Friday, June 26, 2020

Ireland still struggling with Leprechaun economics

In 2016 when Ireland reported that gross domestic product (GDP) had grown by 26% in 2015 Paul Krugman, the New York Times economics columnist, called the claim Leprechaun economics.

The result of the combination of US companies allocating intellectual property (IP) via accounting entries rather than actual innovation in the country; a change in the accounting for over 4,000 commercial aircraft owned by Irish-based aviation leasing firms, and continuing massive tax avoidance, were the main factors for the stunning rise.

The Irish capital stock rose 43% or €300bn in 2015.

Typically Irish ministers and public enterprise agency personnel would welcome the distorted data as a plus for promoting Ireland internationally. For example, Enda Kenny, the Irish taoiseach, met President Obama in the Oval Office, on March 14, 2014. "There is tremendous investment by US companies in Ireland. There's tremendous investment here in the United States by Irish companies. We're an example of the mutually beneficial trade that can take place across the Atlantic," the president said. However, President Obama had not been told that among the biggest "Irish companies" were American companies that were only Irish for tax purposes!

Typically also the Irish media would report official exaggeration and lies as fact.

When the GDP jumped by 26% in one year, the international reaction was ridicule.

In the interval, an alternative metric has been developed with some of the most egregious distortions stripped from the data. However, there is still misinformation that presents a false image of Irish economic activity. See the comment on the European Innovation Scoreboard below.

1."Home grown business drives success of Irish economy - ESRI"

This week the Irish Times headline above was on a paper by John FitzGerald, a retired research professor at the Economic and Social Research Institute (ESRI).

Domestic businesses were responsible for most of Ireland’s “real” economic growth in 2013-2018 rather than foreign multinationals.

FitzGerald says that the best measure of the economic welfare of those living in Ireland is Net National Product (NNP).

Eurostat, the EU's statistics office says, "A measure that reflects material welfare of households is Actual Individual Consumption (AIC), which consists of goods and services actually consumed by individuals, irrespective of whether these goods and services are purchased and paid for by households, by government, or by non-profit organisations."

Last week I reported on data which showed that Ireland's AIC in 2019 again trailed Italy and was 3% below the EU-27 average.

Irish material standard of living per capita below EU-27 average in 2019

FitzGerald says that following the adjustments as per the chart above, in 2018 foreign-owned firms accounted for 21% of Net National Product and "domestic firms" 79%.

The estimated real NNP grew by an average of around 5.2% a year over the period 2013-2018.

In the period 2013-2018, the Irish population grew by an annual average of over 50,000 people. 

However, Irish business firms employ all employees, excluding those in foreign firms — civil servants, nurses and the Irish Army are included in Irish business firms!

According to the CSO (national statistics office), the Total Economy Compensation of Employees in 2018 was €93bn and FitzGerald uses that in his charts.

Public admin, education and health account for 21% of NNP and 29% average share of wages in 2013-2018.

The author says, "The direct contribution of the foreign MNE (multinational enterprise) sector to NNP is then the sum of the wage bill and the corporation tax paid" by the firms.

Government data show that foreign firms' direct expenditure in the Irish economy in 2018 amounted to €23.5bn, comprising €13.8bn on payroll; €3.5bn on materials and €6.1bn on services.

Irish-owned firms spent €26.4bn in 2018 in the Irish economy with the largest proportion of this expenditure being on Irish materials. The breakdown of expenditure in 2018 was €8.6bn on payroll, €12.0bn on Irish raw materials and €5.8bn on Irish services.

FitzGerald, writes, "The sectors where foreign MNEs made a substantial contribution to NNP were manufacturing, distribution, IT services and financial services. Interestingly the contribution to NNP of domestic firms in the IT sector was quite close to that for foreign MNEs, in spite of their much smaller GVA"  gross value added is boosted by tax avoidance.

Nevertheless, there were 116,000 employed in Information, Communication and Computer Services in 2019 with about 10 or more employees, and only 26,000 were in Irish-owned firms  — see charts below:

Foreign-owned firms supported by Irish enterprise agencies

Irish-owned firms supported by Irish enterprise agencies

Irish economic growth data remain unreliable

2. The European Innovation Scorecard 2020 was published on Wednesday and this year Sweden is again the EU Innovation Leader, followed by Finland, Denmark and the Netherlands. Luxembourg (previously a Strong Innovator) joins the group of Innovation Leaders, while Portugal (previously a Moderate Innovator) joins the group of Strong Innovators.

Significant innovation in the EU is concentrated in North-western Europe and the Nordic countries.

Ireland got a 9th ranking in the EU-27 and Heather Humphreys, minister for Business, Enterprise and Innovation, said "it is great to see Ireland’s innovation strengths being recognised among our European peers."

The first striking thing about the Irish data are the GDP per capita (PPS; adjusted for price differences) for Ireland in 2019 at 54,900 (the Purchasing Power Standards are an artificial currency, thus the lack of a euro symbol) compared with Sweden's 36,700 and an EU average of 29,100 — in 2019 Ireland had a stunning per capita GDP, 50% above Sweden's!!

Patent application data are average which means poor; data on net FDI inflows are not reliable; multinational services output/exports are massively distorted and the Total Entrepreneurial Activity (TEA) is not a useful metric compared with business demography data.

Ireland's social, economic and business deficits in 2020