Irish
Irish economy's competitiveness "relatively weak" in key areas
By Finfacts Team
Sep 7, 2005, 11:42

Dr. Don Thornhill is Chairman of the National Competitiveness Council. Prior to that he was Chairman of the Higher Education Authority from 1998 and Secretary General of the Department of Education and Science from 1993 to 1998.

Speaking at the launch of the report, Dr Don Thornhill, Council Chairman, said “Ireland has performed remarkably well in comparison with other countries in terms of increasing employment levels and living standards”.

More broadly, continued improvements in life expectancy and income per capita also supports Ireland’s strong performance in the UN’s Human Development Index, which is a good indicator of the general quality of life. Ireland’s strong economic growth rates over the past decade are likely to reflect a number of national strengths.

Taxation: Despite competition from other countries, Ireland remains highly competitive in terms of both corporation tax (Ireland ranks first of the 16 countries benchmarked – 1st/16) and personal taxes (1st/15).

Entrepreneurship: Ireland has a strong entrepreneurial culture. Ireland has an entrepreneurial activity rate of 7.7 per cent of the adult population, representing 193,000 individuals either actively planning or in the process of establishing an enterprise. Ireland is ranked second in the EU and 7th among the OECD countries for entrepreneurial activity.

Labour market adaptability: Labour market regulations in Ireland are perceived to facilitate business activity (7th/16). Dr Thornhill noted that “despite significant shocks to the economy in recent years, unemployment in Ireland remains low, less than half of the rate in some other eurozone countries”.

Openness to trade and investment. Ireland continues to be one of the most open economies in the world in terms of trade in goods and services, and in foreign investment. Ireland continues to have the highest stock of foreign direct investment per capita amongst the benchmarked countries.

Ireland’s performance is relatively weak in some areas that will be required to drive the knowledge economy.

Education: Ireland continues to enjoy relatively strong attainment levels despite lower levels of investment. While Irish investment rates in education at the tertiary level match the OECD average (7th/13), Ireland invests less in both primary (11th/14) and secondary level (11th/14) than the OECD average. Dr Thornhill noted that ‘while Ireland has made significant progress in terms of increasing secondary and tertiary participation rates, 40% of the population aged 25-64 years does not have upper secondary level education. This is a legacy of past underinvestment in education and contrasts with the more favourable relative position of younger people who are now in the labour force”. Adult participation in life long learning also remains relatively low in Ireland (6th/11).

Science and technology: While both public and business sector investment in R&D have increased substantially in recent years, they are below the levels pertaining in other advanced economies. Ireland is also behind other countries in the development of patents and the use of modern technologies (e.g. ICT).

Performance of the Manufacturing Sector

The National Competitiveness Council (NCC) was established by the Government in May 1997 as part of the Partnership 2000 Agreement. It is required to report to the Taoiseach on key competitiveness issues for the Irish economy together with recommendations on policy actions required to enhance Ireland's competitive position. Forfás, the national policy and advisory board for enterprise, trade, science, technology and innovation, provides the Council's secretariat.

Strong competitiveness pressures are facing internationally trading sectors, particularly manufacturing. The ACR notes that while Ireland’s share of world goods trade increased sharply from the mid-1990s, it peaked in 2002. Industrial production has declined by over 3 per cent in the year to March 2005. However, Ireland’s service exports continue to grow strongly. Ireland’s total share of world services exports has grown from 0.5 per cent to 2 per cent since 1998. Dr Thornhill noted that “reflecting the changing structure of the Irish economy, Ireland’s share of world trade in services is now greater than our share of world trade in goods”.

Prices and Costs

Prices and costs remain a key competitiveness issue. In this respect, the ACR notes that:

• Over the past 12 months, Irish inflation has converged towards the EU average of 2 per cent. However, price levels in Ireland remain amongst the highest across the benchmark group of countries.
• With regards to pay costs, compensation per employee increased by over 5 per cent between 2003 and 2004 placing Ireland 4th highest among the 14 benchmark countries.
• With regard to non-pay business costs, energy (9th/10) and waste costs (8th/10) appear to be growing significantly, while insurance costs are moderating. Dr Thornhill noted that “the improving situation in relation to insurance costs is a good example of how we can make progress through the sustained implementation of good policies”.

Commenting the Minister for Enterprise, Trade and Employment, Mr. Micheál Martin T.D. said, “The Annual Competitiveness Report notes that Ireland performs well internationally on a wide range of indicators including Investment in infrastructure, Corporate and personal tax rates, Openness to trade and investment, Attraction of FDI, rates of entrepreneurship and the availability of Science and Technology graduates. However, there clearly is room for improvement in areas such as the productivity performance of relatively sheltered sectors of the economy, high cost levels, Ireland’s relatively low levels of investment in education and R&D, and a relatively low perception of infrastructure quality”.

Commenting further, the Minister said “This year’s annual report from the NCC presents us with clear challenges about competitiveness. Protecting the prosperity dividend depends on winning business in international and global markets but we are up against unprecedented competition. Protecting the dividend of prosperity in terms of jobs and incomes means we can’t afford to let any of our competitive advantages slip”.

The Annual Competitiveness Report is a statistical document, which will help shape further analysis to be contained in the NCC Competitive Challenge report due for publication in the Autumn. “When I receive the NCC’s analysis and recommendations I look forward to bringing to Cabinet policy options that will help enterprises become stronger. Our economy has the capacity to be far more competitive if we concentrate on accelerating productivity growth” the Minister commented.        

Concluding, Martin noted ”the partnership talks now getting underway will strongly influence our competitiveness and economic progress over the next few years. We need to have a shared understanding that a successful society needs a dynamic economy, which constantly responds to the evolving demands of international competitiveness.  In common with other advanced economies, progress will rely on stronger productivity growth, flexibility and adaptability right across both product and labour markets. Productivity improvements can help us regain the higher ground international competitiveness.”

American Chamber welcomes competitiveness report – warns on education issues.

Commenting on the report American Chamber Chief Executive Joanne Richardson said: “This report is particularly welcome as it indicates that Ireland remains a highly competitive location for inward investment. Despite competition from other countries, Ireland remains first among 16 countries benchmarked for corporation tax and first among 15 for personal taxes. Labour market adaptability is also strong with regulations here facilitating business activity. However, Ireland ranked just seventh among 16 countries benchmarked in this regard, so there may be some room for improvement in this regard.”

Ms Richardson also pointed out that there are some areas of concern which need to be addressed: “Education in both primary and second level education remains relatively weak”, she said. “This feeds into the relatively poor performance in relation to science and technology. Despite significant increases in both public and private sector investment in R&D in recent years they remain below the levels pertaining in competitor countries. We are also behind other countries in the development of patents and the use of modern technologies. More action is needed in these areas if we are not to fall further behind.”

Ms Richardson concluded by saying that the report’s results were generally positive but that its warning signs should be noted. “The NCC does extremely important work”, she said. “While pointing up our areas of strength it also highlights areas of weakness which need action. Government and the business community must work together to address these areas as a matter of urgency.”