TOPIC G: International Trade & Competitiveness

1. TOPIC G:International Trade & Competitiveness TCD M.Sc.(EPS) – Ronan LYONS – EC8001 Irish Economic Policy ISSUES & Context

2. Module Outline

3. Reading & Data • Economy of Ireland: Ch. 9, 11 • Other readings • World Bank Doing Business project/dataset (again!) • National Competitiveness Council’s 2014 Annual Competitiveness Report: Scorecard and Policy Challenges • IBM Global Locations Trends, 2014 Annual Report • EIU/Matheson 2012 report “Investing in Ireland”

4. Topic G: Structure Trade & Competitiveness • Agri-food • Manufacturing & Services • “Industrial Policy” • Measuring competitiveness • Ireland’s competitiveness

5. Production, Technology & Trade • Production function and technology • What can be produced? • What can be traded? • Importance of transportation technologies • E.g. steam power, refrigeration, airplane • Also communication technology (transportation of ideas), e.g. telegraph, internet Production function: relationship between inputs (K, L, A) and outputs (Y) Y Y1 Y = f(A*, K, L, N) Y = f(A, K, L, N) Y0 L0 L

6. Development & Trade • General path for economic structure: • Agriculture -> manufacturing -> services • General path for trade: • High value-to-weight (e.g. spices, metals) -> • Commodities (e.g. grain) -> • Merchandise (e.g. cars) and now -> • Significant trade in services • Why trade internationally? • At individual level, “Smithian growth” – greater specialization means greater incomes • Same principle holds at city, country or continental level

7. Agri: Key indigenous sector • Throughout Ireland’s economic history, agricultural produce (incl live animals) a major export • Long-standing comparative advantage, in wider region, due to climate • Currently ~8% of the economy and ~4% of exports... but 70% of land and nearly one-third of GHG emissions • Cf. scale of domestic demand: food/drink about 18% of household expenditure • Comparable with share spent on housing

8. Intervention-Rich • Significant interventions by government (EU and national): • EU agri tariffs ~18% on average (and more than 100% in some cases), vs 4% for other goods • CAP: dual goals of price stabilisation and income support • Conflict between “fair standard of living” for farmers and “reasonable price” for consumers?

9. Rationale for Intervention • Food security (cf. debate on energy security) • Price volatility - supply susceptible to shocks, inelastic demand • Structure of production: dominated by family farms (need not be - cf. NZ), scale and scope economies under-exploited • Family-run nature leads to greater specialization (thus greater risk of price shocks) • Unmatched lobbying ability in Ireland… and in EU?

10. The Evolution of CAP • Origins of CAP: import tariffs, intervention price • Ensured a high domestic price, where food deficits existed • Growing self-sufficiency meant switch to export subsidies • High prices -> excess production, but only at EU prices • Dumping on international markets plus huge budget • MacSharry reforms 1993: • Reduction in price supports, switch to income supports (direct payments) • Broader rural focus of CAP • Extended in “Agenda 2000” (pre-enlargement) • “Coupled payments” – subsidy based on production

11. Cap in the 21st Century • Issue: farmers now cut off from market demand • Production to get subsidy, not to serve demand • Fischler reforms, 2003: “single farm payment” • 2000-2002 reference period – income subsidy based on that • Decisions to produce linked again to the market – could refrain from producing and still receive income • Cross-compliance condition • Standards of animal/environmental welfare must be met • 2008 Health Check – reforms extended to other markets (including cotton, olive oil, sugar) • Sugar market reforms ended sector in Ireland • Only limited “coupled payments” remain

12. Ireland as (Net) Producer • Comparative advantage in diary, cattle products • Cf. Topic A – dairy to tillage and back in 19thC • Dwindling size • Absolute: from 330,000 in agri 1960 to 87,000 in 2012 • Relative: now less than 5% of the labour force • Structural adjustment • More than half of sector over 55yo, vs. 40% in 2003 • Exit process not smooth, due to age, skill and location profile of sector • Issue of agglomeration economies and rural brain drain (cf. discussion of rural competitiveness later)

13. World As Consumer • Prices falling in real terms since 1950s: role of technological change (supply) vs. preferences (demand) • But prices rose 2008-2011: a "new era" or a blip? Cf. 2014 figures • Demand side: Rising incomes in developing countries, switch into meat and dairy products • Supply side: greater competition for land use (biomass, biofuels)

14. Topic G: Structure Trade & Competitiveness • Agri-food • Manufacturing & Services • “Industrial Policy” • Measuring competitiveness • Ireland’s competitiveness

15. Taxonomy of Trade • Agri-food sector (as per above) • “Traditional manufacturing” • Leather, rubber, cork/wood, paper, textiles • Iron & steel, machinery, transport • “Modern manufacturing” • Chemicals (in particular pharmaceuticals) • Office and electrical machinery, telecomms equipment • Internationally traded services • Financial & computer services • Business services (such as consulting) • Leasing

16. Modern Vs. Traditional

17. Categories of Service Trade • General Agreement on Trade in Services (GATS) • Cross-border trade, e.g. online education taken by overseas students • Consumption abroad, e.g. tourism • Commercial presence, e.g. UK banks trading in Ireland • Presence of natural persons, e.g. Irish engineer travelling to project overseas • Information & communication technologies affect primarily (1) above • Transport technology affects (2) and (4) • (3) is typically controlled through regulation/policy

18. Changing Context of Trade • Growth of services exports • Services 80% of activity in OECD and growing share of exports • Pressure on statistical systems that treat services as residual “black box” sector • Fragmentation of global supply chain • Importance of intra- as well as inter-firm trade • US 2009: ~60% of all OECD imports intra-firm, ~33% of all OECD exports • Supply chains: spiders vs. snakes • What gets offshored? What stays ‘at home’?

19. OFFSHORING • Offshoring vs. outsourcing • Offshoring: within-firm relocation of activity • Outsourcing: involving external firm (local or foreign) • Common motivation: focus on ‘core competences’ • Relatively expensive unskilled labour in OECD means tasks intensive in unskilled labour offshored • E.g. assembly line • Service activities – in particular involving skilled labour – remaining in OECD • Outcome: fall in manufacturing as % of GDP

20. “Servicization”

21. Ireland as a Services Leader

22. Issues of Measurement

23. Expanding Frontier of Trade • Boundary between manufacturing and services not fixed • Cf. Windows 95 vs. Windows 10 • Boundary between traded and non-traded sectors not fixed • E.g. health (Bahrain) and education (Australia) as an export • Construction?

24. Topic G: Structure Trade & Competitiveness • Agri-food • Manufacturing & Services • “Industrial Policy” • Measuring competitiveness • Ireland’s competitiveness

25. What is the Market failure? • What is the economic rationale for policy in relation to trade, industry or enterprise? • For physical infrastructure, economies of scale • Cf. Topic G – natural monopolies • For human capital, positive externalities • Cf. Topic D – subsidies required, otherwise under-provided • Particularly if capital markets are missing • For targeting regions, level playing field? • But what about agglomeration economies foregone? • For targeting sectors/firms, ??? • Information failures? Missing capital markets?

26. from Tariffs To Industrial Policy • Traditional form of trade policy: • Raise tariff barriers in response to negative shock to domestic economy (this could be increased competition from abroad) • Should boost local production, at expense of foreign • Cf. 1780s response of British industry to prospect of free trade with Ireland • Early 20th C: common form of business cycle policy • Beggar-thy-neighbour: reduces specialization so negative-sum game (lower incomes at home ultimately also) • Post-WW2: focus on “industrial policy” – grants to companies to export

27. From Industrial To Enterprise • Growing “servicization” of trade means name shift, from industrial to enterprise policy • Content shift also, as both WTO and EU rules place strict conditions on policies favouring specific firms/sectors • Three key elements of enterprise policy in Ireland: • Taxation of business • Direct grants • Regional development policy • Foundations in 1960s and 1970s • 1960s (and 1950s): switch from autarky to openness • 1970s (and 1980s): entry into world’s largest market

28. Business Taxation • Low corporate tax rates • From “double taxation” to “double non-taxation” • ‘Aggressive tax planning’ and tax avoidance • 2013: OECD BEPS 15-point Action Plan • Address challenges of borderless digital economy • Neutralise “hybrid mismatch” arrangements • Strengthen CFC rules and limit base erosion • Counter harmful tax practices • Prevent treaty abuse • Align transfer pricing with value creation • Require disclosure of tax strategies

29. Direct Grants • Policies focused on business income, rather business prices (tariffs) • 1950s: capital grants for companies producing for export • E.g. of Fyffes – manufacturing status important • More targeted grants from 1970s • Training and R&D, plus loan guarantees • Under EU rules, grants based on geography, skill level and activity type (in favour of high tech) • Milestones in industrial policy • Telesis Report (1984): greater focus on domestic industry • CullitonReport (1992): switch from grant-based to general improvement in competitiveness

30. Regional Development • Clash of politics and economics • Constituencies move a lot more slowly than people • EU Structural Funds: • to help under-developed regions • A success in Ireland given lack of migration to cities, 1995-2007? Or a result of credit bubble? • In general, rationale for attracting FDI could be to create cluster – agglomeration economies • Productivity spillovers, impact on enterprise

31. Challenge of “Picking Winners” • Who wins the taxpayer’s money? • Regional politics • Focus on “trendy” sectors, buzzwords • Cf. current “priority sectors”: • Health informatics, financial analytics, digital lifestyle management, tourism, the food sector, life sciences, software, the creative arts, next generation network-enabled sectors, construction, ageing-related activities… • What is the impact on policy effectiveness?

32. When Policy Meets Real World… • Lisbon Agenda, 2000: • Make the EU “the most dynamic and competitive knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion, and respect for the environment by 2010” • Europe 2020 Strategy, 2010: • Significantly more modest in its goals • Response to crisis • Still refers to goal of “smart, sustainable and inclusive economy”

33. Fit-For-Purpose Statistical Infrastructure? We know all this and more… …but only this Source: Central Statistics Office

34. Topic G: Structure Trade & Competitiveness • Agri-food • Manufacturing & Services • “Industrial Policy” • Measuring competitiveness • Ireland’s competitiveness

35. The Stakes

36. Narrow Vs. Broad • Competitiveness and productivity are closed related • Both measure of ‘bang for buck’ • Narrow competitiveness: • Central Bank of Ireland measures output per worker, adjusting for change in costs • Broad competitiveness: • What is the set of factors that affect where mobile capital decides to locate? • Productivity relative to wages is a symptom… but what causes a high level?

37. CBI’s Measure of Competitiveness

38. Competitiveness Rankings • WEF Global Competitiveness Index • Since 2005; ~145 economies; heavily survey-based • Ireland ranked 25th in 2014 (up from 28th) • IMD World Competitiveness Yearbook • Since 1989; ~60 economies; 1/3 based on exec survey • Ireland ranked 15th in 2014 (up from 17th) • World Bank Doing Business rankings • Since 2004: ~190 economies; based on concrete (often regulatory) measures • Ireland ranked 13th in 2014 (up from 17th)

39. WEF Global Competitiveness Index • 12 Pillars • 4x Basic requirements • Institutions, infrastructure, macroeconomy, health/ primary education • 6x Efficiency enhancers • Higher education, goods markets, labour market, financial market, tech readiness, market size • 2x Innovation & sophistication • Business sophistication, innovation

40. WEF Reliance on SurveyS • Institutions: 26 indicators (25 survey-based) • Infrastructure: 9 indicators (6 survey-based) • Macroeconomy: 5 indicators (0 survey-based) • Health, primary education:10 indicators (4 survey-based) • Higher edu/training:8 indicators (6 survey-based) • Good markets:16 indicators (11 survey-based) • Labour market:10 indicators (2 survey-based) • Financial market:8 indicators (9 survey-based) • Technological readiness:7 indicators (3 survey-based) • Market size:4 indicators (2 survey-based) • Business sophistication:9 indicators (9 survey-based) • Innovation:7 indicators (6 survey-based)

41. WEF: Issues and Limitations • 70% of the input indicators are based on the survey • Sample composition? Sample size? Internationally comparable? • Inclusion of absolute size variables • “Available airline seat kilometers, millions of seats km/week” • GDP (in $PPP billions) • Other issues… • Relevance: Ireland ranks 22nd for “how serious an impact will tuberculosis have on your company in the next five years?” • Linearity: 95% primary enrolment = rank of 62nd • What is it measuring? • If MNCs in Ireland said competitiveness improved hugely 2007-2011, why did Ireland’s ranking worsen?

42. IMF Yearbook • Four factors, each with five sub-factors: • Economic Performance (83 criteria) • Government Efficiency (70 criteria) • Business Efficiency (71 criteria) • Infrastructure (114 criteria) • Based ultimately on two sets of indicators • 135 “hard data” indicators • 118 results from survey • Thoughts… • What is the aim? Is “economic performance” an input or an output?

43. World Bank Doing Business • Ten headings: • Starting a business: 4 indicators • Construction permits: 3 indicators • Getting electricity: 3 indicators • Registering property: 3 indicators • Getting credit: 4 indicators • Protecting minority investors: 9 indicators • Paying taxes: 6 indicators • Trading across borders: 8 indicators • Enforcing contracts: 3 indicators • Resolving insolvency: 9 indicators • Based largely on procedures & time/money costs Main indicators: # procedures Time in days Cost in €/$

44. Sample WB-DB ranking

45. Topic G: Structure Trade & Competitiveness • Agri-food • Manufacturing & Services • “Industrial Policy” • Measuring competitiveness • Ireland’s competitiveness

46. NCC’s Overview of Rankings(Within OECD)

47. Ireland’s Strengths & Weaknesses Ireland’s hit-list: Construction permits Electricity connection Registering property

48. Ireland’s Strengths & Weaknesses

49. Reform Simulator • See: http://www.doingbusiness.org/reforms/reform-simulator • Four scenarios • (0) As-is • (1) “Going Singapore” on construction permits (same procedures but faster and cheaper) • (2) 1 + shaving 1 procedure and 20 days off electricity • (3) 2 + shaving 1 procedure and 10 days off registering property

50. Competitiveness Outcomes