Thursday, February 07, 2019

Irish workers most productive in world or same as Italians?

This week the Organisation for Economic Cooperation and Development (OECD) issued data which showed that Ireland had the highest GDP (gross domestic product) per hour worked in 2017 of 38 mainly rich country economies.

The OECD reported that Ireland was at $99.5, followed by Luxembourg ($98.5) and Norway ($83.1). The United States ($72.0) and Germany ($72.2) were at a similar level while the UK ($61.1) and Italy (57.4) were above the OECD average of $54.8. The Euro Area (19 countries) was at $62.9; EU28 at $56.6 and G7 at $64.1.

In the real world, Ireland is in the British-Italian range and in 2018 the OECD noted that most firms in Ireland had experienced declining productivity over the past decade. Also in 2018 Department of Finance economists in a paper noted that the top 10% of firms account for 87% of value added in manufacturing and 94% in services. 

Even though the Irish data unpurged of what Paul Krugman, the New York Times economics columnist, termed “Leprechaun economics” in 2015, is a fairy tale, a local commercial economist who was a boomtime cheerleader until the economic crash a decade ago, declared this week “it is a very positive sign that Ireland tops the league in terms of productivity, suggesting that while we can well and truly party, we also can work very hard.”

Alan McQuaid, do you seriously believe this bullshit?

Why would an individual working for an American financial services firm in Dublin make such a patently ridiculous claim that is in the genre of Trumpian alternative facts?

GDP and GNI* modified

In 2017 the CSO (Central Statistics Office) produced a new Irish indicator called Gross National Income Modified (GNI*), which strips out some of the massive distortions caused by the tax avoidance strategies of mainly large American-owned firms. The adjustments are in respect of:

  • retained earnings of firms that have re-domiciled to Ireland i.e. changed nationality from US to Irish for tax purposes e.g. giants such as Medtronic and Allergan (the combined market capitalisation of these 2 faux Irish firms was $236bn on Feb 06, 2019);
  • the depreciation of foreign-owned intellectual property (IP) assets located in Ireland. In 2015 a small number of firms relocated their entire shell company balance sheets to Ireland consisting mainly of IP assets, i.e. the IP was on-shored by way of balance sheet relocation rather than purchased by an Irish-resident subsidiary — this was effected by accounting transactions in the US and was for tax avoidance purposes not materially impacting knowledge capabilities in Ireland. The change resulted in the stock of capital assets in Ireland rising by nearly 50% (from €764bn to €1.06tn) in a single year; and,
  • the depreciation of thousands of commercial aircraft owned by Irish aircraft-leasing companies and in turn owned by foreign shareholders.

In 2017 Irish GDP was valued at €294.1bn and GNI* was valued at €181.2bn giving a GNI* ratio to GDP of 61.6%.

Based on GNI* the per hour work rate was €47.5 or $61.3 in current USD and current PPPs (purchasing power parities). This compares with the UK rate of $61.1.

Not all the distortions have been stripped out and while Google can offset its booking of about a third of global revenues in Ireland that are categorised as exports with billions in charges that are treated as imports, so-called contract manufacturing (booking of the output of foreign factories in Ireland) linked to the IP relocations referred to above, are massively boosting reported exports.

The infographic below has custom tracked exports at €123bn and imports at €79bn in 2017 but the total in the national accounts for goods are €194bn and €87bn — a net additional rise for goods exports of an effectively fake €63bn.

The rise in total net exports of goods and services in 2007 was €34bn — thus putting Ireland in the labour productivity range of the UK and Italy at $57.4 is reasonable.   

Separately, in 2017 the Irish per capita standard of living was behind Italy’s despite the latter's long economic stagnation.

Cost of peddling misleading data

Prof Patrick Honohan, when the governor of the Central Bank in 2010, warned that “With the structural shift towards high-productivity sectors during the 1990s and again since 2007, 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.”

Alan McQuaid, an economist at the Dublin office of Cantor Fitzgerald, told the Irish Times this week, “Any business owner looking at moving out of Britain because of Brexit or any other country for that matter, and seeing those productivity figures, would be encouraged to come to Ireland, all other things, such as tax liability, property costs or internet access, being equal.”

McQuaid who wrote in the newspaper in September 2007, “I’m sick to death of people writing off the Irish economy and next year could easily see the Celtic Tiger roaring more loudly than many pessimists think,” is not alone in peddling misleading data.

Marketing bullshit comes at a cost as underlying weaknesses are ignored.

It’s for example laughable that Ireland could be ranked as one of the most innovative countries on earth thanks to exaggerated tech exports; a large share of admin workers in ICT and the most risible of all, large foreign direct investment outflows!

“Ireland is still number 1 in Knowledge diffusion, thanks to its 1st spots in FDI outflows and ICT services exports. The country holds top positions in IP payments and FDI inflows..”