Going North to shop may stop economy going south

Cross-Border shopping will reduce retail prices in the Republic, leading to lower costs generally, writes Jim O'Leary

THERE ARE many issues on which reflex and calm reflection produce different responses. One of them is cross-Border shopping. Here a common reflex (though not necessarily the most common, as evidenced by the long lines of traffic into Newry) is to condemn the activity and label those engaged in it as disloyal. The patriotic thing to do, we are told, is to shop at home and thereby maintain employment in retailing here and sustain the flow of tax revenues to our, rather then Her Majesty's, exchequer.

It's a seductive argument, not least because it appeals to our Inner Partitionist, but it is short-sighted and ultimately self-defeating.

An obvious problem with the crusade against cross-Border shopping is where to draw the line. If it is wrong to go to Armagh to shop, and in the process perhaps to buy goods manufactured in the Republic from a sales assistant who lives in Emyvale, what's the rule about buying British goods in a British-owned store in the Republic with the help of a sales assistant from Krakow?

Or another take: if people from this Republic who go North to shop are fair game for accusations of perfidy, where do we stand on US firms who set up here and, in doing so, export jobs and tax revenues from their home country? Do we tell them that they should up sticks and go back?

It's not hard to see that this sort of thinking opens the door to absurd and outlandish conclusions. It also amounts to a repudiation of one of the core principles that has animated our economic policies for the past half-century.

This is an open economy, highly dependent on the rest of the world for the export demand, investment inflows and migrant labour that sustain output and employment. Our prosperity is predicated on openness.

For us, recovery from the current recession will not occur if we abandon this principle, and will be rendered all the more difficult if any of our trading partners do so. This is no time, if indeed there ever was a time, for giving vent to protectionist instincts.

There is another separate but related point. People are going North in their droves to do their shopping for the simple reason that things are now much cheaper there, mainly because of sterling's sharp depreciation of recent months. However, the big cross-Border price differences that have opened up will not last: prices in the Republic will fall as the effect of sterling weakness feeds through, and one of the factors that will push prices down will be cross-Border shopping.

So, the more it is that people go North to shop, the more pressure there will be on retailers here to cut their margins, cut their costs and persuade their suppliers to cut better deals with them.

This is as it should be, and the sooner these adjustments take place the better.

The problem reflected by large-scale cross-Border shopping is one manifestation of a much wider problem that currently besets the Irish economy, namely the problem of lost competitiveness.

As might be expected, there is a strong causal relationship between competitiveness, or real exchange rate movements, and export growth. Between 1996 and 2000, a period during which the volume of exports more than doubled, the real exchange rate declined by over 10 per cent. By contrast, since 2000, annual export growth has barely reached 5 per cent on average, while the real exchange rate has risen by a cumulative 35 per cent, about two-thirds of which is due to adverse currency movements (the strengthening of the euro against the dollar and sterling) and the rest to faster inflation here than in our main trading partners.

It seems to me that a very big improvement in competitiveness will be necessary to produce the kind of export performance that this economy will need to launch a sustained recovery from recession. How is this to be brought about? In the past when a large boost to competitiveness was required, it could be delivered by a currency devaluation - the devaluations of 1986 and 1993 come to mind - but membership of EMU precludes such a policy response today.

Absent the devaluation option, there is really only one other strategy available. It is to bring about a sizeable fall in costs of production relative to our overseas competitors.

In circumstances where international inflation rates are edging towards zero, what this converts into is the requirement to cut production costs. Perhaps some of the reduction required could be achieved through an acceleration in productivity growth, but mostly it would have to take the form of reductions in wage rates, utility prices and the prices of other inputs, including professional fees and the like.

Understandably, there will be great resistance to all of this. But - and here's the direct link to cross-Border shopping and its effects - the chances of breaking down this resistance would be enhanced if retail prices here were to fall. One could argue that it is our patriotic duty to do what we can to bring that about, including travelling North for our shopping until it has happened.

Jim O'Leary is a Senior Fellow of the Department of Economics, Finance and Accounting at NUI-Maynooth. He can be contacted at jim.oleary@nuim.ie