week 11: regulation & outcomes – competitiveness · q2 . q1 . 2. elastic demand . tax τ €...

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


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

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Fina

nce IP ICT

Oth

er

Irish share of world trade: by merchandise grouping

200520102014


ACCESS TO CONSUMER & LABOUR MARKETS MATTERS

12 Source: EIU (2011), “Investing in Ireland”

REGULATORY & TAX FRAMEWORK ALSO MATTERS


THESE ARE THEMES THAT RESONATE


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


THAT DOES NOT MEAN IGNORE FACTORS WITHIN ITS CONTROL


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



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



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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



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

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100

Ove

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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

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1

Sing

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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

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Stat

us Q

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Scen

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2

Sing

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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

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Stat

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Scen

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3

Sing

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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

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Stat

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Scen

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3

Sing

apo

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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



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

week 11: regulation & outcomes – competitiveness · q2 . q1 . 2. elastic demand . tax τ €...

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