We can prosper with the right environment to export services


OPINION:Services now account for almost half of the total exports from Ireland, writes CAROL NEWMAN

THE INTERNATIONALLY traded services sector is a major source of employment, exports and growth in Ireland. The sector encompasses all service activities that transcend international borders. This includes the flow of services provided by businesses in one country to nationals from other countries.

In Ireland’s case it includes everything from a multinational’s subsidiaries based here providing their sister subsidiaries with accounting functions to call centres providing technical support to customers around the world, as well as more traditional services such as tourism.

Much of the recent growth in this sector in Ireland has been as a result of transformation in the manufacturing sector, whose activities increasingly blur the boundaries between making tangible products and providing high value-added services.

For example, manufacturing firms often provide services with the products they sell, such as training and support services with software packages and hardware systems.

According to CSO data, exports of services amounted to almost €74 billion in 2010, up by 240 per cent from the €21.7 billion just 10 years earlier.

Moreover, services-sector exports remain relatively robust despite depressed demand conditions in the wake of the financial crisis and worldwide recession. Unusually, they now account for almost half of total exports from Ireland, having consistently grown more rapidly than goods exports over the course of the decade.

Europe remains the most important destination market accounting for 70 per cent of total services exports, with the UK alone accounting for one-fifth of the total, suggesting that there are significant opportunities in the world market that are yet to be exploited.

Further expansion of the internationally traded services sector has the potential to make a significant contribution to recovery in employment and living standards in Ireland. This transformation process, however, will bring new challenges that will need to be carefully managed.

An important question is what specific subsectors of the internationally traded services sector should be prioritised?

Computer services are the single most important subsector with exports valued at almost €24 billion in 2009. It is also one of the only sectors in the economy to experience net employment gains in recent years.

Ireland has emerged as an important destination for multinational services companies. For example, in the global entertainment and media sector Google and the social networking websites Facebook and LinkedIn have established bases in Ireland.

Meanwhile, some of the previously large players in the computer hardware sector, such as Hewlett Packard and IBM, have transformed their operations from manufacturing to high value-added services in research, development and innovation.

Ireland has become a significant cluster internationally in the provision of high-end services of this kind. The potential for building on this reputation is acknowledged in the Government’s strategy for a smart economy.

A shift towards high-end service-sector jobs means that the skill sets required of workers may be very different from those who are unemployed. Investment in retraining the labour force is important for reducing unemployment. This, however, should not be at the expense of the investments necessary to produce well-qualified first-time graduates.

Irish universities rank well internationally, in particular in mathematics and science. However, recent results from the OECD show dramatic declines in the relative performance of Irish second-level students in reading and mathematics. To prevent long-term skills shortages, resources for education will need to be diverted to bridging the gap between the skills required of third-level students and the level of preparedness of school-leavers.

Another policy option is to facilitate the export of services that are no longer in demand in the domestic market. For example, there may be opportunities for Irish architects and engineers to export their skills to countries where the construction sector is still booming, such as United Arab Emirates or Malaysia, or to emerging economies, such as Vietnam or Thailand, where skilled professions are in short supply.

An internationally mobile labour force is a necessary ingredient, and there is no doubt that cultural and language differences along with local market constraints will present significant barriers. However, drawing down on some of the contacts developed through Ireland’s diplomatic efforts in the past may help to overcome some of these barriers and facilitate this process.

There are other opportunities for expansion in internationally traded services: for example, the expansion of trade in education services through attracting international students to Irish third-level institutions. This will have spillover effects for the rest of the economy. More innovative teaching delivery methods, such as “global classrooms”, could also increase the export of education services.

The potential for growth of more traditional internationally traded services, such as tourism, is also huge.

The hospitality sector employs more than any other single sub-sector of services. The visits of Queen Elizabeth and President Obama this year, plus major international sporting successes, have helped to improve greatly Ireland’s image abroad.

Falling accommodation and catering prices, aided by the recent cut in the VAT rate and the abolition of the air travel tax, are the factors that perhaps matter most in the long term to the success of tourism in Ireland. There is already evidence of growth returning in this sector, with tourist numbers increasing by over 8 per cent in the first quarter of 2011.

There are challenges associated with the expansion of the internationally-traded services sector. Worldwide rules governing trade liberalisation have yet to be negotiated for services.

There is an element of uncertainty as to what the implications of negotiations under the General Agreement on Trade in Services will be. It is expected – if 10-year-old liberalisation talks are ever completed – that the opening up of trade will lead to further growth in the services sector by expanding the market for its output. This will expose the sector to greater competition leading to lower prices.

Exposure to international competition will present challenges for younger and smaller firms who will find it more difficult to survive. Likewise, for foreign investors in the services sector in Ireland maintaining a low cost environment for doing business will be crucial. The indigenous sector is particularly at risk given that in recent years most Irish firms have been in survival mode rather than seeking to expand, while those in a position to do so have faced serious constraints in accessing the necessary credit.

The future of domestic investment, and inward foreign investment, in the traded services sector will depend on domestic market conditions: the restoration of credit markets, recovery of the public finances, and maintaining an attractive tax regime.

There is no inherent reason why Ireland cannot survive and prosper in this sector given the right policy environment. Future employment and living standards depend on this happening.

Carol Newman is a lecturer in economics at Trinity College, Dublin.