Home-grown entrepreneurs key to recovery
The National Competitiveness Council functions as a national nagging mammy, finger-wagging at her basically feckless bachelor son, Paddy, as he starts to sink back into his bad old ways. The council knows that, deep down, Paddy/ Ireland is a lazy lad who likes lie-ins, fried breakfasts, and pulling a fast one on his employer, or customers. It is only when things get really bad, and disaster threatens, that he pulls his socks up and gets the lead out.
Last week, the council was back ticking us off.
It issued a report last week claiming that our competitiveness faces enormous challenges, which “must serve as a major wake-up call for anyone” who thought such issues had been resolved. “Now is not the time for businesses to hike their prices, now is not the time for unions to make wage demands, and now is not the time for Government to take its foot off the pedal in making the structural reforms we need.”
Requesting a union not to submit a pay claim in a time of economic recovery, however modest, is a bit like asking a cock not to crow first thing in the morning. Suggesting to politicians, ahead of a major electoral test, that they lay off on promises is an equally futile exercise.
The council’s message of abstinence risks falling on deaf ears. The core message in the report is that Irish prices are still too high, despite the crash and a period of deflation followed by exceptionally low price inflation.
Consumer prices in Ireland, at the very bottom of the economic cycle, were 13.6% above the European average, according to Forfás. Our island status, being at the end of the distribution line, explains some of the gap, but by no means all of it.
Irish wages remain high relative to the UK, helping to explain our lower employment rate. Wage rates are not everything. In assessing the competitive position of our firms, the key measure for purposes of comparison is not wage costs per se, but rather unit labour costs, which capture overall levels of productivity.
During the bubble years, the rise in our unit labour costs outstripped those of our EU partners. Our economy was overheating as a result of the credit bubble and building boom, and we ended up pricing ourselves out of key markets at home and abroad.
During ‘the bust’, this situation was reversed as real Irish unit labour costs fell by a combined 10% in 2010 and 2011. Such statistics should, however, carry a health warning.
Construction activity, where output per head has remained low, all but disappeared whereas the high-output modern manufacturing sector of the economy held up well.
This in itself put a flattering gloss on the overall figures. One of the problems the council has is that Irish statistics, through no fault of the CSO, frequently mislead, sometimes flattering to deceive.
Think of Google, Facebook, Starbucks, and of the tax arbitrage these highly effective corporations engage in, and then you get a sense of how apparently spectacular Irish service export data can turn out to be more than a little dodgy.
Yet it can be all too easy to draw an inference from this that the country’s burgeoning tech sector is really little more than a puff of tax accounting smoke.
Intel’s announcement that it has invested $5bn over three years in Leixlip is a reminder that real hard cash commitments are being made to the country.
It might be worth attempting to go through that investment with a fine tooth comb.
Nevertheless, it is clear that Intel, 25 years on from its original game-changing investment, has recommitted itself to the country.
Our cool weather and ready access to water may have played as important a role in this case as the tax and labour factors. The company’s former CEO, Craig Barrett, a regular visitor to these shores, has warned, more than once, that Ireland needs to reduce reliance on its corporation tax regime in its effort to attract and retain foreign direct investment.
His argument is well made. Many rival jurisdictions, including the UK, are making a much stronger pitch for overseas investment by reducing their corporation tax rate and offering a wide range of incentives in areas such as research.
A big push is on to change the method of assigning profit for the purpose of deciding where corporation tax should accrue. It is designed to catch out countries like Ireland which appear to facilitate tax arbitrage on the part of global corporations.
In the 1980s, the government’s foreign direct investment strategy was frequently questioned. Many argued too many resources were being devoted to attracting ‘footloose’ multinationals who could shut up shop and move on at a moment’s notice.
The great post-1989 foreign direct investment boom disproved this notion. The country benefited hugely from the arrival of thousands of highly paid, high-quality jobs. Sadly, we could not deal with the prosperity that resulted. The bachelor son hit the booze, big time. But one of the outstanding features of ‘the crash’ was the extent to which our overseas-owned sector stood out as an island of stability.
As the banking sector collapsed, many large corporations who avoided massive leverage, continued to thrive. Despite dramatic changes brought about by the so-called patent cliff, employment in the pharma sector has stood firm.
The experience of this sector may provide comfort to the Government amid talk of fundamental change in the calculation of taxes across international frontiers, with a move to taxing in the place where the product is sold/consumed.
The concern is that a key, if not the key, pillar of Irish competitiveness when it comes to foreign direct investment could begin to crumble.
The Barrett message is that Ireland needs to grow its own entrepreneurs.
One might add that the country needs to use its tax system more effectively to draw on the increasingly large pool of Irish-born managers, skilled professionals, and entrepreneurs working overseas.
Many with young families tend to be drawn back home. However, they will also want to be assured that the education system remains in good order, hospitals are safe and efficient, and that property is available to rent or buy at a reasonable price.
Michael Smurfit, launching his memoir last week, alluded to the need to create an emerging generation of entrepreneurs running into thousands.
Hardly surprisingly, the Monaco-based businessman views businessmen in a positive light. He may not recognise that capacity of rent seeking business people to capture state resources as has happened too frequently, but the idea of a burgeoning Irish entrepreneurial culture is beguiling and lies at the heart of our future competitiveness.
The National Competiveness Council does not touch on this key consideration. However, its report does home in on flaws in the system that threaten to hobble our recovery.
Take the cost of credit, a critical consideration. It is sobering to learn from the council that new business loans of up to €1m — a proxy for SME loans — in Ireland are over 31.5% more expensive than in the eurozone, as a whole, while for those over €1m, the gap is 27%.
Bank charges here remain relatively low for ordinary consumers, but SMEs complain of heavy and rising charges on top of these high loan rates.
Even firms not saddled by the huge legacy debts from the boom years are being forced to pay for the folly of the bubble bankers by institutions now embarking on the long and painful process of balance sheet rebuilding. We should find out how lengthy and expensive this process could be once the Europe-wide bank stress tests have been completed later this year.
Michael Noonan, the finance minister, has been busy wooing foreign capital as the Nama loan book is run down. One can only hope that, in the process, investment both in our capital-starved banks and in non-bank finance can be stimulated and that this can help to jumpstart investment in new homegrown businesses or international partnerships.
The Irish recovery will not be jumpstarted by clamping down on wage increases. It would help a lot, of course, if senior managers showed restraint. It would also help if the State cut back on the high level of hikes in the price of its own services, hikes which certainly do nothing to boost our firms’ competitiveness.
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