Irish Economy: Economic fairytales had a lot of currency in Ireland during the property bubble when it appeared that the free lunch had been invented thanks to demography. Jean-Baptiste Say (1767-1832), a businessman who was the first professor of political economy in France, and who is said to have coined the word entrepreneur (’l'entrepreneur d’industrie’), had bubble-time economist adherents in Ireland for what is known as Say's law: supply creates its own demand. Today, we have a new set of fairytales that are as misleading and this week, the International Monetary Fund (IMF) fell for one of them. Headline Irish national accounts data cannot be taken at face value.
The IMF issued a working paper (such a paper does not reflect the official position of the Fund. Working papers describe research in progress by the author(s) and are published to elicit comments and to further debate) : 'Boosting Competitiveness to Grow Out of Debt—Can Ireland Find a Way Back to Its Future?' [pdf], which looks at the prospects for Ireland to grow its economy against the backdrop of high indebtedness. It concludes:
The paper notes that exports growth recovered from negative 3¾% in 2009 to 6¼% and 5% in 2010 and 2011, respectively. "It has compensated for falling domestic demand, helping subdue the decline in real GDP to less than one% in 2010 and boost GDP growth to almost 1½% in 2011. Holton and O’Brien (2011) indicate that the increase in Ireland’s GDP towards the end of 2010 had been led by the export-oriented MNCs (multinationals), which tend to be less reliant on domestic banks. This is in line with the finding of studies suggesting that postcrisis declines in exports tend to be smaller for large firms and MNCs (Iacovone and Zavacka, 2009)."
Mwanza Nkusu, IMF economist, says: "The success of Ireland in increasing exports will depend on domestic policies that can bolster competitiveness."
Foreign firms mainly American are responsible for about 90% of Ireland's tradeable goods and services exports. The main markets are the US, the UK and mainland Europe. English speaking markets dominate indigenous firm trade.
Competitiveness is a factor but the corporate tax regime and facilitation of significant tax avoidance are the key ones for foreign firms.
Most annual FDI (foreign direct investment) investment in recent years has been mainly in projects by existing foreign firms in Ireland. New projects tend to be small while included in the 'inward' flows are what are termed 'reinvested earnings.' This is cash technically held outside the United States to avoid a tax charge on repatriation. However, it is not 'trapped' as it is sometimes termed as most of the foreign cash holdings are actually held in the US.
So, what are classified as part of Irish FDI inflows, are in reality held in the United States.
The biggest flight of fantasy is in respect of exports.
The real value of goods exports has been almost
static in the period 2000-2011, but the real value of services exports increased
by 322% and in 2011 accounted for 48% of the value of total exports. However,
there was no increase in total full-time employment in the
internationally tradeable sectors (indigenous and foreign-owned) between 2000
Thirty years after switching policy from protectionism to promotion of inward foreign investment, Intel, the US chip giant, announced in 1989 that it would build a plant in Ireland
For a number of years, Ireland, with only 1% of Europe's population, attracted up to 25% of all US greenfield industrial investment in our continent. The new technology and skills that this inflow brought contributed to a 4% annual increase in output per worker at national level, i.e. productivity.
An official report published in 2004 [pdf] said that "over the period 1990-2002, exports by (State) agency-assisted indigenous enterprise grew in nominal terms at 5.5% per annum (versus 15.9% for foreign-owned companies). When inflation is taken into account, the real growth in both sales and exports was negligible."
In 2002-2011, indigenous tradeable exports rose 4% annually in current price terms. Industrial production in traditional industries fell in the period 2001-2010.
So whatever the IMF models produce, comparing what happened from the late 1980s, which coincided with the US high tech boom, with the outlook today, is not valid.
Mwanza Nkusu, the author of the paper, can’t be really blamed for this (although it does illustrate the limitations of remote desk-bound analysis) as for example this week, Central Bank and ESRI (Economic and Social Research Institute) commentary on booming services exports, avoided the truth that most of the rise can be attributed to the tax strategies of big US multinationals. I delicately term the diversion of revenues from other countries to Ireland that are unrelated to Irish economic activity, as fake exports.
Google has less than 2,000 employed in Dublin from a 37,000 head count ex-Motorola but almost half global revenues are booked in Ireland.
A few months ago, Peter Breuer, the IMF’s resident representative in Dublin, was surprised when I told him that Dell remained Ireland’s biggest merchandise exporter even though it had moved all its EMEA PC production to Poland in 2008/2009.
Services exports now account for half annual exports but up to 40% of the value is fake.
According to Conall Mac Coille, chief economist of Davy, only approximately one-third of pharmaceutical export revenues contribute to Irish GDP because of the corresponding costs relating to intellectual property.
In 2011, the share of pharmaceuticals in Irish GDP was just 11%, well below exports revenues worth 30% of GDP.
The official position aided by business lobby groups such as the Irish Business and Economic Confederation (IBEC) and The Irish Exporters Association (IEA) who are funded by the big US multinationals, is to promote the success of exports even though the FDI and indigenous exporting sectors created no net jobs in 12 years. The US firms also dominate the monthly PMI (Purchasing Managers' Index) manufacturing and services sectors data and services data, even though 'strong' orders received may be end-user sales in for example Google France, Apple UK (business services revenue for Ireland), Facebook Italy or Microsoft Germany.
Official unemployment was 75,000 in 2000 and 325,000 at the end of 2012.
Despite all the blather on exports which exceed 100% of GDP, most jobs are in the non-exporting sectors:
Central Bank economists, Martina Lawless, Fergal McCann and Tara McIndoe Calder, said in a 2012 paper [pdf]:
GNP (gross national product) in recent years has been seen as a closer approximation to reality than GDP but as was seen in quarterly account data last year, it no longer is a reliable indicator. It has been distorted by the movement of profits by UK domiciled multinationals.
Joe Durkan and his ESRI team said this week that the balance of payments surplus is now estimated at €7.8bn in 2012. “The surplus overstates the fundamental underlying situation as the data are distorted by the inflow of profits from overseas multinationals which relocated their Head Office to Ireland, but not any of their productive activities. Their worldwide profits are treated as an inflow of factor payments to Ireland but these firms pay no profit tax in Ireland as a result of double tax agreements with other countries where their productive activities are located. These foreign earnings are to varying extents not distributed to shareholders of the companies and the effect of this is to artificially raise GNP and also Gross National Income (GNI) - - the measure which is used to determine Ireland’s payments to EU funds.”
GNP is set to have increased by 3% in 2012, but is due to fall back by 2% in 2013, before growth of 1.4% in 2014. The underlying change in GNP between 2012 and 2014 is about 0.5% each year.
From the late 1990s, there was a significant rise in proft-shifting by US non-bank MNCs [pdf] and reported net income in Ireland doubled in the period 2000-2002 while sales grew by 23%. By 2007, affiliates in Ireland were reporting a rise in sales of 227% in the period 2000-2007 and a jump in profits of 500%. Bureau of Economic Analysis data.
The jump in affiliates' sales value was reflected in rising Irish export data without any significant change in jobs added. Reported headcount at US non-bank affiliates in Ireland was 90,500 in 2000 and 93,000 in 2007.
However, the IMF paper says: "Net inward FDI dynamics fell in the run-up to the crisis, reflecting in part loss of competitiveness. The stock of net FDI into Ireland, which represented almost 100% of GDP in 2002, fell gradually to less than 20% of GDP by end-2007."
Headline exports should be discounted by about 40% for the IMF working paper to have more relevance. As for Ireland's PPI (producer price index), the main factor in changes in monthly manufacturing prices is the USD/EUR rate as most of the inputs of the dominant foreign sector are priced in dollars. Headline unit labour cost data is not reliable, irrespective of the official agency that produces it.
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