Internationally Traded Services Time for a rethink

The services sector in Ireland, with one million employees and 63% of the total workforce is the fastest growing sector of our economy. Private sector or market services provide 71% of all service employment while public sector employment accounts for 29%. The high growth of the 1990s (74%) has been mainly in the private sector.

This is not surprising, given the commitment by successive Governments to reining in public sector spending, to increased outsourcing of public services and a tripling in export growth. Internally, the market for services grew as the economy expanded. Despite being the largest exporter of software in the World, Ireland has had a negative trade balance in services for a number of years, as can be seen from the official Balance of Payments figures. What do these imports consist of?

Three items – royalties/licences, trade-related services and miscellaneous business services – account for the mots of these “imports” These are the price of our successful merchandise export trade. They include management fees, and payments to multinationals for professional and technical services. Trade-related services appear to relate to commissions on sales and distribution in the export market concerned.

Services currently exported are the equivalent of over 20% of our merchandise exports. The main contributors are computer services (35%) IFSC activities (20%), transport, tourism and travel (25%) and business services (12%). If the official figures were to include services sold to foreign industry based here, and embedded or incorporated in the exported products, the 2001 export figures would be increased by at least £5 billion.

This is significant in two ways. Firstly, services represent the largest component purchased in Ireland by the foreign – owned industry sector – ahead of raw materials, and wages and salaries. Secondly, it demonstrates the strong linkages that exist in the economy between the manufacturing and service sectors.

Service exports are important in balance of payment terms. There are no imported raw material inputs, no transport costs and, in the case of Irish owned companies, no repatriation of profits or licensing fees. There are no or very little energy costs involved in the creation of services exported. This is an important Balance of Payments consideration, given that we import three quarters of our energy requirements.

Favourable treatment from the Government in the past and some discrimination still exists. Although the rate of corporation tax paid by all business will move to 12.5% in 2003, the Irish Coalition of Service Industries has called for the removal of the inequitable withholding tax levied on suppliers of services to Government and public bodies. The tax represents a competitive disadvantage to Irish consultants who are competing in the home market against UK and European consultants who do not bear this burden.

Being a tax on turnover rather than profits, it causes serious cash flow problems. It cannot be justified either on the grounds of security or as a cash flow mechanism for Government. Internationally, the issues raised most often by exporters of services are access to markets and transparency of laws and regulations in foreign markets. In particular the right of establishment in overseas markets is an issue for suppliers of services.

These will be on the agenda for the General Agreement on Trade in Services (GATS) which are scheduled to start later this year. What of the future? The interesting Price Waterhouse Coopers report prepared for Enterprise Ireland recommends a focus on high value-added areas of the knowledge economy, which is now emerging.

The proposals recommend establishing technology hubs on a regional basis, a digital media centre in Dublin, an eBusiness learning centre in the BMW (Border, Midlands and West) Region and a strengthening of the Programme in Advanced Technology with a view to fostering new spin-off companies. The technology hub (Webworks) is a highly wired office facility for technology companies. Apart from a management and support structure the hub offers the most advanced telecommunications infrastructure and flexible leases which reflect the varying growth patterns of these companies. These will be the advance factories of the future.

The report has identified four sectors, which offer great potential – Informatics, Digital Media, eBusiness and Healthsciences. Digital media refers to the convergence between the traditional media and on line media. It combines digital content creation, management and distribution across multiple platforms. Interestingly, information technology and biotechnology have also been chosen as the priority areas for Government support in the £560 million Technology Foresight findings, which are aimed at building a world class R&D infrastructure in Ireland. If implemented, the PWC recommendations would deliver incremental exports of £1.8 billion and incremental jobs of 8,500 by the year 2007 according to the authors.

If such bold initiatives are not taken and if we do not urgently deliver on the wider telecommunications infrastructure issue, there is a danger that our spectacular economic progress will come to an unseemly halt. At the start of the new century it is time to rethink the role of services in the new economy. Service economy thinking replaces input costs with concepts of value added and measures of satisfaction. In the digital age, different services combine with one another and with technology, capital and knowledge to generate new products and services.

There is probably a need for new language to help us grasp what is happening. How many know for example that the manufacturing components in the final cost of an automobile do not exceed 25% of the final price? The balance is made up of market research, design, R&D, distribution, sales and marketing, and of course taxes.

Much energy has been devoted to delineating the boundary between manufacturing and services, an exercise that is probably as irrelevant as it is trivial. It is time to move on from such arguments. The distinctions of yesteryear, which downgraded services to an appendage of manufacturing industry, are obviously spurious.

The classical economists’ definitions of economic goods as being necessarily tangible and tradable have passed their sell by date. When we consider the fees of a top class entertainer or professional footballer, we can but feel pity for the state of mind which equated the services of a surgeon with those of a gigolo or a dancer and considered them all equally irrelevant to the creation of the Wealth of Nations!
Colum MacDonnell