Thursday, August 09, 2018

Brexit and rickety foundations of the Irish economy

In the early heady months after the surprise June 23, 2016 vote of 33.6% of UK adults* to leave the European Union, Boris Johnson, a putative British statesman, invoked the “triumph of hope over experience” when the British army of Afghanistan was wiped out in 1842 – almost to a man. He saw the quest for ‘Global Britain’ as reflecting a country with one in eight of the people born in Britain “now living abroad – a bigger diaspora than any other rich nation, you ask yourself what impulse drives this astonishing globalism, this wanderlust of aid workers and journalists and traders and diplomats and entrepreneurs, because whatever that feeling is, it isn’t xenophobia,” Johnson said, and added to dissenters “who say we are now too small, too weak, too poor to have any influence on the world, I say in the words of Scottish poet Robert Burns: ‘O wad some Power the giftie gie us /To see oursels as ithers see us!’”

Matching the hope with the reality of the Brexit folly has been sobering while providing outsiders with many opportunities for a comfortable sense of schadenfreude. However, it’s common in democracies for stupid people not to vote – seeing no real choice or not caring – while well-cossetted older voters can selfishly be guided by their prejudices at a cost for young voters. Then there are stupid people who vote for a choice despite the risk of both national harm and their own futures.

The outliers are the Nordic countries, where typically about 80% or more of the voting-age population participate — this is more than 20% higher than in Ireland's 2016 general election.

The Irish can enjoy the schadenfreude of observing a shockingly incompetent British government but lest we forget, we too had incompetence on a grand scale a decade ago despite Adam Smith, the Scottish philosopher and one of the European pioneers of political economy, warning in his famous 1776 book, ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ on relying on trading in property to create national wealth:

Though a house, therefore, may yield a revenue to its proprietor, and thereby serve in the function of a capital to him, it cannot yield any to the public, nor serve in the function of a capital to it, and the revenue of the whole body of the people can never be in the smallest degree increased by it."

I have recently written on the vulnerable British economy here:

Brexit, the lost empire, and dodgy modern UK economy — Before Britain's first referendum on mmembership of what was then called the European Economic Community, Margaret Thatcher, leader of the Conservative Party, told the House of Commons on April 8, 1975: "When we went in we knew exactly what we were going into. If we were now to withdraw, it would be a leap in the dark."

Brexit risks to the Irish economy

The IMF says trade with the UK is most significant for Ireland, the Netherlands, Belgium, and Luxembourg, relative to the respective sizes of their economies. The UK is a net provider of financial services to the Euro Area, driven by its large bilateral flows with Ireland. Excluding Ireland, the trade in financial services between the Euro Area and the UK is close to balance.

The Fund says up to 50,000 Irish jobs are at risk and a no-deal scenario using World Trade Organisation (WTO) trading rules, would result in GDP (gross domestic product) of the UK and the Republic falling by 4% in both countries by 2030.

In 2017 35% of indigenous tradeable exports (excluding e.g. tourism and transport) of €23bn went to Britain and about 40% of food exports –  Britain imports about 50% of Irish beef

About 56% of local firm exports went to 4 Anglo-Saxon countries (UK, US, Canada and Australia).

In 2016 local firms spent €22bn in Ireland on payroll, goods and services, compared with €21bn spent by foreign-owned exporters.

Indigenous tradeable exports to the 18 other single market countries in the euro system amounted to only of €3bn in 2016, based on data from Enterprise Ireland (EI) — the state enterprise agency for Irish-owned firms — this low amount accounted for only 1.2% of the 32% Eurozone share of total (foreign-owned + Irish firms) exports value in 2016.

In 2016 Ireland was the UK’s fifth largest trade partner for UK export of goods and there was a balance in food and drinks trade between the two countries with exports on both sides at about €4.4bn.

Ireland is the only member of the EU27 which produces a significant trade surplus for Britain.

"Ireland imports more goods from Britain than the rest of Europe combined," the British Irish Chamber of Commerce said in 2013.

In recent years companies such as the retailer Tesco have helped to bring balance to Irish-UK food and drink trade  — a weak sterling will make Irish food exports to the UK more expensive while Irish prices of UK imports would fall.

The Office for National Statistics Pink Book 2018 and the HMRC trade database show that Ireland is a very important market for Britain:

1) In 2017, UK exports to Ireland were worth £34.0bn; imports from Ireland were £21.8bn, resulting in a trade surplus of £12.2bn;

2) The UK had a surplus with Ireland in both goods and services;

3) Ireland accounted for 5.5% of UK exports and 3.4% of all UK imports;

4) Ireland was the UK’s 5th largest export market and the 9th largest source of imports;

5) The UK has recorded a trade surplus with Ireland every year between 1999 and 2017 while there were both persistent overall trade goods and services deficits in that period.

According to the House of Commons Library, the UK’s trade surplus with Ireland was £12.2bn in 2017. This was the UK’s second highest trade surplus, after the surplus with the United States. Ireland was one of four EU states the UK had a trade surplus with, in 2017 — the other three were with Luxembourg, Sweden, and Denmark.

Overall, UK exports to Ireland represented 5.5% of all UK exports and 12.4% of all UK exports to the EU. UK imports from Ireland represented 3.4% of all UK imports and 6.4% of all UK imports from the EU.

Looking at trade in goods only, the UK exported £20.3bn to Ireland in 2017, a record high. UK imports of goods from Ireland were £14.5bn, also a record high resulting in a trade surplus of £5.8bn in trade in goods.

The UK had a surplus of £6.4bn on trade in services with Ireland in 2017, exporting £13.7bn of services to Ireland and importing £7.3bn. UK imports of services from Ireland reached a record high in 2017 and have now grown every year since 2000.

In cash terms, UK exports to Ireland have increased from £16.0bn in 1999; imports from Ireland have increased from £12.3bn.

Reviving productivity is the key to future output and labour earnings…

The OECD (Organisation for Economic Cooperation and Development) said this year that most Irish firms have experienced declining productivity over the past decade.

“This has largely reflected the poor performance of local firms, with the large productivity gap between foreign-owned and local enterprises having widened. The resilience of the Irish economy hinges on unblocking the productivity potential of these local businesses. This can be achieved by further improving the enabling environment for them to succeed and grow.”

The productivity data for the foreign-owned sector is massively exaggerated by tax avoidance distortions.

The National Competitiveness Council 2018 Scorecard report says:

“Ireland’s growing base of multinationals in high value-added, capital intensive sectors (particularly a small cohort of manufacturing and ICT firms) disguises, to a degree, underperforming sectors and boosts Ireland’s productivity levels. Recent research by the Department of Finance shows most businesses have experienced a decline in productivity growth in recent years. The research suggests that the top 10% of firms account for 87% of value added in manufacturing and 94% in services. This highlights Ireland’s exposure to firm-specific shocks. While Ireland’s productivity growth is relatively strong, there is a need to increase productivity across many sectors and occupations. Supporting an uplift in productivity performance at firm level across all sectors remains a significant competitiveness challenge across a range of policy spheres.”

Denmark which relies on its own firms for about two-thirds of exports is a high wage knowledge economy, and has a high level of productivity reflecting a long-term focus on innovation.  

High regulatory barriers to entrepreneurship

The OECD says there are high regulatory barriers to Irish entrepreneurship. “This reduces competitive pressures on incumbents and the reallocation of resources to new firms that have good ideas. In particular, there are costly regulations relating to commercial property and legal services, while the costs of business failure are high. Access to finance for young firms needs to improve as well and will benefit from further efforts that mend the health of the banking sector and raise the efficacy of state-supported lending initiatives.”

Ireland also has a low rate of exporting firms  — less than a quarter of Denmark's 30,000 exporters.

Ireland has very low employer firm startup rate- UK is 4 times bigger

Domestic infrastructure needs improvement

The OECD says the “government plans to increase capital spending significantly over the coming four years and the projects undertaken must continue to be carefully prioritised through evidence-based evaluation of those with the highest returns. To do this more effectively, systemic collection of information on the performance of existing assets is crucial.”


The Paris-based think-tank for 35 mainly developed country governments, says the capacity of local Irish firms to absorb and implement new technologies is impeded by relatively weak managerial skills. This partly reflects the low proportion of workers participating in lifelong learning activities. With burgeoning skill demand, there should be an increase in the share of training funding to those in employment. Innovation and the ability of Irish firms to fully utilise new technologies is also weakened by low research and development activities. There is scope to reorient innovation policy to better promote the research intensity of local firms. In particular, public grants for business research and development could be increasingly used, as it would better reach local entrepreneurs that may be in a loss-making position and hence less swayed by tax exemptions on research funding.”

Ireland’s population of 4.7m compares with Denmark at 5.7m and Singapore at 5.6m.

UNESCO Institute for Statistics reports that for 2016, R&D (research and development) spending (business, government, universities) in US dollars adjusted for price differences (PPP) was $3.6bn in Ireland; $7.3bn in Denmark and $10.1bn in Singapore.

Business spend was $2.6bn, $5.0bn and $6.2bn respectively while researchers per 1m inhabitants was 4,400; 7,300 and 6,700.

The World Intellectual Property Organisation (WIPO) manages the Patent Cooperation Treaty (PCT) international patent which has 152 contracting states.

PCT applications in 2017 were 486 from Ireland (where there was at least one inventor resident in Ireland); 1,427  Denmark and  867 Singapore.

In 2008 the levels were 477 Ireland; 1,357 Denmark and  580 Singapore.

Switzerland (8.4m pop.) had 4,485 applications in 2017; 4,485 Netherlands (17m) and 3,975 Sweden (10m)

Approximately 0.2% of firms in Ireland accounted for 77% of applications between 1999- 2013.

In November 2015, Catherine Mann, then OECD chief economist, said in Dublin that Ireland will have to sell itself as more than just a low-tax destination in the new era of global tax transparency. She also highlighted the poor links between the FDI sector and the rest of the economy, with Ireland having one of the lowest EU spends on R&D (research and development), despite housing some of the most innovative firms in the world.

"Global capital has come into Ireland...but somehow it hasn't translated into Irish-owned firms," said Dr Mann. "The patents are here, but they're not being linked into the domestic economy, not being levered up by domestic firms or married to domestic workers."

In 2015 the tax avoidance-related relocating of intellectual property (IP) to Ireland accelerated and added €300bn to Ireland’s capital stocks. It was the year of ‘Leprechaun Economics’ when Ireland reported a GDP rise of 26% — the IP rise of €300bn compared with the post-surge GDP value for 2015 of €262bn.

The IP transfer was the result of a few computer accounting transactions in the US, moving values from the accounts of shell companies to related Irish accounts. However, it helps Ireland to have a fake position as the 10th most innovative country in the world — see here:

Best countries in world to start or run a business in 2018

Quality of life issues

The OECD says:

1) Housing affordability is reduced by low dwelling supply in Ireland’s main cities;

2) The health system is failing in terms of cost, patient satisfaction and waiting times;

3) Employment rates are particularly low for young low educated individuals. Some aspects of the social welfare system continue to disincentivise labour market participation by imposing high effective tax rates when taking up work. Ireland also exhibits relatively weak labour force participation for women.

The proportion of EU young people (aged 20 to 34) neither in employment nor in education and training in 2017 ranged from 7.8 % in Sweden to 29.5 % in Italy.

According to Eurostat, the Irish rate was 16.1%.

The OECD says employed people are those aged 15 or over who report that they have worked in gainful employment for at least one hour in the previous week or who had a job but were absent from work during the reference week. The working age population refers to people aged 15 to 64.

OECD data show the employment rate in Ireland in Q2 2018 was 68.4%; 85.2% Iceland; 80.0% in Switzerland; Sweden 77.2%; Netherlands 76.5%; Germany 75.6%; Denmark 75.2%; UK 74.7%; US 70.6%; France 65.2% and Italy 58.2%.

Irish Housing Crisis: It’s time for radical solutions — Part 1

Average Irish housing size lowest of EU's rich countries — Part 2

Irish real house prices up 175% in 50 years, UK +405%, Germany -1%

Ireland's material standard of living below EU28 and Italy's 

Among OECD advanced countries Ireland at 22.5% in 2017 was second to the United States for the percentage of low pay workers in the economy — defined as the share of workers earning less than two-thirds of median (mid-point where half of the population are above and half below) earnings. 

Average annual earnings per capita were €37,646 in 2017, up by 2.0% on 2016.

In the 9 years from end 2008 to end 2017, total earnings in the economy rose 3.9% while the consumer price index increased by 0.2%. In the period the total number of paid hours were similar.

For household net-adjusted disposable income per capita (including transfers and net of taxes),  in 2010 USD adjusted for price differences (PPS), Ireland in 2015 was at a rank of 17 of 29 OECD countries. At $25,490 Ireland compared with the average of $30,620 and Italy's $26,063 — despite also 20 years of economic stagnation.

The Government announced an auto-enrollment system for occupational pensions last February and it confirmed that only 35% of Irish private workers have coverage — the worst in the developed world. 

The state pension provides about one-third of average earnings.

Data from Eurostat show that in 2017 material standard of living per capita, based on consumption of public and private goods and services, was again below the EU28 average and Italy's  

The average German had consumption that was 30% ahead of Ireland’s.

Irish 2017 per capita standard of living again below Italy and EU-28 average

Over-dependence on foreign-owned firms

There were 428,000 employed in the tradeable exporting sector in 2017 — 50,000 were part-time employees. The employers are on the records of enterprise agencies that provided jobs grants.

205,000 were employed by local firms in 2017 and 223,000 by foreign-controlled firms. In addition, there were employments in for example foreign-controlled retail and banking businesses e.g. Tesco, Lidl and Ulster Bank.

There were 2.2m employed in the economy in Q4 2017.

The National Competitiveness Council on August 1, 2018, published a report on economic concentration.

It noted “the gap between high value-added sectors, such as Chemicals and ICT, and other sectors of the economy. Among enterprise agency client firms, value-added per person employed in 2016 ranged from €761,000 in the Chemicals sector, €445,000 in computer programming, to €65,000 and €60,000 in agriculture and waste respectively.”

The council avoids stating that the big factor in the gulf between the foreign-controlled sectors and local dominated sectors reflects profit shifting and giants like Google and Facebook booking about a third of their global revenues in Ireland.

The NCC says the composition and range of exports from Ireland, is very dependent on a relatively narrow base of sectors and commodities. Chemicals and related products account for 55% of goods exports, up from 47% in 2007. Machinery and transport equipment exports account for - 17% down from 25% in 2007, with exports of food and live animals relatively unchanged at 10%. Exports in computer services represent 47% of the total export in services.

The NCC says CSO data show that the top 5 exporters accounted for almost one-third of all goods exports in 2016. Approximately 75% of the total goods value is exported by the top 50 exporting enterprises. Figure 8 shows that Ireland’s high share of total trade accounted for by a small number of traders is high relative to the many EU member states. Across the EU28, in Industry, the top five traders accounted for 22.8% of total exports (in value terms) in 2015 compared to 40.4% in Ireland.

Again, it should be noted that the values of exports of foreign firms are not reliable. For example half the value of computer services exports may be fake.

The council also says over 20% of Irish owned firms export one product with almost 50% exporting fewer than five. Food products account for close to half of the export value of Irish-owned exporters, and 40% of firms export a single product. In 2015, one product, Meat of Bovine Animals, accounted for 23% of total exports by Irish owned enterprises.

In addition to custom-tracked goods exports in 2017 of €122.5bn, there was the tax scam of adding overseas manufactures of  €71.7bn or 58.5%  of normal exports to the merchandise total, even though this €71.7bn had no Irish inputs.

Aviation leasing companies in Ireland employing about 1,000 people own over 3,000 commercial aircraft which are valued in the Irish national accounts, but have only a financial connection with Ireland.

On corporation tax receipts the NCC says:

“The proportion of corporation tax paid by the top 10 companies is 39% showing a high degree of concentration. Reflecting the large number of small and micro enterprises in the economy, three-quarters of corporation tax payers paid an amount less than or equal to €20,000. These account for slightly less than 2% of total net corporation tax receipts. Shocks affecting any of the top 10 companies could have an impact on receipts. Ireland’s exposure related to the concentration of receipts among a small cohort of firms is a risk in terms of the sustainability of public expenditure.”

Corporation tax receipts rose 49% in 2015 thanks to Leprechaun Economics (coined by Paul Krugman, the American economist, in 2015 when GDP rocketed 26%) which increased facilitation of tax dodging.

The rise in 2015 to €6.9bn was followed in 2016 by receipts of €7.3bn and €8.2bn in 2017. The Department of Finance has said that the ratio of receipts is “generally around 80% for foreign-owned multinational companies" and most of them are American. 

Third of UK adults voted for Brexit 

*The UK Office for National Statistics has reported that the adult UK population (over 18 years) at June 30, 2016, was 51.8m ("We...publish population estimates which show that on 30 June 2016 there were estimated to be 757,787 people aged 17 and a total population of people aged 18 and over of 51,767,543.") 

The chart below from the London Independent/Indy100 (the data was sourced from the Electoral Commission) is misleading as it relates to the total UK population of 64.6m,  including teens and children.

We calculate 5.3m adults who were not on the register and adding to the 13.0m on the register that didn't vote gives a total of 18.3m or 35.3%. In effect, 33.6% of the adult population voted for Brexit — less than the number of adults who didn't vote.

The frog in the well

The Chinese have a fable of a contented frog looking at the sky from a deep well. However, following the visit of a turtle from the East Sea, the frog realises the insignificance of its world.

In Ireland over sixty years since the first tax incentives were introduced to boost exports, Brexit provides a warning for smug Irish policymakers that Ireland's economic model needs to be adjusted to changing horizons.

Brexit has prompted a typical reaction from policy makers and the big professional firms. Ready-made jobs can again be delivered from elsewhere with some more tax incentives.

Absent a vigorous indigenous sector with the competence to export internationally, reliance on low innovation jobs in both Irish and foreign firms will ensure that Ireland will not become a wealthy country.