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Competiveness in a global economy Measuring and improving national competitiveness

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Competiveness in a global economy Measuring and improving national competitiveness Session 7b Macroeconomic Concepts and Issues MSc Economic Policy Studies – PowerPoint PPT presentation

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Title: Competiveness in a global economy Measuring and improving national competitiveness


1
Competiveness in a global economy Measuring and
improving national competitiveness
  • Session 7b
  • Macroeconomic Concepts and Issues
  • MSc Economic Policy Studies
  • Alan Matthews

2
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

3
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

4
Competitiveness definitions
  • the set of institutions, policies and factors
    that determine the level of productivity of a
    country
  • World Economic Forum

5
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

6
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

7
Comparative price levels between EU member
states, 2007
Source Eurostat
8
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

9
Source NCC, Annual Competitiveness Report Vol 1,
2010
10
FOOD
11
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)

12
Source NCC, Annual Competitiveness Report 2010
13
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14
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15
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

16
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17
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18
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19
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

20
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21
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22
Unit labour costs take both earnings and
productivity growth into account
23
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
24
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

25
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
26
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27
Taken from OBrien CBQB No 1, 2010. This series
is not regularly updated by the CB due to data
difficulties
28
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

29
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

30
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

31
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32
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?

33
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

34
Web sources
  • National Competitiveness Council, Annual
    Competitiveness Reports
  • DG Enterprise and Industry, European
    Competitiveness Reports

35
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.
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