Ireland is losing competitiveness as Brexit storm clouds gather

19 Dec 2018692 Views

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The economic storm clouds are gathering, but has Ireland learned anything from the last economic crisis or are we heading back into another boom-and-bust cycle?

Headline economic figures are masking serious threats to Ireland’s competitiveness, the National Competitiveness Council (NCC) has warned.

In a new report, the Irish Government’s independent advisory council, which monitors the competitiveness of the Irish economy, has made some serious warnings that policymakers and business leaders need to heed.

‘The loss of competitiveness in the run-up to the global financial crisis left Ireland particularly vulnerable. That must not happen again’
– PETER CLINCH

Crucially, it warns that even without the dire prospect of a no-deal Brexit, there are signs that the global economy is becoming increasingly turbulent, and international trade wars are likely to gather momentum. Not only that but attitudes towards international tax, a crucial lever in Ireland’s ability to attract inward investment, are hardening.

Ireland is falling in the global competitiveness rankings

On the face of it, the Irish economy is doing well with fast growth rates and declining unemployment, with the number of people in jobs approaching a record high.

However, Prof Peter Clinch, chair of the NCC, warns that Ireland must be careful not to find itself in the same vulnerable position it was in exactly a decade ago when the global financial crisis caught the country and its leaders unaware.

“Ireland is facing a significant competitiveness loss as the economy heats up and prices and living costs rise,” Clinch warned. “The overall performance of the economy, and government finances, are dependent on a small number of firms in a small number of sectors. Moreover, the majority of Irish-owned firms export a small number of products to a small number of destinations. The narrow base of enterprises in high-value-added sectors, and within sectors, disguises many underperforming firms where productivity growth is stagnant or falling.

He added: “The loss of competitiveness in the run-up to the global financial crisis left Ireland particularly vulnerable. That must not happen again.”

A return to boom and bust?

Clinch warned that the Irish economy is beginning to suffer from capacity issues, as can be seen by rapid house price inflation and rising traffic congestion.

‘We are at a critical time in Ireland’s economic development where decisions will determine whether we return to a boom-and-bust cycle’
– PETER CLINCH

He said that such warning signs were ignored in the previous economic crisis, and warned that unsustainable growth will ultimately lead to a return to a boom-and-bust cycle.

He called on businesses, workers and Government to focus on improving productivity, maintaining cost competitiveness, and ensuring a virtuous circle between productivity, the cost of living and wage rates.

“The vulnerabilities in the fabric of the Irish economy, coupled with the challenging global environment, endanger the sustainability of the economic model. It has never been more important that the Government recognises, and diagnoses, these vulnerabilities and acts now to strengthen our productivity performance and competitiveness to secure our future prosperity.”

In a number of practical steps, Clinch said that the gap between indigenous SMEs and the multinational sector needs to be eradicated, and that deeper links between indigenous and foreign sectors, as well as upskilling the workforce, are needed.

He said that the severe shortage of affordable accommodation is a “substantial threat” to Ireland’s competitiveness. “The problem continues to grow, and it undermines our economic development and potential.”

Infrastructure, talent and Brexit

Clinch said that the Government has a responsibility to deliver high-quality, future-proofed infrastructure under Project 2040 in a way that does not overheat the economy and ensures value for money. In particular, the dawdling in rolling out broadband is reminiscent of similar blundering on digital infrastructure pre-2008.

“The delay (and possible high cost) in the full roll-out of the National Broadband Plan across the country remains a clear, and ongoing, competitiveness concern. Reliable, high-speed broadband is essential to increase the attractiveness of regional areas for investment.

“Delivering improved connectivity can enhance the growth prospects of small and microbusinesses, and create opportunities arising on a regional basis, such as remote working, cloud computing and business efficiencies, all of which serve to diversify the rural economy.”

In terms of talent, although Ireland is ranked fifth in the world in the IMD World Competitiveness Yearbook 2018 in terms of attracting and retaining talent, increasing demand and chronic underinvestment in the higher education sector is endangering our competitiveness performance. This is illustrated by the fact that not a single Irish third-level institution has been ranked in the top 100 in the latest international university rankings for 2018.

Clinch said that a future-proofed model for higher education that guarantees a steady output of well-educated graduates with the skillsets needed for the 21st century should be a priority.

He added that the uncertainty associated with Brexit, and the implications in all areas of economic activity – including potential tariff and non-tariff barriers, delays associated with deterioration in land-bridge traffic, lack of adequate port capacity, and security of energy supply – require urgent action to help enterprise to adapt to the shift in the UK trading and regulatory environment.

“We are at a critical time in Ireland’s economic development where decisions will determine whether we return to a boom-and-bust cycle,” Clinch warned.

“High growth figures must not lead us to be complacent. The international climate has become more challenging for small open economies, and Ireland has lost ground in the international competitiveness rankings. To avoid repeating the mistakes of the past, it is critical that competitiveness and productivity are positioned as a central pillar of Ireland’s economic policy.”

John Kennedy is an award-winning technology journalist who served as editor of Siliconrepublic.com for 17 years.

editorial@siliconrepublic.com