Lost competitiveness must be tackled

ECONOMICS:It is possible that, through correct choices, Ireland can fight its way out of its difficulties

AS IRELAND enters a fully-fledged recession, it is important not to let the descending gloom lead us to lose sight of fundamentals required for a prosperous economy. We should focus instead on the features that may help us make our way out of this recent reversal of fortune.

There is no doubt that the loss of jobs, the public finance crisis and worsening economic conditions do give cause for concern and warrant analysis, but this should reflect on where this small regional economy has come from, the experiences we have gained and the successes achieved that will help us to make correct decisions in the coming months.

One of the main causes for concern from a long-term growth perspective is Ireland's loss of competitiveness since 2000. There are also clear warning signs in recent months that this trend is continuing at a quickening pace.

This is evidenced by the rising cost of doing business in Ireland, and as a result the rising numbers of manufacturing firms closing, or planning to close, Irish plants in favour of overseas locations.

Adding further cause for concern for job prospects is the decline in construction employment. The knock-on effects of this has impinged on the rest of the construction sector and more worryingly, on the economy as a whole. While, for now, employment is still growing, albeit at a much slower pace, against the backdrop of worsening economic conditions, the situation could get worse.

These changes should be viewed as part of a gradual structural change that has taken place throughout history.

An early dependence on agriculture is replaced by a process of industrialisation, creating strong manufacturing. Most developed economies have experienced a fall in the share of output and employment attributable to manufacturing, and a rise in the importance of services. Ireland is no exception.

Emphasis needs to shift from traditional manufacturing sectors towards strategic sectors for employment growth, such as high value-added activities like high-skilled manufacturing and internationally traded services.

Government policy needs to facilitate this process through, for example, delivering on the National Reform Programme. It was fostering an environment in which jobs could be created that was the backbone of growth in the late 1990s and 2000s.

Some of the main contributors to the rising cost environment are increasing labour costs (Ireland has one of the highest minimum wage levels in the world), deficits in our physical infrastructure, and the high and rising cost of domestic services, including energy and utilities. These areas present key policy challenges.

It is important that the Government does not scrimp on its capital expenditure but delivers on the National Development Plan. This will have the benefit of providing jobs for those caught by the decline in private housing construction.

Investment flows should be facilitated, particularly in the wake of the global credit crunch. The Government's guarantee on bank deposits is a positive short-term step. In the longer term, it will also be important to facilitate overseas investment. There is strong evidence to suggest that high levels of outward direct investment are linked to a strong export base and high levels of RD investment.

A diversified portfolio can help protect the economy from regional downturns. More fundamentally, mounting concern over the effectiveness of public expenditure growth and whether or not such growth has led to a sustainable improvement in public services means that much needed, but painful, reform is required in the public sector, something confirmed by an OECD report in May 2008.

There is doubt over the level of human capital in Ireland, in particular compared with parts of Asia and northern Europe, despite the view in many quarters that Ireland has a superior education system. Policies aimed at re-skilling those displaced by changes in the labour market and promoting high value-added activities in manufacturing and services will also be necessary.

If these measures are achieved, there is no reason why Ireland cannot remain a high-income and high-employment country. There are almost twice as many people employed in 2008 as there were 15 years ago, and this is not going to be reversed. Neither will the gains in public and private wealth in this period.

Attitudes to business, entrepreneurship and success have changed in the last 20 years. There is acceptance of increased competition and openness, partly brought about by membership of the EU and moves towards a single market, and by increased competition from Asia.

New opportunities are sought out with the help of agencies like Enterprise Ireland and the IDA. Levels of outward direct investment are also increasing. There is no reason to believe that Ireland has not got the ability to exploit these opportunities.

It is possible that, through making the right choices now, Ireland can fight its way out of its difficulties and build on the successes of the last 20 years. The huge gains in employment, GDP and private wealth will all remain. They just may not increase in size again until necessary adjustments to policy have been effected.

This article is a collaboration between Carol Newman and John O'Hagan, who are at the department of economics, school of social sciences and philosophy, Trinity College Dublin. Their recent edited book, The Economy of Ireland: National and Sectoral Policy Issues highlights major changes in the economy in recent years