Economics 7/11/10: Irish competitiveness - myths and facts

As of late, the official Ireland - from the Central Bank to the Minister for Finance, to a host of 'attached' economics experts have been drumming up the tale of our rapidly improving competitiveness. In fact, in his speech this week, Minister Lenihan once again referred to the topic, saying:

"Price and earnings data confirm that significant competitiveness adjustments have taken place since 2008." The press release to accompany DofF latest efforts to predict the near term future also stated that "Further details on the nature of the adjustment for 2011 and the distribution and composition of the measures over the remaining years of the forecast period will be announced in the Four-Year Plan. In addition the Plan will outline a programme of structural reform, which will help to further restore competitiveness and support economic growth."

All of these alleged 'competitiveness gains' are routinely attributed to the heroic efforts of the Government.

But:

• Are these claims true? Did our competitiveness increase significantly over the recent months?
• Have increases in Irish competitiveness been exceptional (as would be consistent with Government claims to credit) compared to our peers in the EU?

Here are some facts. Source for data below is the European Central bank. Keep in that in all charts, higher numbers imply lower competitiveness.

First chart shows two alternative metrics for harmonized competitiveness indicators for Ireland. The first metric is deflated by GDP, showing much higher degree of competitiveness than the second metric - deflated by the unit labour cost.
So per chart above, our competitiveness has been underpinned by the direct outcome of recession (GDP effects) and less by the labour costs relative to labour productivity (allegedly - a policy target). Table below details some of the less than pleasant dynamics in the two series:
To summarize the above data: our competitiveness gains so far -

• In the last 12 months through Q2 2010 our competitiveness gains were, in absolute terms ranging between 5.96% and 7.4% with GDP effects outweighing labour costs effects by ca 25%
• In the last 24 months the same gains were more impressive - 12.03% to 12.68%
• But over the crisis years in total these gains were five times higher for GDP effects than for labour competitiveness gains: 11.41% (not all too great to begin with) and just 2.67% - a tiny number barely noticeable on the charts
• Per averages, since 2000 on we had pretty poor record of competitiveness overall and year to date performance is pretty much a disaster.

In my opinion, the claim of 'gains in competitiveness' is about as true as a 'glass half-full' claim. The gains are there, but they are small by historical standards and we are only back to Q1 2007 levels of labour competitiveness, after experiencing a wholesale destruction of this economy during this crisis.

Ok, enough of the absolute numbers, let's compare ourselves to our EU peers. All comparisons are based on unit labour cost HCIs.

First, all countries together:
All's clear in this picture -

• We are the least competitive country in the union.
  
• And were such since Q3 2005.
• All countries experienced improvement in their competitiveness during the crisis
• Many countries have experienced as fast of an adjustment in competitiveness as Ireland, while experiencing far slower wages deflation than us. In other words, it appears that in many other countries productivity of the workforce was growing faster than it was in Ireland during this crisis.

Let's look at the least healthy countries in Europe - the PIGS (Italy will be treated separately, as it is a large economy):
Same story as with the total EU group. Ireland is far from catching up with any of the countries in the group in terms of labour competitiveness.

Of course, what matters is how we do compared to our immediate trade and investment peers - the small open economies of Europe. Chart below illustrates:
No reason to comment on the above - the picture says it all.
The really sad thing is - we are not even competitive compared to the larger, less mobile, EU states. Embarassingly, Italy and Spain are beating us. I am not sure if their Governments brag about 'great sacrifices that lead to improved competitiveness', but given the figures above - they should.

Chart above relates relative competitiveness in Ireland to the EU16 as a whole. Again, the chart is self-explanatory, but couple of points worth mentioning:

• In the last year, our gains in competitiveness have been on average almost exactly identical to those in the EU16
• The above is also true for the last 3 years

Summarizing in a table:Should I say it? Well, the figures above show that

1. Irish gains in competitiveness during this crisis have been rather smaller than asserted; and
2. Irish Government hardly had much to do with these gains, as the gains were pretty much matched by changes across other EU countries, so unless Messrs Lenihan and Cowen have some secret effect on EU16, it's hard to single out Ireland as a 'uniquely' competitiveness improving land of promise.