There is no simple measure of economic progress in Ireland according to an article in the forthcoming Quarterly Economic Commentary of the ESRI (Economic and Social Research Institute). The change in GDP is now a defective indicator of welfare. While GNP is a much more satisfactory measure as the profits of the significant foreign-owned sector are eliminated, it can also be distorted by the behaviour of redomiciled plcs — typically American companies that become Irish for tax purposes while continuing to be run from the United States.
The article, "Problems Interpreting the National Accounts in a Globalised Economy – Ireland", by John FitzGerald (Research Affiliate, ESRI and retired research professor) considers problems in interpreting the Irish National Accounts in a globalised economy.
FitzGerald suggests that commentators should focus on the output side of the accounts, and aim to identify the GNP arising in individual sectors of the economy.
Mainly foreign-owned aviation firms in Ireland own about 4,000 commercial aircraft valued at $115bn, and while the leasing income (c. €8bn) is included as a service export, the aircraft used do not appear in the trade flows or the physical capital stock. They are treated as a financial asset and that is about to change.
Ryanair is also a significant purchaser of aircraft.
The CSO in its accounting treatment plans to book the import of aircraft, which will be counterbalanced by a rise in investment, but "it will have a considerable immediate impact on the current account of the balance of payments."
We have covered the other issues raised here:
Irish Export Performance: Myths and reality - Ireland is a poor exporter — Double Irish fake services exports and overseas contract manufacturing
US-Ireland Tax Inversions 600,000+ staff: Kenny, Noonan met with top US corporate lawyers — In the first quarter of 2015 (CSO to publish data next month), there will be the addition of 2 "Irish" companies with combined payrolls of 110,000. Medtronic, the US medical device firm, became Ireland's largest company when it started trading on the New York Stock Exchange in late January following the acquisition of Covidien, another US company that had previously become Irish. On March 17, Actavis plc, the drugs firm and another US company that had become Irish, announced that it had completed the acquisition of Allergan, Inc. in a cash and equity transaction valued at approximately $70.5bn
The idiot/ eejit's guide to distorted Irish national economic data
ESRI says data volatility hinders Irish economic forecasting; Tax avoidance taboo cause
Article Summary: "Problems Interpreting National Accounts in a Globalised Economy - Ireland"
Globalisation poses increasing problems in using standard national accounts data, such as GDP, to understand what is happening in the Irish economy.
This article focuses on a series of relatively new problems in interpreting the Irish national accounts. In the case of two of them, the so called “patent cliff” in the pharmaceutical sector and the changing behaviour of the large IT sector, the impact of growth in these sectors on GDP has become very uncertain. However, if one focuses instead on GNP, their true contribution to the Irish economy is clearer.
Traditionally, a key to understanding the behaviour of the Irish economy was the growth in exports and imports. However, recently implemented definitional changes in the national accounts make these data very difficult to interpret. The inclusion in the national accounts later this year of aircraft leasing activities on a comprehensive basis will further complicate the situation. The ongoing large purchases of aircraft by the leasing sector will, henceforth, be included under imports. As well as making the data on exports and imports difficult to interpret, this will also make the policy implications of changes in the current account of the balance of payments more obscure.
Finally, the activity of a small number of firms, commonly referred to as “redomiciled plcs”, is also distorting the figures for Gross National Product (GNP) and the current account of the balance of payments.
Taken together, these new developments affecting the Irish national accounts mean that there is no simple measure of economic progress in Ireland. The change in GDP is now a defective indicator of welfare. While GNP is a much more satisfactory measure, it can also be distorted by the behaviour of redomiciled plcs.
To understand developments the Irish economy in the future, the solution is probably to focus on the output side of the accounts. The aim should be to identify the GNP arising in individual sectors of the economy. Already the CSO has gone some distance down this route in a recent publication, separately identifying the contributions to output of foreign and domestic firms.
Globalisation is making it more difficult to interpret traditional economic data, both in Ireland and in other countries such as the Netherlands. This increase in complexity is unavoidable. The solution lies in the provision of more detailed information, combined with a more critical analysis of what, in the past, seemed relatively simple national accounting concepts.