Warning signs for Ireland Inc

24 Apr 2003

Every now and then a new terminology enters the collective business speak in terms of economic health. During the cold economic years of the Seventies to the early Nineties policy makers and the press talked of the ‘brain drain’ of our youngest and brightest fleeing the country in search of jobs.

Then, when the good wind started to blow in the mid-Nineties, an influx of inward investment led by players such as Intel and Gateway combined with growing levels of productivity by indigenous firms spawned such terminology as ‘Ireland Inc’ and ‘Celtic tiger’.

Today, three years into a global recession a not so new term, but one with vast implications, trips off the tongue of economists, politicians, journalists and captains of industry — that word is ‘competitiveness’. This is defined as the criteria that compel multinational IT organisations to locate manufacturing, sales, financial services, software and internationally traded services in Ireland.

It’s about ‘bang per buck’ and pertains to wage costs, education, road and rail infrastructure, communications and other benefits available to companies looking to do business in and from Ireland. A decade ago, the availability of a young, English-speaking and well-educated workforce, allied with a 12.5pc corporate tax regime and stringent efforts by IDA Ireland to attract the best foreign direct investment (FDI) projects from mostly US multinationals, spurred Ireland’s economic prowess. It effectively generated a 10-11pc peak in terms of GDP, making us the envy of Europe. As well as this, Ireland had succeeded in attracting approximately 25pc of all US investment in Europe — not bad for a country with only 1pc of Europe’s population.

However, it is 2003 and most of that young, well-educated workforce has grown up and is used to being paid amongst the highest salaries in Europe. As well as this, concerted efforts by local management over the years have been aimed at pushing local operations higher up the food chain in terms of responsibility, moving from manufacturing to higher value add roles such as research and development, internal back office applications and e-commerce. Apple in Cork and Oracle in Dublin are examples of this change in regime, hosting mission-critical services vital to the running of their parent companies. However, in order to perfect this rise up the ranks, significant chinks in Ireland’s armour have been revealed in the form of poor road and rail links, as well as lack of broadband communications in regional centres. It is widely acknowledged that it has taken executives of key multinationals an extra day just to reach the European mainland.

The fact is that Ireland is no longer viewed as a competitive, affordable place to conduct business. Locations such as Mexico and India are now becoming more attractive for the kind of low-cost productivity labour that attracted companies such as Dell to Ireland more than a decade ago. Three years of global recession, particularly in the IT sector, has seen the loss of 15,000 tech jobs so far.

Dell, which employs under 5,000 people here and accounts for 5pc of Ireland’s GDP, has been making noise about the fact that rising wage costs are impacting Ireland’s attractiveness.

An IDA Ireland spokesman acknowledges the worsening situation: “We warned since last year that competitiveness is being eroded in Ireland, with overall operating costs constantly rising. It’s not just labour costs, but all the issues around infrastructure of business, such as telecoms and transport. If it costs an executive an extra day just to meet a client in Europe, well it’s not good enough.

“In terms of Dell, it is undertaking major productivity improvements and this has enabled it to remain competitive but that gets squeezed at a certain point and more has to be done to accommodate its concerns,” the IDA spokesman concludes.

Indeed, last month IDA Ireland’s CEO Sean Dorgan, addressing an American Chamber of Commerce meeting in Cork, admitted: “Ireland is at a turning point in its economic development. Determined action is needed now all around to push for the required levels of growth. While education and quality of infrastructure will be key to success, achieving the results will depend to a great extent on the managers in US companies.”

Business leaders and economists argue that if Ireland is going to succeed in going higher up the value chain, then the investment in infrastructure must take place now. This should either involve spending what’s left in the national coffers, thereby running up a deficit, or borrowing.

Dr Dan McLoughlin, chief economist with the Bank of Ireland, recommends that Finance Minister Charlie McCreevy should look at running up a deficit now whilst Ireland still has 3pc growth in GDP in order to reap the rewards of investing in infrastructure. “The Irish economy has managed to weather the storm of recession in recent years; the economy didn’t overheat, nor did it slow down dramatically. Ireland is running a small deficit this year, but has a big surplus of €5bn on the balance of payments. Why not run a deficit in order to fund infrastructure in time for when the economies of the world rebound? A GDP last year of 6pc, which dramatically reduced to 3pc, is still a laudable performance when most other countries are doing less than this,” he says.

McLoughlin acknowledges that wage costs are quite high. “Ireland is now a rich country in western Europe and no one wants to return to the way it was here. But I do see wage costs decelerating. The nation is running at 4.5pc unemployment. People are prepared to take lower pay because they are insecure about their jobs.

“The key issue is Irish competitiveness. You cannot have third world wages in a rich western country. The notion that you can go backwards is crazy. It’s not really about wages; what matters is productivity and infrastructure. So far management of the €40bn National Development Plan has been poor and needs to be looked at again. Short-term downturns in the global economy are not reason enough to slash spending on infrastructure we will need in the long term. We need to examine the overall productivity picture.”

McLoughlin hits out at the culture of dependency that exists within Irish society and industry: “Ireland’s dependency culture extends from the individual to the corporate world, with too many industries still looking for the government, ie the tax payer, to bail them out when market conditions turn against them.”

“Unemployment has risen only modestly and the flexibility of the labour market has ensured a marked deceleration in wage inflation, which belies the claims of those who warn of a free for all in the absence of a partnership agreement. This flexibility will limit the deterioration in competitiveness and result in a fall in price inflation,” he says.

Joanne Richardson, CEO of the American Chamber of Commerce Ireland, echoes McLoughlin’s views: “We are not going to revert to a low-wage economy. But in terms of competitiveness, we need to look at other costs that are affecting the bottom line of IT companies based here — insurance, electricity and telecommunications.” The American Chambers of Commerce represents some 570 US companies that employ 90,000 people and collectively have invested €34bn in coming to the Irish market.

She said: “US industry accepts that wage costs here are no longer what they were, but productivity is high and business has evolved. Many of the employees of US companies in Ireland are highly skilled and the companies are run by Irish management. Irish management is getting better at selling itself to its US parents. However, infrastructure and the cost of doing business are key concerns amongst US companies and we believe that the Government should borrow to get our infrastructure, particularly broadband communications, back on track.”

However, she pointed to recent investments by Xilinx, IBM, Intel, Abbot and Google as proof that Ireland is still popular as a location for US firms. “In the past decade US industries that have invested in Ireland have realised a 24pc after tax return on investment every year, according to figures from the US Department of Commerce, so Ireland still ranks high. In 2002, of 55 investment projects that landed in Ireland, 60pc came from the US. To keep this momentum, we need to get the infrastructure right and the Government must consider borrowing if it has to.”

The option of borrowing, however, is something that doesn’t appeal to Andrew McDowell, manager of the National Competitiveness Council (NCC) at Forfás. “Price rises and inflation increases would be the result of borrowing,” he says. The council was established to benchmark Ireland’s effectiveness on an international scale in competing against other economies in areas including economic policy, physical infrastructure, labour costs, productivity, innovation, education and skills.

McDowell said: “The 12.5pc corporate tax rate is one of the key incentives remaining for attracting FDI. We are still on top of the list as far as the US Department of Commerce figures on return on investment are concerned. However, there is some concern that to a certain extent some US investors may be overstating their profits in Ireland.

“In terms of investment, it is critical that the cost of labour is justified by productivity levels. In Ireland, unit labour costs are increasing and we are losing competitiveness. This is where Ireland Inc is exposed right now,” McDowell warns. “Ireland doesn’t have to be a low-wage economy. People can be paid as high as they like as long as we are reaching the appropriate productivity levels. We need to maintain an average rise of 4pc per annum. At present we are paying ourselves too much and inflation is ahead of the rest of Europe. Eradicating the inflation problem should be our number one priority.”

One person certain that Ireland faces a challenging period ahead is IBEC’s Brendan Butler, a director of ICT Ireland, which represents the interests of the majority of indigenous and overseas technology companies based in Ireland. By his estimates some 70,000 people are employed in overseas tech firms, with a further 30,000 in indigenous companies. “If you are going to look at such parameters as wage costs, costs of doing business and inflation, we have issues. In terms of competitiveness of those parameters, it is clear that we are not as attractive as some emerging EU countries or India, China or Mexico.

“From ICT Ireland’s perspective, infrastructure is one of the top three issues facing the health of the IT industry in Ireland. But Ireland is still coming out on top in terms of productivity compared with other countries and Dell in Limerick announced that its plant is the most productive throughout the world. I believe that firms that have invested are still getting good bang for their buck. Investments such as IBM, Google, Xilinx, SAP and Intel prove that we are definitely still moving up the value chain, but without the right infrastructure investment we will lose the momentum we need. The tech sector is not as labour intensive as before (the Google project may require half a million servers), but we need to keep employment figures up around the 100,000 mark. Being 2pc ahead of the rest of Europe in inflation needs to be addressed quickly and we need to prove through productivity that Irish workers justify the pay levels they currently enjoy,” Butler concludes.

Competitiveness: How we compare

In its most recent report on national competitiveness, the NCC highlights that escalating wage costs, prices and infrastructural deficits are impacting on Ireland. All of these, the report reads, could seriously undermine the unparalleled economic growth of the last 10 years. EU data contained in the Council’s Annual Competitiveness Report estimates that average Irish nominal wages for full-time employees was 3.6pc above the EMU-12 (the eurozone member countries) average in 2001, with average wages levels forecast to rise to 13pc above the EMU average by 2003.

Other key findings in the report ranked Ireland:
– Fourth highest out of 16 countries in terms of office occupation total costs
– Second highest out of 10 countries for average house price inflation since 1980, with an average annual growth rate of 9.5pc
– Second highest out of eight major economies for industrial electricity prices for middle to large capacity users
– Telecoms costs are now the ninth most expensive across 16 countries surveyed.

By John Kennedy