Economic Context for Skills Development

Overview of Irelands Competitiveness

Don Thornhill, Chair National Competitiveness Council National Skills Conference 26 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

Irelands International Competitiveness Rankings Where does We Stand Internationally?

35 WEF 30 25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 IMD

Source: WEF & IMD

Irelands 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

2000 Employment Short Term Unemployment Long Term Unemployment 1800

1600

1400

1200

1000 1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Thousands of persons

Source: QHNS, CSO

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

10 9.4 1995-1999 2000-2004 8

Migrants per 1,000 of population

6 4.3 4 3.1 1.8 0.5 0 -0.2 -2 Ireland Northern Ireland EU 15 US NEU 10 Japan -0.5 -0.2 -1.0 0.7 4.2 4.1

Source: International Migration Outlook 2006, OECD

% of the Population Aged 20 to 24 having Completed at Least Upper Secondary Education (2005)
Poland Sweden Ireland Finland Hungary France UK Denmark Netherlands EU 15 Italy Germany Spain 0% 10% 20% 30% 40% 50% 61.3% 60% 70% 80% 90% 100% 90.0% 87.8% 86.1% 84.8% 83.3% 82.8% 77.1% 76.0% 74.6% 74.1% 72.9% 71.0% Lisbon Target 85%

Source: Structural Indicators, Eurostat

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

OECD 25-34 UK 35-44 45-54 Ireland 55-64

EU 15

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Irelands Weaknesses
Irelands 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 Irelands 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

3.0%

Irelands Share in World Merchandise and Services Trade, 1993-2005

Services Merchandise

2.5%

2.0%

1.5%

1.0%

0.5%

0.0% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: WTO

Erosion of Irelands Cost Competitiveness Labour Cost Growth Rate, 2000-2005

Germany Denmark Sweden UK Euro-zone Austria EU 25 France Ireland (Q2 2005) Poland Czech Republic Hungary 0% 10% 20% 30% 40% 50% 60% 70% 15.1% 18.4% 22.1% 22.5% 23.4% 23.8% 24.4% 26.4% 29.6% 42.0% 55.3% 79.0% 80% 90%

Growth in Labour Costs, 2000-2005

Source: General and Regional Indicators,2006, Eurostat

Not Maximising the Potential of ICT Computers per 10 Students (mean), 2003
US Korea UK New Zealand Hungary Austria OECD Japan Denmark Finland Sweden Netherlands Italy Ireland Spain Germany Portugal Poland 0 0.5 0.8 0.8 0.7 0.7 1 1.5 2 2.5 3 3.5 1.1 1.4 1.3 1.7 1.6 2 1.9 1.9 2.3 2.3 2.3 2.2 2.7 3

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

10%

Government
8%

Consumption

Investment

Net Exports

6%

4%

2%

0%

-2% 1990-95 1995-2000 2001 2002 2003 2004 2005e

Grounds for Concern

1. 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. Irelands debt burden

Ireland has very high levels of household indebtedness And Irelands indebtedness continues to grow rapidly while interest rates are increasing

100%

120%

20%

40%

60%

80%

0%

Italy
2003

Greece

2004

Belgium

France

2005

Austria

2006f

Finland

Euro area

Portugal

Spain

Germany

Ireland (GDP)

Grounds for Concern Household Debt

Netherlands

Ireland (GNP)

Grounds for Concern Construction

3. Dependence on the construction sector
By the end of 2005, over 13 per cent of Irelands 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 Irelands housing needs and infrastructural deficit are addressed, constructions exceptionally high share of economic activity and employment can hardly be sustained. Are these skills transferable?

Grounds for Concern Business Costs

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 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 Irelands 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
Irelands national competitiveness has been central to Irelands success Ireland needs to recover some its lost export competitiveness a skilled, adaptable and knowledge intensive workforce is essential