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Irish Economy: Given the official mantras on export growth in recent years
from ministers, the Department of Finance, the Central Bank of Ireland and the
semi-official Economic and Social Research Institute (ESRI), coupled with
echoing in Troika reports, it may come as a surprise to some that the
pharmaceuticals sector, which accounts for more than 50% of merchandise exports,
is not critical for economic growth. Therefore the expiration of patents on
blockbuster drugs -- known as the patent cliff, not to be confused
with the fiscal cliff! - - should not be a serious concern in Ireland.
In seeking a roadmap to the future, think of the Kerryman's advice to the
tourist seeking directions.
Should it be any surprise that jobs in the export sectors (both FDI and
indigenous) are at a 12-year low?
On Wednesday, Davy Stockbrokers published a report on the Irish
pharmaceutical sector and patent cliff. In 2011, exports of pharmaceuticals were
€50bn, around 30% of nominal GDP (gross domestic product). In September, Irish industrial production fell
by an enormous 12.7% on the month, driven by a 35% decline in output of basic
pharmaceuticals, and in part most likely related to patent expirations on
'blockbuster' drugs. The falls in September have fed speculation that prospects
for the key pharmaceutical sector, worth 30% of Irish GDP, may now be depressed
by patent expirations, with potentially dire consequences for Irish export and
However, Davy said these fears are largely misplaced. Due to the high import
content of pharmaceuticals, specifically royalties and licence counted as
imports, the impact on Irish GDP and GNP (gross national product) will be limited. 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 pharmaceutical sector accounts for 1.2%
of total employment, and contributed corporation tax revenues worth 0.5% of GDP.
So, even if profits in the sector halved, the impact on GDP and tax revenues
would be limited, and manageable within the context of Ireland's EU/IMF
Pharmaceutical patent cliff evident in industrial production and
pharmaceutical output fell by 35% and exports of organic chemicals declined
pharmaceutical exports amounted to €50bn, 54% of total goods exports or 31%
of nominal GDP;
Temporary factors may
partially explain the weak September figures, and the impact of the patent
cliff on revenues may be more gradual than expected.
But importance of pharmaceutical sector wildly overstated
Only around one-third
of pharmaceutical export revenues count towards GDP. The value added of the
pharmaceutical sector was €13.8bn in 2011 or just 8.7% of GDP;
The large gap between
revenue and value added reflects high import intensity, principally royalty
and licence fee payments related to intellectual property;•
So sharp falls in
pharmaceutical goods exports also show up in weaker services imports,
limiting the impact on GDP.
Pharmaceutical sector employment and tax contribution low
Just 22,500 were
employed in the pharma sector in 2010;
In 2010, €800m in
corporation taxes came from pharma companies; if this figure halved,
government revenues would fall by 0.25% of GDP;
This is small
compared with the planned budgetary adjustments of 2.1% in 2013 and 1.8% in
The GNP impact of a
reduction in pharma exports would most likely be negligible, but the gap
with GDP (net factor payments) could narrow slightly
"Exports have grown steadily since 2007. Growth is led by
services exports, which have trebled as a share of GDP since 1999. Total
exports as a share of GDP now exceed the peak of 2001 (Chart 6),
reflecting improved competitiveness and positive exchange rate movements
since the beginning of the crisis. Irish export destinations are concentrated in
Europe and North America, with little exposure to high-growth emerging markets.
Economic growth fell across many of Ireland’s largest export markets in the
first half of 2012 (Chart 7), posing a challenge to a continued export-driven
In addition, over two-thirds of exports comprise
pharmaceuticals, chemicals and medical goods, computer services and
business/financial services. These sectors are dominated by multinational
corporations and are vulnerable to structural factors, like the expiry of
patents, as well as external demand."
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 --Department
of Finance, 'Mid-Term
Fiscal Statement,' Nov 2012
statement is wrong, misleading and against the public interest.
The rise in services exports
is related to tax strategies of multinational firms, not price and cost
competitiveness. Delusion or deliberate misinformation is hardly going
to help to devise credible policies to cut the long-term (continuous for
12 months or more) unemployment total of more than 188,000 -- Michael