Welcome to the Finfacts Blog

Thursday, March 10, 2011

Ireland: GDP or GNP? Which is the better measure of economic performance?

UPDATE Sept 09, 2014: The idiot/ eejit's guide to distorted Irish national economic data

UPDATE: May 26, 2013: In recent years, Accenture, the US management consultancy firm, has been among several big international groups that have moved their headquarters to Ireland.

They may engage in little or no economic activity beyond an office in Dublin but their results are included in Ireland's national accounts and the GNP metric in particular has been distorted.

Reported profit in one year can eventually be moved out of the system via dividends but the impact on data continues as these firms are big compared with the Irish economy and there are a flow of new entries and exits.

Steven Rattner wrote this week in The New York Times:

WHILE a Senate report detailing Apple’s aggressive tax sheltering of billions of dollars of overseas income grabbed headlines this week, little notice was paid to a surreptitious thrust at tax minimization that was announced at nearly the same moment.

In a news release, the American drug maker Actavis announced that it would spend $5 billion to acquire Warner Chilcott, an Irish pharmaceuticals company less than half its size.

Buried in the fifth paragraph of the release was the curious tidbit that the new company would be incorporated in Ireland, even though the far larger acquirer was based in Parsippany, N.J.

The reason? By escaping American shores, Actavis expects to reduce its effective tax rate from about 28% to 17%, a potential savings of tens of millions of dollars per year for the company and a still larger hit to the United States Treasury.

Actavis is hardly alone in fleeing to lower-tax countries. For example, Eaton Corporation, a diversified power management company based for nearly a century in Cleveland, also became an “Irish company” when it acquired Cooper Industries last year.

John FitzGerald, an economist at the ESRI, an Irish economics think-tank, recently produced a paper on the impact.

Bottom line....

Both GDP and GNP are now unreliable measures of Irish economic activity.

Irish Economy: No growth in 2012; 6,500 direct jobs account for 52% of services exports

The original post below dates from March 2011

Ireland's national statistics office, the CSO, says Gross Domestic Product (GDP) and Gross National Product (GNP) are closely related measures. GDP measures the total output of the economy in a period i.e. the value of work done by employees, companies and self-employed persons.

This work generates incomes but not all of the incomes earned in the economy remain the property of residents (and residents may earn some income abroad). The total income remaining with Irish residents is the GNP and it differs from GDP by the net amount of incomes sent to or received from abroad.

In Ireland's case, for many years past, the amount belonging to persons abroad has exceeded the amount received from abroad, due mainly to the profits of foreign-owned companies, and our GNP is, therefore, less than our GDP.

State agency Forfás said last year that GNP is a better measure than GDP of the value added accruing to residents of the country. In Ireland, GNP is now considerably lower than GDP because of income flows to non-residents, especially profits and dividends of foreign direct investment enterprises. In 1970, the reverse was the case with GNP higher, because of income flows to Irish residents from abroad.

As a result of this turnaround, GNP growth has been somewhat slower than GDP growth. Since 1970, real GNP has increased about four times. In the year 2008, GNP decreased by 2.8% while in the five years (2003-2008) it increased by an average annual rate of 3.8%.

The growth in exports has been especially noticeable. Since 1970, the value of exports has increased over twenty times in real terms. The other demand components making up GDP have increased to a lesser extent over the same period, e.g. personal consumption over four times, public expenditure about four times and investment about five times.

Some of the growth during the bubble resulted from increasing numbers at work. While GNP at constant prices increased by 19% between 2003 and 2008, the increase per person in employment was much less at 1.3%.

GNP was until recent times about 82% of the value of GDP. however, the National Recovery Plan 2010-2014 forecasts a level of 73%.

During the boom, the per capita GDP data did not chime with reality.

Even allowing for inequality, it just wasn't credible that we were among Europe's wealthiest and when Bank of Ireland had us as runners up to Japan as the wealthiest on earth it seemed more bizarre - - Japan had at the time about 35% of its workforce as temps, earning less than the Irish minimum wage.

In recent times, we have seen pharmaceutical exports jump without any impact on jobs and we know that the MNCs have profits of sales from Ireland inflated to maximise the benefit of the low corporate tax rate.

We have about 500 employed in the leasing sector and we manage over 3,000 aircraft from Ireland; in 2004, the 2 biggest companies by revenue were owned by Microsoft and were operating from the offices of a Dublin law firm. They still operate to channel patent and other income from other overseas Microsoft units to Ireland. They now have unlimited status and their results are not publicly available.

A leasing company with 20 people can have huge revenues but it does not reflect economic activity in Ireland.

The other side of the coin are Irish companies earning income abroad.

CRH for example, is only Irish because its headquarters are in Ireland and because of its background -- up to 90% of its shareholdings are held by non-Irish and only about 2,000 of its 80,000 staff are based in Ireland.

On paper the outward stock of foreign direct investment is greater than the total for inward investment.

Danny McCoy, the director general of the business lobby group IBEC, told his conference last November: "However, what we see is the extent to which Irish-owned assets are working for us overseas and creating that €50bn in wealth that flows back into Ireland.

Ireland's stock of direct investment overseas (ODI) in other words, Irish owned assets abroad was just shy of €190bn. The stock of FDI assets here in Ireland was just below €170bn.

Ireland therefore has a net Direct Investment asset position of €20bn.

This number shows the growing impact of large Irish multinationals many of them represented here today operating in the international sphere: companies like CRH, Smurfit Kappa Group, Glen Dimplex, Kerry Group, Glanbia, Paddy Power, Creganna-Tactx and Greencore indigenous companies growing their international reach and acquiring new businesses overseas."

This is of course another example where the bragging/bullshit does not chime with reality.

Foreign firms are responsible for more than 90% of our tradeable exports.

The American management consultants, Accenture, moved their hq to Ireland from Bermuda and I would think that some of the €50bn referred to by McCoy includes profit from activities in for example the US that shouldn't affect Irish national accounts data.

GDP and GNP for most countries are at similar levels. However, Ireland is exceptional for its dependence on FDI (foreign direct investment).

The difference between the 2 measures has widened during the recession.

I would think that the GNP level is more a reflection of reality today.

Employment in the FDI sector is back to 1997 levels when the workforce was 25% smaller.

This issue of GDP v GNP was raised by economist Michael Taft in a blog comment response to a Finfacts article on Wednesday.

Richest EU countries have the highest taxes; Irish tax burden will be as high as Denmark's by 2014

0 Comments:

Post a Comment

<< Home