IN REPORTING to the Taoiseach in recent years on how Ireland Inc has performed relative to its global counterparts, the analysis of the National Competitiveness Council (NCC) has become depressingly familiar – that Ireland has lost competitiveness. And its prescription has been unfailingly consistent – that the Government must tackle the high cost of doing business here. NCC chairman Don Thornhill again warns in its latest report that unless this issue is addressed, the economy may enter “a prolonged period of depressed economic activity” and a general decline in living standards.
As the 2009 report shows, Ireland saw a 35 per cent decline in international price competitiveness between 2000 and 2008. Two-thirds of this reflects exchange rate movements and one-third a higher rate of domestic inflation. This has happened, in part, because the Government chose to ignore the NCC’s past advice.
Rapid economic growth between 1997 and 2007 came in two distinct stages. The first was export-led with Ireland benefiting from its position as a small, open and competitive economy in a booming global market place. In the second phase the driver changed, with less reliance on exports and more on domestic growth, on housing and consumption. As the report notes: “Though economic growth rates remained strong, our international competitiveness weakened as the domestic boom increased the costs of doing business here and as reforms to improve competitiveness were delayed”.
This loss of competitiveness has compounded the difficulties facing the economy. Economic recovery requires a return to export-led growth which remains the key to long-term national prosperity. This can be best achieved by a sharp improvement in national competitiveness. Quite clearly, Ireland can no longer afford either electricity prices for industrial users that are among the highest in the EU or broadband services that are slow and expensive. Neither should the Government allow the cost of State services – energy, education and public transport – to inflate rapidly while the price of so many private-sector goods and services are dropping sharply.
The NCC report provides a measure of competitive performance which shows that Ireland has under-achieved relative to international counterparts. That performance provides the basis for critical judgments and important decisions. Multinationals may decide whether to locate investment here and financial institutions and international investors may decide whether to buy Irish government debt – and at what price.
In recent months the risk premium attaching to Irish debt has fallen. The National Treasury Management Agency (NTMA) sold a further €1 billion in bonds earlier this week at an attractive yield following strong investor demand. This reflects increased market confidence in the Government’s efforts to contain both a banking and public finance crisis. Likewise, a serious attempt by Government to address the competitiveness challenge is overdue. It could improve Ireland’s credit rating and mark a return to export-led growth.