Limerick East): The key to reducing unemployment lies in our competitiveness. The living standards and the number of jobs in Ireland depends, ultimately, on our success in selling against international competitors. As a nation we must compete for employment.
We cannot ignore this fundamental need for international competitiveness. Larger countries may bend rules and use protectionist measures to temporarily protect local inefficiences. For Ireland this is not on. We must seek to be better competitors. We earn our living standards by our success in export markets. Our pay levels must adapt to changes in the pay costs among our competitors. When exchange rate movements place overseas competitors at a temporary price advantage, we ignore the implications for our pay and other costs at our peril.
It is not just those sections of the economy directly exposed to international competition which must respond to these forces. Inefficiencies in the sheltered sectors will act as a drag on the competitiveness of other sectors and reduce the standard of living of all Irish people.
Similarly, the appropriate size of the public sector is dependent on the wealth we create. It is too large when it results in excessive taxation and pushes up rates of interest to the detriment of productive investment.
The last 20 years have been marked by extraordinary changes in the shape of the Irish economy. During that period we have witnessed a very rapid growth in industrialisation. A massive structural change has also taken place. The growth of industry has been marked by an increasing emphasis on areas involving high technology and requiring highly skilled Irish workers.
Nowhere, can the significance of these changes be seen more vividly than in the export performance. In 1965, exports from Ireland were valued at 24 per cent of GNP. Twenty years later their value had risen to nearly two-thirds of GNP. The total amount traded, the combined value of exports and imports, is now much higher than GNP. This level of trade means that Ireland, and in particular Irish industry, competes to a greater degree for international markets than all but a very few countries in the world. No longer is the focus of Irish trade on exchanging agricultural commodities for new machines. The core of our trade is represented by head-on competition to sell similar types of industrial products against producers in other members states of the EC and further afield.
I would like in that context to mention the excellent work which is being carried out by Coras Tráchtála in their marketing endeavours throughout the world, especially in Europe. The fact that our export performance enormously exceeds the EC average is an indication that while certain Irish industries have weaknesses in marketing, Córas Tráchtála are very strong indeed. When Deputy O'Kennedy spoke about educating young Irish people in marketing he must not have been aware of the programmes which are now available in the NIHE in Dublin and in Limerick and especially the recent programme in marketing in the NIHE in Dublin which involves students spending up to a year in the particular target market in continental Europe. It is a course which will fill a gap and provide well qualified young people to Irish industry, both indigenous and offshore.
Our export drive can continue very strongly in the years ahead. We must export to survive in this country. The home market is far too small to provide employment for our people and to provide us with the standard of living we have grown to expect and aspire to. We must see ourselves as trading into that very sophisticated market of 320 million consumers in Europe. We must build on our strengths and performance to date. That performance has been very good.
To do as Deputy O'Kennedy has done and pick per capita exports to the Netherlands and to compare and contrast them with per capita exports to West Germany is a cod statistic. Obviously, if you take total Irish exports to West Germany and divide them by 50 million Germans you are going to come up with a smaller per capita export than if you divide a similar or a smaller amount by between 12 to 14 million Dutch. To compare per capita exports to a small country and a large country casts no light on the topic whatsoever. If you divide our exports to the United States by the number of people in America you will come out with a very low figure of per capita exports to the United States of America, which still accounts for 12 per cent of our total exports. It is the kind of cod statistic which Deputy O'Kennedy has used throughout his speech to support generalities and I must say he was very short on specifics.
The key to our success lies as I have said in our ability to exploit our strengths and in particular the talents of our people. It is not enough to be competitive in an Irish context. Irish firms must compete against the best producers in Britain, West Germany and Italy while also maintaining advantages against competition from newly industrialised countries.
Structural change does not take place in a tranquil environment, however. The future of a business must be built in today's environment. The wide fluctuations in interest rates and exchange rates have resulted in serious and immediate difficulties for the competitiveness of a significant number of firms. While these difficulties are short term, a failure to adapt to their implications could have major adverse effects on employment.
The immediate impact of the rise in the value of the Irish pound against sterling is to raise the price of Irish produced goods relative to competitors based in Britain. The size of the increase over the last year has been of the order of 14 per cent. It is very difficult for a company on a year to year basis to take a rise of 14 per cent. Obviously, in selling into the UK it is very hard to be competitive when exchange rates alone account for 14 per cent. It is also hard to compete on the home market when UK companies have a 14 per cent advantage. It is an extraordinary high level of change in a 12 month period. There are very few products whose export markets could bear rises of that magnitude. Similarly, production for the home market will find itself at a major price disadvantage against products originating in Britain.
The benefits of a stronger exchange rate will be captured in lower rates of inflation and lower interest rates. A recent study by the Central Bank suggests that these benefits may take up to two years to be realised. What I am basically saying is that if you are into a hard currency policy as we are — and there is no question that we would even consider a devaluation of the pound — the adverse effects flow very quickly from the neighbour who is at an advantage, especially when it is a big economy like the UK. The benefits are time lagged. It will take a while. Irish industry has a problem with exchange rates. It is 95p and 96p against the £ sterling. There will be an enormous advantage in the medium and long-term but it will take a while. The only immediate option for many firms to maintain their markets is, therefore, to reduce their prices which, in turn, must involve a squeeze on costs or profits. The scope to reduce profits among the type of firm most severely affected by these events is very limited. The most recent survey of the profitability of indigenous companies in manufacturing industry found the average for all companies to be 2.5 per cent of sales. What little scope there is to squeeze profits in firms is likely to choke off the investment necessary to build future competitiveness and secure long term employment in these firms.
Typically, in an Irish firm raw materials costs are equal to around 60 per cent of the value of output. These costs are not generally susceptible to domestic control as they come in the form of imports or, as in the case of much agricultural produce, at price levels which are maintained regardless of domestic economic circumstances. The largest component of the value added by the firm is the payroll cost. It is the cost of wages and salaries, therefore, which will be a key factor in determining whether companies successfully adapt to the price-cost squeeze consequent to exchange rate movements.
In many of the firms which are in competition with firms based in Britain there can be little scope for payroll increases. Recent figures quoted of pay agreements involving annual rises of 5 per cent to 6 per cent may be sustainable in enterprises with rapid productivity growth and a strong presence in other EC countries. For companies which are dependent on competition against UK producers, rises of this magnitude will have serious consequences for employment and must be seen as too high. They will provide a further impetus to the reduction in employment in the traditional sectors of Irish industry.
Over the past five years we have seen companies in the traditional sectors increase their productivity, in order to maintain competitiveness, by reductions in the size of their workforces. In part, pay rises for those in employment have been paid for by the removal of others from the payroll. It is a crude but effective response to the ebb and flow of international competitive forces. Unfortunately, it is more "ebb" than "flow" with the contraction of the workforce in response to pay and other cost pressures reducing the potential for subsequent expansion.
Basically, what I am saying is that companies instead of looking at individual wage costs are looking at the total payroll cost. Those exporting to Britain at present cannot take wage increases of 5 per cent and 6 per cent per annum on top of the difficulties which the strong exchange rate has given them. In order to reduce the payroll cost they will shed workers. There should be a great awareness among those who negotiate wage agreements that if indigenous firms exporting to Britain settle for 6 per cent or 7 per cent this year they will reduce payroll costs by having more redundancies. A higher wage for some means no jobs for others. That is the bottom line and should be stressed again and again.
Ensuring the cost competitiveness of the traded sectors requires control of more than pay costs. The public sector imposes costs through taxation and charges for services and also through its impact on interest rates. The sectors of the economy sheltered from international competition, for example, in the areas of banking, insurance, legal fees, distribution and restaurants affect the cost structure of the traded sectors and the standard of living of everyone.
The Government have already set out their targets for the public finances in 1987. The achievement of the target for the current budget deficit will involve significant cuts in public expenditure, and the levels of service from the public sector which we have become accustomed to. As long as we endure such high levels of unemployment combined with excessive levels of borrowing, however, there is no case for defending one of the root causes of the problem.
Put simply, the original objective in expanding the public sector has backfired. The build-up of public sector employment and services in the seventies, in anticipation of subsequent accelerated growth of employment in the private sector, has had the opposite to its intended effect by choking much of the potential for growth.
To put it bluntly, Deputy O'Kennedy's analysis of interest rates is accurate even though interest rates are less than they were when he left office. The way to get interest rates down is not through more public expenditure programmes, whether on the current or capital side, but rather to cut public expenditure. The budget and the Book of Estimates we envisage bringing in at the end of January will involve cuts in public expenditure which will bring the Exchequer borrowing requirement down to 11.8 per cent — the current budget deficit is 7.4 per cent. In the first four or five months of the year that will have the effect of bringing interest rates down between 4 per cent and 5 per cent. That does not leave any scope for pretending that you can shake out the public sector because there is waste in it. The waste has been eliminated by and large. If you want to cut public expenditure you have to cut programmes. The theory that you can get massive savings without hurting programmes is total fallacy.
While I agree with what Deputy O'Kennedy said about interest rates, he lacks the will to do anything about them. He did not say anything today which would suggest that he, if Minister for Finance, would do anything more than exacerbate the problem and increase interest rates to the historic levels they were at when he left office.
I do not have to repeat the problems brought about by high rates of taxation. The growth in the tax burden was halted in 1984. Its reduction now requires significant progress in reducing public expenditure.
There are some home truths which can be put simply. You cannot have increased public expenditure and reduced taxation at the same time unless you borrow more. Everything the Government collect in taxation is spent on services — on education, health, social welfare and so on. On top of that, another £2 billion is being borrowed. To promise increased public expenditure and reduced taxation, as Deputy O'Kennedy did, does not add up. You cannot form the equation unless you put in the X factor which is more borrowing. If you borrow more you are not doing your job. You increase public expenditure and drive interest rates up into the twenties.
A further serious problem which can be traced to the imbalance in the Exchequer finances are the high rates of interest I have just mentioned. These rates of interest are a terrible burden on home owners. They are also a major constraint on investment.
International studies suggest that successful companies require a real return on investment, that is, the return net of inflation, of between 3 and 8 per cent, to be successful. The Department of Finance guidelines on public investment decisions look for a real return of at least 5 per cent.
At present, available projects with this level of return can only be undertaken in the confidence that current rates of interest will fall significantly. In recent months investors have been faced with real rates of interest in excess of 10 per cent.
The causes of these high interest rates lie in both national and international circumstances. The main cause which is under domestic control is the high level of public sector borrowing and the accompanying speculation that the country's indebtedness will rise further. The details of how the Government intend to implement their 1987 budgetary strategy will allay these concerns. This announcement in the New Year will exert a downward pressure on interest rates. We can look forward to major reduction in domestic interest rates during the first half of the year. The value of this for home owners and investors provides ample justification for implementing the necessary cuts in public expenditure.
I stress again that it is not a question of shaking out public expenditure and finding money hidden in the corners. The crock of gold theory of economics is in disrepute. If there is to be a cut in public expenditure there must be policy cuts. Programmes must be cut or reduced. That is the only way to bring down interest rates and the only kind of policy, pursued for a number of years, which will reduce taxation. That is the strategy we must adopt. If we have reduced interest rates and a downward trend in taxation then there will be investment in risktaking areas. That leads, as it has done in the strong economies, to job creation after a while of sustained growth.
We must continue to promote competitiveness in the private sector. I should like to refer to what we are doing in that area. The key instrument of public policy in the services sector has been and will continue to be the promotion and monitoring of competition. I have already referred to the need for the public sector services to compete against the yardstick of the best international practice. A similar criterion must be applied to the private sector. In this context I have already circulated the Restrictive Practices (Amendment) Bill which is intended to streamline the operation and extend the scope of current competition legislation. It is intended to allow restrictive, uncompetitive and unfair practices to be tackled in a more speedy and effective way than heretofore. It gives the agencies involved in this process greater powers for this purpose.
The Bill opens highly regulated sectors such as the banks, transport, telecommunications and electricity to review under the monopolies and restrictive practices legislation for the first time. The very fact that such questioning can take place should give an incentive to these enterprises to achieve higher levels of efficiency and consumer awareness. Deputy O'Kennedy remarked on our high transport costs but could have gone on to talk about our high electricity costs also and high banking charges. This Bill opens those areas to competition for the first time. It is about time that was done. The fact that these companies can be inquired into, in the same as can any private sector company in the economy, will have beneficial effects. The effects of competition in these semi-monopolistic areas will be very effective indeed.
The Restrictive Practices Commission have already looked at a number of areas where further competition might be promoted. They are currently engaged on an extensive review of restrictive practices in the professions. I need not take up the time of the House on the Adjournment Debate to talk about that. They have commenced the review. I expect them to report to me in the New Year on certain practices in the accounting and engineering professions. Some weeks ago the commission announced the commencement of their study into the legal profession, which will cover all aspects of restrictive practices which might appear to be anti-competitive. The commission have also submitted a report in recent months on the operation of cable television services in Dublin. I expect that the reports of the commission's review of the Restrictive Practices (Groceries) Order will be published within the next month.
It will be clear from the foregoing that the Restrictive Practices Commission have been particularly active in the last year and are likely to be increasingly so. In this way there can be positive steps towards the identification and removal of barriers which impede competition and efficiency throughout the economy. The argument that I am putting forward, to give it again in resume before I proceed with some other points, is that we are a small, open economy, we have 3½ million people on this island, we have very high standards internationally. We are not among the top players but we are in the top 20 in the world in terms of living standards. We have very good services for our young people. We have a problem — we cannot have real jobs for all the people that we have in the country at the moment. Added to that, we have a certain standard of living and aspire to a higher standard. Those aspirations cannot be fulfilled on the home market. The only way it can be done is by creating more goods and services in this country and selling them abroad. To do that we have to be competitive.
The main argument I am putting across today is that we need to be competitive because we are competing with every economy in Europe, and many of the new economies in the Pacific Basin, in the market place. The primary market place is Europe, but we must also sell in the United States and further afield. If we cannot get interest rates down — and I have given reasons why they are high — we will not be competitive. If wage costs are too high, we are not going to be competitive. If we cannot compensate for strong currency in the UK market, we are not going to be competitive. Irish industry exporting into the United Kingdom will be at a disadvantage and the only way that it can recover the advantage is by cutting costs further. The main area in which to cut costs is wages and salaries or to give very low increases in 1987. Any company that gives a 6 per cent or 7 per cent increase — and they are negotiating at that level at the moment — will have a shake-out and will reduce payroll costs by having more redundancies, and that is not the direction to take.
As well as being competitive in the manufacturing area and the private, open, competitive sector, we must look also at the sheltered sections of the economy. I am using the resources of my Department, through the Restrictive Practices Commission, to look at the banks, the building societies, the insurance companies, the cost of electricity — any areas open so that restrictive practices are taken out and the cost to Irish industry, the extra burden of cost imposed by the sheltered sector on the open competitive sector, will be reduced. We can be very effective in doing that and making very effective progress.
I should like to refer now to another area of my Department which might be of interest. I have responsibility for science and technology to a certain degree and attended Research Councils of Ministers meetings in Brussels. I am concerned that there is such a lack of appreciation of the critical importance of science and technology in our economic development and their contribution to job creation. It has been recognised that science and technology as weapons for economic and social development have very wide horizons. However, I want to concentrate here on those aspects of science and technology which relate to innovation and the enhancement of competitiveness and value added in manufacturing industry and services.
Compared with most of our EC partners, Ireland was a late starter in the area of science and technology. It still lags behind and is in serious danger of falling further back. For example, our investment in research and development per head of population is about one-fifth on the average of the EC as a whole, allowing for disparities between the level of development between member states. This means that compared with the more advanced states, of which West Germany is the most obvious example, the gap is even wider.
In his comments in this House on 2 July 1985 on the European Council meeting which had just taken place in Milan, the Taoiseach referred to the emphasis between the completion of the internal market of the Community and the promotion of a technological Europe. He also mentioned that the three major concerns of Europe centred around the problem of economic growth, our ability to tackle unemployment and the way in which Europe is falling behind technologically. I should like to quote from what he said, which was:
This can and has been exaggerated but there is need for action to ensure that industry located in Europe can take part in the market of the future.
We in Ireland cannot afford to be left out of or fall behind in that race.
The importance to Ireland of an effective and comprehensive EC programme of research and development, particularly in the area of high technology, has been emphasised in the recent explanatory guide on the Single European Act. which has referred to the appreciable benefits which we derive from existing Community programmes such as the ESB programme on information technology. Whereas the larger member states seem to regard the Community's R and D programmes as complementing national programmes, that does not apply in our case. We look very much to such programmes to provide valuable new scope and opportunities to firms in this country.
Again to summarise what I am saying, if we do not invest more in research and development, if manufacturing industry in Ireland does not invest more in research and development, it will not remain competitive in the medium term. If it becomes uncompetitive, again we shall not be able to sell into the market place against the prime competitors that we have. In that context, the House will already be aware that Ireland is a participant, along with 18 other European countries and the European Commission, in the EUREKA Programme of Collaboration for Research and Development. This programme, initiated by France and Germany in the summer of 1985, is broadly complementary to the research and development programmes of the EC. Unlike the EC programmes, however, no control fund exists for the benefit of participating enterprises — indeed, there is a strong aversion to such funding on the part of many of the participating countries.
It is recognised, however, that the position of small and medium sized enterprises requires continuing further attention. Ireland has already played a leading part in ensuring that the role of small and medium sized industries is fully reflected in the declaration of principles governing EUREKA. Since the inception of the EUREKA programme, over 110 projects have been announced, 39 of them at yesterday's conference in Stockholm. Of the number, two have an Irish interest, one is a project involving the IIRS in partnership with a production engineering research association in Great Britain to reduce the cost of machine vision systems and advance manufacturing operations. The European Commission has also expressed interest in this project.
Despite strenuous efforts by the National Board for Science and Technology, it has not been possible up to now to involve Irish firms or research institutions in the many EUREKA projects. There are various reasons for this, such as the scale, nature, profitability, the lack of research orientation of Irish firms and also the fact that one of the existing EC programmes is a more attractive option and that funding is available. However, efforts to involve suitable Irish interest in the EUREKA programme will be maintained and the fact that EUREKA now have a permanent secretariat based in Brussels should also be a help.
One of the attractive dimensions of EUREKA to Irish firms is that it provides the possibility of links with firms in small countries outside the EC such as Norway, Finland, Austria and Switzerland. This must be a significant advantage to the Irish manufacturing industry. I should like to see a bigger participation rate by private companies in Ireland in the EUREKA programme. If research and development is offshore in the United States or West Germany, we will not have strategic units of companies in this country and indigenous Irish companies will find themselves out of the ball park very quickly. We must invest in research and development and the private sector, in its own interests, must invest in research and development in the manufacturing industry.
People always think of the lives of countries in terms of centuries and that great historic changes in their economies take place over timescales of hundreds of years but that is not true. In 1906 Argentina was in the top four countries on a league table of per capita income in the world and the UK was second. The UK is lucky to get into the top 20 now and Argentina would not make the top 100. West Germany and Japan rose from the rubble of 1945 to become the two greatest economies in the world. A couple of more interesting points are worth mentioning. In 1966 Japan had a per capita income one fifth of that of the United States and, despite the great growth in the United States over the last 20 years, in statistics published a month ago, Japan has now passed the United States in terms of per capita income.
Singapore had the worst slums in South East Asia and race riots in the streets in the middle sixties but now their GNP is stronger than ours in an area about half the size of County Dublin. If we follow the strategies I outlined, the timescales for turning around the economy do not have to be very long and an enormous amount can be achieved in timescales of between four and ten years.