ISME Annual Conference, Hodson Bay Hotel, Athlone, May 24 2001
Is there a third way? Berlin, Boston or Baile Atha Cliath?
Professor Patrick A McNutt Competition Consultant and Partner, Indecon
Consultants
This is an intriguing question for an economy at full employment and with an
exchequer surplus level at its highest in the history of the State and which was
ranked fourth in a recent(1) IMD World Competitiveness Index that assesses how
countries are doing in terms of their business competitiveness. The criteria
include economic performance, government efficiency, business efficiency and
infrastructure. Ireland ranked seventh in 2000. So there may well be an Irish
way, an economic model that could be exported abroad and replicated. However,
when you begin to scratch below the surface of our economic success, there may
be particular attributes of the economy that ought to be fixed before we can
begin to champion our economic model as a third way.
New Economy Effect
The fashionable(2) belief of the past few years that a new paradigm of economic
performance and competition had emerged, carrying profound implications for all
facets of government policy, has been challenged. Nasdaq stock prices have
halved, telecoms are struggling with huge debt problems and a host of e-tailers
have shut up shop. More fundamentally, confidence in the US miracle of
perpetually rapid growth may have faltered. And in Ireland, the problems of the
last six months from public sector strikes to cattle diseases have had a physical
impact on peoples' lives.
Our economy is participating in what can be described as an information and
communications technology cycle. It is everywhere, affecting all business activity,
making possible the automation of all the information and paper processing,
record-keeping and administrative activities which on some estimates account for
50% of all hours worked. The proposition that there is a 'new economy effect'
could survive the demise of dotcoms and the downturn in the US economy.
I am reminded of the comment by Solow that the new economy was 'visible
everywhere except in the productivity statistics'. There will be a delayed impact
and the reason for the delay is that it takes time for a new technology to be
absorbed and used effectively by Irish business. Rapid volume growth and
collapsing prices only creates uncertainty for business. Business would hope that
the new economy cycle is not equivalent to the agricultural cycle of the
eighteenth century where productivity outpaced new demand and delivering an
optimum outcome of employing fewer people. Business would hope that the new
economy creates a new category of demand, analogous to the new technology in
the car industry of the nineteenth century, leading to a new sector of
employment.
Resurgence of Old Economy Jobs
For that to happen, there has to be a careful balance in the economy and an
understanding that the new economy can be beneficial, because it eliminates jobs
in some sectors, making possible new employment growth elsewhere. But for that
to happen, labour markets have to be reasonably flexible and demand growth
maintained. It is worth noting that the most rapidly growing jobs in the US and
Europe include chefs, nurses, waiters, leisure centre employees, sports club
professionals and gardeners. The paradox of the new economy is that
productivity growth increases the importance of categories of consumer
expenditure and employment which we might call 'old economy jobs'. However,
they do create policy priorities for government. It requires a refocus on old
economy values - on profit, on positive cash flow for business; on equal access to
health and education, on improvements in public infrastructure for government.
Third Way Politics?
And this takes us into a 'third way politics' and the ideas of progressive politics.
Parties and government struggling to make sense of the new economy world, yet
determined to hold on to a belief in social justice, have used the third way as a
means of modernising their approach to politics. For(3) New Labour, the new
progressive politics has two driving concepts, one whereby national and local
government, voluntary and community organisations and trade unions advancing
the interests of the individual. Secondly, a realignment of economic and social
policy, away from public ownership to more 'effective markets' where the
individual can best maximise their potential.
Some could argue that income inequality, social exclusion and long term
unemployment are the price of a modern dynamic economy. In third way politics,
income inequality, social exclusion and long term unemployment 'are not just
morally wrong but economically inefficient'. And the difficulty in dealing with
these issues may be exacerbated with the impact of globalisation. Economic
globalisation(4) is the product of two distinct, but mutually reinforcing forces,
liberalisation of the barriers to movement of goods, services, capital and labour
and reductions in the cost of transport and communications.
What would be the socio-economic characteristics of a third way?
Continued investment in education and training
Businesses do lots of things that are expensive and necessary. McKinsey in a
recent report have calculated that a typical western bank can outsource 17-24%
of its cost base, reducing cost-income ratio by 6-9%, and in many cases doubling
its profits. So why not ship the work to India? GE Capital Services opened India's
first international call centre in 1995. It now employs 5000 people. BA and
Swissair have centres that run frequent flyer programmes and Amex has a big
back-office support in Delhi. eFunds International, part of a company spun off
Deluxe, the biggest US printer of cheques, has a large data processing centre in
India. Their CEO commented that 'Indian teleworkers outperform Americans in
similar jobs because they treat them as serious careers and because they are
better educated than their American counterparts, who are often college dropouts'. Big companies looking to reduce their back-office costs are considering
outsourcing to Bangalore and Hyderabad. There will be a requirement for
continued investment in education and training to facilitate 'office work proffered
through space and time'.
Promoting Competition
The core premise of competition policy should be the fundamental objectives of
achieving a level playing field for business firms of all sizes and obtaining the
benefits of effective competition including, the lowest possible prices, the highest
quality and the greatest variety of product and service offerings for the public.
Our competition law makes no provision for the protection of high cost or
otherwise inefficient business firms from the fair and honest competition of their
more efficient rivals. It is inconsistent with a free enterprise system, which is
cocooned within the new economy model. Nor should competition law retard the
growth of large firms of superior efficiency.
Let Go of the Public Utilities!
And in a related issue, 'it is time to let go' of the public utilities and allow
competition to prevail or proceed with regulation of areas where market forces
are not enough to protect the public interest. At the moment there is an uneasy
mixture of government and regulation and market forces, in which the leading
unknown is the future of the market under review.
Avoid Adapting Slowly to Change
The fable of King Midas tells us that man cannot live by gold alone. Ireland has an
educated workforce. However, in the old school of development economics in the
1950s - once applied as guidance on policy to the 'third world economies' - it was
shown that growth can be retarded by slow adaptation to change and by the need
for a new geographical distribution of population.
Paradoxically, Ireland is slowly adapting to change precipitated by competition
while government policy is searching for a new approach to population. The
message from the old school may have a particular relevance in Ireland Inc today
as we come to realise it is the investment in the 'social capital' of the Irish
workforce that is likely to be an important contributory factor to improving private
marginal productivity. Yet, critically at this juncture in our economic history,
private marginal productivity may be constrained by a deteriorating travel-work
environment, imposing heavy short-period costs on an educated workforce.
Unless social marginal productivity can be improved, for example, through
improvements in public infrastructure, private marginal productivity may have to
be sacrificed.
Competitiveness?
Competitiveness factors are evolving in business and include quality, speed,
customisation, product image and after-sales service, all of which are overtaking
traditional cost factors. With the 'death of distance', the access to world markets
for EU players is counterbalanced by similar access by their competitors to EU
markets. Web sites, for example, are consulted to compare and analyse price and
business strategies. The accelerating globalisation and the rapid emergence of
new forms of competition - for example, mastery of technology, access to global
markets, speed of action, innovation, intangible investment - call for a revision of
traditional industry demarcations as well. As companies slice up the value chain
of their products and services across separate markets, traditional criteria
focusing on individual sectors are becoming less and less appropriate for strategic
analysis. The real yardstick for competitiveness should not be sectoral activity,
but, rather, activities and business strategies across markets. Irish businesses
will have to diversify, expand abroad or compete in the local market as niche
players. It is not the time for national champions. With the increase in crossborder equity, in the relocation of operations, in the rapid rotation of ownership
and in 'IT-enabled services' (that is tele-working) a company's geographical
identity is becoming more and more diffuse.
Concluding Comments
It is our underlying economic structure and the relative success of Irish
businesses that have determined the kind of society Ireland Inc has become over
the past decades. The implementation of the characteristics above as policy
changes may not be sufficient to ensure continued economic prosperity. The
changes will become reforms, and as such should be inter-related and presented
piece-meal, in sequence, so that each reform can be assessed as a key
contributor to improving social capital and extending and promoting competition.
To conclude, there is no radical choice to be made between a third way and
pragmatism. Ireland is an economy wherein politics helps to determine the
economy. Therefore a 'third way' would have to elicit how the government can be
the architect of economic and social progress while responding to both the direct
and pragmatic requirement of business and the long-term, ambitious challenges
emerging from the new economy. A qualitative political and institutional leap is
under way - the leap has been created by the economy's success to date. A third
way, an appropriate model for fostering a uniquely Irish entrepreneurial
economy, would promote competition more vigorously and be guided by the
history of developing economies that growth can be retarded by slow adaptation
to change and by the need for a new geographical distribution of population.
The political and economic view of markets and national economies is changing;
rather than a focus on public policy considerations, the view will now focus on an
IT driven global business policy, wherein companies innovate and dominate
national markets. European governments, who have spent a decade squeezing
budget deficits in readiness for the single currency's introduction, will compete
not just for FDI, capital and investment but also to be the location of the newly
emerging high-tech global companies. As companies seek to locate in markets
with the most favourable regulatory conditions, governments will struggle
between the Charybdis of ensuring positive regulatory effects on competitiveness
and innovation and the Scylla of duplicative and inefficient regulations(5). But it
will be judicious political decisions, not technology nor economics alone that will
ensure the continued success of Ireland Inc and the fostering of indigenous
entrepreneurial talent. If there is an Irish economic model that can be exported,
it is rather simple - let the government establish the broad parameters on
handling the issues of 'bottlenecks' in infrastructure and services and income
redistribution, provide the incentives for business and leave the free market to do
the rest.
(1) Institute for Management Development, IMD, World Competitiveness Index 2001, Switzerland
(2) Vide the excellent book by Adair Turner: Just Capital: The Liberal Economy published by Macmillan
(3) Article by Tony Blair 'Third Way:Phase Two' in Prospect issue March 2001 pp. 10-13
(4) Vide Martin Wolf in Financial Times January 25 2001 in special survey '2001 and Beyond'
(5) There has been a debate on labour supply regulations - the minimum wage legislation and work permits;
however a serious issue on worker mobility and flexibility has arisen through industrial action from the
nurses, teachers and rail and bus workers. The problems will continue as competitiveness translates into a
trend of outsourcing, downsizing, decentralisation and relocation with consequences for the security of
employment
© Professor Patrick McNutt Consultant at Indecon Consultants, Dublin