[This is an expanded version of a paper delivered to the Conference of Irish Geographers at NUI Maynooth on May 1, 2010]

Introduction: The importance of exports to the Irish economy

Due to the small size of the domestic Irish economy, Irish-based businesses must look to export markets in order to achieve the economies of scale or specialisation capable of generating high living standards comparable to other advanced economies.  The achievement and maintenance of export competitiveness (i.e. the ability of Irish-based firms to compete in export markets) is therefore an essential requirement for the Irish economy’s long-term success. Expanding exports has been a central objective of Irish government policy since the late 1950s and has enjoyed a considerable measure of success as reflected in the ratio of exports of goods and services to GDP which grew from just over a quarter in 1950 to 94% in 2000 – one of the highest such ratios in the world.

The Irish government has mainly relied on inward investment by TNCs as the means of expanding Ireland’s export base, with foreign firms accounting for 89% of all exports of goods and services by 2000 (a proportion which has remained constant in the 2000s).   In that year, eleven sectors accounted for three quarters of all exports (Table 1), with Office Machinery & Data Processing Equipment and Organic Chemicals between them accounting for almost 36%.  The 1990s in particular were a period of spectacular export growth, the annual compound growth rate of 13.8% (in volume terms) being exactly twice the GDP volume growth rate of 6.9% – itself a very high sustained growth rate over such a long period. Thus, while GDP almost doubled in volume terms in the 1990s, the corresponding volume growth of exports totalled 265%.  This saw Ireland’s share of global exports doubling, from 0.64% to 1.22%, between 1991-2000, according to World Trade Organisation (WTO) data.

The loss of competitiveness myth

The performances of Irish exports and export competitiveness after 2000 have been the subject of an extraordinary process of distortion and misinterpretation on the part of a wide range of highly influential economic commentators.  The effect of the virtual unanimity of view expressed by these commentators has been the creation of a veritable myth surrounding Ireland’s export competitiveness over the last ten years, a myth which has now, unfortunately, achieved the status of accepted wisdom.

Table 1: Main export sectors 20001

Sector

% total exports
Office machinery & data processing equipment 19.2
Organic chemicals 16.5
Electrical machinery & apparatus etc 7.7
Food & beverages 6.8
Software 5.8
Medical & pharmaceutical products 5.2
Telecommunications & sound equipment 3.7
Business services 3.2
Travel & tourism 2.8
Essential oils & perfumes etc 2.3
Financial services 2.2
All merchandise exports 82.1
All service exports 17.9

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1 Note: Services sectors derived from CSO Balance of Payments data; Merchanside sectors derived from CSO External Trade data.  The Balance of Payments data include totals for merchandise exports which differ slightly from the External Trade data, but do not provide the sectoral breakdown required for compilation of this table.

The key elements of this myth are that Ireland lost its export competitiveness in the decade after 2000 and that this loss of competitiveness was due largely (if not entirely) to Irish labour costs rising more quickly than in Ireland’s main trading partners in this period.

Among those who have espoused the view that Ireland lost competitiveness in this period are Alan Ahearne (NUIG economist and current economic advisor to the Minister for Finance); Patrick Honohan (currently Governor of the Central Bank); Alan Barrett and John Fitzgerald (senior economists at the ESRI); Morgan Kelly (Professor of Economics at UCD) who, in an article in the Irish Times on December 29 last, wrote that Ireland’s competitiveness “collapsed” after 2000; Philip Lane (Professor of International Macroeconomics at TCD); Jim O’Leary (Department of Economics, NUI Maynooth) who writes a regular column in the Irish Times; and Rossa White, chief economist at Davy Research.

These and others have also ascribed this supposed loss of competitiveness to Ireland’s rising wage costs and have advocated wage cuts as the principal or only means of “restoring” Ireland’s competitiveness.  The following is a list of relevant quotations:

Alan Ahearne:”if we are to regain competitiveness, we have to do it the difficult way – through wage cuts.” (Sunday Tribune, January 11, 2009)

Alan Barrett: “wage falls are vital to the restoration of competitiveness” (quoted in The Irish Times, April 29, 2009)

John Fitzgerald: “Wage cuts of 5 per cent in both the private and public sector are needed ‘to achieve the necessary improvement’ in the economy’s competitiveness” (quoted in The Irish Times, Oct 17, 2009)

Morgan Kelly: “The economy will not begin to grow until real wages fall to competitive international levels” (Irish Times, January 20, 2009)

Jim O’Leary: The competitiveness of the Irish economy will be “enhanced” by “the emergence of lower private sector wages” (Irish Times, August 7, 2009).

Undoubtedly the most ardent proponent of the thesis that Ireland lost export competitiveness through excessive labour cost growth in the 2000s has been former Taoiseach and UCD economist Garret Fitzgerald, who has advanced this argument repeatedly in his Saturday column in the Irish Times.  Fitzgerald has particularly identified the sharp rise in labour costs associated with a surge in public spending by the Fianna Fáil government in the period 1997-2003 as being responsible for what he has termed the “disastrous” decline in Ireland’s national competitiveness over the last ten years (Irish Times, January 31, 2009).  This view has also been endorsed by The Irish Times itself which, in an editorial in the issue of April 29, 2008, stated that “wage falls…are the necessary and unavoidable means to regaining competitiveness lost over recent years”.

In that follows we will be presenting evidence which shows that Ireland’s exports rose more quickly than most of Ireland’s main trading partners during the 2000s, that Ireland’s unit labour costs in the key manufacturing sector actually fell relative to our main trading partners in this period, and that while, overall, Ireland’s share of global exports slipped back somewhat between 2002-2007, this varied between sectors with many sectors experiencing significant growth in export share.  We will also provide evidence to show that labour costs had no obvious influence on the varying export performances of the different export sectors over the last decade and that, indeed, labour costs comprise only a small proportion of the total costs of most export sectors.  The paper then goes on to point to the wide range of considerations which have a bearing on national export competitiveness, and to argue that the reduction by economic commentators of competitiveness to a matter of labour costs is not only grossly simplistic but also potentially profoundly damaging to Ireland’s long-term export growth prospects.

Measuring Ireland’s export competitiveness

The two standard methods of gauging a country’s export competitiveness are to compare trends over time in either export growth (or decline) or in export market share vis-à-vis other countries.  Data relating to the former method are provided by the OECD and for the latter by the World Trade Organisation (WTO).  Figure 1 shows the trend in volume growth in exports of goods and services from Ireland and the OECD as a whole between 2000 and 2007 (prior to the onset of the current recession in Ireland).  Volume growth adjusts overall value growth for changes in prices.  This shows that Ireland’s exports grew much more rapidly than for the OECD at large in 2001 and 2002, with the gap then narrowing somewhat up to 2006 and widening again in 2007.  Thus, at end-2007, Ireland’s exports, in volume terms, were 48.4% greater than in 2000 compared with an overall figure for the OECD of 39.1%.

Figure 1: Index of volume growth of exports of goods and services, Ireland & OECD, 2000-2007 [2000 = 100]

Source: OECD

Clearly, therefore, Ireland’s export performance was significantly better than that for the OECD as a whole over the period.  There is no evidence here of the sharp loss of competitiveness postulated by many economic commentators.  Ireland’s export growth rate was superior to that of 19 of the 29 other members of the OECD, including the UK and the USA.  The only West European countries to exceed Ireland’s growth rate were Luxembourg, Austria and Germany (the other seven being the Czech Republic, Hungary, Poland and Slovakia – all East European countries coming from a low base – Turkey, Japan and South Korea).

The second export performance indicator used here refers to trends in Ireland’s share of global exports.  For comparison purposes, we use Ireland’s 12 most important trade partners, calculated from the combined value of exports to, and imports from, all trade partners in 2007 (the first year for which detailed data on the distribution of services exports and imports are available).  Table 2 compares the change in Ireland’s share of global exports between 2000-2007 with that of Ireland’s 12 main export partners.  This shows that Ireland’s share of total global exports actually increased slightly over the period, whereas the combined share of Ireland’s 12 main trading partners declined.  Again, the evidence shows that, far from a major loss of competitiveness, Ireland actually improved its competitiveness position in this period. Of Ireland’s 12 main trading partners, seven experienced a loss of global market share, the largest relative declines being shown by the USA, Japan, France and the UK, in that order (the UK and the USA being by far Ireland’s main trading partners).  Of the five countries which experienced a growth in their export share, only China (which more than doubled its share) and Germany posted increases significantly greater than Ireland’s.

Table 2: Shares of total global exports 2000-2007

2000 2007 2007 as % 2000
Belgium 2.77 2.90 104.7
China 3.52 7.72 219.3
France 5.13 4.03 78.6
Germany 7.96 8.85 111.2
Italy 3.74 3.51 93.9
Japan 6.91 4.84 70.0
Netherlands 3.55 3.71 104.5
Spain 2.11 2.19 103.8
Sweden 1.35 1.34 99.3
Switzerland 1.39 1.36 97.8
United Kingdom 5.09 4.14 81.3
USA 13.35 9.32 69.8
12 trading partners 56.85 53.93 94.9
Ireland 1.21 1.24 102.5

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Source: WTO

While Ireland’s share of total global exports rose between 2000-2007, this masks substantial differences between merchandise and services exports over the period.  These differences are demonstrated in Figure 2.  This shows Ireland’s overall share of global exports growing from 1.21% in 2000 to 1.46% in 2002, then falling gradually to 1.19% in 2006 before recovering to 1.24% in 2007.  In 2000 Ireland’s share of global merchandise and services exports were almost identical at around 1.2%.  Thereafter, Ireland’s share of global services exports grew continuously and strongly (from 1.24% in 2000 to 2.76% in 2007), whereas merchandise exports, having grown from 1.20% in 2000 to 1.36% in 2002 then declined consistently to 0.87% in 2007.

Figure 2: Ireland’s share of global exports 2000-2007

Source: WTO

Table 3 compares Ireland’s performance with respect to these two broad sectors with that of Ireland’s 12 main trading partners over the 2000-2007 period.  As regards merchandise exports, overall the 12 trading partners combined experienced a loss of global market share over the period, although not nearly as substantial as Ireland’s.  However, of seven countries which experienced a loss of market share, three (the USA, Japan and the UK in that order) experienced a relative loss of market share which was greater than Ireland’s.  Of the five countries which gained market share, again China performed particularly strongly, more than doubling its share over the period.

As regards services exports, while six each of the 12 trading partners gained and lost market share, as a group they lost market share.  The USA experienced the greatest relative loss of market share while China and Sweden experienced the strongest gains, albeit well behind that achieved by Ireland.

Table 3: Trends in shares of global merchandise and services exports – 2000-2007

Merchandise Services
2000 2007 2007 as % 2000 2000 2007 2007 as % 2000
Belgium 2.92 3.09 105.8 2.10 2.14 101.9
China 3.86 8.72 225.9 2.03 3.60 176.8
France 5.07 3.94 77.7 5.39 4.41 81.7
Germany 8.55 9.44 110.5 5.38 6.42 119.4
Italy 3.73 3.57 95.9 3.78 3.27 86.6
Japan 7.42 5.10 68.8 4.69 3.76 80.2
Netherlands 3.61 3.94 109.0 3.26 2.79 85.4
Spain 1.79 1.81 101.4 3.52 3.76 106.9
Sweden 1.35 1.21 89.4 1.35 1.87 138.7
Switzerland 1.25 1.23 98.6 1.99 1.90 95.6
United Kingdom 4.42 3.14 71.0 8.00 8.30 103.7
USA 12.11 8.21 67.7 18.77 13.92 74.2
12 trading partners 56.07 53.40 95.2 60.26 56.13 93.2
Ireland 1.20 0.87 72.4 1.24 2.76 223.0

Source: WTO

Conclusion to Part 1

The data presented above do not support the thesis of a generalised loss of export competitiveness on the part of Ireland vis-à-vis its main trading partners over the period 2000-2007.  Ireland actually increased its share of total world exports (albeit marginally) and did better in this respect than seven of Ireland’s twelve main trading partners.  In terms of share of global services exports, Ireland’s powerful performance easily surpassed all twelve main trading partners and, while Ireland’s performance with respect to merchandise exports was poor, it was still superior to that of Ireland’s two leading trading partners, the UK and USA, as well as Japan.

Part 2 of this paper will interrogate two further myths relating to Ireland’s export competitiveness i.e. that rising unit labour costs negatively impacted on Ireland’s export competitiveness in the period after 2000 (thereby bringing about Ireland’s postulated loss of competitiveness in this period) and that labour costs are a key determinant of Ireland’s export competitiveness.

TO BE CONTINUED…

Proinnsias Breathnach