Irish Economy
Irish Economy: Economic fairytales of Ireland, exports, FDI and the IMF
By Michael Hennigan, Finfacts founder and editor
Feb 3, 2013 - 3:26 PM

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Source: IMF

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:

"These findings suggest that Ireland is poised to return to its path of strong growth and low imbalances, though the road could be bumpy due to ongoing challenges. Enhanced competitiveness was a key factor in pulling Ireland out of its high indebtedness of the late 1980s and can play that role again. The decline in domestic costs registered since the crisis, together with the associated boost to inward FDI (foreign direct investment), suggests that even with the tepid external demand currently projected for the medium-tem, Ireland can still register moderate exports growth and a boost to GDP and fiscal revenue."

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 and 2012.

The US-dominated drugs sector, which along with medical devices account for two-thirds of merchandise exports, has had big gains in ‘output’ but no need for additional staff.

Numbers in ‘computer services’ have also been unchanged despite huge jumps in headline exports.

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]:

“the vast majority of indigenous employment (which makes up 78% of private sector employment) is still accounted for by traditional sectors such as Hotels & Restaurants, Wholesale & Retail, Business & Administrative services and Transport & Storage.

These figures suggest that, while export growth and export linkages are vital to modernisation and growth strategies, the role of the typical domestic-demand driven services economy must not be overlooked when contemplating strategies for employment creation.”

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.

Economic fairytales of Ireland

Exports, productivity and investment data (e.g. about 1,000 people work in the international aircraft leasing sector that has over 3,000 commercial aircraft with an asset value of over €80bn -- about half the value of GDP), GDP and GNP should not be taken at face value.

Patrick Honohan, governor of the Irish central bank, spoke in November 2010 of "the accounting and measurement challenges that have been presented by the extraordinarily globalized nature of the Irish economy as it evolved over the years...unit labour costs tend to fall even if wage costs for any individual firm or industry are increasing. Because of this shifting composition effect, as has been well-known for decades, but is routinely forgotten by superficial analysts, unit labour costs are a false friend in judging competitiveness developments for Ireland. Measurement and accounting are of crucial importance at times of structural change. Careful scrutiny is needed to ensure that policy choices are quantitatively well-judged...Analysing the distinctive structure of the economy that it created requires careful analysis of good accounting data, both national and private."

Nevertheless, the Central Bank Quarterly Bulletin [pdf] issued this past week, ignored the reason for the jump in services exports and noted that the mainstay of growth in exports over  recent quarters has been the services sector. Services exports accounted for 21%  of all exports in 2000, but as of Q3 2012, are estimated to amount to 50% of  the total. Computer services exports grew at an average  rate of 14.6% over the first three quarters of the year while the value of business services exports was 14.2% higher in the year to Q3 2012 compared to the same period in 2011.These two sectors combined account for over two-thirds of services exports. Data from the Services Purchasing Managers  Index suggest continued buoyancy in the sector over recent months although the overall  index remains well below the level recorded in 2007."

It added that "a notable development in the Balance of Payments statistics during 2012 was the emergence for the first time of a surplus in the services trade balance."

Given that up to 40% of services exports are likely fake, the surplus may well reflect the timing of intercompany charges which would tend to be skewed to the fourth quarter.

The Economic and Social Research Institute said in its Quarterly Economic Commentary that "exports of services in 2012 grew very rapidly. We estimate the growth at 8-9%. This growth was due primarily to the expansion of recently established overseas firms in the communications and IT sectors."

This claim is balderdash!

The pattern of recent years is that Google and Microsoft alone have accounted for over a €4bn rise in Irish reported computer services revenues in a 12 month period - -  Google's Irish reported revenue rose  €2.3bn in 2011 and Microsoft posted €2.2bn in respect of its 2010/2011 financial year. Computer services exports were valued at €32bn in 2011 and 28.2bn in 2010.

Apple Ireland is one of Apple's most important overseas units and is responsible for operations in the world ex the Americas and  China. So business services charges of several billion annually are likely booked in Ireland.

While fearful of attributing the jump in services exports to tax strategies, the ESRI does say: "While these exports now outstrip merchandise exports, there are very significant management charges associated with their operation, so that the contribution to GNP per € exported is less than for manufacturing exports from multinationals. This sector is now driving growth of approximately 4% in exports of goods and services, so that it is as well to recognise that the domestic impact on the economy of a 1% rise in exports is now less than a decade ago."

In the High Tech/Life Sciences sectors, there were 104,500 employed in foreign-owned firms in 2002 and 101,800 in 2011; there were s 29,200 and 29,100 employed in Irish-owned firms, respectively in that period according to Forfás, a State agency.

Why no jobs added if the exports were real?

Jamie Smyth, Financial Times correspondent in Dublin reported in September 2011: 'Pharma sales help to cure Irish ills'

“'About three-quarters of Irish exports are driven by foreign multinationals. New companies are coming in, bringing high value jobs, which is standing Ireland in good stead,' said John Whelan, chief executive of the Irish Exporters Association."

"Ireland’s strong export sector is also drawing favourable comparisons with Greece and Portugal, the other eurozone states bailed out by the EU and IMF.

"Dermot O’Leary, chief economist with Dublin-based Goodbody Stockbrokers, said Ireland meets the two conditions required to enjoy an export-led recovery – having a big enough export sector to spur economic growth and producing goods other states want.

“'Irish exports are worth over 100% of GDP, compared to less than 30% in Portugal and less than 20% in Greece, while it specialises in areas such as pharmaceuticals and computer services,' O’Leary said."

Keep in mind as discussed, the impact of the pharmaceutical patent cliff is exaggerated while computer services data include fake Irish exports -  - Microsoft had a global revenue per employee of $777,140 in fiscal 2011 and $27m in Ireland; Google had a global revenue per employee in 2010 of $1.33m and $8.52m in Ireland.

Paul Krugman, New York Times columnist, Princeton University professor of economics and Nobel Laureate commented on the FT article: "There’s a visible push to claim that recent Irish experience - - somewhat better-than-expected growth in the second quarter, rising exports - - vindicates austerity policies. Here’s a new piece on export growth, trumpeting a rise in pharma exports.

So, some cold water. First of all, eventual recovery after years of Depression-level unemployment is a strange definition of success. But there’s also a specifically Irish twist. Pharma accounts for a large share of Irish exports — but it makes a much smaller contribution to the Irish economy. Partly that’s because pharma uses a lot of imported inputs, so that it has relatively low domestic content. Partly that’s because pharma is very capital-intensive, employing very few people - - and the capital is foreign owned, so that the contribution to Gross National Product, which deducts income paid to foreigners, is smaller than the contribution to Gross Domestic Product, which doesn’t. Indeed, Ireland is one of those countries where you really want to track GNP rather than GDP to get a sense of how the country is doing."

...balderdash from the Department of Finance

"Support for overall activity is coming from the exporting sectors, with services exports becoming an increasingly important engine of  growth in recent quarters. This, in no small part, reflects the improvements in price and cost competitiveness that have been evident since the onset of the crisis" - - the Department of Finance conveniently ignored the manna from heaven that has resulted from MNC tax strategies. Mid-Term Fiscal Statement November 2012 [pdf]

"Demand from our main export markets was subdued but unit cost reductions and more favourable exchange rates boosted competitiveness and enabled firms to grow market share. More businesses have successfully made the transition from domestic sales to exports and progress continues in developing new markets.

Manufactured goods exporters suffered most from the Eurozone crisis and weak demand from the UK; however, the sector has remained incredibly resilient and has clearly  benefited from the restructuring efforts during the 2008-2010 period. Internationally traded services businesses remain the main driver of both export and employment growth for the Irish economy" - -  IBEC January 2013 [pdf]

There are several false statements here.

When exports and output are artificially boosted, the resultant economy unit labour costs are reduced and become bogus. Prof Honohan, central bank governor, after all said that unit labour costs tend to fall in Ireland even if wage costs for any individual firm or industry are increasing. Even if the actual services figures were reliable, the net benefit would be negated by patent royalties and inter-firm charges.

I e-mailed John Whelan of the Irish Exporters Association in 2012 following its decision to name Google as Ireland's top exporter of 2011 - - following the diversion of 45% of its global revenues to Ireland.

I wrote: "To declare Google as Ireland's biggest exporter is in the realm of fairytales.

So companies can divert end-user revenues in foreign markets to Ireland and it becomes an export?

Look at the crazy revenue per worker and it will be clear how data from Google, Microsoft and increasingly  Facebook, with the purpose of minimising taxes elsewhere is making fools of policy makers and others in Ireland."

Whelan sent me a cryptic response:
"Google employ 1600 people  here in Ireland."

There was no point pursuing the issue with a hired hand of a lobby group.

"A downward adjustment in real wages allowed exports to get competitive” said Michael Hasenstab of Franklin Templeton, a US investment firm, who has built up an almost €9bn holding in Irish bonds. “Taking aside the chaos of the financial crisis, where clearly there was an over-investment, and a crash, this was evidently a country with an incredible wealth of long-term drivers of growth.”

Again competitiveness is trotted out as a factor but official comparative data is unreliable while the biggest gain in exports results from MNC tax strategies.

Hasenstab may well make money irrespective of the extent of his knowledge about the Irish economy or lack of it.

As for drivers of growth, excluding the property bubble, FDI has been the main factor for decades but it has peaked.

Irish Economy: Sustainable growth dependent on foreign firms since 1990; Now FDI has peaked

Kenny in Davos: Ireland's tax regime is "very clear, very transparent"

Company cash hoards rise to $8tn; Taxes, squeezed labour and 'trapped' cash

Irish Economy: Actual Individual Consumption per capita in Ireland is at EU average along with Italy; Germany at 20% above and UK at 18% - - Irish GDP per capita is 29 % higher than the EU average but that statistic is misleading.

Irish Economy: Pharmaceutical patent cliff no growth threat; High exports have low impact

Irish Economy: Export growth insufficient to pull domestic economy out of recession

Irish Economy 2012: At least a third of value of Irish services exports is overstated

Dell remains Ireland's biggest manufacturing exporter despite closing Limerick plant

Irish Economy 2012: Only 50,000 Irish direct workers responsible for 69% of annual Irish exports

Irish Economy: Innovation, a failed enterprise policy and inconvenient facts for 2013

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