1. EF303: Irish Economic Analysis Lecture 10 Topic 5: Economic Structure - The Rise of Services

2. Readings 1)Forfas “Ahead of the Curve” 2)Forfas “The changing nature of manufacturing and services: Irish trends and international context” (2006) 3)IDA Annual Report 2006 4)OECD “The impact of structural policies on trade-related adjustment and the shift to services” (2005)

3. Global trends Global trends in manufacturing: –Strong growth in output and value added in global manufacturing… –Manufacturing employment declining in most OECD countries over the past two decades –Output rising, employment declining… how? –Productivity growth as the main factor driving growth in global manufacturing -- technology etc. –In terms of the share of total value added in the global economy, the services sector is growing at the expense of manufacturing.

4. Global trends Reproduced from Forfás, 2006: The changing nature of manufacturing and services. Appendix 2.2

5. The Rise of Services –Increasingly competitive international markets –Globalized world … Economic performance across the OECD increasingly linked to countries’ ability to adapt economic structure to this new reality Emerging markets compete to offer most attractive low-cost location for manufacturing Wealthier economies, with a higher cost base, increasingly focus on services sector Services sector now accounts for over 70% of jobs and value-added in the OECD

6. The Rise of Services Why do wealthier economies tend to have an increasing share of services in their economic activity? Two reasons: 1)High income elasticity of services 2)International trade: -globalization, liberalization of markets --> increased international trade -Trade leads to specialization --> specialize according to principle of Comparative Advantage -Thus, as noted, emerging economies (with low cost base, and plentiful/cheap labour supply) have come to dominate low-cost manufacturing and assembly -Rise of services in the developed world: - absorbing spare capacity and resources released through trade liberalization and productivity gains in the manufacturing sector

7. Ireland’s place in the ‘globalized economy’ Small, extremely open economy --> highly reliant on trade… –Export 85% of our manufacturing output –combined trade (exports+imports) was 150% of GDP in 2006 (equivalent figure for US is about 30%) Challenging global environment -- both opportunities and threats… Traditional industry, manufacturing and agricultural production are particularly vulnerable to overseas competition from low-cost locations ‘Low-cost’ status has been eroded… rapid economic growth accompanied by rising cost base

8. The decline of ‘traditional’ manufacturing in Ireland Traditional sectors -- labour intensive, low value-added… In decline… no longer economically viable in this country - costs and competition from abroad… Textiles and food processing -- traditionally big employers, have been in severe decline… Job losses in major regional employers such as: –Fruit of the Loom in Donegal –Guinness in Dublin –Dairygold in Mitchelstown –Coca-Cola in Drogheda

9. Employment in Manufacturing, Services and Total Employment in Ireland. Base: 1997 Q4 = 100 Source: CSO Data

10. Employment in ‘Modern’ and ‘Traditional’ Manufacturing in Ireland. Base: 1998 Q1 = 100 Source: CSO data

11. Ireland’s Competitiveness Challenge Relatively small domestic market Openness of the economy –> dependence on trade… To the extent that we wish to continue importing goods and services, these need to be financed in the LR by exports --> importance of competitiveness 2007 Ireland ranked 14th on the IMDs World Competitiveness table… down from 4th in 2000 World Economic Forum report 2006-2007, Ireland ranked 21st, down from 5th in 2000 Loss of competitiveness since 2000 explained by two factors: –Higher inflation –Slower productivity growth… why??

12. Rising costs of doing business in Ireland High inflation and rising costs of doing business.. Why? –Rapid economic growth –Scarce labour –Other reasons?… recall our discussion of locally trading enterprises and non-traded services… sheltered/uncompetitive environment… The cost of labour increased by 29.6 per cent in Ireland between 2000 and 2005 – over 6 percentage points ahead of the Euro Zone average increase for the same period Inflation data (September 2008, annual % change): –CPI +4.3% –Energy products +14.3% –Utilities +7.5%

13. National Competitiveness Council Survey 2006 Compared costs in Irish cities vs other regions… –Dublin, Cork, Limerick, Galway- Manchester and London (UK) –Boston (US)- Copenhagen (Denmark) –Singapore- Maastricht (Holland) –Bangalore (India)- Budapest (Hungary) broad cross-section of the locations with which Ireland is now competing for international trade and investment Results: –Utility charges particularly high in Ireland even vs other high cost locations such as Copenhagen and London –Electricity costs (across Ireland) were the third highest –High rents and the expense of locally traded services (legal, IT and accountancy) were also found to contribute to the high cost of doing business in Ireland –All categories of business costs (other than communications) were found to be significantly higher for Ireland than those in cities benchmarked in Eastern Europe, India and the Far East – regions with which we are increasingly competing for trade and investment

14. The end of low-cost assembly in Ireland National Irish Bank/OCO Investment Performance Index, October 2007 Measures performance in attracting inward investment Placed Ireland 13 th of 30 countries, with India and Poland topping the rankings Nine of the top ten destinations in this index are emerging economies in Eastern Europe, Asia and South America, with Belgium the only Western European nation to break in to the top 10. These results reinforce the notion that Ireland can no longer compete with the newly industrializing, low cost economies The fact that Ireland continues to outperform most other developed economies on this index suggests we are well placed to compete for investments higher up the value chain… Belgium and Switzerland were the only ‘developed’ nations to rank higher than Ireland on this index, with the USA, Germany and the UK all finishing well down the list…

15. Areas of Opportunity for Ireland “The challenge for Ireland in the next decade is to build distinct competitive advantages that will sustain high living standards in the face of intense global competition.” (Enterprise Strategy Group Ahead of the Curve, 2004. p38) Potential Growth areas: 1)Internationally traded services… -global growth of this sector presents opportunities -Established sector for Ireland -- success of IFSC -Highly educated workforce -Low corporate tax regime --> attractive location Evidence: - 29,212 jobs created in IDA supported financial services enterprises since 2002 (IDA annual report, 2006) - success in attracting European/EMEA and global HQs… e.g. Google

16. Areas of Opportunity for Ireland 2) High value-added manufacturing reputation as successful location for manufacturing operations (some of the highest productivity per worker in manufacturing operations in the world!… high profitability etc.) high level of efficiency and expertise in manufacturing operations need to augment operational expertise with knowledge based activities such as R&D, new product development, marketing, customer relations and sales… Evidence of success to date: - pharmaceutical & healthcare, ICT and engineering -- between them have seen approx. 23,000 new jobs created in IDA supported enterprises since 2002 (IDA annual report, 2006)

17. Permanent Employment in manufacturing and internationally traded services in Ireland. Source: IDA data

18. Recall from Forfas report…

19. Success stories Where manufacturing operations in Ireland have successfully expanded their mandate to include ancillary services such as marketing, R&D activities, product innovation and development, shared services and even European/EMEA or global HQ’s… E.g. from IDA report… PepsiCo Ireland –Established a manufacturing operation in Cork in 1974. –Today supplies 65% of worldwide concentrate volume. –Ancillary services now include: financial shared services, global data centre, strategic management of marketing information globally, a treasury hub and next generation product R&D.

20. Further evidence of success in these areas… Manufacturing: high-tech sectors (ICT/chemicals/pharmaceuticals)… account for 58% of Irish manufactured exports, compared with EU-15 average of 24% Services: - the services sector accounts for 67% of employment in Ireland (2006) - In 2004 Ireland was the world’s 13th largest exporter of services (ahead of Canada and India for example) - 2.2% share of world export services, 7 times Ireland’s share of global GDP (0.32% in 2004).

21. Conclusions Ireland will no longer be able to compete with the emerging economies of Eastern Europe, Asia and South America on a purely cost basis Continued economic success will therefore depend, to a large extent, on the economy’s ability to attract investment from higher up the value chain. High value-added manufacturing, particularly in the life sciences sector, and internationally traded services, have been identified as the main sources of potential growth for Irish enterprise over the coming years