don thornhill, chair national competitiveness council national skills conference 26 october 2006

Economic Context for Skills DevelopmentOverview of Ireland’s Competitiveness

Don Thornhill, ChairNational Competitiveness Council

National Skills Conference26 October 2006

What is Competitiveness?• National competitiveness refers to the ability of firms based

in Ireland to trade in global markets.

• Competitiveness is partly about costs, prices and wages…

• …but more about better business performance through innovation and productivity

• Competitiveness remains a foundation for national economic and social progress

Ireland’s International Competitiveness Rankings Where does We Stand Internationally?

Source: WEF & IMD

0

5

10

15

20

25

30

35

2000 2001 2002 2003 2004 2005 2006

WEF IMD

Ireland’s Strengths• Ireland continues to attract high levels of overseas investment• Competitive personal and corporate tax rates• Strong labour force growth, reflecting both natural growth

and immigration• Improving school completion and third level participation

rates• Relatively low levels of regulation – but perceived to be

increasing• High rates of entrepreneurship• High levels of public investment• Productivity levels in ‘modern’, export-oriented

manufacturing and services sectors are high by global standards

Strong Labour Force Growth…

1000

1200

1400

1600

1800

2000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Employment Short Term Unemployment Long Term Unemployment

Thousands of persons Source: QHNS, CSO

Net Migration per 1,000 of Population, 1995-2004

4.3

-0.2

1.8

3.1

-0.2

0.5

9.4

-0.5

4.2 4.1

-1.0

0.7

-2

0

2

4

6

8

10

Ireland Northern Ireland EU 15 US NEU 10 Japan

Mig

rant

s pe

r 1,0

00 o

f pop

ulat

ion

1995-1999 2000-2004

Source: International Migration Outlook 2006, OECD

% of the Population Aged 20 to 24 having Completed at Least Upper Secondary Education (2005)

61.3%

71.0%

72.9%

74.1%

74.6%

76.0%

77.1%

82.8%

83.3%

84.8%

86.1%

87.8%

90.0%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Spain

Germany

Italy

EU 15

Netherlands

Denmark

UK

France

Hungary

Finland

Ireland

Sweden

Poland

Lisbon Target 85%

Source: Structural Indicators, Eurostat

Population by Age Cohort that has at Least Third Level Education, 2003

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

EU 15

Ireland

UK

OECD

US

25-34

35-44

45-54

55-64

Ireland’s Weaknesses• Ireland’s international trade performance is weakening• Ireland is losing employment in manufacturing – over 32,000 job losses

since 2000• Too few Irish start-ups develop real scale• Erosion of Ireland’s cost competitiveness• Poor (but improving) infrastructure - road, air, seaports, waste and

energy• Low levels of domestic competition and productivity in many

domestically trading sectors• Average national educational performance• Dual labour force and low levels of engagement in life long learning• Young and undifferentiated R&D system• Not maximising the potential of ICT

Ireland’s Share in World Merchandise and Services Trade, 1993-2005

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Services Merchandise

Source: WTO

Erosion of Ireland’s Cost CompetitivenessLabour Cost Growth Rate, 2000-2005

79.0%

55.3%

42.0%

29.6%

26.4%

24.4%

23.8%

23.4%

22.5%

22.1%

18.4%

15.1%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Hungary

Czech Republic

Poland

Ireland (Q2 2005)

France

EU 25

Austria

Euro-zone

UK

Sweden

Denmark

Germany

Growth in Labour Costs, 2000-2005

Source: General and Regional Indicators,2006, Eurostat

Not Maximising the Potential of ICTComputers per 10 Students (mean), 2003

0.70.7

0.80.8

1.11.3

1.41.6

1.71.91.9

22.2

2.32.32.3

2.73

0 0.5 1 1.5 2 2.5 3 3.5

PolandPortugal

GermanySpain

IrelandItaly

NetherlandsSwedenFinland

DenmarkJapanOECDAustria

HungaryNew Zealand

UKKorea

US

Current Assessment of Competitiveness• Using GDP and GNP growth figures, Ireland is still competitive• However, growth since 2000 has changed in nature and it does

not necessarily reflect improved international competitiveness• Domestic demand is driving growth, driven:

– rising national confidence,– high rates of borrowing,– low interest rates, – a shift towards services, and– greater international competition.

Dominance of Domestic Demand

-2%

0%

2%

4%

6%

8%

10%

1990-95 1995-2000 2001 2002 2003 2004 2005e

Government Consumption Investment Net Exports

Grounds for Concern1. Loss of internationally trading businesses• Ireland share of world markets in decline, particularly in manufacturing• Current account deficit is growing – Irish residents are spending more than

they earn• Loss of 32,000 manufacturing jobs since 2000 – replaced by jobs in

construction and the public sector

2. Ireland’s debt burden• Ireland has very high levels of household indebtedness…• …And Ireland’s indebtedness continues to grow rapidly…• …while interest rates are increasing

0%

20%

40%

60%

80%

100%

120%Ita

ly

Gre

ece

Belg

ium

Fran

ce

Aust

ria

Finl

and

Euro

are

a

Port

ugal

Spai

n

Ger

man

y

Irela

nd (G

DP)

Net

herla

nds

Irela

nd (G

NP)

2003 2004 2005 2006f

Grounds for Concern – Household Debt

Grounds for Concern – Construction

3. Dependence on the construction sector• By the end of 2005, over 13 per cent of Ireland’s employment was accounted

for by the construction sector – higher than any other OECD country and over twice the rates of the USA and Germany.

• As Ireland’s housing needs and infrastructural deficit are addressed, construction’s exceptionally high share of economic activity and employment can hardly be sustained.

• Are these skills transferable?

4. Costs • Ireland has experienced a loss of international price

competitiveness, reflecting both higher inflation and a worsening of our trade-weighted exchange rate

• Consumer prices: Ireland is both an expensive country and one where prices continue to rise faster than in most other EU countries

• Labour costs, largest cost category for business: costs have grown at faster rates than experienced in other euro-zone economies

• Non-labour costs: NCC research highlights the relatively high cost of property and utilities, including electricity, mobile communications, and waste disposal in Ireland

Grounds for Concern – Business Costs

Grounds for Concern – External Risks

• Long run economic growth depends on success in exports markets

• Over time, the Irish economy must shift back from the current domestic driven phase of economic growth towards export-led growth

• Also need to be aware of external risks, such as:– Further rises in oil and energy prices– House price volatility throughout the OECD– A further weakening of the dollar, which would affect the cost

competitiveness of Irish exporters

Five Key Policy Challenges: Productivity

1. Need for enhanced productivity growth across all sectors of the economy

• Productivity growth has slowed considerably in recent years

• Investment required in all levels of education system• Investment in infrastructure - including broadband• Cost reduction

Five Key Policy Challenges: Competition

2. Promotion of competition• Costs of doing business in Ireland high, particularly

for utilities, communications, property and key professional services

• Nationally – removal of government and sectoral restrictions on competition

• Internationally – promotion of free trade and work with others to get Doha back on the rails

Five Key Policy Challenges: Tax System

3. Securing the competitiveness of the tax system• International trends in relation to tax have changed –

Ireland’s model is being adopted elsewhere• Broadening of the tax base • Efficiency of public services

Five Key Policy Challenges: Innovation

4. Improving the capabilities of our companies to move up the value chain• Pursue with relentless determination the

implementation of the strategy for science, technology and innovation, and initiatives to enhance management capabilities

Five Key Policy Challenges: Skills

5. Meeting Future Skills Needs: Globalisation and ICT– Fears around outsourcing and automation– But not all jobs can be outsourced, and ICT both substitutes

and complements human skills– Growing demand for skills that require expert thinking and

complex communications – Evidence (Levy et al) suggest a ‘hollowing out’ of moderately

skilled jobs that are routine in nature and rule based

Five Key Policy Challenges: Skills

5. Meeting Future Skills Needs: Implications for Education– Need to retrain existing workers at risk– Need for strong basic skills and competencies

• Basic competencies needed to develop more advanced skills• Quality and effectiveness of the teaching of maths and science – new

strategies?– Need for advanced skills

• Need for attention to problem solving and interpersonal skills• Understanding and rote learning• Implications for teaching resources and the format of examinations?

Conclusions

• Ireland’s national competitiveness has been central to Ireland’s success

• Ireland needs to recover some its lost export competitiveness…

• …a skilled, adaptable and knowledge intensive workforce is essential