Wednesday, October 14, 2009

Lack of Competitiveness

I have considered for many years that the Irish economy suffers from a fundamental lack of competitiveness. Unfortunately this was persistently ignored during the crazy property bubble years of the 2nd phase of the Celtic Tiger. So what was misleadingly trumpeted then by politicians as "inherent strengths" of the Irish economy e.g. continuing high growth and employment were in effect hiding the true reality of a highly artificial economy, with bad value and poor work practices evident in every sector.

One of the unchallenged assumptions that was made here was that removal of barriers in the EU internal market would in itself guarantee competition in Ireland.

However for a number of reasons this argument is highly suspect due to grave faults with respect to the way the market operates.

Though the market works better in relation to freely traded goods, even here major impediments exist. For example Governments prevent cars being freely imported from lower price jurisdictions. So apart from differing road regulations here favouring right hand drive cars (as opposed to left hand drive on the Continent) hefty regulation fees have been put in place to deter direct customer buying from other EU states.

Then well known prescribed drugs (such as for blood pressure and cholesterol) are available in other EU countries for as little as 1/10th of the price of what is charged in Ireland. However rigid prescription practices are deliberately used to deter customers availing of much lower prices elsewhere.

Also many products for which the economy is inherently suited to produce, sell at especially high prices in Irish supermarkets e.g. bottled water, yogurts and cheese.

Ireland is a small economy that - apart from Northern Island - is geographically isolated from the rest of Europe. Thus when the price of bottled water is pitched at an outrageous level, the consumer is left with the option of either directly importing from another countries, which due to the bulky nature of the product is impractical. Alternatively one could travel to Northern Ireland which can be time consuming and inconvenient (creating its own additional expenses). So where goods are perishable such as food, or alternatively bulky of relatively low value, little competition can be enforced on domestic sellers. Then as all can mutually benefit from maintenance of high prices, an effective cartel is often then operated by the oligopoly sellers.

The situation is even worse in the provision of services. Dental charges for example are wildly excessive in the Republic again through high costs and collusion amongst providers. One is therefore forced to travel to another jurisdiction to avoid such charges. However this involves additional travel costs, a considerable amount of inconvenience and problems regarding effective follow-up.

One could argue that the answer is to encourage outside service practitioners to set up in Ireland. However there are considerable difficulties to this as the EU still does not provide the same rights of establishment to service providers.

The services sector is now the most important, both in terms of output and employment throughout the EU. So one can realise the restricted nature in practice of competition.

So the Irish economy as an isolated geographical entity on the West of Europe is most easily able to avoid the rigours of competition. As so many services are consumed locally, there is little need to match prices in other member countries. And where the domestic market is concerned local competition is often avoided through cartel type arrangements between providers.

Likewise many goods providers are insulated from foreign competition through prohibitive costs and time delays with respect to the importation of foreign products. And once again because of the small size of the market, it is much easier for sellers to operate informal cartels and price fixing arrangements which distort competition further.

And as over 90% by value of exports (goods and services) comes from multinational subsidiaries located here mainly for tax advantages, to a considerable extent we have been able to ignore the problem of competitiveness.

As measures to tackle this issue would indeed prove unpopular among sellers, the Government has so far largely evaded the issue.

Due to the damaging effects on sales, the deep recession in the economy will gradually take care of competitiveness for many firms in the private sector. This problem is further compounded for indigenous exporters by the current high value of the euro against sterling and the dollar. However far tougher implementation of competition regulations is required with respect to many service providers e.g. doctors and dentists, as we cannot maintain a model whereby practitioners here continue to enjoy unrealistically high earnings.

The Government should also introduce a specific regime to continually monitor costs and prices in various sectors (both over time and in comparison to other EU countries). The very fact of making the information publicly available would serve to highlight key problems thus causing pressure for change. Also campaigns focusing on special anomolies would be in order.

A particular difficulty exists with respect to public services. Payment here e.g. in health and education is out of line with rates in other EU countries and also with private sector pay in Ireland. We have allowed this problem grow during the inflated riches of the Celtic Tiger. The problem is that many people have entered into financial commitments based on this lax approach which then creates considerable resistance to any proposed reforms. This is worsened by a patent lack of social justice whereby privileged groups such as politicians, judges, bank directors and hospital consultants seek to live by different rules than those that apply to the rest of the community. So this issue will create distortions in our economy for some time. Public sector unions enjoy an unduly powerful role in Ireland (effectively acting as coalition partners) largely because of weak government. So when demands for pay cuts and reduced numbers are made the unions will stoutly resist. And then I expect the Government to back off making cuts to capital rather than current expenditure.

This is a sure recipe for continued recession in the economy with short-term recovery highly unlikely.

Of course competitiveness involves more than just consideration with unit wage costs. Largely because of our reluctance to properly face up to the cost issue, many seek to promote Ireland as "the knowledge economy" presumably concentrating on high skilled activities where pay competiveness would not be so important. However there is considerable delusion in this. So far Ireland's competitive advantage largely springs from artificial tax provisions. Also other countries will quickly see the benefit of developing the "knowledge economy" with much lower costs.

So we need to stop fooling ourselves. We have been trading for years off artificial advantages i.e. low corporate tax and the propery boom and in the process lost any real compass as to future directions.
We need to quickly get back to basics i.e. low costs, hard work and genuine pride in the country. Even then we will need all the ingenuity at our disposal to develop new competitive strengths that can serve us well into the future.

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