Competiveness in a global
economy
Measuring and improving
national competitiveness
Session 7b
Macroeconomic Concepts and Issues
MSc Economic Policy Studies
Alan Matthews
Lecture objectives
• Discuss the role of other price and nonprice factors affecting Irish
competitiveness
• Introduce some important indicators used
in assessing a country’s competitiveness
• Reflect on elements of a policy to restore
Irish competitiveness
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
Competitiveness definitions
• ‘the set of institutions, policies and factors
that determine the level of productivity of a
country”
– World Economic Forum
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
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
Comparative price levels between
EU member states, 2007
Source: Eurostat
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
Source: NCC, Annual Competitiveness Report Vol 1, 2010
FOOD
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)
Source: NCC, Annual Competitiveness Report 2010
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
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
Unit labour costs take both earnings
and productivity growth into account…
… 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
Unit labour costs in common
currency terms
• Incorporates the effects of both wage and
productivity growth in Ireland relative to Ireland’s
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
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
Taken from O’Brien CBQB No 1, 2010. This series is not regularly updated by the
CB due to data difficulties
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
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
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 country’s level of development.
– Strong emphasis on business leaders’ opinions
results in some strange individual rankings
• See critique on Irish Economy blog
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 Ireland’s 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?
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
Web sources
• National Competitiveness Council, Annual
Competitiveness Reports
• DG Enterprise and Industry, European
Competitiveness Reports
Follow up and reading
• O’Brien, D., 2010, Measuring Ireland’s
price and labour cost competitiveness,
Central Bank Quarterly Bulletin No. 1.
• Cassidy, M. and O’Brien, D., 2007.
Ireland’s competitiveness performance,
Central Bank Quarterly Bulletin No. 2.