1/6/2012: Gains in Competitiveness? Much done, yet even more to do

Much has been made of the fabled increases in Irish competitiveness in recent years. And to be honest, data does show some significant gains. But as this blog has pointed out repeatedly, these gains have not been (a) as straight forward as the Government would like us to believe, and (b) not a significant as to warrant the claims that we are one of the most competitive countries when it comes to labour productivity.

On (a) above, we know that most of the gains in Irish competitiveness during the crisis are accounted for by jobs destruction in heavily overheated construction and retail sectors. In other words, Irish average productivity improved because we pushed less productive workforce into emigration and unemployment, not because our more productive sectors increased their labour productivity.

On (b), here are the latest stats. All data is based on Harmonized Competitiveness indicators, unit labour costs, reported by the ECB. Latest data is through Q4 2011 and higher values reflect lower competitiveness.

Consider first the data for annual average readings:

Chart above suggests relative improvement in Ireland's position vis smaller member states of the euro area, but lack of significant gains compared to some groupings, especially those that combine more advanced economies in Europe. And chart below confirms the same:

Looking at the Q4 data - Irish competitiveness gains through 2011 have been far less impressive than annual averages suggest. Charts below show full sample of countries, followed by the EA12 euro area states excluding the 2004 Accession states.

Considered across the end-of-year figures, Irish unit labour costs remain well ahead of those in our closest competitors. Luxembourg - a country with virtually un-interpretable statistics due to huge imbalance between its workforce and population, as well as its economic output composition - is the only country of the old EA12 group that currently has lower labour competitiveness than Ireland.

What about pre-euro and euro-period changes? Chart below illustrates:

The introduction of the euro has resulted in deterioration in hci-based labour competitiveness metrics in all euro area economies, save for Austria, Finland and Germany. Largest deterioration took place in Slovakia and Estonia (catching up period, due to high entry differential), with Ireland posting third largest deterioration. The same remains even during the crisis period 2008-present, as illustrated in the chart below.

During the crisis, Irish hci-ulc index reading fell from 130.5 at the end of 2007 to 111.5 in Q4 2011 - the largest gain in competitiveness of all EA12 states. However, the rate of gains for Ireland has slowed down significantly in 2011. In 2009, the first year of improvements, competitiveness rose 7.1% on 2008, which was followed by a gain of 9.1% in 2010 and only 2.9% in 2011.

13/5/2012: Sunday Times 06/05/2012: Irish labour costs competitiveness

This is my Sunday Times column from May 6, 2012 (last week), unedited version.

Latest research from ESRI shows that, contrary to the prevalent opinion in the media and official circles labour earnings in Ireland have been rising, not falling, during the early years of the crisis. This trend, on the surface, appears to contradict claims of wages moderation in the private sector, the very same claims that have been repeatedly used to argue that structural reforms and changes in Ireland during the crisis have seen a dramatic return of productivity growth.

The ESRI research, carried out by Adele Bergin, Elish Kelly and Seamus McGuinness used data from the National Employment Surveys on the changes in earnings and labour costs between 2006 and 2009. Per authors, “despite an unprecedented fall in output and rise in unemployment, both average earnings and average labour costs increased marginally over the period.”

Surprising for many outside the economics profession, these findings actually confirm what we know from Labour Economics 101.

Firstly, wages and earning are sticky when it comes to downward adjustment. In other words, while wages inflation can be rampant, wages deflation is a slow and economically painful process. This is precisely why currency devaluations are always preferred to cost deflation (or internal devaluations) as the means for correcting recessionary and structural imbalances.

Secondly, wages deflation  is even slower in the economies where collective bargaining is stronger. Ireland is a strong candidate for this with its Social Partnership and tenure-linked pay structures.

Thirdly, average earnings movements reflect not only changes in wages, but also changes in the composition of the national and sectoral employment. More specifically, as the ESRI study concludes, the core drivers of rising earnings during 2006-2009 period were “increases in both the share of and returns to graduate employment and a rising return to large firm employment”. Of course, both of these factors are correlated with the destruction of lower-skilled and less education-intensive construction and domestic services jobs.

Lastly, increases in part-time employment also drove up average earnings. In fact, the latest figures from the Eurostat show that a total of 7.4% of our currently employed workers are classified as part-time employees willing to work longer hours, but unable to secure such employment. This is the highest proportion in the entire EU27, and well above the 3.9% reading for Greece.

Overall, ESRI researchers concluded that “a good deal of the downward wage rigidity observed within Irish private sector employment since the onset of the recession has largely been driven by factors consistent with continued productivity growth.”

In my opinion, this is not a foregone conclusion. Irish labor productivity may have risen during the period of the crisis, but much of that increase is probably accounted for by the very same four forces that drove increases in earnings. Higher proportion of jobs in the economy within the MNCs-dominated exporting sectors, higher survival rate for jobs requiring higher skills, and the nature of the early stages of public sector employment cuts most likely simultaneously explain changes in both earnings and productivity.

The latter aspect is worth explaining. In the early part of the crisis, all public sector employment reductions took place out of cuts to part-time and contract positions, thus most heavily impacting lower earning younger workers. This would simultaneously increase the proportion of higher paid public employees and the average productivity in the sector. Post-2009, cost reductions have been running via early retirement schemes, but these are not reflected in the 2009 data.

In other words, on the surface, it might appear that Irish labour productivity has grown over time, but in reality, it is the reduction in less productive workers’ employment that has been driving these ‘improvements’. Incidentally, this story, not the ESRI conclusion, is consistent with the situation where domestic economic activity has contracted more than domestic employment.

In brief, our ‘productivity gains’ outlined by the ESRI might be a Pyrrhic victory in the Irish economy’s war for internal devaluation.

And the said victories continued since 2009 – the period not covered in the ESRI study.

Since January 2010, earnings have been falling in Ireland as jobs contraction became less pronounced and as public sector entered the stage of early retirement exits. Irish average hourly labour costs peaked at €28.0 per hour in 2009, 5.7% above the Eurozone average. In 2011, however, the average hourly labour cost in Ireland stood at €27.4 per hour, 0.7% below Eurozone average. If in 2009 Ireland had the eighth highest average hourly cost of labour in EU27, by 2011 we were 11^th most expensive labour market.

According to the Eurostat, across the Irish economy, labour costs rose 7.7% in 2007-2009 period followed by a drop of 1.6% in 2010-2011. However, over the period of the entire crisis, the labour costs are still up 5.2%. The only good news here is that our euro area competitors have all posted higher labour costs inflation. The same pattern is repeated in Industry, Services and across the Public Sectors. Only ICT and Financial Services broke this pattern, driven by fixed wages in the state-owned domestic banking, robust demand for IFSC and ICT specialists. In Professional, Scientific and Technical Activities, earnings rose 6.3% between 2007 and 2011, with wages moderation kicking in only from 2010 with a relatively strong decline of 4.8%. Still, this is just half the rate claimed in the official promotional brochures extolling the virtues of decreased labour costs in this area in Ireland.

With relative stabilization of unemployment and longer duration of joblessness, our average earnings are now set to decline over time as younger educated workers come into the workforce to replace retiring older workers. In the mean time, our productivity metrics will continue to improve in specific MNCs-dominated exporting-heavy sub-sectors. Competitiveness will improve, but not because real productivity will expand. Instead, continued re-orientation of economy toward MNCs will drive headline numbers as we become more and more a tax haven, rather than indigenous entrepreneurship engine.

These accounting-styled gains in productivity and cost competitiveness are likely to coincide with stagnation of Ireland’s GNP. In the period since 2007, Irish after-tax earnings have actually suffered significant deterioration compared to our counterparts in Europe. This deterioration is strongly pronounced for demographically most productive part of our workforce – those in the 25-45 years of age.

Eurostat data shows that in 2007-2011, after-tax earnings in Ireland have increased only for single persons with no children earning 50% of the average wage (a rise of 2.3%) and households with two parents and two children on 100% of the average wage income and sole earner (up 1.8%). The smallest declines in after-tax earnings occurred for the category of single person households with no children earning 100% of the average wage (down 0.8%), families with two earners and no children bringing in 200% of the average wage in combined earnings (down 0.8%), and families with similar income (down 0.6%). At the same time, the largest declines in after-tax earnings were recorded for single persons and families with no children and earnings of 167% of the average wage (declines in the range of 2.3% and 3.7%). Above-average after-tax earnings drops were recorded for all other types of households, including families with children on combined earnings in excess of 133% of the average wage. In other words – younger households and households with two earners have been the hardest hit by the recent trends.

With decline in net after-tax earnings, Irish economy is now facing a number of pressures. Costs of living, commuting and housing are likely to continue rising in months and years ahead, driven by the state desire to extract more in indirect taxation and the market structure that is largely captured by the less competitive state enterprises and defunct banks. Direct tax burden will also continue to rise, while pre-tax earnings will fall. These pressures will imply further reductions in consumer spending and domestic savings. The latter means, among other things, that we will see renewed pressure on banks (as part of our savings reflects repayment of household debts) and on domestic investment.

CHARTS: 

Box-out:

The latest Community Innovation Survey for Ireland for the period of 2008-2010 has been released by the CSO, detailing some very interesting trends in overall innovation activity in Irish economy. Headline figure shows that 28% of enterprises in the industrial and selected services sectors had product innovations in 2008-2010, with 33% of enterprises engaged in process innovations. However, only 18% of enterprises were engaged in both process and product innovations. Not surprisingly, foreign-owned enterprises led Irish-owned enterprises in terms of product innovation 38% to 25%, in process innovation 40% to 30%, and in dual product and process innovation 25 to 16%. Irish-owned enterprises derived slightly more of their total turnover from adopting innovations new to the firm, while foreign-owned enterprises led strongly (more than 2.5 times) in terms of new to market innovations. This suggests that Irish enterprises strength remained in adopting new innovations developed outside, while foreign-owned enterprises are strong leaders in creating new products, services and processes for the market. Not surprisingly, of €2.5 billion spent on innovation in 2010, just 49% went to finance in-house R&D. The most innovation-intensive sector of the MNCs-dominated economy was, not surprisingly Manufacture of petroleum, chemical, pharmaceutical, rubber and plastic products (72.5% of enterprises with technological innovation activities), while the most intensive traditional sector was Manufacture of beverages and tobacco products (91.7%). Did someone mention booze and pills sciences?

11/02/2012: Labor Productivity - some cross-EU comparatives

There has been much of talk about Euro area (and EU27) competitiveness trends recently in the media. Some of the commentary I've seen references the issue of decoupling in competitiveness across EU states. In light of this, I decided to take a look at productivity trends. Using eurostat data, I was able to:

1. Take eurostat main series for per person aggregate (total) productivity index that sets 2005=100
2. Rebase the index to Q1 2000=100 and recompute entire set of EU27 countries, plus EA17 and EU27 aggregates
3. Obtain via (1) and (2) above new set of productivity indices that reflect dynamics in per person productivity since Q1 2000 through Q3 2011
4. Note: data is seasonally adjusted and I am only reporting countries where data is hours adjusted as well.

Here are the core charts (I added Ireland and EU 27 average in every chart):

So few trends are apparent:

• Ireland performs - since the beginning of the crisis extremely well in terms of productivity improvements and levels - much due to the massive destruction of its employment base (I commented on this effect a number of times before). Overall - this is remarkable performance albeit at huge cost.
• Spain has posted some significant increases as well, mostly due to destruction of employment - much more so than Ireland.
• Italy is performing poorly as does Greece. In fact, Greece is the third worst performer in the entire EU27 in terms of productivity growth since the beginning of the crisis (Q1 2008).
• Portugal improvements appear to be largely consistent with the pattern for Spain.
• Finland clearly leads the pack (after Ireland) in the group of Small Open Economies (SOEs)
• Strong trends in growth in East-Central Europe (ex Hungary and Slovenia) 

Now, let's take a look at cumulative growth in productivity since the beginning of the crisis - note: green boxes mark countries that outperform EU27 average by more than 1/2 STDEV, while red boxes mark those countries that underperform the EU27 average by more than 1/2 STDEV:

And similar analysis for cumulative growth in productivity since Q1 2000:

 So is there 'decoupling' going on in terms of labor productivity? Not really. Here's what's happening:

• Spain shows highest gains in total productivity since Q1 2008 but weak (roughly average) gains since Q1 2000
• Ireland shows second highest gains since Q1 2008 and above average (6th highest in EU27) gain since Q1 2000
• Slovakia doing spectacularly well, albeit, of course, from low levels, as is Estonia (though not too great during the crisis period)
• During the crisis, Belgium, UK, Greece, Hungary, Italy, lux & Sweden all posted below average (more than 1/2 STDEVs) performance
• Since Q1 2000, Italy and Lux were the only two statistical underperformers.

So unless we go beyond Q1 2000 (the period for which we don't really have coherent comparable data) there is no 'decoupling' going on in labor productivity. There is shallow growth in it on average, but no dramatic 'decoupling'. In other words, much of core Europe is pretty poor in terms of labor productivity growth, while East-Central Europe and Ireland are performing pretty well.

23/10/2011: Economic Freedom of the World 2011

Couple of weeks ago, Ireland's Open Republic Institute and Canada's Fraser Institute published annual Economic Freedom of the World Index - the most comprehensive and academically credible index of institutional quality of economic environments around the world. Unlike other similar indices, EFW uses latest comprable available data for all countries in the index and undertakes detailed assessment of the largest number of criteria in arriving at its final rankings.

The results for Ireland are not good. As well as for Europe overall.

No EU countries in top 5 ranks, only one EU country in top 10 and no Euro area country in top 10. In top 20 ranked countries group, there are only 3 Euro area core EU countries, with 3 more Central and Eastern European states. Ireland ranks only 25th in the world - an extremely poor performance, given that last year we were ranked 11th and in 2009 index we were ranked 9th.

Overall, chart below shows historical trend for Ireland:

We are now ranked back in the position that is consistent with economic environment-determining institutions quality that is worse than the entire 1980s!

Charts below summarize the sources of our underperformance:

The data above refers to performance parameters for 2009. Since then, Irish economic conditions and policies have deteriorated substantially so we can expect further downgrades in the index.

2/09/2011: Competitiveness in the long run: did the euro help?

Another look at the evolution of euro area competitiveness: in the chart below I plot ECB’s Harmonized Competitiveness Indicators for the euro area since 1995 as measured by the average annual HCIs deflated by unit labour costs. The higher the value of the index, the lower is competitiveness.

Here are some interesting points to observe, based on the data:

• The period since introduction of the euro witnessed deterioration or no improvement in overall competitiveness in all countries, save Germany, once the lags are accounted for (note, there is strong path dependency in many countries’ wages/labour costs due to long term contracts and generally sticky wages). Hence, for the period 1995-2001, euro area HCI averaged at 98.8, while for the period 2002-2010 the HCI averaged 99.8. Similarly, for France, HCI averages for the two sub-periods were 99.1 against 101.7, for Italy: 97.0 against 107.1, for Spain 98.4 against 108.3, for Finland, the Netherlands (Nordics) & Austria: 99.91 against 99.94 (statistically identical), for Ireland: 100.2 to 117.5 and for the rest of the euro area: 99.2 to 113.0.
• The period of highest competitiveness for all countries, except Germany, coincides with the period when pre-euro qualification period forces of improving competitiveness reach their peak: 2001-2002. This overall euro area competitiveness peaks in 2001, France’s competitiveness peaks in 2001, Italian, Spanish, Nordics’ & Austrian, Irish and Rest of euro area competitiveness peaked in 2001.
• After 2001, losses of competitiveness become pronounced across all economies, except Germany, with lowest competitiveness post-2000 points reached around 2008 (France, Spain and Ireland) or 2009 (all other countries, plus euro area as a whole).
• Since the onset of the crisis (again, accounting for lags) there have been significant gains in competitiveness. As I noted elsewhere, in some cases (Ireland and Spain, for example) these gains came primarily due to a wholesale destruction of a number of non-competitive domestic sectors (construction and retail).
• Gains in competitiveness have been very shallow in France (decline in HCI off the local pre-crisis peak of just 2.4%) and Italy (-3.2%), moderately weak in Germany (-5.22%), Nordics + Austria (-4.69%), Rest of Europe ex-Ireland (4.5%). Gains were close to euro area overall average (-9.2%) in Spain (-7.2%) and spectacularly strong in Ireland (-17.1%). It is worth noting once again that Irish gains in competitiveness came to a large extent from destruction of jobs in sectors that were least competitive before the bust (construction and domestic retailing and hospitality).
  

Overall influence of impressive German economic performance over the 2000s in terms of competitiveness can be clearly seen from the chart below.

But what the two charts above clearly suggest in terms of analysis for Ireland is really rather disturbing. Despite significant gains in competitiveness, Ireland remains well behind its peers in terms of absolute levels of HCIs – according to the latest data, we are lagging behind Germany, France, Italy, Spain, Finland, the Netherlands, Greece, Cyprus, Luxembourg, Malta, Austria, Portugal and Slovenia.

More importantly, delivering a similar magnitude decline over the next 2 years (a task that will either require unemployment rising to over 22% or a gargantuan effort in terms of productivity growth not seen in modern history of any state) will get us to the level of competitiveness comparable to 2001 – achieving HCI of ca 96.2.

It might be not bad, but should the trends across the other euro area countries also remain identical to those over the last 2 years, Ireland (with projected HCI under this scenario reaching 98.8) will be still less competitive than the euro area as a whole (92.9), Germany (82.8), the Nordics and Austria (98.7). If anyone expects this type of miracle to occur, good luck to them, but if anyone expects the result of this miracle to be a huge boost to our economic growth, let me point out the last little factoid that the data reveals: back in the 1990s our average HCI was 102.7 – below the euro area average of 104.2. With two consecutive ‘miracles’ we are not even aiming to get to parity of the euro area average.

15/07/2011: Irish electricity prices and subsidies

Some interesting data on electricity prices within the EU - the latest is now available from the Eurostat, covering H2 2010. Keep in mind, between 2008 and 2010 we have experienced the largest deflation of overall consumer prices in the Euro area.

In terms of household prices for electricity, 2010 H2 price in Ireland was €0.1875/kWh up on €0.1855/kWh in H2 2009 and down from €0.2033/kWh in H2 2008. Back in H2 2008, Ireland ranked as the 6th most expensive electricity market for households in EU27, plus Norway, Turkey, and Bosnia & Herzegovina (let's call these EU27+3 for brevity hereinafter). The ranking improved to 7th most expensive in H2 2009 and to 9th in H2 2010. Chart below (arranged in order of increasing cost for H2 2010) illustrates.
Small, but progress: over 2 years overall decline was 7.8% in average prices.

Next, the cost of electricity for industrial users: In H2 2010 Irish electricity prices for industrial users averaged €0.1131/kWh down from €0.1419/kWh in H2 2008 and down on €0.1175/kWh in H2 2009. So the decline in the industrial electricity prices over the same period of time was almost 3times larger than for households - 20.3%.
Why? One reason - taxes. Our Government, incapable of creating a level playing field for investment and entrepreneurship has made a conscious choice to shift tax burden from the shoulders of producers/employers onto the shoulders of employees/households. Hence, as with income tax and other taxes, business taxes are kept lower for electricity than for households.

Before taxes are added, Irish household electricity cost was 0.1629 in H2 2010, which was 44.9% above the comparable pre-tax price for industrial users. Now, suppose this premium was justified by higher transmission costs to the households. And do note that Ireland and France are the only two countries that do not report break down of final prices by generation and transmission. For all other countries, network transmission costs account for about 42.15% on average of the total pre-tax price of household electricity in H2 2010. But here comes a tricky thing. After taxes are factored in, final price premium for electricity paid by households over and above industrial users rises to 65.8%.

What's the 20.85% tax wedge on the premium about? Most likely - a subsidy from the households to industrial users, cause, you know, to be competitive we have to charge someone to subsidise someone else... Although the subsidy is a sort of Pyrrhic victory, you see, since even with this transfer, Irish industrial users face the 6th highest electricity tariff in the EU27+3 in H2 2010, same as in H2 2009, but an improvement on the 4th highest in H2 2008.

Let us say thank you to the Social Partners and CER who work this hard protecting our consumers' interests.

11/06/2011: Irish Competitiveness: latest data

Q4 2010 data for Euro area-wide competitiveness indicators is now out and it's worth updating my old charts and crunching through some numbers.

Remember - Irish and some European policymakers are quick to point to improving competitiveness as a core strength of Irish economy. I am slightly in a more skeptical camp on this. Improving competitiveness is good, but it matters where these improvements come from and whether our competitiveness is improving not in absolute terms, but relative to the rest of Euro zone. Let's take a look at what data tells us:

• Euro area Harmonized Competitiveness Indicator (unit labour cost-based) deteriorated in Q4 2010 to 97.9 from 96.3 in Q3 2010 (higher values reflect lower competitiveness). This means that qoq HCI for Euro area (the average benchmark to compare ourselves against) has deteriorated 1.66%, while yoy it is still showing improvement of 9.69%. For the 6mo from July through December 2010 Euro area competitiveness improved 9.55% on same period in 2009.
• Irish HCI has moved from 110.8 in Q3 2010 to 113.8 in Q4 2010 - a deterioration in competitiveness of 2.71% - much deeper drop than for the Euro area average. However, year on year we are still outpacing Euro area gains in competitiveness, with our competitiveness improving 10.60% on Q4 2009, against Euro area improvement of 9.69%. For the 6 mo through December 2010, Irish competitiveness improved 10.62% yoy again outpacing improvements in the Euro area at 9.55%.
• So the speed at which our competitiveness indicators are improving is about 16-17% faster compared to Euro area for the Q3-4 2010, but in Q4 our competitiveness has deteriorated about 10% faster than that of the Euro area.

Charts to illustrate:

This means that we have to think not only in terms of the rates of change, but in terms of actual levels of competitiveness. And here we are not exactly a shining example of a competitive economy:

• In Q3 2010, Ireland was the third least competitive economy in the Euro area, scoring 110.8 HCI reading against 111.7 for Luxembourg and 171.3 for Slovakia. In Q4 2010 we slipped down to the second least competitive economy ranking with 113.8 for Ireland, against 113 for Luxembourg. Not exactly where we would like to be, nor the direction we would like to be heading in. Especially since wages are not growing and unemployment is not improving, while overall employment is declining - in Ireland, while the opposite is true for many of our competitors. Which suggests that the value added of our output is declining to drive our HCIs readings up.
• More significantly, since Slovakia and Lux are not exactly our immediate comparators, as chart below shows, our performance remains extremely poor compared to other core Euro area economies.

So let's use the FF slogan from the past: "Lots done, more to do" to describe our situation. At the peak of our 'non-competitiveness', Irish HCI's exceeded Euro area reading by 25.9 points (Q1 2008). In Q4 2010, we exceeded Euro area benchmark by 15.9. Less than half of the gap in competitiveness has been erased by Ireland Inc. To get ourselves down to the level of our direct competitors (other Small Open Economies, SOE) we would need (assuming they stay put at Q4 2010 levels and excluding Slovakia and Ireland) to shave off roughly speaking another 8 points from our HCIs. In other words, you can think of this in the following terms - for all the pain we've experienced, we've traveled so far just under 56% of the road to becoming as competitive as the average other similar SOE. "Lots done, folks. Yet much left to do, still."

15/05/2011: Some data on electricity prices comparatives

Here is some interesting data on electricity prices comparatives from Eurostat (note: chart below refers to simple EU averages for EU27 and weighted EU averages for EU15, while table below is based solely on weighted EU15 averages):

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.
   

Economics 16/9/10: Improving competitiveness

Recently, there have been plenty of claims concerning improving Irish competitiveness through the crisis. Most refer to the Irish Central Bank-reported Harmonized Competitiveness Indicators (HCIs). Here are some charts to detail what has been going on in this area:

The first chart below shows historical trends in HCIs.

On the surface, it looks like:

1. The story of dramatic improvements in our competitiveness (at least as measured by the HCIs) has been true - we are now back to competitiveness levels not seen since June 2007 (in Nominal HCIs), February 2003 (when it comes to HCIs deflated by consumer prices) and January 2006 (as measured by HCIs deflated by producer prices)
2. At the same time, the gap between our performance in HCIs deflated by producer prices and consumer prices clearly shows that these gains in competitiveness were not due to producer cost deflation (improved productivity), but due to massive deflation in consumer prices (margins erosion and collapse in domestic demand).

A closer look in the chart below, however, shows that the timing of our competitiveness gains is not as straight forward as the arguments put forward in the public suggest:
Starting with the peak year for our bubble (2007), our gains in competitiveness since the beginning of this recession in Q1 2008 are hardly impressive at all. To summarize these, here is a table of relative changes:

Loss of 1.4% (nominal) in competitiveness, contrasted by gains of just 2.4% in producer prices-termed HCI and 5.6% in consumer prices-termed HCI are hardly a matter of bragging rights for Ireland Inc.

Irish HCI data is strongly suggesting that so far in the recession, Ireland's producers have failed to gain significant inroads into productivity gains. Instead, lower retail prices so far remain the primary drivers of the improved indices reading.

Economics 30/05/2010: A gargantuan task ahead

As the Government continues to insist that the worst is over for Ireland Inc, let us consider some headline numbers on the structure of our public spending.

The figures reported below refer to 2008 comparisons, so they omit most of the horrific fall-out from the current economic crisis. as such, these comparisons relate more to the structural imbalances our state is running, not to the recessionary effects. This is worth keeping in mind, for it means that the differences between Ireland and other states reported below, as well as the adjustments required for us to reach sustainable long term equilibrium on spending and taxation sides will have to be put in place no matter what happens to our economy in years to come. It is also worth keeping in mind because the figures reported below underestimate the extent of our post-2008 imbalances compared to other countries that had experienced much less pronounced crisis over 2009.

All data is taken from the publicly available sources - the IMF and CSO - so the Government and our tax-and-spend crowd of Unions-led economists are fully aware of these. Plausible deniability does not apply, therefore, when it comes to our Government pronouncements about its policies and the current position of the Irish economy on international competitiveness scale.

Chart above plots Ireland's position vis-a-vis its peers in the developed world in terms of the overall size of the primary (non-capital) share of public expenditure in the economy. Two facts worth highlighting here:

• Ireland's Government spending as a share of our real economic income (GNP) is the second highest of all countries in the group, and is well in excess of the average for small open market economies (SOME). It is in excess of Germany (Berlin) and well ahead of the US (Boston).
  
• By this metric, Ireland simply does not qualify as a 'market' economy, as domestic private sector accounts here for less than 47% of GNP! In the USSR of the 1980's, private economy (black market) accounted for around 40% of the total GNP. Get the comparison?

Chart above shows that Irish public sector is clearly one of the most lavishly paid one in the entire developed world. In fact, our public sector wages and earnings swallow over 14.4% of our national income, making Ireland's PS workers the 5th highest paid (on aggregate) in the advanced world. The gap between Irish public sector earnings bill and that for the average SOME is a massive 4.47% of our GNP. Roughly speaking Irish public sector wages bill contains a roughly speaking 48% premium relative to the PS counterparts in similar economies around the world. Clearly, even the reductions in overall take home pay imposed on PS in Budgets 2009-2010 has not erased this premium, especially when one recognizes that since 2008 our GNP has contracted almost in line with the decline in PS pay.

Chart above maps Ireland relative to the US (Boston) and Germany (Berlin) to show just how absurd the whole notion of Ireland Inc being positioned between Boston and Berlin is in the real world. In reality, just one parameter - Social Benefits as a share of GDP/GNP - marks our relative position as being between Boston and Berlin. In every other parameter, we are a basket case of excessive public spending and taxation relative to both the US and Germany.

With the above data in mind, what adjustments in the budgetary positions will be required to bring Ireland into the exact position of being between US and Germany to reflect our stated competitive benefit of being an economy that can facilitate trade and investment flows between the two giants - the EU and US?
To restore our competitive balance we need:

• A cut of €23 billion in gross annual primary spending by the state (current expenditure) - some 14.7% of our GNP. Not €3bn as Brian Lenihan is doing, or €3.5bn as An Bord Snip Nua was suggesting. A whooping €23 billion, folks!
• The cut above cannot come from the capital budget side - where most of the cuts so far took place. It has to be cut from the current expenditure. The reason for this is simple - capital spending is one-off item of expenditure and it is associated, in theory, with a net positive return on investment. Current spending is permanent and yields no financial return.
  
• The cuts must include at the very least a €9.3bn reduction in the wages and pensions bill in the public sector (5.9% of GNP or almost 44% cut in the total PS wages bill, achievable through both reductions in numbers employed and wages paid and pensions benefits entitlements).
• Social benefits, at least in the long run, actually are in line with us being smack between Boston and Berlin, so no adjustment is needed here in the short term (given further deterioration in the fiscal position in Ireland since 2008, I would actually recommend a temporary cut here. Also, longer term reforms, to change the structure of welfare benefits and state pensions must be enacted, but for the reasons different from the budgetary considerations).
• Instead of raising tax revenue, Irish Government should engage in a dramatic reduction of tax burden on the economy. Generally, total tax take in the Irish economy exceeds the average Boston-Berlin position by 6.5% of GNP, requiring a reduction in overall tax burden of €10.3bn on 2008 numbers.
• This reduction in the tax burden should include a cut in personal income tax, CGT and personal gains/profits taxes of 2.1% of GNP or €3.3bn.

There is absolutely no ground for our Government and policy leaders' claims that Ireland is strongly positioned between the low(er) tax US and high(er) tax Germany as a competitive destination for exports and investment arbitrage. In fact, due to the Government-own policies, fiscal and tax imbalances created in this economy mean that we are, at a macroeconomic level, grossly uncompetitive relative to

• both the EU and the US,
  
• as well as relative to our main competitors world wide - the small open market economies.