account” which includes not only net flows of export revenues but also net flows in factor income and transfer payments. By far the biggest component of the latter elements is net direct investment income i.e. income earned by transnational firms from overseas operations.
In 1999, the net outflow of direct investment income came to €13.5 millions, which exceeded the trade surplus. However, a surplus in other investment income gave a small surplus in the overall current account of €226 millions which is the figure given by Leddin for the trade surplus. By 2007 the net outflow in direct investment income had doubled to €26.3 billions, €7.7 billions greater than the trade surplus. Deficits in transfer payments and other income flows produced the overall current account deficit of €10.1 billions which Leddin presented as the trade deficit.
Over the next two years the net outlow of direct investment income rose by €2.6 billions but a much sharper rise in the trade surplus (of €9 billions) produced the substantial fall in the current account deficit which Leddin presented as a fall in the trade deficit.
Overall, therefore, where Leddin claimed that Ireland’s net exports fell by €10.4 billions between 1999-2007, they actually rose by €6.7 billions. This, of itself, undermines Leddin’s argument that Ireland’s competitiveness deteriorated in this period. Indeed, the key factor in the difference between Leddin’s purported net export data and the true position, i.e. rapid growth in the net outflow direct investment income, is itself an indicator of rising rather than falling competitiveness, to the extent that it reflects rising profitability among foreign firms based in Ireland.
It is shocking that a senior academic economist would make such a glaring mistake in the presentation of basic macroeconomic data. What is more disturbing is that this is just the latest instance of misinterpretation (or non-interpretation) of data by a wide range of economists in support of an erroneous view that Ireland’s competitiveness was undermined in the first decade of the current century. I have already refuted this view in some detail in a series of articles on the Ireland After Nama website (May 2010).
Almost unanimously, these economists further attribute this postulated loss of competitiveness for the most part to rising labour costs (itself not true, at least insofar as it applies to Ireland’s main export sectors). The idea that international competitiveness is primarily dictated by labour costs is extraordinarily simplistic (and of course untrue, at least for the markets in which Ireland participates).
What is even more extraordinary is how widely held this idea is among Irish economists. It is a view very firmly held, for example, by Alan Aherne, Brian Lenihan’s economic advisor who wrote in the Sunday Tribune (January 11, 2009) that “if we are to regain competitiveness, we have to do it the difficult way – through wage cuts” and followed this up on RTE’s Morning Ireland programme (January 19, 2009) with the view that “the only way to improve export competitiveness is through wage cuts in the export sector”.
This immediately rules out enhanced productivity, design and performance improvement, technological upgrading, marketing and branding, to mention just a few of the standard approaches used by firms to improve market share in the real world. If the Irish government’s economic policy is based on views and analyses of the level of accuracy and sophistication indicated here, then there really is little hope for us at all.
The basic thrust of the article was that Ireland’s international competitiveness declined seriously for most of the 2000s due mainly to rising costs, but that a fall in costs and wage restraint since 2007 helped reverse this trend. Leddin concludes that a deflationary budget, through further containing wage and other costs, will work to Ireland’s long-term advantage by enhancing competitiveness.
Leddin cites trends in what he terms net exports (i.e. exports minus imports) in support of his argument. He states that net exports fell from a surplus of €226 millions in 1999 to a deficit of €10.124 billions in 2007 (reflecting falling competitiveness) but then recovered to a deficit of €4.85 billions in 2009 (indicating improving competitiveness).
Even if these data were accurate, they would indicate a highly unlikely speed of response on the part of trade volumes to changes in costs. However, much more seriously, not only are the data inaccurate, but the trends derived from the data are the opposite of actual trends in net exports. In 1999, according to CSO Balance of International Payments data, total exports of goods and services exceeded imports by €12 billions, not the €226 millions claimed by Leddin. Between 1999 and 2007, the excess of exports over imports increased by €6.7 billions (to €18.7 billions), directly contrary to the fall of €10.3 billions postulated by Leddin.
Over the next two years Ireland’s trade surplus grew by a further €9 billions to €27.7 billions (according to Leddin there was a deficit of €4.85 billions in 2009).
The data cited by Leddin refer, not to net exports, but the so-called “balance on current account” which includes not only net flows of export revenues but also net flows in factor income and transfer payments. By far the biggest component of the latter elements is net direct investment income i.e. income earned by transnational firms from overseas operations.
In 1999, the net outflow of direct investment income came to €13.5 millions, which exceeded the trade surplus. However, a surplus in other investment income gave a small surplus in the overall current account of €226 millions which is the figure given by Leddin for the trade surplus. By 2007 the net outflow in direct investment income had doubled to €26.3 billions, €7.7 billions greater than the trade surplus. Deficits in transfer payments and other income flows produced the overall current account deficit of €10.1 billions which Leddin presented as the trade deficit.
Over the next two years the net outlow of direct investment income rose by €2.6 billions but a much sharper rise in the trade surplus (of €9 billions) produced the substantial fall in the current account deficit which Leddin presented as a fall in the trade deficit.
Overall, therefore, where Leddin claimed that Ireland’s net exports fell by €10.4 billions between 1999-2007, they actually rose by €6.7 billions. This, of itself, undermines Leddin’s argument that Ireland’s competitiveness deteriorated in this period. Indeed, the key factor in the difference between Leddin’s purported net export data and the true position, i.e. rapid growth in the net outflow direct investment income, is itself an indicator of rising rather than falling competitiveness, to the extent that it reflects rising profitability among foreign firms based in Ireland.
It is shocking that a senior academic economist would make such a glaring mistake in the presentation of basic macroeconomic data. What is more disturbing is that this is just the latest instance of misinterpretation (or non-interpretation) of data by a wide range of economists in support of an erroneous view that Ireland’s competitiveness was undermined in the first decade of the current century. I have already refuted this view in some detail in a series of articles on the Ireland After Nama website (May 2010).
Almost unanimously, these economists further attribute this postulated loss of competitiveness for the most part to rising labour costs (itself not true, at least insofar as it applies to Ireland’s main export sectors). The idea that international competitiveness is primarily dictated by labour costs is extraordinarily simplistic (and of course untrue, at least for the markets in which Ireland participates).
What is even more extraordinary is how widely held this idea is among Irish economists. It is a view very firmly held, for example, by Alan Aherne, Brian Lenihan’s economic advisor who wrote in the Sunday Tribune (January 11, 2009) that “if we are to regain competitiveness, we have to do it the difficult way – through wage cuts” and followed this up on RTE’s Morning Ireland programme (January 19, 2009) with the view that “the only way to improve export competitiveness is through wage cuts in the export sector”.
This immediately rules out enhanced productivity, design and performance improvement, technological upgrading, marketing and branding, to mention just a few of the standard approaches used by firms to improve market share in the real world. If the Irish government’s economic policy is based on views and analyses of the level of accuracy and sophistication indicated here, then there really is little hope for us at all.
Sunday, 26 September 2010
Reading the fine print in export figures
Michael Taft: There was some cheer when the goods export figures were released on Friday. The Irish Times’ was positively bullish: ‘Strong growth in exports signals continuing recovery’.
But, like a contract that reads too good to be true, it is always helpful to read the fine print or, in the case of goods exports, the detailed tables.
On the surface, it certainly does look positive. The value of exports rose, from a low in December last year, by €1.85 billion, or nearly 32 percent up to June this year. This, along with service exports, is what is driving our GDP (even in the recent 2nd quarterly National Accounts, which saw a seasonable dip in real GDP, total exports rose by 7.6 percent over the 1st quarter).
There is a problem, however. This export growth is completely lop-sided. Exports from the Chemical sector made up 88.7 percent of the net increase. The value of exports rose, from December to June by:
Chemicals / Pharmaceuticals: 58.2 percent
All Sectors excluding Chem/Pharm: 6.9 percent
Our manufacturing exports – and, so, our GDP - is being driven largely by one sector only.
This may not be a problem (and there’s always a problem in over-relying on one sector for growth) given that other indicators are impacted positively, namely employment. If history is any guide, however, the impact will be negligible.
Between 2000 and 2007, Chem/Pharm exports increased by nearly €16 billion, or nearly 60 percent. However, employment remained static, rising by just 300. While there might be some short-term bump from increased Chem/Pharm exports, in the medium-term we shouldn’t expect a significant job increase in this capital-intensive sector.
Again, this might not be a problem if there was a strong linkage between increased production and exports, and domestic firms sourcing into the sector. As production is ramped up to meet new export orders, the Chem/Pharm sector will be purchasing more goods, or inputs, to create their products.
The problem is that there is almost no linkage between the Chem/Pharm sector and the rest of the economy. 85 percent of inputs in the Chem/Pharm sector are imported. In other words, increased exports may create jobs downstream – but in other countries, not in Ireland.
We should be grateful that exports sectors are growing (better than contracting). But we should also be mindful of the details, the sectors and the larger economic impact. Even the Department of Finance has accepted that GDP driven by net export growth will not be tax-rich. If it is located in capital-intensive sectors which import most of their inputs, it won’t be job-rich either.
But there’s one more brain-twister. If the composition of the current export growth will have only a limited impact on the economy, we still have to ask: to what extent is even that growth real or fictional?
I’ll follow up that question in the next post.
But, like a contract that reads too good to be true, it is always helpful to read the fine print or, in the case of goods exports, the detailed tables.
On the surface, it certainly does look positive. The value of exports rose, from a low in December last year, by €1.85 billion, or nearly 32 percent up to June this year. This, along with service exports, is what is driving our GDP (even in the recent 2nd quarterly National Accounts, which saw a seasonable dip in real GDP, total exports rose by 7.6 percent over the 1st quarter).
There is a problem, however. This export growth is completely lop-sided. Exports from the Chemical sector made up 88.7 percent of the net increase. The value of exports rose, from December to June by:
Chemicals / Pharmaceuticals: 58.2 percent
All Sectors excluding Chem/Pharm: 6.9 percent
Our manufacturing exports – and, so, our GDP - is being driven largely by one sector only.
This may not be a problem (and there’s always a problem in over-relying on one sector for growth) given that other indicators are impacted positively, namely employment. If history is any guide, however, the impact will be negligible.
Between 2000 and 2007, Chem/Pharm exports increased by nearly €16 billion, or nearly 60 percent. However, employment remained static, rising by just 300. While there might be some short-term bump from increased Chem/Pharm exports, in the medium-term we shouldn’t expect a significant job increase in this capital-intensive sector.
Again, this might not be a problem if there was a strong linkage between increased production and exports, and domestic firms sourcing into the sector. As production is ramped up to meet new export orders, the Chem/Pharm sector will be purchasing more goods, or inputs, to create their products.
The problem is that there is almost no linkage between the Chem/Pharm sector and the rest of the economy. 85 percent of inputs in the Chem/Pharm sector are imported. In other words, increased exports may create jobs downstream – but in other countries, not in Ireland.
We should be grateful that exports sectors are growing (better than contracting). But we should also be mindful of the details, the sectors and the larger economic impact. Even the Department of Finance has accepted that GDP driven by net export growth will not be tax-rich. If it is located in capital-intensive sectors which import most of their inputs, it won’t be job-rich either.
But there’s one more brain-twister. If the composition of the current export growth will have only a limited impact on the economy, we still have to ask: to what extent is even that growth real or fictional?
I’ll follow up that question in the next post.
Thursday, 19 August 2010
Holidaying in the financial sector
Michael Taft: Conor McCabe has produced an interesting and potentially disturbing set of figures over on Dublin Opinion. Based on World Trade Organisation data, he compares the exports per worker in the financial sector in the following countries:
Spain: $23,398
Italy: $15,492
Netherlands: $38,182
The figure for Ireland is, however, an astronomical $367,033. He goes on to ask whether these figures are based on a fiction – the same fiction we were fed only a few year ago:
‘Do you remember holiday homes? How every single unsold house in Ireland was a holiday home so there was nothing to worry about? That there was no bubble? In fact, we should keep on buying homes at inflated prices because there were no inflated prices? All those reports in the newspapers, all that property porn on RTE? We were told not to worry, that the purchases were real?’
So are the figures for Irish service exports this year’s holiday homes? We have to be cautious. One explanation could be that the Irish financial sector is more export-oriented than other EU countries which are dominated by home market activities – especially considering the presence of our IFSC. Still, an export of more than 10 times per other EU workers seems a tad on the high side.
The issue isn’t academic. If we are to have an ‘export-led recovery’ we must be confident that we can accurately measure those exports and that such measurements are robust enough to base future policy on. This calls for a critical approach that goes beyond the surface of headline figures. Are there other ways to compare our financial sector with other EU countries? Yes, courtesy of the EU Klems database. These comparisons mirror Conor’s figures:
We see that value-added per labour hour in the Irish financial sector is over 150 percent that of the Eurozone average; gross output is over 160 percent; while capital compensation – or profits (gross operating surplus) – is 250 percent of Eurozone average. Are these numbers credible? Or are we picking up something else – namely, transfer pricing activities (whereby the profits generated in other countries are counted as part of our GDP)?
Even if these numbers are capturing real economic activity, there are other reasons to be cautious about what the Central Bank Governor calls the ‘dynamism of Irish exports’. According to the CSO, financial/insurance exports increased by 47 percent between 2003 and 2007. During that same period employment increased by 17,000 jobs – or 4,250 on average.
The question is, will these exports return to that growth – a growth stimulated by a regime of financialisation that now seems like from another age; an age not plagued by credit constraints and substantial deleveraging? If anything, we may be heading into a period of considerable employment contraction if the IBOA’s fears are even partially realised.
And that’s if the exports figures are all above board.
Conor has opened up a new area of investigation and consideration. It’s about time we took a cold, hard look at some of the platitudes and easy assertions that pass for informed comment. Otherwise, we may end up with more empty assets, bankrupt policies and a future where recovery is statistical only.
Spain: $23,398
Italy: $15,492
Netherlands: $38,182
The figure for Ireland is, however, an astronomical $367,033. He goes on to ask whether these figures are based on a fiction – the same fiction we were fed only a few year ago:
‘Do you remember holiday homes? How every single unsold house in Ireland was a holiday home so there was nothing to worry about? That there was no bubble? In fact, we should keep on buying homes at inflated prices because there were no inflated prices? All those reports in the newspapers, all that property porn on RTE? We were told not to worry, that the purchases were real?’
So are the figures for Irish service exports this year’s holiday homes? We have to be cautious. One explanation could be that the Irish financial sector is more export-oriented than other EU countries which are dominated by home market activities – especially considering the presence of our IFSC. Still, an export of more than 10 times per other EU workers seems a tad on the high side.
The issue isn’t academic. If we are to have an ‘export-led recovery’ we must be confident that we can accurately measure those exports and that such measurements are robust enough to base future policy on. This calls for a critical approach that goes beyond the surface of headline figures. Are there other ways to compare our financial sector with other EU countries? Yes, courtesy of the EU Klems database. These comparisons mirror Conor’s figures:
We see that value-added per labour hour in the Irish financial sector is over 150 percent that of the Eurozone average; gross output is over 160 percent; while capital compensation – or profits (gross operating surplus) – is 250 percent of Eurozone average. Are these numbers credible? Or are we picking up something else – namely, transfer pricing activities (whereby the profits generated in other countries are counted as part of our GDP)?
Even if these numbers are capturing real economic activity, there are other reasons to be cautious about what the Central Bank Governor calls the ‘dynamism of Irish exports’. According to the CSO, financial/insurance exports increased by 47 percent between 2003 and 2007. During that same period employment increased by 17,000 jobs – or 4,250 on average.
The question is, will these exports return to that growth – a growth stimulated by a regime of financialisation that now seems like from another age; an age not plagued by credit constraints and substantial deleveraging? If anything, we may be heading into a period of considerable employment contraction if the IBOA’s fears are even partially realised.
And that’s if the exports figures are all above board.
Conor has opened up a new area of investigation and consideration. It’s about time we took a cold, hard look at some of the platitudes and easy assertions that pass for informed comment. Otherwise, we may end up with more empty assets, bankrupt policies and a future where recovery is statistical only.
Thursday, 8 July 2010
GDP Growth and Government Policy
Nat O'Connor: The Minister for Finance is celebrating GDP growth of 2.7 per cent in the first quarter of 2010 as evidence of the success of Government's policies (Irish Times). This is based on the latest CSO Quarterly National Accounts figures (30 June 2010). The Minister is reported to have said "our plan is working" and "we must stick to it" (RTÉ). However, there is a lot of evidence that this growth is happening despite, not because of Government policy. And in fact, the more common comparison made between GDP with the same quarter of the previous year shows that GDP has gone down by 0.7 per cent (which is the headline statistic used by the CSO in 2008 and 2009).
In the CSO's Quarterly National Accounts (QNA), when you compare GDP in the first quarters of 2009 and 2010, the 2010 figure is €300 million lower (a decrease of 0.7 per cent year-on-year). In fairness to the CSO, the comparison of Q1 2010 with Q4 2009 is relevant to the question of whether Ireland has technically come out of recession (i.e. quarter-on-quarter growth for two quarters in a row) and it is used internationally. But we should be cautious about switching too much attention away from the continuing (albeit slowing) year-on-year decline of GDP. Likewise, more attention should be paid to the significant fall in GNP of 4.2 per cent, compared to Q1 2009.
But to return to the composition of GDP? Where is 'growth' happening? Let's look at Table 5 in the QNA, which compares Q1 2010 with Q4 2009 (which is where the 2.7 per cent growth figures arises):
Personal consumption is down: -1.1 per cent.
Government current expenditure is down: -0.9 per cent.
Capital formation is down: -11.0 per cent.
Exports are up: 9.0 per cent.
Imports are also up: 3.6 per cent.
We can match up certain Government policies with some of these factors. Personal consumption is down because of jobs losses, pay cuts and increased taxes; i.e. people have less money to spend and have less confidence in the economy. This may also increase imports, as people turn to cheaper imported goods. Imports were boosted by the Government's car scrappage scheme, which must have led to leakage, since we don't make cars in Ireland (in fact, we imported €422 million in road vehicles in Q1 2010 compared to €325 million in Q1 2009).
Government current expenditure is down through cuts. Some of this may be inevitable given the crisis in tax revenue. However, the massive decrease in capital formation (i.e. investment in the physical stuff like roads, factories, etc. that will lead to future economic development) can be parked at the Government's door through the massive cutting of capital investment programmes, whereas the social partners are united in calling for state-led investment (e.g. IBEC, ICTU and others).
But what about exports?
The Government's claim is that wage cuts are making Ireland's exports more competitive. This has already be dealt with comprehensively on this blog here, here and here. At any rate, Government policy can only take credit for cutting public sector wages, which lowered consumption and raised personal debt relative to incomes, while having negligible impact on exports.
Ireland's exports in Q1 2010 are composed of €20.4 billion in merchandise and €16.6 billion in services (CSO, Balance of International Payments).
The CSO's External Trade figures gives a breakdown of Ireland's trade for Q1 2010 compared to Q1 2009. (We don't have the same detailed data available for just Q1 2010 v Q4 2009, so we are again looking at the year-on-year picture).
The top four account for 90% of exported commodities:
- Chemicals and related products (€12.2 billion, 59% of exported commodities) down over €450 million
- Machinery and transport equipment (€2.6 billion, 12%) down €1,200 million (includes nearly €800 less exports of office machines and computers)
- Misc manufactured articles (€2.4 billion, 12%) up €120 million
- Food and live animals (€1.5 billion, 7%) up €31 million
There is no clear evidence here to suggest the Government's plan is "working". Exports are still down by 5 per cent (over €1.1 billion) year-on-year. Deflation may have benefitted miscellaneous manufacturing, yet even within this sector only four out of nine sub-headings are up (Table 3, Section 8).
As for service exports, the CSO figures show that the biggest ones are: computer services (€6.3 billion), business services (€5.1 billion), insurance (€2.1 billion) and financial services (€1.4 billion). About a third of all service exports are IFSC. Overall, services are up €1.1 billion compared to Q1 2009. Computer services seems to be the most important sector here as we have relatively low imports, whereas we imported €2 billion more in business services than we exported.
What exactly is the Government's "plan" to boost services? Many of the big players in computer services, like Google and Microsoft, are concerned with quality infrastructure and quality of life to attract high-end staff. Wage deflation does not help them.
For example, the American Chamber of Commerce in Ireland stated in its Pre-Budget Submission that "Ireland continues to face increasing competition from lower cost economies for FDI. However, its sustained commitment to investment in knowledge and physical infrastructure is successfully transforming our economic aspiration to develop a credible base of industry that is underpinned by research excellence and innovation, and is supported by world class infrastructure."
Similarly in its May 2010 statement: "the decision by EA Games [to locate in Galway] is a testament to the educated and skilled workforce in Ireland's western region. Galway offers a readily available pool of talent, global market access and vastly improved physical infrastructure. EA's arrival will act as a boost to the local economy".
Intel's general manager in Ireland has also spoken about the need for digital infrastructure "right around the country" and Government policy that supports "a strong base of well-educated young people".
Undoubtedly, Ireland's tax policies are attractive to some of our major exporters. But where is the Government's "sustained commitment to investment in knowledge and physical infrastructure"? The Government's current policy of disinvestment in infrastructure and public services, without any plan for how we will develop them in the medium-term, is a major disincentive to knowledge-based companies, like computer services.
Where is Ireland's "educated and skilled workforce"? They are emigrating, if they are among those people identified by the OECD when it stated that "Ireland's recovery will not be vigorous enough to re-employ the 174,000 people who have lost their jobs." (RTÉ)
In the high emigration era of the 1980s, the Minister for Finance's late father, then Minister for Foreign Affairs, remarked that "We can't all live on a small island". There can be no doubt that emigration is still being used as some kind of 'safety valve' for the sake of GDP growth. As people emigrate, this lessens the pressure on social welfare payments, plus it artificially lowers the number of people counted on the live register, despite that fact that it is at its highest level ever at 444,900 in June (277,400 unemployed, the remainder working part-time).
Yet there is plenty of room on the island for a lot more people to live in prosperity. Ireland has a total population of 4.3 million, living on c. 70,000 sq km (island total: 6.1 million people on 85,000 sq km). For comparison, the island of Sri Lanka, in the Indian Ocean, has a population of 21.5 million on less than 66,000 sq km.
In order to develop a social and economic infrastructure that supports more people to live in Ireland, this requires a strategy to build up the physical and knowledge infrastructure in a way that will boost sustainable jobs. However, the Government's plan offers nothing to the tens of thousands of our best-educated young people who are likely to emigrate, despite the preference of many to build their lives here. The Government could have stimulated growth and softened the landing for some people working in construction by a targetted investment in vital infrastructure, which in turn would have incentivised private investment in Ireland, but they chose not to.
All governments need to face the fact that many factors in the economy are outside of their control, including a number of the reasons for Ireland's economic growth. Our current policy-makers have to go further and recognise that their "plan" is part of the problem, not the solution.
In the CSO's Quarterly National Accounts (QNA), when you compare GDP in the first quarters of 2009 and 2010, the 2010 figure is €300 million lower (a decrease of 0.7 per cent year-on-year). In fairness to the CSO, the comparison of Q1 2010 with Q4 2009 is relevant to the question of whether Ireland has technically come out of recession (i.e. quarter-on-quarter growth for two quarters in a row) and it is used internationally. But we should be cautious about switching too much attention away from the continuing (albeit slowing) year-on-year decline of GDP. Likewise, more attention should be paid to the significant fall in GNP of 4.2 per cent, compared to Q1 2009.
But to return to the composition of GDP? Where is 'growth' happening? Let's look at Table 5 in the QNA, which compares Q1 2010 with Q4 2009 (which is where the 2.7 per cent growth figures arises):
Personal consumption is down: -1.1 per cent.
Government current expenditure is down: -0.9 per cent.
Capital formation is down: -11.0 per cent.
Exports are up: 9.0 per cent.
Imports are also up: 3.6 per cent.
We can match up certain Government policies with some of these factors. Personal consumption is down because of jobs losses, pay cuts and increased taxes; i.e. people have less money to spend and have less confidence in the economy. This may also increase imports, as people turn to cheaper imported goods. Imports were boosted by the Government's car scrappage scheme, which must have led to leakage, since we don't make cars in Ireland (in fact, we imported €422 million in road vehicles in Q1 2010 compared to €325 million in Q1 2009).
Government current expenditure is down through cuts. Some of this may be inevitable given the crisis in tax revenue. However, the massive decrease in capital formation (i.e. investment in the physical stuff like roads, factories, etc. that will lead to future economic development) can be parked at the Government's door through the massive cutting of capital investment programmes, whereas the social partners are united in calling for state-led investment (e.g. IBEC, ICTU and others).
But what about exports?
The Government's claim is that wage cuts are making Ireland's exports more competitive. This has already be dealt with comprehensively on this blog here, here and here. At any rate, Government policy can only take credit for cutting public sector wages, which lowered consumption and raised personal debt relative to incomes, while having negligible impact on exports.
Ireland's exports in Q1 2010 are composed of €20.4 billion in merchandise and €16.6 billion in services (CSO, Balance of International Payments).
The CSO's External Trade figures gives a breakdown of Ireland's trade for Q1 2010 compared to Q1 2009. (We don't have the same detailed data available for just Q1 2010 v Q4 2009, so we are again looking at the year-on-year picture).
The top four account for 90% of exported commodities:
- Chemicals and related products (€12.2 billion, 59% of exported commodities) down over €450 million
- Machinery and transport equipment (€2.6 billion, 12%) down €1,200 million (includes nearly €800 less exports of office machines and computers)
- Misc manufactured articles (€2.4 billion, 12%) up €120 million
- Food and live animals (€1.5 billion, 7%) up €31 million
There is no clear evidence here to suggest the Government's plan is "working". Exports are still down by 5 per cent (over €1.1 billion) year-on-year. Deflation may have benefitted miscellaneous manufacturing, yet even within this sector only four out of nine sub-headings are up (Table 3, Section 8).
As for service exports, the CSO figures show that the biggest ones are: computer services (€6.3 billion), business services (€5.1 billion), insurance (€2.1 billion) and financial services (€1.4 billion). About a third of all service exports are IFSC. Overall, services are up €1.1 billion compared to Q1 2009. Computer services seems to be the most important sector here as we have relatively low imports, whereas we imported €2 billion more in business services than we exported.
What exactly is the Government's "plan" to boost services? Many of the big players in computer services, like Google and Microsoft, are concerned with quality infrastructure and quality of life to attract high-end staff. Wage deflation does not help them.
For example, the American Chamber of Commerce in Ireland stated in its Pre-Budget Submission that "Ireland continues to face increasing competition from lower cost economies for FDI. However, its sustained commitment to investment in knowledge and physical infrastructure is successfully transforming our economic aspiration to develop a credible base of industry that is underpinned by research excellence and innovation, and is supported by world class infrastructure."
Similarly in its May 2010 statement: "the decision by EA Games [to locate in Galway] is a testament to the educated and skilled workforce in Ireland's western region. Galway offers a readily available pool of talent, global market access and vastly improved physical infrastructure. EA's arrival will act as a boost to the local economy".
Intel's general manager in Ireland has also spoken about the need for digital infrastructure "right around the country" and Government policy that supports "a strong base of well-educated young people".
Undoubtedly, Ireland's tax policies are attractive to some of our major exporters. But where is the Government's "sustained commitment to investment in knowledge and physical infrastructure"? The Government's current policy of disinvestment in infrastructure and public services, without any plan for how we will develop them in the medium-term, is a major disincentive to knowledge-based companies, like computer services.
Where is Ireland's "educated and skilled workforce"? They are emigrating, if they are among those people identified by the OECD when it stated that "Ireland's recovery will not be vigorous enough to re-employ the 174,000 people who have lost their jobs." (RTÉ)
In the high emigration era of the 1980s, the Minister for Finance's late father, then Minister for Foreign Affairs, remarked that "We can't all live on a small island". There can be no doubt that emigration is still being used as some kind of 'safety valve' for the sake of GDP growth. As people emigrate, this lessens the pressure on social welfare payments, plus it artificially lowers the number of people counted on the live register, despite that fact that it is at its highest level ever at 444,900 in June (277,400 unemployed, the remainder working part-time).
Yet there is plenty of room on the island for a lot more people to live in prosperity. Ireland has a total population of 4.3 million, living on c. 70,000 sq km (island total: 6.1 million people on 85,000 sq km). For comparison, the island of Sri Lanka, in the Indian Ocean, has a population of 21.5 million on less than 66,000 sq km.
In order to develop a social and economic infrastructure that supports more people to live in Ireland, this requires a strategy to build up the physical and knowledge infrastructure in a way that will boost sustainable jobs. However, the Government's plan offers nothing to the tens of thousands of our best-educated young people who are likely to emigrate, despite the preference of many to build their lives here. The Government could have stimulated growth and softened the landing for some people working in construction by a targetted investment in vital infrastructure, which in turn would have incentivised private investment in Ireland, but they chose not to.
All governments need to face the fact that many factors in the economy are outside of their control, including a number of the reasons for Ireland's economic growth. Our current policy-makers have to go further and recognise that their "plan" is part of the problem, not the solution.
Tuesday, 1 June 2010
Wednesday, 5 May 2010
Ireland is in top 10 Exporters of Services in 2009
Paul Sweeney: Last year saw huge collapses in economies all over the world and a massive fall in trade. China overtook Germany as the world’s greatest exporter, a position it is likely to retain by virtue of its size. Ireland was 9th largest exporter of services in the world in 2009.
The 12% drop in the volume of world trade in 2009 was larger than most economists had predicted. World trade volumes fell only on three other occasions since 1965 (—0.2% in 2001, —2% in 1982, and —7% in 1975), but none of these falls approached the magnitude of last year’s economic slide (Chart 1). A factor which reinforced the 2009 trade slump was its synchronized nature. Exports and imports of all countries fell at the same time, leaving no country or region untouched.
Chart 1: Volume of world merchandise exports, 1965-2009 (click to enlarge)
(Annual % change)
(Source: WTO)
Germany was the world’s biggest exporter until overtaken by China last year, though when it comes to exports of service, the US leads by a long haul.
What is most interesting is Ireland’s position as one of the greatest exporting countries in the world – for services. This in spite of our small size.
Ireland is in the top 10 exporting nations of the world in 2009 - at the 9th largest exporter of services as the table below shows (LHS). We sold $95bn in services last year. Interesting as the table also shows (on RHS), we are also big importers of services – even higher in the league, at 8th place, at $104bn. With a fraction of 1 per cent of the world’s population, we export almost 3% of services. This probably means that we import lots of IP software, add a bit of value and export it again. Yet services can have a very high value added and unlike goods, they are not losing as much in value terms – gaining in many instances - with falling terms of trade for goods.
Services exports in the world fell by 13% in 2009 to $3.31 trillion as the table below shows, but this was less than the overall collapse in merchandise trade of 22% in nominal terms. This was the first time since 1983 that trade in commercial services declined.
Services are of growing importance globally and especially for Ireland. In 2007 services exports made up 43% of total Irish exports - way up from just 21% seven years earlier. Exports of goods have been sluggish in recent years and with the collapse in trade worldwide, services exports have helped the economy significantly.
Leading exporters and importers in world trade in commercial services, 2009 (click to enlarge)
(Billion dollars and percentage)
a Preliminary estimate.
b Secretariat estimate.
Note: While provisional full year data were available in early March for 50 countries accounting for more than two thirds of world commercial services trade, estimates for most other countries are based on data for the first three quarters.
Source: WTO
Ireland’s Balance of Payments is in good shape, with imports falling rapidly as demand falls. Domestic demand is collapsing due to rising unemployment and reduced consumption, thanks in no small part to the government’s deflationary policies and the uncertainty engendered, leading to greater savings. We had a whopping trade surplus of €38bn last year, with imports down a massive 29% on peak in 2007 in value terms. Irish exports only fell slightly in 2009.
The WTO is optimistic about the immediate future. It concludes, “After the sharpest decline in more than 70 years, world trade is set to rebound in 2010 by growing at 9.5%.” Will this rising tide lift Ireland’s wee boat, as the conservatives hope, in the face of falling demand?
The 12% drop in the volume of world trade in 2009 was larger than most economists had predicted. World trade volumes fell only on three other occasions since 1965 (—0.2% in 2001, —2% in 1982, and —7% in 1975), but none of these falls approached the magnitude of last year’s economic slide (Chart 1). A factor which reinforced the 2009 trade slump was its synchronized nature. Exports and imports of all countries fell at the same time, leaving no country or region untouched.
Chart 1: Volume of world merchandise exports, 1965-2009 (click to enlarge)
(Annual % change)
(Source: WTO)
Germany was the world’s biggest exporter until overtaken by China last year, though when it comes to exports of service, the US leads by a long haul.
What is most interesting is Ireland’s position as one of the greatest exporting countries in the world – for services. This in spite of our small size.
Ireland is in the top 10 exporting nations of the world in 2009 - at the 9th largest exporter of services as the table below shows (LHS). We sold $95bn in services last year. Interesting as the table also shows (on RHS), we are also big importers of services – even higher in the league, at 8th place, at $104bn. With a fraction of 1 per cent of the world’s population, we export almost 3% of services. This probably means that we import lots of IP software, add a bit of value and export it again. Yet services can have a very high value added and unlike goods, they are not losing as much in value terms – gaining in many instances - with falling terms of trade for goods.
Services exports in the world fell by 13% in 2009 to $3.31 trillion as the table below shows, but this was less than the overall collapse in merchandise trade of 22% in nominal terms. This was the first time since 1983 that trade in commercial services declined.
Services are of growing importance globally and especially for Ireland. In 2007 services exports made up 43% of total Irish exports - way up from just 21% seven years earlier. Exports of goods have been sluggish in recent years and with the collapse in trade worldwide, services exports have helped the economy significantly.
Leading exporters and importers in world trade in commercial services, 2009 (click to enlarge)
(Billion dollars and percentage)
a Preliminary estimate.
b Secretariat estimate.
Note: While provisional full year data were available in early March for 50 countries accounting for more than two thirds of world commercial services trade, estimates for most other countries are based on data for the first three quarters.
Source: WTO
Ireland’s Balance of Payments is in good shape, with imports falling rapidly as demand falls. Domestic demand is collapsing due to rising unemployment and reduced consumption, thanks in no small part to the government’s deflationary policies and the uncertainty engendered, leading to greater savings. We had a whopping trade surplus of €38bn last year, with imports down a massive 29% on peak in 2007 in value terms. Irish exports only fell slightly in 2009.
The WTO is optimistic about the immediate future. It concludes, “After the sharpest decline in more than 70 years, world trade is set to rebound in 2010 by growing at 9.5%.” Will this rising tide lift Ireland’s wee boat, as the conservatives hope, in the face of falling demand?
Monday, 29 March 2010
Lies, Damn Lies & Irish Economic Statistics - A Basic Lesson in Corporate Tax Planning
An Saoi: I have had enough of all of those stockbroker economists & politicians who lecture us incessantly that exports are the key to getting us out of their economic mess. I decided to put together this note on “Irish” exports, or more correctly Ireland’s role in worldwide tax planning. You will doubtless have heard that “Irish” exports have fallen very little through this depression. This post tries to explain why.
Please make the effort to read it all; I have tried my best to keep it as simple as possible.
The diagrams below show a basic simple structure used by many multi-nationals to avoid paying tax. Sales are booked through an Irish trading company for perhaps the whole of Europe, and the profits are quickly hoovered into another “Irish” company, but this one is actually in a tax haven. It is sometimes referred to as a “double Irish”.
Let us say a US multi-national wants to set up an Irish trading subsidiary or as they are normally described by the IDA a “European Headquarters”. Instead of setting up one company however it sets up two, a trading sub, which will carry out the activity and a holding company, which will move its centre of management and control to a tax haven, let us say the Bahamas, directly after formation. This company is Irish Registered and Non-Resident or an IRNR.
The IRNR will own the license or intellectual property required by the trading company and issues a sub-license to a Dutch BV.
The Dutch BV passes on a sub-license to the Irish trading company. This avoids the IRNR being deemed to be resident in Ireland and thus taxable in this State. It is the reason you interpose a Dutch BV, which acts as a conduit to get the profits tax free up to the IRNR.
The Irish trading company “sells” the license, goods or whatever the company makes or does throughout Europe, paying local subsidiaries a small commission to do the marketing. It passes most of the profit upwards in the form of a royalty payment. Instead of paying a tax rate of 12.5%, it actually has a tax rate of about 3% or even less.
The US accepts that companies are resident in the country where the company is resident, but Ireland looks at its so-called “centre of management and control”. The haven company therefore is Irish as far as the Yanks are concerned, but is not consider Irish by the Revenue Commissioners.
Fig. 1
Fig. 2
Kathleen Barrington of the Sunday Business Post described here how NCR washed most of its profits through Ireland and Simon Bowers writing in the Guardian showed how Google books all its sales through Google Ireland Ltd here.
Tax avoidance is a serious issue, which as an Oxfam publication issued in March 2009 showed costs lives. Ireland is a prime player in world tax avoidance because we happily co-operate with many of the largest multi-nationals, by not just allowing these types of structures, but actually marketing the country as the place to locate.
The accounts of the Irish trading entity would look something like this. This is not an extreme example, but should give a flavour of the type of “exports” we really produce.
(*I have assumed that Depreciation = Capital Allowances)
Please make the effort to read it all; I have tried my best to keep it as simple as possible.
The diagrams below show a basic simple structure used by many multi-nationals to avoid paying tax. Sales are booked through an Irish trading company for perhaps the whole of Europe, and the profits are quickly hoovered into another “Irish” company, but this one is actually in a tax haven. It is sometimes referred to as a “double Irish”.
Let us say a US multi-national wants to set up an Irish trading subsidiary or as they are normally described by the IDA a “European Headquarters”. Instead of setting up one company however it sets up two, a trading sub, which will carry out the activity and a holding company, which will move its centre of management and control to a tax haven, let us say the Bahamas, directly after formation. This company is Irish Registered and Non-Resident or an IRNR.
The IRNR will own the license or intellectual property required by the trading company and issues a sub-license to a Dutch BV.
The Dutch BV passes on a sub-license to the Irish trading company. This avoids the IRNR being deemed to be resident in Ireland and thus taxable in this State. It is the reason you interpose a Dutch BV, which acts as a conduit to get the profits tax free up to the IRNR.
The Irish trading company “sells” the license, goods or whatever the company makes or does throughout Europe, paying local subsidiaries a small commission to do the marketing. It passes most of the profit upwards in the form of a royalty payment. Instead of paying a tax rate of 12.5%, it actually has a tax rate of about 3% or even less.
The US accepts that companies are resident in the country where the company is resident, but Ireland looks at its so-called “centre of management and control”. The haven company therefore is Irish as far as the Yanks are concerned, but is not consider Irish by the Revenue Commissioners.
Fig. 1
Fig. 2
Kathleen Barrington of the Sunday Business Post described here how NCR washed most of its profits through Ireland and Simon Bowers writing in the Guardian showed how Google books all its sales through Google Ireland Ltd here.
Tax avoidance is a serious issue, which as an Oxfam publication issued in March 2009 showed costs lives. Ireland is a prime player in world tax avoidance because we happily co-operate with many of the largest multi-nationals, by not just allowing these types of structures, but actually marketing the country as the place to locate.
The accounts of the Irish trading entity would look something like this. This is not an extreme example, but should give a flavour of the type of “exports” we really produce.
(*I have assumed that Depreciation = Capital Allowances)
Monday, 11 January 2010
Reduced costs are not the route to export competitiveness
Proinnsias Breathnach: I sent the following to the Irish Times in early December but it wasn't published:
The ability to penetrate export markets is the crucial ingredient upon which Ireland’s recent economic success was built. Today, exports of goods and services are the equivalent of over 80% of gross domestic product compared with less than 30% in 1960. However, the basis of Ireland’s exporting success is very poorly understood by most Irish economic commentators and by the politicians who come under their influence.
There is an extraordinary unanimity among economists that Ireland has been losing international competitiveness and that this is attributable to rising wage levels relative to our main trading partners. This view of Ireland’s competitive position is not only simplistic and erroneous but could be profoundly damaging to this country’s economic future.
In the modern global economy the recipe for competitiveness is a complex mixture of a wide range of ingredients. Up to now Ireland has managed to produce a good blend of these ingredients and, while the unsustainable boom conditions of the 1990s are now well behind us, the export sector has, for the most part, continued to perform quite solidly. Contrary to what appears to be a common view, Ireland’s exports grew in real terms (i.e. allowing for price changes) in each year between 2000-2007. Export volumes did fall by one per cent in 2008, and have fallen further in the first six months of 2009. However, the rate of export decline has been much lower than for the EU and OECD countries at large, which means that Ireland’s share of export volumes in both these regions has actually been growing.
Between 2000-2008 Irish exports grew by a total of 47% in real terms. While Ireland’s share of total world exports (in current value terms) did fall slightly in this period, this was due mainly to contraction in the electronics sector arising from growing competition from Asia, and particularly China. By contrast, Ireland has increased its share of global exports in six key sectors which, between them, now account for one half of our total exports: computer services (mainly software), insurance, financial services, other business services, odourifous mixtures (mainly drink concentrates) and heterocyclic compounds. Ireland’s share of global exports in some of these sectors is extraordinarily high, ranging from 18% (insurance services) through 21% (computer services/software) and 28% (heterocylic compounds) to 40% (odouriferous mixtures).
Strong growth in these sectors clearly has not been inhibited by rising labour costs. It could be that, unlike elsewhere in the economy, productivity is rising more quickly than wage costs in these particular sectors. However, in order to properly understand why Ireland might have a competitive advantage in sectors such as these requires a somewhat more sophisticated analysis of the nature of competitiveness than has generally been offered to the Irish public by our politicians and economic commentators.
The National Competitiveness Council (NCC) was established in precisely to provide such analysis, which it does in its annual Competitiveness Report. Unfortunately, the fruits of the NCC’s labours appear to have never troubled the gaze of those who seek to influence or formulate Irish economic policy. In its Competitiveness Reports, the NCC uses 18 different indicators (just one of which relates to productivity and labour costs) to assess Ireland’s competiveness. These include, inter alia, business environment and performance, physical and knowledge infrastructure, prices and costs, productivity and innovation. However, the NCC does not quantify these indicators in a way which would allow them to be compared with each other, or combined together to create a composite competitiveness index which would allow Ireland’s overall competitiveness to be monitored over time.
However, such an index is produced in the Global Competitiveness Report published annually by the World Economic Forum (WEF), the Swiss-based independent think-tank organisation. The WEF’s Global Competitiveness Index (GCI) was devised by, and is compiled under the supervision of, Michael Porter of Harvard University, one of the world’s foremost authorities on international competitiveness and author of the path-breaking book The competitive advantage of nations (1990).
The GCI is compiled from no less than 113 different indicators, divided into twelve “pillars” of competitiveness (education, efficiency of labour and product markets, business sophistication, innovation, etc.).. The relative weights given to these indicators vary depending on each country’s level of development. In the WEF’s view, competition based on cost is only appropriate for countries at a low level of development, for whom cheap labour or resources are frequently their only source of competitive advantage.
For countries at an intermediate level of development, the keys to competitiveness are production efficiency and product quality, while for countries at the highest development levels, the key factor is the ability to produce new and different products employing cutting-edge production processes. In the system of weightings applied to this group of countries (in which the WEF places Ireland), labour cost factors account for just 1.7% of the total value of the competitiveness index.
What is more, while Irish economists have been decrying Ireland’s declining competitiveness, the WEF have been moving Ireland up its competitiveness league table, from 30th position in 2002 to 22nd in 2009. From their point of view, Ireland’s key competitiveness weakness lies in infrastructure, along with small market size and the country’s current macroeconomic stability problems. Labour costs are not mentioned.
Evidence from other sources vindicates the WEF’s relatively sanguine view of the direction in which the Irish economy is moving. According to the IDA, the rate of return on US investment in Ireland rose from 19% to 22.5% between 2000-2007. This is over twice the EU15 average and is only surpassed by China, India and Singapore. In 2008 Ireland was the most successful country in the world in attracting foreign investment, up from tenth place the previous year. These are hardly the signs of a country in competitive decline.
Ireland’s economic future lies in maintaining and enhancing the country’s attractions for high-end inward investment. Inward investors repeatedly highlight the skillsets of Irish workers in this context. Spokespersons for the foreign sector have regularly emphasised the importance of continued and expanded investment in education – at all levels – and technological know-how. This was the key message in an article by Jim O’Hara, General Manager of Intel, published in the Irish Times on November 13 last.
Yet the Government appears to have swallowed, hook, line and sinker, the argument that reduced costs are the key to enhanced export competitiveness. This argument is being routinely used to help justify the current programme of spending cutbacks. While there is an obvious need to contain costs, it would be misguided to do so on the basis of false premises. The way to strengthen Ireland’s competitiveness is through expanded spending in education. Spending cuts in this area in order to balance the books in the short term could have very negative long-term consequences.
The ability to penetrate export markets is the crucial ingredient upon which Ireland’s recent economic success was built. Today, exports of goods and services are the equivalent of over 80% of gross domestic product compared with less than 30% in 1960. However, the basis of Ireland’s exporting success is very poorly understood by most Irish economic commentators and by the politicians who come under their influence.
There is an extraordinary unanimity among economists that Ireland has been losing international competitiveness and that this is attributable to rising wage levels relative to our main trading partners. This view of Ireland’s competitive position is not only simplistic and erroneous but could be profoundly damaging to this country’s economic future.
In the modern global economy the recipe for competitiveness is a complex mixture of a wide range of ingredients. Up to now Ireland has managed to produce a good blend of these ingredients and, while the unsustainable boom conditions of the 1990s are now well behind us, the export sector has, for the most part, continued to perform quite solidly. Contrary to what appears to be a common view, Ireland’s exports grew in real terms (i.e. allowing for price changes) in each year between 2000-2007. Export volumes did fall by one per cent in 2008, and have fallen further in the first six months of 2009. However, the rate of export decline has been much lower than for the EU and OECD countries at large, which means that Ireland’s share of export volumes in both these regions has actually been growing.
Between 2000-2008 Irish exports grew by a total of 47% in real terms. While Ireland’s share of total world exports (in current value terms) did fall slightly in this period, this was due mainly to contraction in the electronics sector arising from growing competition from Asia, and particularly China. By contrast, Ireland has increased its share of global exports in six key sectors which, between them, now account for one half of our total exports: computer services (mainly software), insurance, financial services, other business services, odourifous mixtures (mainly drink concentrates) and heterocyclic compounds. Ireland’s share of global exports in some of these sectors is extraordinarily high, ranging from 18% (insurance services) through 21% (computer services/software) and 28% (heterocylic compounds) to 40% (odouriferous mixtures).
Strong growth in these sectors clearly has not been inhibited by rising labour costs. It could be that, unlike elsewhere in the economy, productivity is rising more quickly than wage costs in these particular sectors. However, in order to properly understand why Ireland might have a competitive advantage in sectors such as these requires a somewhat more sophisticated analysis of the nature of competitiveness than has generally been offered to the Irish public by our politicians and economic commentators.
The National Competitiveness Council (NCC) was established in precisely to provide such analysis, which it does in its annual Competitiveness Report. Unfortunately, the fruits of the NCC’s labours appear to have never troubled the gaze of those who seek to influence or formulate Irish economic policy. In its Competitiveness Reports, the NCC uses 18 different indicators (just one of which relates to productivity and labour costs) to assess Ireland’s competiveness. These include, inter alia, business environment and performance, physical and knowledge infrastructure, prices and costs, productivity and innovation. However, the NCC does not quantify these indicators in a way which would allow them to be compared with each other, or combined together to create a composite competitiveness index which would allow Ireland’s overall competitiveness to be monitored over time.
However, such an index is produced in the Global Competitiveness Report published annually by the World Economic Forum (WEF), the Swiss-based independent think-tank organisation. The WEF’s Global Competitiveness Index (GCI) was devised by, and is compiled under the supervision of, Michael Porter of Harvard University, one of the world’s foremost authorities on international competitiveness and author of the path-breaking book The competitive advantage of nations (1990).
The GCI is compiled from no less than 113 different indicators, divided into twelve “pillars” of competitiveness (education, efficiency of labour and product markets, business sophistication, innovation, etc.).. The relative weights given to these indicators vary depending on each country’s level of development. In the WEF’s view, competition based on cost is only appropriate for countries at a low level of development, for whom cheap labour or resources are frequently their only source of competitive advantage.
For countries at an intermediate level of development, the keys to competitiveness are production efficiency and product quality, while for countries at the highest development levels, the key factor is the ability to produce new and different products employing cutting-edge production processes. In the system of weightings applied to this group of countries (in which the WEF places Ireland), labour cost factors account for just 1.7% of the total value of the competitiveness index.
What is more, while Irish economists have been decrying Ireland’s declining competitiveness, the WEF have been moving Ireland up its competitiveness league table, from 30th position in 2002 to 22nd in 2009. From their point of view, Ireland’s key competitiveness weakness lies in infrastructure, along with small market size and the country’s current macroeconomic stability problems. Labour costs are not mentioned.
Evidence from other sources vindicates the WEF’s relatively sanguine view of the direction in which the Irish economy is moving. According to the IDA, the rate of return on US investment in Ireland rose from 19% to 22.5% between 2000-2007. This is over twice the EU15 average and is only surpassed by China, India and Singapore. In 2008 Ireland was the most successful country in the world in attracting foreign investment, up from tenth place the previous year. These are hardly the signs of a country in competitive decline.
Ireland’s economic future lies in maintaining and enhancing the country’s attractions for high-end inward investment. Inward investors repeatedly highlight the skillsets of Irish workers in this context. Spokespersons for the foreign sector have regularly emphasised the importance of continued and expanded investment in education – at all levels – and technological know-how. This was the key message in an article by Jim O’Hara, General Manager of Intel, published in the Irish Times on November 13 last.
Yet the Government appears to have swallowed, hook, line and sinker, the argument that reduced costs are the key to enhanced export competitiveness. This argument is being routinely used to help justify the current programme of spending cutbacks. While there is an obvious need to contain costs, it would be misguided to do so on the basis of false premises. The way to strengthen Ireland’s competitiveness is through expanded spending in education. Spending cuts in this area in order to balance the books in the short term could have very negative long-term consequences.
Tuesday, 24 March 2009
Stimulus
1 One of the key arguments against a stimulus package in Ireland is that additional public spending will leak out through imports. In other words additional consumption and investment by the State will suck in more imports and will have little impact on the economy. This argument is made quite apart from other considerations including the critical level of national debt, Maastricht rules etc.
2 The nature of Ireland's small open economy is said to be a break on any home-grown Keynesian stimulus response to the current collapse in consumer confidence. Sometimes, commentators refer to something in the order of 80% of GDP being accounted for by exports. This is misleading. GDP is the value of output in all sectors of the economy where output is measured as 'value-added' = final gross value minus inputs of labour, capital etc. In dividing exports by GDP we are not comparing clike with like. Exports need to be adjusted for factor input like GDP.
3 The CSO recently published Input-Output tables. In Table 5 of the tables (referring to 2005), the 'direct and indirect' import content of each sector can be seen. In many of the manufacturing sectors, the direct and indirect import content amounts to 40-60% of the value of output, or even higher in some cases. But the corresponding figures are a good deal lower in construction (26.5%) and in many of the service sectors - e.g. public administration and defence (12.7%), education (8.7%), health and social work services (16.2%). (There would also be further imports arising from the spending of the employees in these sectors, but these types of figures do indicate which sectors have relatively high or relatively low import content.)
4 Hence, any package aimed at boosting domestic consumption - especially if it is targetted at sectors such as education, health and social work services (exactly those areas of public spending most trenchantly criticised and earmarked for cuts) - can still have a significant impact on employment and consumption. A focused investment programme in labour intensive-infrastructure allied to upskilling would strengthen our human capital base in preparation for a recovery as help stimulate employment and, ultimately, tax revenue.
5 However, a stimulus in a small open economy does not work on its own. Crucially, intervention at the international level is an urgent necessity. Hence, the key to any 'New Deal' is:
international - especially European - coordination
targetting on areas of high social need (health, education, housing) and relatively low import content
prioritising labour-intensive projects in the Public Capital Programme
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