13/8/2012: Telling tales about our 'Productivity'?

IDA recently used the following chart in the context of Irish competitiveness comparatives to the rest of EEC:

According to the above, Irish labour productivity per person employed is at 136.9% of the EU27 average, which makes us the second most productive economy in the Euro Area and the third most productive in the EEC. Of course, the thing that jumps out in the chart is the massive over-performance in output terms by two other 'special' countries: Luxembourg and Norway. This should ring lots of alarm bells when it comes to trusting the above data to base actual comparative assessments on.

It turns out that adjusting our productivity performance for GDP/GNP gap so as to remove the portion of our output that has absolutely no anchoring in Ireland (net after-tax factor payments to foreign investors) implies Irish productivity index at around 102-106% of the EU27 average, placing us below-to-just-above Germany and ahead of Greece.

I wouldn't argue that that is indeed where we are positioned, but rather that the chart used by IDA is simply reflective of vastly over-inflated real productivity of our workforce, just as it is for Norway (petro-dollars economy) and Lux (an economy with massively undercounted non-resident workforce and an industrial scale 'dry cleaning laundry' for European, EEC & Eastern European corporates).

13/8/2012: National Competitiveness: Not Exactly Good Numbers for Ireland

An interesting paper, THE DETERMINANTS OF NATIONAL COMPETITIVENESS by Mercedes Delgado, Christian Ketels, Michael E. Porter and Scott Stern (NBER Working Paper 18249) looked at three broad and interrelated drivers of foundational competitiveness:

• social infrastructure and political institutions (SIPI),
• monetary and fiscal policy (MFP), and 
• the microeconomic environment. 

The study defined foundational competitiveness as "the expected level of output per working-age individual that is supported by the overall quality of a country as a place to do business".  The paper focused on output per potential worker, which is "a broader measure of national productivity than output per current worker". This "reflects the dual role of workforce participation and output per worker in determining a nation’s standard of living".


Using data "covering more than 130 countries over the 2001-2008 period", the authors found "a positive and separate influence of each driver on output per potential worker". Specifically, "we find significant evidence for the positive and separate influence of SIPI, MFP, and the microeconomic conditions on national competitiveness":

• Consistent with prior studies, institutions (SIPI) positively influence national output per potential worker;
• However, microeconomic conditions have a strong positive impact as well, even after controlling for current institutional conditions;
• Microeconomic conditions have a positive influence on competitiveness even after controlling for historical institutional conditions and incorporating country fixed effects (which offer a broader measure of a country’s unobserved legacy);
• Current institutions and macroeconomic policies "seem largely endogenous to historical legacies";
• "Overall, the findings strongly suggest that contemporaneous public and private choices, especially those that relate to microeconomic competitiveness, are an important driver of country output per potential worker and, ultimately, prosperity".

The paper also defined a new concept, global investment attractiveness, "which is the cost of factor inputs relative to a country’s competitiveness".

Using the new metric, the authors rank the countries with respect to their global investment competitiveness:

The unpleasant bit is that in 2010, a year after we began the process of 'competitiveness improvements' that has stalled since around mid 2011, we were ranked just 24th. The pleasant bit... we still made it into top 25.

And in terms of other comparatives, here are few charts:

Oh, the naughty, naughty authors did get some things right: "In the case of Ireland, we used GNP instead of GDP because of the size of dividend outflows to foreign investors".

And here's what they had to say in terms of their analysis of the Global Investment Attractiveness scores (GIA): "Countries with high GIA tend to experience a strong positive growth, including China and India (with growth rates above 8% and 4%, respectively).  In contrast, countries with low GIA tend to experience a high contraction in output with growth rates below the median value, including Italy, Spain, Ireland, and Venezuela, among others."

Now, wait, is that really the neighborhood we (Ireland) are in? You wouldn't think so from our policymakers/IDA/EI/Forfas/ESRI/CBofI/... statements.

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.