Competitiveness - CIPD Conference

24 May 2002

Address by David Begg to the CIPD Conference, Galway on 24th May 2002

I recall that when I last addressed this conference about seven years ago one person said afterwards that he had never before heard anything with which he so profoundly disagreed. I will do my best to maintain consistency today.

What I would like to do this morning is to explore a few aspects of the conference theme:

  • To consider whether popular notions of competitiveness theory are not unduly simplistic;
  • To look at actual conditions in the Irish economy and to explore how they might develop;
  • To pose a few questions about the receptivity of ordinary people to exhortations on competitiveness;
  • and finally
  • To make some suggestions abut the future with particular reference to social partnership or the absence thereof.

John Bruton, when Taoiseach, once famously replied to a question from a journalist about the peace process - " F*** the Peace Process". Being on the receiving end of so much rhetoric about competitiveness I must confess at times to similar feelings. But in reality it is not a subject one can be agnostic about because it pervades public discourse in an extraordinary way.

Governments issue Competitiveness White Papers and invite businessmen and women to join Competitiveness Councils. Global institutions issue tables ranking countries by competitiveness. Right-wing politicians tell us that competitiveness demands smaller welfare states and lower taxes. Lobby groups reach for "the threat to competitiveness" as the easiest weapon with which to beat off unwanted Government actions. Europe, it is alleged, faces a crisis of competitiveness, and needs to compete more effectively with America in the new economy. The message is reiterated in countless books, and strikes a chord with practical business people facing competitive challenges to their own individual businesses. It feels right that if companies are locked in ever more global competition, so too must countries be.

From a business perspective the language of external competition serves a useful polemic purpose. It is much more appealing for company management to talk not about productivity and profit as an end per se, but about the inevitability of change in the face of global competition - and at the level of the company that is sometimes true but not always. And it is much easier for politicians to argue, if they are of a liberal persuasion, for a minimal state and low taxes in the language of competition.

This is all far too simplistic from my perspective.

Competitiveness-speak thus degrades public policy debate across a wide range of issues. It does so above all by directing public discourse away from the intelligent debate of trade-offs and choices a country can make, for example, about infrastructural investment (roads instead of hospitals), taxation, regulation, welfare, employment and the role of Government in the economy.

Competitiveness can certainly be an issue at the level of a company. It is less so at the level of a country and it is virtually meaningless at the level of Europe. There are two main confusions found in discussions on national competitiveness theory:

  • One is the assumption of a limited pot of prosperity for which all countries compete and the notion that if one gains another loses;
  • The other is the use of the term "competitiveness" without specification of the exchange rate.

Generally speaking, one country's prosperity has no inherent influence on another's prosperity; and one country's rate of growth has no direct influence on another's growth.

In the case of the European Union only 11 per cent of its GDP is traded outside the borders of the EU, and only 5 per cent is traded with emerging low-income countries. And that proportion has fallen not risen over the last 20 years.

The exchange rate is the most critical factor influencing our ability to sell goods and services overseas. It is a particularly important factor for Ireland because of the openness of our economy.

The interesting thing is that there is such uniformity of thinking on competitiveness theory even though the conventional wisdom has been attacked by people like Paul Krugman, Samuel Brittan of the Financial Times and Adair Turner for quite a few years now. Turner is, I think, particularly interesting because he was, up to two years ago, Director General of the CBI. He published a book last year called "Just Capital" in which he said:

"By 1995 the CBI had carved out a name for itself as an advocate of competitiveness: in becoming its Director General, in a sense I became the High Priest of a cult whose beliefs I though rather confused, but which I could not reject outright without causing much confusion, ineffectiveness and indeed, offence. Invited to join a Competitiveness Council, it is churlish to say you will do so only if the name is changed, and one can seek to achieve sensible policy through such forums even if competitiveness is not a meaningful definition of the objective".

It is not my mission to prove that everything being said about competitiveness is wrong. I am sure it is not but I would like to establish that the issue is not a simple one. I would also like to shake your confidence in orthodoxy if I could.

Anyway, let's park the theory and go on to consider practical conditions in the Irish economy.

During the 1990's, average labour productivity growth in the manufacturing sector exceeded average earnings growth. As a result there was a steady decline in average unit labour costs throughout this period. According to the CSO's "Unit Wage Costs and Productivity Indices", unit wage costs in manufacturing in 2000 were around 20 per cent below the 1995 level. In the last two years, these competitive gains have been enhanced further by a 25 per cent depreciation of the Euro relative to the Dollar. Since Sterling tends to follow the Dollar this has placed us at a significant advantage in relation to exports to both the US and Britain. It is also a big advantage to tourism albeit offset by Foot & Mouth and the fallout from 11 September.

The environment for business was also helped by:

  • A 20 per cent reduction in Capital Gains Tax;
  • The lowest rate of Corporation Tax of the 49 countries covered in "The World Competitiveness Yearbook" survey;
  • Very low real interest rates;
  • The lowest Social Insurance taxes in the OECD;
  • A high quality labour supply much better than anywhere else in Europe by virtue of our demographic advantage. We are a generation behind the rest of Europe in terms of an ageing population.

So, with all these advantages how could we go wrong? The answer, of course, is that we didn't.

If you look at the recently published "World Competitiveness Yearbook" you will see that there is a minor slippage in our position down from 7th to 10th place in the overall scoreboard. We are still ahead of such major economies as the UK, Germany and Sweden. In fact of the 15 members countries of the EU, only Finland, Luxembourg, the Netherlands and Denmark came higher. We scored very highly in terms of the flexibility and adaptability of our workforce, funding for technological development and support for competitiveness. The image of Ireland abroad as a centre for business is also cited as a major advantage. This latter point has a relevance, I think, to the current debate about the future of social partnership and I will return to it later.

Where we did slip back was in the infrastructure category, where the Republic has fallen from 15th last year to 23rd this year. The actual distribution infrastructure - roads, trains and planes - is ranked 46th, ahead of only Italy, the Philippines and Columbia. So here then is the answer posed by CIPD - infrastructure. There is hardly anything to be regained as such. It is more a matter of not having made the investment in infrastructure that we should have to keep up with the pace of economic growth.

There may be some merit in looking at a couple of factors that could cause us problems in the future. There is a belief, though there is no real empirical evidence to prove or disprove it, that the imbalance in the American economy involving a $500 Billion Dollar current account deficit will correct itself. In so doing the Dollar could weaken quickly against the Euro thus hitting the mainstay of our competitiveness advantage. I don't think there is much we can do to hedge against this risk. If the adjustment takes place gradually it will not be such a problem. A related factor is Britain's entry to the EMU which will almost certainly be at a lower Sterling exchange rate. If you have been watching the recent series of "Newsnight" interviews with Tony Blair you would be justified in concluding that Britain is moving towards a referendum.

The other risk is inflation which is running at about twice the EU average. However, goods price inflation is not markedly higher than in the reset of the Euro area but services inflation is up to about 11 per cent. I do not think this is being driven by wages. In fact a recent statement by IBEC acknowledged that wage growth in the sector slowed down to 5.9 per cent in the last quarter of 2001 from 8.6 per cent in the Third Quarter.

What I do think is causing serious inflation are things like insurance costs and, I regret to say it, unscrupulous profiteering from the introduction of the Euro. Hans Eichel, the German Finance Minister admitted this recently. According to an article in the Guardian on 13th of this month he said, "We relied too much on the fact that retailers would police themselves and that was possibly a mistake". You can bet it was a mistake. It was a mistake here too because there are some people in business who are so exceptionally greedy that they couldn't pass up an opportunity to rip off the public. Expecting them to behave reasonably is like expecting water to flow up a hill.

I recently had practical experience of what I thought was an extraordinary scam. I needed a part fitted to an appliance in my house. My daughter was at home when the chap came to do the job. When it was completed she enquired about the cost and he said it was €30. She proffered a €50 note but he said he had no change but she could pay by Credit Card. My daughter does not have a Credit Card so then he said she could send on a cheque but it would cost an extra €20. Later my wife rang the company and they confirmed that this was indeed policy. Needless to say we didn't pay the extra €20 and they accepted the cheque for the original price of €30. But it just shows you what people will try on and I suppose there are people who go along with it. This was a large reputable company not a cowboy outfit. I suspect it is not an isolated incident either.

The problem of inflation is that it hits the poor in society hardest. It will also put pressure on wage bargaining, particularly now as we are coming towards the end of the current agreement.

Leaving aside all questions of theory and judgement about the competitive status of the Irish economy you have to confront a deeper question. What is it all for? What is the point of a competitive economy unless it is seen to benefit everyone? I think there is a bit of a credibility problem here.

Workers do not, for one minute, believe business people when they appeal for moderation in the name of competitiveness. Most particularly they do not listen to bankers - nor should they, having regard to the disgraceful record of the banks over the last few years. They believe, and they are right, that competitiveness-speak has to do with one thing only - profit.

How could people be other than cynical? Everyday you take up a newspaper you read another story - Enron, Andersen, AIB, Credit Suisse, Merrilllynch. You read about gods whose feet are found to be made of clay. People like Larry Ellison, head of Oracle, Bernie Ebbers of Worldcom, Diana Brooks of Sothebys, "Kenny Boy" Lay of Enron, Jack Welch of General Electric. Mr Welch, in the words of the "Economist" "is now widely portrayed not as a star Chief Executive but as an ageing philanderer". Enron, of course, was the catalyst for this opening of the floodgates of exposure to the sleaze and corruption that has for so long passed as corporate culture. We, in Ireland, had an advance preview over the last few years.

There was an article in the "Personal View" column of the Financial Times a few weeks ago by a lady called Kate Jennings. She is now an author but used to be an investment banker in Wall Street. She was scathing about the corporate deception and investment banking hypocrisy in which she used to play a part. She said, "Corporations seem to have forgotten that integrity and excellence were Enron values, engraved on Lucite Gew Laws and Desk Decorations. Such words need a long rest in the corporate world; they have been spoilt even for those companies that genuinely live by them".

Consider as well how managers and workers related to one another in the workplace here. I saw earlier in the week that the Small Firms Association issued a statement about people watching football matches during the World Cup. The intention apparently was to advise member organisations how to handle the situation. It advised "that staff could be allowed to listen to the radio or look at television during short breaks at work but make it clear that this is a privilege that will be withdrawn if abused". Is this any way to talk to people? Does the SFA regard the workplace as a sort of prison with "privileges" to be conferred and withdrawn?

Of course the World Cup is a nuisance and a distraction for anyone running a business. But you know, the amount of goodwill you could get by showing a little generosity would more than counteract any loss of time involved. Personally I am appalled at this attitude. It smacks of class distinction. You would not speak like this to anyone you regarded as an equal.

So you see, there is no common goal here. Unless competitiveness as an issue can be set in the context of a broader agenda of desirable economic and social objectives it will find few enough advocates in the ranks of organised labour.

Having said all that I suppose we have to try to live together and find some kind of modus vivendi.

I have said on a number of occasions recently that I personally am an advocate of partnership. It is not that I think it is necessary for pay determination purposes, I don't. But I do think it allows us a mechanism for dealing with the broader range of economic and social issues which affect us all. It seems to me that if you look at a range of macro economic, distributional and supply side issues like:

  • Infrastructural development - roads, housing, transport;
  • Improved quality of public service;
  • Caring for young and old;
  • Immigration;
  • Inequality;
  • EU enlargement;
  • Control of inflation;
  • Pay determination.

We are facing some challenging times ahead. There is, I think, a case in logic for continuing the process that has served the country well for 15 years. Nevertheless, it is no part of my business to attempt to persuade you of that. As Human Resource professionals you are as well able to evaluate the options as I am. And unless all parties to a process see advantage in it then it will not be viable.

I would like to make a couple of remarks about Jim Power's position, as I understand it. Jim is against partnership. Nothing unusual about that - most Economists have been against it since 1987. The more liberal in doctrine have been opposed, as a matter of ideology, to the involvement of trade unions in social or economic policy development in any way.

A more benign view of the project seems to be taken outside the country than inside it. I offer two pieces of evidence in support of this contention. One is a book called "Driven" just published and written by two Harvard Business School Professors, Lawrence and Nohria. They compare economic and social progress in a number of countries and are very complimentary about the role of partnership in Ireland, to which they attribute the country's recent success.

The second piece of evidence is that I was asked a couple of weeks ago to address a lunch hosted by all of the EU ambassadors on the subject of the future of Europe. At least fifty per cent of the time was spent answering questions about the future of partnership. This is significant, I think, in the context of the "World Competitiveness Yearbook" finding that Ireland was ranked third out of 49 under the factor "Image of Ireland abroad as a centre for business".

Jim regards trade unions as being impotent, at least in the private sector, and attributes the decrease in strike activity to weakness. Perhaps he is right. If the employers invade Belgium on your advice, Jim, will you be around when they reach Flanders?

And it might be prudent to defer doing a jig on our grave for just a little bit longer.

Membership actually increased by 5,000 last year. It has not increased in proportion to the growth in employment certainly. But most of the employment growth is in the services sector which by its nature is more difficult to organise. In strategic terms though, 80 of the top 100 companies are unionised as well as the entire public sector of course.

It might be worth noting that union density in Ireland is higher than in Italy or Germany but CGIL and IG Metal respectively have demonstrated in the last few weeks their capacity to influence economic affairs. I would like to think that we in Ireland would be just as effective if called upon. If there has to be a trial of strength then at least we will find out the answer to Jim's proposition. It is not the way I would like to do business but with 20 years of industrial relations experience it would not faze me either. I suppose that if we have to test the proposition then the very concept of partnership is dead anyway.

If we do manage to stay in partnership mode there are a couple of initiatives I would suggest in regard to competitiveness:

  • I think we need a serious piece of research into the implications of EU enlargement and in the context of the two economies on this island. Out of that research could come a programme to get optimum synergy into our island economy: I have already proposed a project to Government along these lines;
  • We should look at the possibility of restructuring our corporate tax base with a view to better targeting. What I mean is that it makes no sense to be reducing corporate tax to twelve and a half per cent for businesses not in the traded sector. It would make more sense to use a system of tax credits to encourage R&D investments and to boost manufacturing.

I would like to conclude on this cautionary note. Every country seems to be engaged in a relentless quest for competitiveness which is in reality a relentless quest for more and more profit. In an EU context, with a single currency and uniform interest rates, this will inevitably bring a focus on to wages. Just as surely that will foster a resurgence of union militancy right across the continent. There is a growing discontent, not unconnected I suspect to the emergence of populist but extreme political parties in Europe. We are playing here for high stakes and how we chart the future for our own country requires some careful consideration.

As I said earlier we do have choices.