Policymakers need to get their act together

BUSINESS OPINION: Watching business and the economy at the moment is a bit like viewing two movies at once.

On screen one, we see a severe competitiveness squeeze on industry, bringing short-term problems for many companies and highlighting the longer-term issue of what happens when much of our current industrial base moves eastwards over the next few years.

On screen two, meanwhile, they are still serving popcorn to the audience and we see earnest discussions on how to arrange the special payment of almost 9 per cent to public servants over and above the basic terms of the new national pay deal.

We some see some rumblings from parts of the private sector that 7 per cent over the next 18 months is not enough. And we see a group of ESB workers refusing a €250,000 per head offer for the closure of the defunct Rhode power station. (Perhaps the 30-day "cooling off period" should be redesignated as a "copping on period".)

The realisation that the economy is facing into a very difficult period seems slow to sink in.

Competitiveness has been hit by rising domestic costs and a falling currency. Weakness in exports is only being hidden by a boom in sales from the pharmaceutical/chermical sector, without which total exports in the first 10 months of last year would have been down 9 per cent.

A range of other costs to business are also rising. As a result, unemployment is rising steadily.

This does not suggest that we are facing a major downturn - but it does show that conditions are difficult and are unlikely to lift until much later this year, at the earliest.

Which brings us to the longer-term issue - and long-term these days is two-three years at most. A document produced by Forfás this weekend quoted EU figures suggesting that average nominal wage levels here would be 13 per cent above the average of the euro zone this year. You don't need a degree in strategic thinking to realise that the days of attracting inward investment on the basis of low wage costs and low taxes are coming to an end.

The second part of the equation - a low corporate tax rate - remains in place for the moment, at least, though pressure from our EU partners is likely to intensify. But once the likes of Hungary and Poland join the EU next year, the relatively high level of wages here will be very evident and many of these locations will also offer attractive tax packages. Meanwhile the Far East provides even lower manufacturing costs.

To continue to prosper, Ireland must thus be able to first protect and then redefine its competitive advantage.

In the short term, the difficulty is that our policymakers have left themselves with little flexibility. The expensive public sector benchmarking deal will leave little or no scope in the Exchequer finances - at best we can expect a couple more budgets like this year's, with the tax burden nudging up and most extra spending going on pay. Businesses also face an increase in other state-inspired costs - in power, telecommunications, rates etc.

We are thus left crossing our fingers for a global upturn - and for some easing in the value of the euro. Beyond that, it is a matter of hoping that the anti-inflation programme to be announced as part of the new national agreement can make some headway.

Policymakers do, however, have an urgent responsibility to address the longer-term competition issues. Top of the list is a coherent programme to invest in the necessary infrastructure, particularly for transport, energy and communications. To date, the National Development Programme has been bedevilled by cost over-runs and delays. We simply have to do better in this area over the next few years - and this requires new approaches in planning, costing, raising finance and project management.

We also need a coherent view of what kind of industries can have a long-term future in this economy and how to build the correct conditions for them to prosper. There has been work in this area from Forfás and the new Science and Technology Ireland agency. We now need a focus led from the highest level.

To put it bluntly, the flow of job losses we have seen in the last few months is set to continue - or quite possibly accelerate. And we have some way to catch up in building up the base for knowledge-led replacement industries. Forfás estimates that investment in research and development (R&D) in 2001 rose sharply to 1.2 per cent of Gross Domestic Product. This is still significantly below that of advanced knowledge-intensive economies such as Sweden (3.8 per cent), Finland (3.2 per cent, the US (2.8 per cent) and South Korea (2.7 per cent.)

In the light of the above, business needs to hear two messages from Government. One is a realisation of the current difficulties, both to help adjust expectations (see Rhode power station above) and to do what can be done to help hold down the costs which are within the control of the State. The rather woolly terms of the benchmarking deal also need to be translated into tangible improvements in public services, if competitiveness is not to be further hit.

The second message is a strategy from Government to provide the conditions for the longer-term protection and development of the industrial base. We need a little better from our political leaders than a string of "task forces/inter-agency groups/ sectoral studies " to respond to closures in the months ahead, as the inevitable eastward drain of jobs continues.