Our Economic Future Challenges

8/2/2019 Our Economic Future Challenges

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1

Don Thornhill,

Chair,

National Competitiveness Council

Institute of International and EuropeanAffairs

31 March 2010


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Our Economic Future

Challenges, Questions and

Policy Directions?

Testing the message and themessaging!


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Transcending challenge for economic policy ?

Can we construct a convincing narrative for a

prosperous economic future?

Robust economic performance

High levels of employment and return to prosperity

Capacity to achieve social progress


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In this world, the optimists have it, not because

they are always right, but because they are positive.

Even when wrong, they are positive, and that is the

way of achievement, correction, improvement, andsuccess.

Educated, eye-open optimism pays; pessimism can

only offer the empty consolation of being right

The Wealth and Poverty of Nations - David Landes


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Easy to construct a dismal narrative?

We remain mired in economic despondency

Twin deadweights of public and private sector indebtedness

Declining share of world trade failing to adjust to changes inglobal economy

Western economies get stuck; our exports and inward FDI

go into secular decline

Increased social conflict

Failure to achieve political and public service reform

High unemployment and emigration


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1. Irelands Competitiveness Position

2. Challenges for the Future

3. Questions

4. Policy directions?


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1. Irelands Competitiveness Position

7


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Our success as an exporting country is of vitalimportance

8

0%

10%

20%

30%

40%

50%

60%

70%

80%

N

etherlands

Hungary

Ir

elandGNP

Luxembourg

Ir

elandGDP

Germany

Sweden

Finland

Denmark

Poland

EU-15

Italy

Portugal

France

UK

Spain

Exports to Non-EU Countries Exports to EU Countries

Source: Eurostat, External Trade

Exports of goods, intra-EU and extra-EU (as a % of GDP), 2008


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How have we been doing?

9

Contribution of Net Exports to Irish Economic Growth, 2001 - 2009

Source: NCC Calculations; Central Statistics Office, Annual National Accounts

-15%

-10%

-5%

0%

5%

2001 2002 2003 2004 2005 2006 2007 2008 2009

Q1+Q2+Q3

Net Exports Investment Government Consumption


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How have we been doing?

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

2000

2001

2002

2003

2004

2005

2006

2007

2008

Services

Total

Merchandise

Irelands Share of World Trade: Total, Merchandise and Services (%), 2000-08

Source: World Trade Organisation


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1111

Household Borrowing per Capita, June 2009

There can be no return to domestic led growthOur debt burden grew rapidly and we are now highly indebted

Source: ECB

0

10,000

20,000

30,000

40,000

50,000

60,000

S

lovenia

Italy

Greece

Belgium

Portugal

France

E

uroarea

Austria

G

ermany

Finland

Spain

Neth

erlands

Ireland

Luxe

mbourg

2009 H1 2004


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Government debt is rising sharply

Source: Eurostat, Economy and Finance; Dept of Finance; European Commission

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2000Q1

2000Q2

2000Q3

2000Q4

2001Q1

2001Q2

2001Q3

2001Q4

2002Q1

2002Q2

2002Q3

2002Q4

2003Q1

2003Q2

2003Q3

2003Q4

2004Q1

2004Q2

2004Q3

2004Q4

2005Q1

2005Q2

2005Q3

2005Q4

2006Q1

2006Q2

2006Q3

2006Q4

2007Q1

2007Q2

2007Q3

2007Q4

2008Q1

2008Q2

2008Q3

2008Q4

2009f

2010f

Euroarea Ireland

General Government Consolidated Debt (as a % of GDP), 2000-2010F


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1313

Source: Central Bank of Ireland January 2000=100.

Harmonised Competitiveness Indicator, 2000-2009

Cost competitiveness has weakened in recentyears

90

95

100

105

110

115

120

125

130

135

140

Ja

n-00

J

ul-00

Ja

n-01

J

ul-01

Ja

n-02

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ul-02

Ja

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J

ul-03

Ja

n-04

J

ul-04

Ja

n-05

J

ul-05

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n-06

J

ul-06

Ja

n-07

J

ul-07

Ja

n-08

J

ul-08

Ja

n-09

J

ul-09

AxisTitle

Nominal HCI Real HCI

Improvement

Deterioration

Impact of IrishInflation


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Recent export performance

-20

-15

-10

-5

0

5

10

15

2005

20

06

2007

20

08

2009

20

10

Ireland Euro area OECD

Annual Growth in Exports Goods and Services (%), 2005- 2010f

Source: OECD Economic Outlook 86, December 2009


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1515

Where do we stand in terms ofpromoting export led growth?


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Strengths

Resilient export performance in face of collapse in global trade

but sectoral performance has varied significantly

Inward FDI remains relatively strong role in stabilising the

economy over the downturn (Barry and Bergin)

Improved infrastructure, education and R&D performance (risk

of faltering on R&D?)

Pro-enterprise tax and regulatory environment policy challenge

to sustain this?


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Weaknesses

Dependence on property and household borrowing has

been exposed deadweights of private and public debt

Long-term unemployment re-skilling challenge

Cost competitiveness poor despite recent cyclical

improvements

Slow productivity growth

Falling world market share in manufacturing; services

better


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2. Challenges for the future

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Competitiveness is beginning to improve

-but largely due to the sharpness of the recession andcyclical reductions in mortgage interest, oil and gasprices rather than structural changes


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2. Irelands Competitiveness Challenge

Macro Issues: Restoring stability of public finances

Ensuring the banks are channelling credit to viable businesses

Improving CostCompetitiveness

Incomes and prices

Property

Energy

Waste

Local authority charges

Increasing ProductivityGrowth

Restructuring the economy

Skills

R&D and innovation

Capital and technology deepening

Infrastructure

Competition and regulation

State supports

Workplace development


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3. Questions

20


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Growing Productivity

Productivity isn't everything, but in the long run it is

almost everything. - Paul Krugman


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3. INCREASING PRODUCTIVITYGROWTH

Growing Productivity

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-1%

0%

1%

2%

3%

4%

5%

SouthKorea

Hungary

Poland

Finland

UK

Japan

US

Sweden

S

witzerland

OECD

IrelandGDP

Germany

Ne

w

Zealand

N

etherlands

Spain

France

Denmark

IrelandGNP

Italy

2004-2008 2000-2004

Source: Groningen Growth & Development Centre, Total Economy Database, Jan. 2009

Average Annual Growth in Output per Hour WorkedProductivity LevelsPer Hour Output, 2008OECD-28 Ranking:GDP: 9 (4)

GNP: 18 (-)

Productivity GrowthAverage Annual Growth inOutput per Hour Worked, 2000-2008OECD-28 Ranking:GDP: 13 (7)

GNP: 26 (17)

(change since 2000)


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Compare and contrast

Department of Finance: 'To support the achievement of the Governmentseconomic and social objectives by:

promoting a sound, sustainable economic and budgetary environment,

continuing improvements in the efficiency of public services, and

an effective framework for financial services.

Department of Enterprise, Trade and Employment: We will work forGovernment and the people to equitably grow Ireland's competitiveness and

quality employment.

Do we adequately incorporate productivity, and its sister innovation, in

budgetary and policy decisions?

Should a senior Cabinet Minister have a transcending brief for driving

productivity growth in Ireland does the Cabinet restructuring meet this

challenge?


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3.2 Are our policies, institutional structuresand mindsets rooted in the past?

Ireland's Merchandise and Services Exports:2001 ( bn)

Ireland's Merchandise and Services Exports:2008 ( bn)

Source: CSO

3 2 A li i i tit ti l t t


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2008Total manufactured exports

2000Total manufactured exports

Percentage of Manufactured Exports

Source: CSO, External Trade

3.2 Are our policies, institutional structuresand mindsets rooted in the past?

Our Manufacturing Base has Changed significantly


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2000Total services exports

2008Total services exports

Source: CSO, Balance of Payments

3.2 Are our policies, institutional structures andmindsets rooted in the past?

Services Exports have Grown ExponentiallyPercentage of Services Exports


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3.2 Are our institutional structures and mindsetrooted deep in the past?

Do our Departmental Structures reflect the changes in our economy?

Food and drink accounts for 9% of merchandise exports. Unprocessed

food (live animals, fruit and vegetables) account for 7% of total food

and drink exports.

Are we measuring the right things?

165,300 sheep were slaughtered in January 2010. Stats released on

February 25th.

Business services accounted for 29% of Irish services exports in 2008.

What do these companies do, how are they performing in January

2010? Are we allocating our resources in the right areas?

Of the total 550 FTE PhD and non-PhD researchers employed in the

government sector, 308 are employed in agriculture related fields

(56%).


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3.3 Sources of economic growth and employment

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Indigenous Exporters

Exports = 13.4 bn

Employment = 134,000

Spend in economy = 19 bn

Overseas Owned Exporters

Exports = 109.9 bn

Employment = 125,000

Spend in economy = 21 bn

Exports from Development Agency Assisted Firms by Key Sectors and Ownership


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3.4 Where will the Jobs come from?

Agency employment stable

over the past decade

Also need to take account of

multiplier effects estimated at

1:1

Potential to grow export jobs?

Potential to attract labour

intensive projects.

Potential to create jobs acrossthe wider economy?

-

500.00

1,000.00

1,500.00

2,000.00

2,500.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Exporting Firms

Employment

Unemployment

Employment, Unemployment and Employment inAgency Supported Export Firms (000s)


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3.5 Cost Competitiveness

Source: Central Bank, October, 2009

Harmonised Competitiveness Indicator A high cost base is a

damaging legacy of the

boom, particularly for many

indigenous exporters who

are focused on the UK

market (/Stg.)

Prices are now moderating,

but we believe that this is

largely a result of the

current recession (cyclical

factors) rather than a

response to structural issuesin the economy.

A quick adjustment is

essential to achieving a swift

improvement in

competitiveness.

80.00

85.00

90.00

95.00

100.00

105.00

110.00

115.00

120.00

125.00

130.00

January

July

January

July

January

July

January

July

January

July

January

July

January

July

January

July

January

July

January

July

January

July

January

July

January

July

January

July

January

July

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Nominal HCI

Real HCI (Deflated by consumerprices)


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Do economist have an

excessive focus on

wages?

Are we willing to

tackle other costs?

How can we tackle

other embedded costs?

What other tools exist

to manage costs

competition policy,

NDP investment, skills

development, etc.

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3.5 Cost Competitiveness

Average Firm Cost Structure (broad input category as a

% of total domestic costs)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

BioPharm BioTech B/Hotel Eng Funds Food Medical Telecom

Labour Uti li ties Property Transport Locally Traded Services


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3.6 Seek to Compete to Win

Being average only works when you want average living standards.How can we engender a culture that seeks to be world class ateverything we do education, transport, R&D, innovation, etc.

Who should we be seeking to learn from who should we be seeking tobeat! Who has been improving their competitiveness while we werebuilding houses?

Finland in primary and secondary education?

Israel in promoting high tech start-ups?

Sweden in delivering of advanced broadband?

Singapore in delivering efficient public services?

Are their other newly emerging competitors?


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4. Policy directions?

O hi li i i


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Overarching policy imperative

The growth of the export base (and its extension

into currently mainly non-traded areas (e.g.

education)) is the essential foundation for allpolicies

I li ti ?


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Implications?

1. Difficult to see any alternative to high reliance on FDI

companies as generators of growth for medium term future

2. Bring essential infrastructures up to being the most

competitive in the world education and research,broadband, roads, labour market flexibility

3. Recast public service pay bargaining no more paying for

productivity in advance but ensure application of outcomes

related pay structures, fairness and best practice HR policies a long and difficult road. Reminder NCC is not part of the

pay negotiations processes

Implications more?


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Implications more?Shift activity and resources to internationaltrading sectors

4. Incentivise enterprise and resources into externally traded activities?

5. Remove all incentives and tax expenditures which favour non tradedeconomic activity

6. Extension and forceful application of competition policy forcefulapplication in law, health, finance and other sectors

7. Ensure we never again have a property speculation bubble strategy,physical planning and legal changes needed?

8. Promoting export and economic growth through enhancedcompetitiveness is a higher priority than securing a accountingpositive rate of return from NAMA?


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Thank you

www.competitiveness.ie

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Our Economic Future Challenges

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