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A Tale of Two Cities

Posted on October 28, 2016 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

“It was the best of times, it was the worst of times” – the opening line of Charles Dicken’s The Tale of Two Cities is a familiar one. It could be applied to the fall-out from the ‘Brexit’ vote in the UK on 23 rd June. If UK policy makers, analysts and the general public were not exactly prepared and informed for what would happen, what of Irish policy makers, analysts and the general public? We have seen very little yet (and Brexit has not happened yet). Currency volatility is nothing new. We have lived with that for most of 4 decades.  

 

By now we are well familiar with the warnings of analysts and commentators. But, this is not enough. We are faced with a crisis in particular sectors and regions of the economy of the Republic (for now exporters to the EU in Northern Ireland have experienced a boost). Something needs to happen quickly. Yet, we don’t know what to do. Nobody can directly control the gyrations in the sterling-euro exchange rate.  Even if it wanted to, the Irish Government cannot signifcantly grant aid companies threatened with collapsing due to EU state aid rules. Measures entailing subsidies might stem job losses temporarily but what if the underlying conditions and prevailing exchange rates remain in place? In any case, the ‘fiscal rules’ that Ireland is locked into legally and constitutionally are unhelpful especially at times of transition but there is nothing that we can do about that in the immediate term except, perhaps, to take a leaf from Germany, Spain and Italy and seek forgiveness rather than permission to bend these rules especially where public capital spending is concerned.

The Food and Drink Industry Ireland (which is part of IBEC) recently published a report entitled, “ Brexit the challenge for the food and drink sector – safeguarding business, jobs and trade ”. In this Report they make a strong case, among other things, for wage repression. While there is an argument for caution on labour costs in this sector which happens to be highly labour intensive it would be short-sighted to drive a policy on wages on foot of currency volatility. The challenge for food exporters in the Republic of Ireland is twofold:

  • Food manufacturing needs to target niche markets based on product quality, high value-added and upsklling.
  • Over-reliance on the UK market is a major risk factor.

The IBEC report points to relatively high costs compared to the UK especially in light of a much stronger Euro (against sterling). See for example Figure 8 on page 15 of the report. However, the gap in labour costs (including employer social insurance) needs to be seen in the context of labour productivity which is markedly higher in food manufacturing. Consider labour cost per hour in Chart 2 (below).

 

We get a very different picture of relative position when the focus turns to labour productivity (Chart 3). It should be borne in mind that there is a sharp difference in productivity performance within food manufacture as between indgenous and foreign owned enterprises with the practice of 'transfer pricing' in the latter.  Further analysis of these differences will be undertaken by the NERI.  

The Republic of Ireland stands out as having the lowest share of personnel costs in total purchase of goods and services by food manufacturers.  It seems that IBEC is focussing on the wrong category of costs.

 

 

Though productivity is extraordinarily high in food manufacture the rate of investment was particularly low in 2012 (the last year for which data were available). See Chart 5.

 

 

The picture that emerges is much more complex than a narrow focus on labour cost.

All of this suggests that responses to Brexit are best directed by a medium-term strategic plan that avoids over-reaction or one-sided policy focus.  To complete the quotation from Dickens:

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair…, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way…”

 

 

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