ANALYSIS:The news from the NCC is good but improving exports and investment will be tough

EXPORTS AND foreign investment are the motherhood and apple pie of Irish economic life: nobody is against them and everybody wants more of them. Now, with one of the highest rates of unemployment in the rich world, there has rarely been a more urgent need to sell more abroad and attract foreign companies to set up shop here.

Together, exports and foreign direct investment (FDI) offer by far the best near-term prospect of creating jobs and boosting the incomes of those at work. It is difficult to find anyone who rejects this view. If there is near universal consensus on the importance and benefits of exports and FDI, there is only marginally less agreement on how to grow them both. Boosting competitiveness is policy-makers’ holy grail.

But what is competitiveness? Though politicians and policymakers often talk about it, they rarely define it. That is because it is extremely hard to define, and to measure. Today’s annual report by the 14-year-old National Competitiveness Council illustrates this.

Its 120 pages are filled with dozens of indictors comparing Ireland with competitor countries. Over the years, these reports have not remained the same, indicating that there is no set-in-stone composite of indicators which definitively measure competitiveness.

If yesterday’s NCC report brought good news, it was that exports and FDI – levels of which are determined to a great extent by competitiveness – are doing well. But more of both are needed. Thus, efforts to become more competitive must be redoubled. How can this be done?

Broadly there are two ways to boost competitiveness: become more productive and cut costs.

The former is less painful but can be harder to achieve. One reason is that raising productivity often involves investment. Investment usually requires financing. With Ireland’s banking system broken, business investment is very hard to fund, something that is particularly problematic in Ireland because alternatives, such as equity financing and corporate bond issuance, have traditionally been less used than elsewhere.

The report shows that business investment last year, as measured either as a percentage of GDP or GNP, was by far the lowest among a sample of peers. Its other financing metrics show just how banjaxed the credit mechanism is.

Another way to raise productivity is to make better products and provide services in more efficient ways. This requires innovation. Here again, there is reason for concern. Indigenous companies have not traditionally been world class innovators – as evidenced, for instance, by their low exports levels over decades (foreign-owned companies account for 90 per cent of Irish exports). But with the collapse of demand in the home market, and many companies’ very survival at stake, perhaps necessity will drive them to seek new markets. There is some evidence this is happening.

Cutting costs is the other vital aspect of competitiveness. Businesses that lower their input costs can cut their output prices. Lower prices allow them to win market share. More market share means more demand. More demand usually means more jobs.

There is lots of evidence to show that both pay and most non-pay costs are moving back to more realistic levels.

The companion report to today’s offering will make proposals on boosting competitiveness. It will be its first such report since the coalition took office. It is likely to push for some politically difficult measures, despite the NCC’s make-up.

Set up in the heyday of social partnership in the late 1990s, its 16-member council is made up almost entirely of interest group representatives and public servants of various kinds. Of its separate advisory council, seven of eight members are senior officials from government departments. There are no independent experts or representatives of disinterested foreign institutions. All of this should be a recipe for lowest common denominator fudge.

Surprisingly, and unlike, say, the financial regulator, its reports over the boom years were unfashionable in pointing out of weaknesses and advocating reform. There is little reason why the next report would be different. Whether the new Government pays more attention than its predecessor to NCC’s proposals will say much about its own reforming instincts.