Competiveness in a global economy Measuring and improving national competitiveness

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Competiveness in a global economyMeasuring and
improving national competitiveness

• Session 7b
• Macroeconomic Concepts and Issues
• MSc Economic Policy Studies
• Alan Matthews

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Lecture objectives

• Discuss the role of other price and non-price
  factors affecting Irish competitiveness
• Introduce some important indicators used in
  assessing a countrys competitiveness
• Reflect on elements of a policy to restore Irish
  competitiveness

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Competitiveness

• The ability of an economy to achieve and sustain
  sufficient presence in markets subject to
  international competition to ensure full
  employment and living standards
• Contested concept
• Some economists argue that living standards are
  solely a function of domestic productivity
  growth, full stop (i.e. not relative to other
  countries)
• However, for small open economies (regional
  economies) the key issue is being able to
  attract and retain sufficient economic activity
  to be able to generate sufficient job
  opportunities

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Competitiveness definitions

• the set of institutions, policies and factors
  that determine the level of productivity of a
  country
• World Economic Forum

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Measurement of competitiveness

• Price competitiveness
• Cost competitiveness
• Labour costs Unit Labour Costs in a common
  currency
• Non-labour cost measures
• Non-price competitiveness measures
• Survey comparisons
• World Economic Forum Global Competitiveness Index

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Consumer price level

• Not a direct measure of competitiveness, but
  influences competitiveness directly (tourism) and
  indirectly (through effects on wages)
• If prices are out of line with our trading
  partners, creates incentive for Irish retailers
  to import products rather than sell domestically
  produced goods
• In 1999 Irish prices 6 above the EU average, now
  22 above
• Since introduction of euro to 2007, Irish
  inflation has averaged 3.5 pa, compared to euro
  area average of 2.2
• Difference is particularly due to higher services
  inflation

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Comparative price levels between EU member
states, 2007
Source Eurostat
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Changes in price level (comparative inflation
rates)

• Inflation measured using CPI (Consumer Price
  Index ) or HICP (Harmonised Index of Consumer
  Prices)
• HICP covers around 90 of CPI expenditure
• Main difference is exclusion of mortgage interest
  relief and some differences in definition of
  insurance
• Distinction between headline and core inflation
  deducts energy and sometimes food

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Source NCC, Annual Competitiveness Report Vol 1,
2010
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FOOD
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Recap Harmonised Competitiveness Indicator

• Real exchange rate shows trend in relative
  price levels expressed in a common currency
• An excessive price level (when prices are higher
  than justified by economic fundamentals) affects
  competitiveness and results in lower output and
  employment
• Conventional price HCI uses consumer prices as
  the deflator.
• Criticised because
• Does not take into account prices of intermediate
  and capital goods
• Indirect taxes and price controls can give a
  distorted view
• Inclusion of non-traded goods and services
  distorts measure of international competitiveness
• Other deflators are possible (see later)

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Source NCC, Annual Competitiveness Report 2010
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Wage and labour costs

• Wage vs labour costs
• Difference is employer social security and
  pension contributions
• Irish labour costs around the EU average though
  they have risen rapidly
• Irish labour costs up 40 between 2000 and 2006
  compared to 16 for EU15 and euro area

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Productivity growth

• If higher growth in labour costs reflects higher
  growth in productivity, competitiveness does not
  suffer
• But ex post figures may mislead if the rise in
  labour costs drives low-productivity businesses
  out of existence
• While Irish productivity levels are close to OECD
  average, growth rates have been falling

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Unit labour costs take both earnings and
productivity growth into account
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but heavily influenced by compositional effects
Note how Chemicals greatly influences the trend
in manufacturing ULC Also trends elsewhere in
non-manufacturing not as favourable Source
Central Bank Quarterly Bulletin
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Unit labour costs in common currency terms

• Incorporates the effects of both wage and
  productivity growth in Ireland relative to
  Irelands trading partners as well as exchange
  rate movements
• Calculated as wages / labour productivity
• During the 1990s relative ULC in common currency
  declined, signifying gains in cost
  competitiveness.
• Since 2002, increase in ULC in common currency
  has been around 25 economy-wide
• An alternative measure of relative
  competitiveness to the real HCI deflated by
  Consumer Price Index

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See Box A, CB Quarterly Bulletin No 1, 2011 pp.
22-24 for a discussion of how this cost
competitiveness index is influenced by
compositional effects. The apparent sharp fall
in manufacturing ULCs due to increase in
importance of high value added but low employment
modern sectors between 2008 and 2010
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Taken from OBrien CBQB No 1, 2010. This series
is not regularly updated by the CB due to data
difficulties
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General business costs

• Benchmarked annually in the NCC Annual
  Competitiveness Reports
• Examples
• Property costs, utility costs, IT, accountancy
  and legal services, waste and professional
  services

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Non-price elements of competitiveness

• Business environment
• labour force skills, quality of entrepreneurship,
  tax system, physical and knowledge
  infrastructure, labour and product market
  regulation, access to finance
• Technological competitiveness
• Innovative and adaptive capacity of economy

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Competitiveness surveys

• World Economic Forum Global Competitiveness Index
• The GCI is compiled from 113 different
  indicators, divided into twelve pillars of
  competitiveness (education, efficiency of labour
  and product markets, business sophistication,
  innovation, etc.)..
• The relative weights given to these indicators
  vary depending on each countrys level of
  development.
• Strong emphasis on business leaders opinions
  results in some strange individual rankings
• See critique on Irish Economy blog

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Restoring Irish competitiveness

• National Competitiveness Council
• Annual Competitiveness Report Vol. 2
• Investment priorities
• Taxation policy to support competitiveness
• Lowering costs of doing business
• Education and skills
• Building Irelands Smart Economy
• Download
• Addressing cost competitiveness without the
  possibility of devaluing the currency
• Forfás Restoring Labour Cost Competitiveness
  2010
• Achieving an internal devaluation
• How important are wage costs to competitiveness?

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Review and conclusions

• Irish competitiveness a function of productivity,
  cost and exchange rate developments
• We have learned how to measure cost
  competitiveness using the HCI deflated by either
  consumer prices or unit labour costs
• Global competitiveness rankings assess a wider
  range of competitive capacities
• For Ireland, exchange rate movements of the euro
  are particularly important driver of changes in
  competitiveness
• Policies to restore competitiveness in short and
  longer runs

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Web sources

• National Competitiveness Council, Annual
  Competitiveness Reports
• DG Enterprise and Industry, European
  Competitiveness Reports

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Follow up and reading

• OBrien, D., 2010, Measuring Irelands price and
  labour cost competitiveness, Central Bank
  Quarterly Bulletin No. 1.
• Cassidy, M. and OBrien, D., 2007. Irelands
  competitiveness performance, Central Bank
  Quarterly Bulletin No. 2.