Complacency a killer for Irish competitiveness?

19 May 2003

The slowdown in the world economy and the growing menace of inflation has made national competitiveness a key talking point in many industries, particularly the technology sector, whose prosperity is heavily dependent on a small handful of US multinationals.

Last week’s First Tuesday gathering at Dublin’s Burlington Hotel knew all about competition – the Champions League all-Milan semi-final clash dented the numbers who turned up to hear a panel of heavyweights from Ireland’s ICT industry discuss whether Ireland was losing its edge or merely negotiating another twist on the road to continued economic prosperity.

The panellists seem agreed that the situation is serious rather than just a minor distraction. “Without a shadow of a doubt we are losing competitiveness,” Joe Browne, general manager of Xerox Ireland, said emphatically.

Brendan Butler, director of ICT Ireland within IBEC, didn’t go as far. “We’re losing it but haven’t lost it,” was his assessment, while Microsoft Ireland head Joe Macri saw potential threats from low-cost countries such as India and China. This view was echoed by Denis Molumby, head of strategy business and financial services at the IDA, who saw the erosion of competitiveness as the inevitable result of the “realities of globalisation”.

While everyone agreed that competitiveness was suffering, there were mixed opinions about what it meant for individual businesses. For Joe Browne, the importance of cost could not be overstated. “Cost is a huge factor,” he said. “As [former General Electric CEO] Jack Welch said, ‘you’re never done on cost’.”

Joe Macri said that although Microsoft Ireland was ranked second in Europe in cost terms, the business was not suffering as a result. “Cost competitiveness is not a significant issue for us,” he said candidly. “The regulation and policy environment are more important.” Elaborating later he added that the high cost base was outweighed by the country’s favourable corporate tax rate. “If [the attractive tax rate] was gone, it would be very different,” he said.

Macri’s assessment seemed to be backed by Dan O’Brien, senior editor of the Economist Intelligence Unit, who drew a distinction between the effect of cost hikes on multinationals for which Ireland still delivers the highest returns on capital in the world and the more serious impact on domestic companies, particularly exporters, which “can get hurt by even small increases in wages”.

There were mixed feelings on whether Ireland could sustain its winning position, although there was general agreement on the well documented factors that lie behind the country’s prosperity, namely the low corporate tax rate, economic stability, educated workforce, wage control in the economy, demographic changes and long-term government policy. Luck, or if not that, at least good timing, was seen as another factor in Ireland’s success. “The long-term decision made in the 1970s in education combined with the demographic changes of the 1980s to put us in a great position compared with our European neighbours,” noted Denis Molumby, although Joe Browne preferred to think that the foresight of policy planners played a more important role than luck in creating a booming economy.

The government did not come in for universal praise, however. Brendan Butler pointed out that, with inflation becoming a political hot potato, the government was quick to lay the blame for rising costs at the door of industry. “A lot of the debate has been focussed on the rising cost of commercial services but what’s really driving inflation? A lot of government decisions are driving it. Of the current inflation rate of 4.3pc the government is responsible for 2pc of it,” he claimed.

While many of the conditions that underpin Ireland’s economic boom are still in place today, some panellists detected a growing complacency among business and government leaders. “There used to be a hunger [among policy planners] and a desire to look for new ways to stay ahead. Nowadays, I don’t see the same creativity, hunger and aggression,” noted Browne.

Molumby agreed that the mentality had changed but argued it was understandable given our changed circumstances. “When we had unemployment of 20pc it was relatively easy to marshall the troops and address the problem. It’s easier to make decisions when you’re under pressure and you have to – it’s human nature.”

Whatever is driving it, complacency is leading the Irish economy into serious trouble, felt O’Brien. “The condition for a perfect storm for the Irish economy is out there,” he said ominously.

However, not all the panellists were predicting doom and gloom for economy, or for the ICT sector at any rate. “If this is an industry on its knees, I’d like to see it when it’s doing well,” laughed Butler of ICT Ireland, making the point that, despite the doomsayers, the IT industry is surviving the downturn remarkably well.

For Butler there is one overriding reason why Ireland continues attract foreign direct investment. “The economic and political stability here has been a key factor in selling Ireland as a location of choice.”

Though not advocating a high-cost economy, he turned the notion of cost efficiency on its head by arguing that higher labour costs can have benefits as well as drawbacks. “Higher pay levels can be seen as good as well as bad. It puts more money into the economy and provides more tax that the government can put to good use. Also, Ireland needs to be seen as a good place to come to work and live.”

Dan O’Brien delivered the best line of the day as well as some hope for the future when he said: “Competitiveness is not like virginity: once you lose it, you can still get it back”.

By Brian Skelly

Pictured at the First Tuesday event was Dan O’Brien, senior editor of the Economist Intelligence Unit