By Cormac Lucey
Last week Danny McCoy, chief executive of the employer’s group Ibec, warned that excessive wage inflation could undo Ireland’s hard-won economic recovery. “Right now, we’re burning through our competitiveness in a way that’s more severe than during the Celtic tiger,” he asserted, pointing to evidence on his very doorstep.
Rents on Baggot Street in Dublin 2 (where Ibec is based) have risen from €25 per sq ft to €62 over the past three years. And while Dr McCoy drew comfort from the fact that Ireland is at the pinnacle of a growth phase in the global economy, he warned that exponential growth in the cost base of the economy “will erode our competitiveness”.
Last December the National Competitiveness Council (NCC), of which Dr McCoy is a member, published “Ireland’s competitiveness challenge 2017”. It is not easy for a state body such as NCC to make negative findings about the economy. You won’t find many in the Taoiseach’s foreword to its reports.
So, it was no surprise that the key conclusion was reassuringly upbeat. Ireland’s competitiveness performance is positive, despite intense global competition and challenges in the external environment. Indeed, the NCC argues that Ireland’s competitiveness has improved. In the latest world competitive rankings, Swiss business school IMD showed Ireland climbing to sixth, compared to 17th four years ago.
The key comment in the NCC report from Professor Peter Clinch, the organisation’s chairman, was long on mild exhortation and short on criticism. “Improving competitiveness is the key to our efforts to ensure a sustainable economic model that avoids a boom and bust cycle,” he said.
“While the challenges we face are significant, we must face them with confidence and, importantly, we must face them together.”
Such sentiment could form the foundation of a national entry for the Eurovision song contest. It is rather lame set beside McCoy’s alarming warning. Nonetheless, the work being done at the NCC under Clinch sets out in a simple and straightforward manner the key challenges facing the Irish economy.
The NCC wants competitiveness to be the central pillar of Ireland’s economic policy: I entirely agree.
The NCC report then sets out how that goal might be achieved. It argues rightly that it is vital to focus on improving Ireland’s tax competitiveness, particularly in enterprise, investment and employment, compared with the UK.
It is crucial that in promoting secondary locations as engines of economic growth, the competitiveness of Dublin is not damaged by diverting critical infrastructure investment away from the capital.
Currently the greatest infrastructure deficit relates to housing, and policy here should be built on a coherent and effective planning and regulatory framework, one which encourages higher densities that can be better serviced by public transport.
The NCC argues that education funding remains a challenge. It is time to increase funding of the higher-education sector to protect our competitiveness rankings and appeal to foreign direct investment (FDI). It also advocated the alignment of education and training with labour market needs.
These are all sensible proposals. Yet when the NCC turns to the cost of doing business in Ireland, the tone of the report changes. While inflation is subdued, this is largely due to currency effects and Ireland remains “a relatively high-cost location”. It also warns that the impact of Brexit will be felt most among firms mainly embedded in the domestic economy.
Many of these are small companies with low profit margins and limited room to manoeuvre.
To my mind, the core competitiveness challenge centres on our split-personality economy. A thriving FDI sector benefits from tax advantages of uncertain duration, which are under sustained attack from our larger EU neighbours.
Meanwhile, we have a limping indigenous sector with pitiful levels of productivity. A focus on productivity is “urgently required”, the NCC concludes, particularly for our indigenous sector. The challenge is to find ways of realising this goal.
According to the NCC, Irish enterprise needs more effective investment in knowledge-based capital, a competitiveness-based approach to supporting start-ups and scaling, and enhanced management to drive productivity at firm level.
Policies to support these goals are already in place, yet the poor productivity performance of the indigenous sector persists.
Mobile FDI can come and go. Our long-term prosperity depends on home grown industry. Yet our complacent government prefers the sugar hit of the big FDI job announcements to the hard yards needed to deliver progress for the domestic sector.
Maybe it’s time we gave the NCC greater attention. And maybe it’s time its chairman, Clinch, was given a greater role in national policy-making. But there are two problems with that suggestion.
First, Clinch served as chief economic adviser when Brian Cowen was taoiseach. I can’t recall the issues addressed in the NCC report getting more or less attention during that administration, which was swamped by Ireland’s bursting property bubble.
The second problem with the recital of Ireland’s economic problems and listing of coherent measures to address them is that we’ve seen it all before.
As a student in the 1980s, I bought a copy of the report of the National Planning Board, then headed by Dr Peter Bacon. I was enchanted by its prescriptions for the woes experienced under Garret FitzGerald’s second government. For all its cleverness and elegant reports, that government delivered economic failure.
It was Ray MacSharry, a man without Leaving Certificate qualifications, who showed finally the steely character necessary to come to grips with Ireland’s overspending. Under MacSharry, surely the country’s best finance minister, we escaped the doldrums of economic underperformance finally.
Intellectual credentials and clever thinking are important, yet not nearly as important as political courage, character and the willingness to endure short-term unpopularity to advance long-term national interests.
The biggest impediment to Ireland’s competitive position today is the deficit in this area.
Published in The Sunday Times (Ireland edition)
April 8th 2018