Cracking the competition conundrum

From kathleen barrington: 24 January 2010

By Kathleen Barrington

Anybody who heard last week’s debate on RTE‘s Frontline about how to restore cost competitiveness might have jumped to the conclusion that the only weapon available was to slash the minimum wage. It is true that the minimum wage here is higher than in Britain and the North, a matter highlighted on the programme by Mark Fielding, chief executive of the Irish Small and Medium Enterprise Association (Isme).
The disparity may contribute to higher prices in the Republic than in the North, a matter which is naturally of interest to retailers which are increasingly forced to compete with their Northern counterparts – given the willingness of consumers in the Republic to dart across the border to avail of cheaper prices.
But matters are not quite so simple, as the reports published by the National Competitiveness Council (NCC) this year and last year reveal.
True, the NCC said earlier this month that the rate at which incomes and price levels generally adjusted to the changed economic environment would have a considerable bearing on how fast we would recover from the recession.
But equally, it pointed out last year that labour costs weren’t the principal problem. It devised a traffic light system of red, amber and green lights to analyse which areas were in the danger zone and which were performing well.
The most striking thing about that analysis was that it indicated that labour costs were not the main problem in Ireland. In fact, contrary to the impression conveyed by some, there were no red lights flashing when it came to labour costs, while there were only two amber lights flashing in nine labour cost categories surveyed – both relating to the cost of manufacturing in Ireland.
The main problems were in the non-labour cost areas, where 12 out of 13 categories were flashing red – including industrial and office rents, industrial electricity, mobile telephony and waste disposal, accountancy, information technology and legal fees, and health insurance and childcare costs.
In its report published earlier this month, the NCC recommended that the price of land, office, factory space and housing in Ireland needed to adjust to the levels justified by their underlying potential for adding value or earning rent. It said that, in this context, it was ‘‘important that the actions taken by the banking sector and the National Asset Management Agency (Nama) support an appropriate adjustment within the property market’’.
That sounded like a rather polite warning that Nama wouldn’t much help the economy if its main objective was to restore property values to their previously inflated levels, in order to ensure that taxpayers got a return for the risks they had assumed in bailing out the banks.
The NCC also recommended that the tax treatment of property should also be progressed to limit future housing boom and bust cycles. In particular, the proposal to introduce a value-based property tax should be advanced quickly.
Falling land and property prices did not reduce the necessity for structural change in respect of land planning, it said.
Limited competition in the locally traded sectors of the economy, particularly in the professions, has serious implications for the costs of doing business in Ireland, while ensuring that competition law applies to all sectors of the economy, removing barriers to competition in sheltered sectors, is critical.
Despite some price moderation, the NCC found that Ireland faced significantly higher costs than many of its competitors across a number of key business inputs, including utilities and professional services (eg legal and accountancy services).
‘‘These higher costs and the factors driving them must be addressed,” it said.
Noting the allocation of €2.6 billion for professional services in Nama’s draft business plan, the NCC said it was ‘‘important that this large spend does not provide a price floor for the hiring of professional services in Ireland in the future. Given Nama’s need for extensive legal, accounting and other professions services, the government needs to use its considerable purchasing power to apply downward pressure on professional fees’’.
The limited competition in the non-traded sectors has been repeatedly highlighted by the Organisation for Economic and Cultural Development (OECD).
The organisation has also said that efforts to strengthen domestic competition were a result of initiatives taken at EU, rather than domestic, level.
In spite of the general price declines this year, there have been significant increases in a range of publicly administered prices, such as bus and rail fares (up 11.7 and 8.3 per cent, respectively), taxi fares (up 8.2 per cent) and health insurance (up 20.7 per cent).
The NCC was concerned about energy costs, saying that high utility costs in Ireland were damaging the competitiveness of important exporting sectors such as food, ICT hardware and engineering.
Recent energy price reductions were necessary but not sufficient, it warned.
It also voiced concerns that Ireland remained highly dependent on landfill facilities and had one of the highest landfill costs compared with competitor countries, while local authority charges were also seen as a significant cost.
The NCC was established in 1997 to advise on key competitiveness issues and offer recommendations on policy actions required to enhance the country’s competitive position. It is telling us now that becoming competitive is about a lot more than slashing wages, it is also about tackling the power of the landlords who dictate property prices, the professions, the energy and waste industries and local authorities.