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T C D M . S C . ( E P S ) – R O N A N L Y O N S – E C 8 0 1 5 C O M P E T I T I O N & R E G U L A T I O N
WEEK 11: REGULATION & OUTCOMES –
COMPETITIVENESS
STRUCTURE
Regulation & Outcomes – Competitiveness
1. Context: Ireland’s Competitiveness 2. The Direct Impact of Regulation 3. The Indirect Impact of Regulation 4. Efficient Regulation: Scenarios 5. Outcomes
2
OPENING DISCUSSION
What competitive advantages does Ireland have?
3
CONTEXT: FDI SUCCESSES
• Ireland attracts more FDI than most European countries • Despite being one of the
smallest in population • FDI Intelligence report
2015: • Ireland attracted 4.5%
(168) of 3,700 greenfield FDI projects in 2014
• Up from 158 (3.5%) in 2013
0%
5%
10%
15%
20%
25%
30%
UKG
erm
any
Spai
nFr
ance
Pola
ndIre
land
Net
herla
nds
Russ
iaRo
man
iaIta
lyFi
nlan
dO
ther
European greenfield FDI: market share
2013 2014
Source: fdi intelligence 4
COMPETITIVENESS OUTCOMES
5
DUBLIN A GLOBAL HUB
6
QUALITY AND QUANTITY OF FDI
Source: IBM GILD report, 2014 7
IRELAND’S SHARE OF THE PIE
• Ireland comprises 0.06% of world population and 0.30% of global GDP • Ranked 42nd and 122nd
respectively • Ireland comprises 1.3% of
global trade • 0.8% of agricultural trade • 0.8% of trade in
manufactures • 2.7% of trade in services
0
50
100
150
200
250
300
Pop
ula
tion
GD
P
All t
rad
e
Serv
ices
trad
e
Ireland's share of world… (in bp)
8
GROWTH OF SERVICES TRADE
• Since 2005, merchandise trade has grown strongly • From $8.1trn to $14trn in 2014
• Services trade has almost doubled in ten years, $2.7trn-$5.0trn (2005-2014) • ~¼ is tourism, another ¼
“other” and nearly ¼ transport or goods-related services
• Remainder: financial & computer services, IP and now construction
Global services trade, 2014
Goods-relTransportTravelConstructionInsur/pensionFinanceIPITOther
9 Source: WTO database
IRELAND’S MARKET SHARE: MERCHANDISE
• Irish merchandise exports have grown slowly since 2005 • From $103bn to $113bn
• Since 2010, Irish manufacturing exports have stalled: $98bn • Increase in pharma
($18bn to $30bn) and food ($9bn to $14bn)
• Collapse in machinery ($28.5bn to $13.bn)
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
Agr
iFu
elIro
nC
hem
ica
lsIC
TTr
ans
por
tTe
xtile
sC
loth
ing
Irish share of world trade: by merchandise grouping
200520102014
10 Source: WTO database
IRELAND’S MARKET SHARE: SERVICES
• Irish service exports have grown rapidly since 2005 • From $56bn to $134bn
• Biggest growth since 2010 in ICT-related services • From $37.5bn to
$57.6bn… issue of transfer pricing (and now HQs?)
• Finance, insurance & pensions enjoying much steadier growth
• Transport & travel now significantly less important
0%2%4%6%8%
10%12%14%
Goo
ds-
rel
Tra
nsp
ort
Tra
vel
Con
stru
ctio
nIn
sur/
pen
sion
Fina
nce IP ICT
Oth
er
Irish share of world trade: by merchandise grouping
200520102014
11 Source: WTO database
ACCESS TO CONSUMER & LABOUR MARKETS MATTERS
12 Source: EIU (2011), “Investing in Ireland”
REGULATORY & TAX FRAMEWORK ALSO MATTERS
13 Source: EIU (2011), “Investing in Ireland”
THESE ARE THEMES THAT RESONATE
14 Source: EIU (2011), “Investing in Ireland”
OVERALL ENVIRONMENT FAVOURABLE FOR FDI
Low and clear corporate tax rates
15
Local labour force highly skilled
Source: EIU (2011), “Investing in Ireland”
IRELAND’S BIGGEST DISADVANTAGES OUTSIDE ITS CONTROL
16 Source: EIU (2011), “Investing in Ireland”
THAT DOES NOT MEAN IGNORE FACTORS WITHIN ITS CONTROL
17 Source: EIU (2011), “Investing in Ireland”
ASSESSING THE EVIDENCE
• Ireland’s performance reflects “servicization” • Services still 25% of global trade – but have gone from 35%
to 54% of Irish trade exports • Moving out of merchandise – especially ICT equipment –
but with exceptions in Pharma and Food • Moving into services – especially ICT services – an exception
in construction! • Ireland’s strengths and weaknesses
• Major strengths reflect key decisions made 1960s-1990s: access to skilled labour and to EU consumer markets
• Major limitations include factors outside of local control: market size and location, larger politics
• Other constraints on competitiveness exist, however 18
STRUCTURE
Regulation & Outcomes – Competitiveness
1. Context: Ireland’s Competitiveness 2. The Direct Impact of Regulation 3. The Indirect Impact of Regulation 4. Efficient Regulation: Scenarios 5. Outcomes
19
EU MAP OF REGULATORY IMPACTS
20
FACTORS UNDER LOCAL CONTROL
• Analysis above suggests two key factors within Irish policymaker’s control to improve competitiveness • High cost of doing business • Red tape and bureaucracy
• On costs, issue typically broad and/or relate to regulated sectors • Utilities and infrastructure • Rents and wages; cost of living
• Focus needs to be on regulation as constraint to competitiveness • Begin by looking at the direct impact
21
HOW TO ASSESS THE DIRECT IMPACT
22
REGULATION’S DIRECT BENEFITS
• Improved well-being • Health • Safety • Environment
• Market efficiency • Improved information • Cost savings • Wider range
23
REGULATION’S DIRECT COSTS
• Regulatory charges • Typically clear – but burden not decided by regulator
• Substantive compliance costs • One-off • Recurring
• Administrative burdens • Information requirements
• Hassle costs • Harder to measure, e.g. time wasted
• Enforcement costs • Monitoring, adjudication and enforcement
24
RECAP: BURDEN OF CHARGES
€
Q
S
D
Q1 Q2
2. Elastic demand
tax τ
S+ τ €
Q
S
D
Q1 Q2
1. Inelastic demand
tax τ
S+ τ
P2
P1
P2
P1
With inelastic demand, a charge on sellers will fall mainly on buyers:
τ is similar to p2-p1
With elastic demand, buyers have other options, so a charge on sellers
will cause a change in Q, not P 25
DISCUSSION
• The ultimate burden of costs of compliance, administration, hassle and enforcement follow the same logic as regulatory charges
• Where might you expect the burden to fall in the following scenarios? • A requirement that all toilet spaces in restaurants are fully
accessible • An EU regulation stipulating that all new drugs must be
tested on treatment/control groups of 10,000 (not 1,000) • An International Financial Services transaction tax • Introducing an energy efficiency requirement in new homes • An airport exit charge
26
STRUCTURE
Regulation & Outcomes – Competitiveness
1. Context: Ireland’s Competitiveness 2. The Direct Impact of Regulation 3. The Indirect Impact of Regulation 4. Efficient Regulation: Scenarios 5. Outcomes
27
HOW TO ASSESS THE DIRECT IMPACT
28
INDIRECT COSTS
• Indirect compliance costs • E.g. opportunities foregone due to diversion of
management resources • Substitution effects
• E.g. avoidance of cost burden leads consumers to switch into other, less preferred, products
• Transaction costs • E.g. greater time or resources are now required to transact
the good/service in question (e.g. filling out waivers) • Reduced competition
• Cf. contraction in supply: regulation prevents entry/causes exit, leading to fewer choices for consumers
29
INDIRECT & ULTIMATE BENEFITS
• Indirect benefits • Wider macroeconomic benefits • Other non-monetizable benefits
• Ultimate impacts
• Well-being • Life satisfaction, happiness • Environmental quality • Income • Employment • Equality
30
MONTHLY RESTAURANT LICENSING
• Market efficiency? • Other non-monetary? • Well-being/life satisfaction? • Income? • Employment? • Environmental? • Social equality? • Macro benefits?
• Regulatory charges? • Compliance costs? • Administrative burdens? • Hassle costs? • Enforcement costs? • Substitution effects? • Transaction costs? • Reduced competition?
31
In Budapest, certain municipal districts require bars and restaurants to renew their licence to trade every month. Renewal may be
withheld if local residents have registered complaints about noise or other negative spillovers. How would you assess this regulation?
STRUCTURE
Regulation & Outcomes – Competitiveness
1. Context: Ireland’s Competitiveness 2. The Direct Impact of Regulation 3. The Indirect Impact of Regulation 4. Efficient Regulation: Scenarios 5. Outcomes
32
WB DOING BUSINESS RANKINGS
• Ten headings: • Starting a business: 4 indicators • Construction permits: 4 indicators • Getting electricity: 4 indicators • Registering property: 4 indicators • Getting credit: 2 indicators • Protecting minority investors: 2 indicators • Paying taxes: 3 indicators • Trading across borders: 8 indicators • Enforcing contracts: 3 indicators • Resolving insolvency: 2 indicators
• Tweaked each year – above is 2016 index
36 indicators: • 7 x # procedures • 8 x time in days/hrs • 12 x Cost in $/% • 9 x Indices
33
IRELAND’S RISE… AND FALL
1
3
5
7
9
11
13
15
17
19
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Ove
rall
WB-
DB R
anki
ng
SingaporeNZUKIreland
34
Ranking as published – methodology
changes year-to-year
IRELAND’S STRENGTHS & WEAKNESSES
110192837465564738291
100
Ove
rall
Star
ting
Con
stru
ctio
n
Elec
trici
ty
Prop
erty
Cre
dit
Inve
stor
s
Taxe
s
Trad
e
Con
tract
s
Inso
lven
cy
2016
DB
Rank
ing
SingaporeNZUKIreland
Ireland’s hit-list: 1.Enforcing contracts 2.Ease of trading 3.Construction/property/
electricity
35
PRINCIPLES OF REFORM
• Minimise the costs, for a given set of regulatory benefits • Roots in “Standard Cost Methodology” • Not about the goals/outcomes of the regulation – merely
about the time/money/effort involved in complying with it • What’s feasible in other countries is feasible in
Ireland • Cf. “Best small country in the world in which to do business”
• Areas for reform: • Ease of international trade • Enforcing contracts & paying taxes • Construction, property registration and utilities
36
1. EASE OF TRADE
• 24hrs to comply with borders, when exporting or importing in Ireland • Vs. 0 in best practice • In addition $305/$253, vs
$0 in best practice • Also documents required
cost $75 for both imports and exports: $0 in BP
• 1-hour, zero-cost trading would lift Ireland from 17th to 12th in the DB rankings • 6% of distance-to-frontier
13579111315171974
767880828486889092
Stat
us Q
uo
Scen
ario
1
Sing
apo
re
DTF (LHS)
Rank (RHS)
37
2. CONTRACTS & TAXES
• Halve the days (650 to 325) and halve the cost of enforcing contracts • BP: 216 days, 9%
• Also reform to match OECD best practice for paying taxes • From 9 to 4 payments,
and from 82 to 55 hours • These reforms would lift
Ireland from 17th to 11th in the DB rankings • 9% of distance-to-frontier
13579111315171974
767880828486889092
Stat
us Q
uo
Scen
ario
2
Sing
apo
re
DTF (LHS)
Rank (RHS)
38
3. CONSTRUCTION, PROPERTY & UTILITIES
• From 150 to 60 days for PP, and reduce the cost from 6% to 1%
• From 85 to 28 days for electricity (and cost from 70% to 5%)
• From 5 procedures (and 30 days) to 1 (+1) to register property
• These reforms would lift Ireland from 17th to 7th in the DB rankings • 15% of distance-to-frontier
13579111315171974
767880828486889092
Stat
us Q
uo
Scen
ario
3
Sing
apo
re
DTF (LHS)
Rank (RHS)
39
4. ALL THREE SETS OF REFORMS
• Making it easier to trade internationally
• Making it easier to enforce contracts and pay taxes
• Making it easier to connect to utilities and comply with building and property regulations
• All these reforms would lift Ireland from 17th to 3rd in the DB rankings • 30% of distance-to-frontier
13579111315171974
767880828486889092
Stat
us Q
uo
Scen
ario
3
Sing
apo
re
DTF (LHS)
Rank (RHS)
40
IRELAND’S COMPETITIVENESS CHALLENGE
Cf. seven priority areas in December 2015 report: 1. Sustainable fiscal policy 2. Capital investment in physical and knowledge
infrastructure 3. Improving cost competitiveness 4. Enhancing talent and skills 5. Improving access to finance for enterprise 6. Supporting innovation and productivity 7. Broadening the enterprise and export base • Match? Mismatch?
41
BEYOND ADMIN/COMPLIANCE…
• What is the correlation between reducing direct compliance and administrative costs/charges and… • Indirect compliance costs • Substitution effects • Transaction costs • Reduced competition
• Which are most likely to be reduced by cutting paperwork/charges?
• Which are least likely to be reduced? What other measures/processes are needed?
42
STRUCTURE
Regulation & Outcomes – Competitiveness
1. Context: Ireland’s Competitiveness 2. The Direct Impact of Regulation 3. The Indirect Impact of Regulation 4. Efficient Regulation: Scenarios 5. Outcomes
43
CONCEPT OF COMPETITIVENESS
• Discovering and preserving ‘comparative advantage’ • Natural resources: place (first-order geography) • Unique skills: people • Agglomeration: people + place (second-order geography)
• More broadly, the productivity of… • Natural capital/resources • Physical capital • Human capital • Technology: (1) scientific, (2) social/political [incl regulatory]
44
BACK TO OPENING DISCUSSION
What competitive advantages does Ireland have?
Geography? Agglomeration? Scientific technology? Social technology?
Which sectors and regions does this map on to?
45
MAPPING COMPETITIVENESS
• House prices and wages are higher in Dublin than elsewhere in Ireland… • What sustains this? Why does FDI still disproportionately
come to Dublin/cities? • Can rural areas be globally competitive? What
have they a comparative advantage in?
46
“DESTINATION WEDDINGS”
• ~1,800 destination weddings a year in Ireland • ~ 200,000 tourist trips through wedding guests • Annual spending of ~€130m (including couples’ spend)
• “Destination weddings” currently sustain 4,700 jobs • Opportunity since the 2015 Marriage Equality Referendum?
• A largely “excluding Dublin” phenomenon • Dublin: ~1/3 of population but about ~1/6 of weddings
• Increasing destination weddings to 5,600 per year would generate an additional 10,000 jobs • Opportunity: change in regulation around weddings • Means: rural Ireland’s natural and architectural beauty • Motive: jobs where they are needed most
47
COMPETITIVENESS & OUTCOMES
• Income • Direct and positive relationship: adding more K (and A)
boosts productivity of L, N, and therefore boosts Y • Employment – direct and positive
• ~1m jobs each year in global FDI projects) • Equality
• Is FDI biased towards/against skill? • Is this different for developed/developing countries? • Remedial measures if needed?
48
COMPETITIVENESS & OUTCOMES
• Environmental quality • Nature of sector: services vs. merchandise • Nature of transport and energy: steamships vs. electric cars • Other linkages?
• Other impacts • Well-being, life satisfaction, happiness • How (reliably) are these measured? • Where might the biggest impact of FDI be here? • Employment, unemployment and the scarring effect
49