Policy makers really have a problem. They know that Ireland is a high-cost country but they seem to be unable or unwilling to figure out why. Forfas surveys all manner of cost inputs – energy, property, labour, insurance, etc. – but while they uncover some valuable information, they still can’t seem to connect all the high-cost dots into a coherent picture. I have a small answer. It is not the whole answer but it can help complete the picture and, just as importantly, it can help us see what is not the problem. And that answer is this: entrepreneurial cannibals – a species of businessmen and women who make a lot of money by cannibalizing other businesses, driving up enterprise costs and making our economy uncompetitive.
These entrepreneurial cannibals – they’re literally eating us alive.
Forfas has stated that a major cost factor in Irish business is the high price of many of the services they purchase:
‘Prices and costs in non-traded sectors quickly feed into the cost base of internationally trading firms who purchase goods and services in the local economy. Examples include labour services frequently purchased by trading sectors, such as accountancy, IT and legal services, where figures show Ireland – and Dublin in particular – to be very expensive.’
Indeed, the Business Service sector itself is considered quite costly compared to other countries. This is an important sector because its major client base is other businesses. This sector consists of:
- Computer management services/consultancy
- Legal, accounting, tax and market research services
- Advertising, recruitment and architectural services
- R&D and testing
- Security and industrial cleaning
This is in addition to a number of other miscellaneous services. So the Business Service sector is a good test case – to find out if entrepreneurial cannibals actually do exist.
One of the reasons put forward for high costs is lack of competition. This is the Competition Authority’s very first article of faith: the more ‘competitors’ you have, the better off you are. One indicator of competition is the number of enterprises. It’s not prime facie evidence - they could all be participating in collusion or there could be state price controls (as in the electricity sector) - but we are informed by the high priests of competition that, all things being equal, the more competitors you have, the more competition there will be, resulting in lower prices.
So could this be an explanation for high costs in Business Services – not enough ‘competing enterprises’? Probably not. The CSO's Annual Services Inquiry tells us that over 37% of all non-financial service enterprises in the state operate within this sector. And it is growing. Indeed, this sector accounted for the entire increase in enterprise start-ups … and then some. There’s a lot of IT consultancy, legal, accountancy, marketing, PR and advertising firms setting up shops everywhere (in the three year period the number of Business Service enterprises increased by over 36%). This doesn’t suggest a ‘lack of competition’.
We can’t blame wages either. Even the National Competitiveness Council admitted that wages are by and large ‘competitive’. In any event, we know from a number of databases – such as the OECD – that Ireland is a relatively low-waged country. So what’s making this sector so expensive?
Again, according to the CSO data, profits have increased at over four times the rate of wages. This is quite an entrepreneurial accomplishment in what are essentially labour-intensive sectors. Is this normal? Is this what we might expect of Business Service enterprises throughout Europe?
Fortunately, we have an international measurement in the form of the EU KLEMS database – which charts the inputs and value-added in various economic sectors among all EU-15 countries. What is the norm for this sector?
My, oh my. It seems our native bourgeoisie take a lot more profit than their counterparts in the EU. The KLEMS database can’t be directly compared to the CSO figures, primarily because the former excludes self-employed income while this is included in the latter. But what it can do is compare across borders.
It’s also worth noting that between 2002 and 2005, while Irish entrepreneurs were raking in even more dosh, profits per employee were actually falling slightly in the rest of the EU-15.
We are constantly being lectured to – about wage increases feeding into the cost base, which in turns make our products and services more expensive, which in turns reduces our competitiveness. But what is never mentioned is how profit levels also do the same thing. We hear of ‘wage competitiveness’ but never ‘profit competitiveness’.
This shouldn’t come as too much as a surprise. The formative experience of native business in post-independence Ireland was one of protectionism, cartels and short-termism. This phase lasted 30 years (and in some sectors still exists). We may operate in a more open, market-orientated environment today but attitudes die hard. This has created an incompetent native management culture which only manages to contribute about 10% of total manufacturing and service exports.
Let’s try a calculation. Though I’m going to mix some apples and oranges (KLEMS and CSO) let’s calculate the impact on prices were Irish entrepreneurs to make the same profit per employee as Germans (I wouldn’t dare suggest our native business men and women live on the EU-15 average). What would happen? Price levels in the Business Service Sector would fall by 8.3%.
An 8.3% decrease in prices. What a boon this would be to our internationally traded services sector, to our inflation rate, to our competitiveness. Almost overnight we would experience a significant reduction in our costs base – benefiting households and enterprises throughout the economy. And our entrepreneurs in the Business Service sector would still be making above average profit levels.
And if you applied that to all the other sectors – Wholesale/Retail, Transport & Communication, the Hospitality Sector, Personal Services, Financial Services - the effect on the economy would be transformative. If only our entrepreneurs weren’t so damned gluttonous to the point that they are ruining our ability to generate wealth.
I’m not suggesting that this is the exact number or the exact comparison. You would have to take into account economies of scale, etc. to get an exact fit. But what I am suggesting is that this is a fruitful ground for Forfas and the Department of Enterprise to explore. They’ve tried to examine almost every other comparison – why not this?
And while we’re at it – here are a few more high business-cost areas for our policy makers to study:
- The effect of property speculation on commercial rents
- The effect of privatisation on our telecommunications infrastructure
- The effect of state price controls and investment embargoes in the energy sector
I appreciate that this might embarrass the Government, since it was their policies that had such an influential and devastating impact on these competitiveness areas. But to paraphrase the Roman dictum:
‘Let economic justice be done though Fianna Fail fall.’
Meanwhile, pass the salt.