Saturday, October 03, 2020

Retooling Ireland's economic engine - look to Denmark & Netherlands

Ireland's indigenous exporting sector is small while about 67% of Danish goods exports are from domestic firms, as are 80% of services exports, led by Maersk which has been the biggest global container ship operator since 1996.

The National Economic Plan to be published in November 2020 will follow the Budget 2021 announcement on October 13, 2020, and is unlikely to signal a retooling of Ireland's current economic engine — typically the long term is for aspirations and while the year 2020 was the endpoint for many past reports with rosy prognostications, it inevitably became their graveyard.

In 2019 Irish-owned exporters were responsible for exports to the other 18 member countries of the 342m population Euro Area, that accounted for 1.2% of the corporate tax avoidance bloated total export value of €449bn. Indigenous tradeable exports accounted for 6%.

Leprechaun economics endures and despite fairytale data that deceive, the model with the over-reliance on foreign direct investment is no longer the philosophers' stone (not philosopher's stone!), for long imagined by Irish policymakers and the professional firms that coined from it.

In 2019 indigenous exporters employed 192,000 full-time permanent people according to government data and 235,000 were employed in foreign-owned exporting firms.

Irish-owned exporting firms spent €26.4bn in 2018 in the Irish economy with the biggest portion on Irish materials — €8.6bn on payroll, €12.0bn on local raw materials and €5.8bn on Irish services. In 2018, direct expenditure by foreign firms amounted to €23.5bn, comprising €13.8bn on payroll, €3.5bn on materials and €6.1bn on services purchased in Ireland.

Exports by Irish firms were 52% of total sales in 2018 with Irish food and drink firms buying 79% of materials and 86% of services locally. The corresponding rates for foreign-owned chemicals/ pharma firms were 7% and 5%.

The Irish firms had 62%/65% ratios for total Irish purchases of materials and services while the foreign firm rates were 13%/5%.

Foreign direct investment (FDI) both inward and outward is a feature of a modern economy but over-reliance means a low level of innovation and national income.

Small Denmark, lacking fossil fuels like Ireland, became a world-class innovation economy with one of the world's top GDP per capita (see chart above).

Irish national income per head is much lower.

There is a low level of entrepreneurship reflected in a poor employer startup performance and the rate of SME firm exporters is one of the lowest in Europe.

Irish economy grew by a mere 1.5% in 2019

Ireland still struggling with Leprechaun economics

Irish material standard of living per capita below EU-27 average in 2019 — Highest 2019 consumer price levels in EU27 were Denmark at 41% above average; Ireland at 34% and Germany 7%. The Mercer Cost of Living Index 2020 has Dublin in 46th place globally, while it remains the most expensive city for expatriates in the Eurozone. In 2019 John FitzGerald, an economics commentator, noted in The Irish Times, "In Ireland, the high price level is more than compensated for by higher incomes, leaving Ireland with an above-average standard of living compared with our EU neighbours" — this claim is not true as Eurostat data on median and mean income adjusted for price differences show.

Entrepreneurship falls as reliance on high growth firms rises — No Irish firms in FT 1,000 rankings of fast-growing firms in Europe 2020

Irish employer entrepreneurship remains on a respirator

Top global 2500 R&D firms- 4 Irish include 2 banks

State of Irish high tech and biotech 2020

The Irish land racket and Dublin housing crisis

In July G20 finance ministers of 19 leading advanced and emerging economies, plus the EU said in a communiqué “We stress the importance of the G20/OECD Inclusive Framework (including about 140 countries) on Base Erosion and Profit Shifting (BEPS) to continue advancing the work on a global and consensus-based solution with a report on the blueprints for each pillar to be submitted to our next meeting in October 2020.”

If Biden becomes the next US president, the likelihood of agreement in 2021 is strong.

For Ireland, the main threat is a global minimum corporate tax rate that could be set in the range 12-15% — coupled with measures on profits shifting which would seriously blunt Ireland's appeal as a location for foreign direct investment.

The indigenous trading sector was the poor relation for decades as ministers bragged about easy ready-made jobs from mainly American firms.

Apart from the tax issue, we don't know how changes in globalisation will affect flows of international investment in the coming years.

Deal with the reality not fairy tales:

US FDI into Ireland and Irish investment in America — facts and myths

SMEs the backbone of an economy

Among small and medium-sized enterprises (SMEs) Denmark is one of the best EU performers in business internationalisation with both significant exporting in intra (EU Single Market) and extra (outside EU) trade.

The overwhelming majority (98.9%) of enterprises in the EU-27's (ex-UK) non-financial business economy in 2017 were enterprises with fewer than 49 persons employed (small enterprises), followed by medium enterprises (50-249 persons employed) with 0.9% of all enterprises. In contrast, just 0.2% of all enterprises had 250 or more persons employed and were therefore classified as large enterprises.

Micro firms (0-9 employees) were the most common size of firm, accounting for 90.0% of all firms in the non-financial business economy.

According to Eurostat, in 2017 there were 22.2m SMEs in the EU contributing to over half of total value added (56%). SMEs employed 83.9m people, accounting for 67% of all employed in the EU.

While services activities accounted for the largest share of the enterprise population within the EU-27’s non-financial business economy, more than one quarter (25.9%) of the 22.2m enterprises were classified as distributive trades (motor trade, wholesale trade and retail trade), while close to one in five (18.8%) were in professional, scientific and technical activities.

Beyond the employee classification, the European Commission has further criteria here on what defines an SME.

In the European Union, data on SMEs are a work in progress and the main focus is on goods trade. However, the STEC database on services exports covering 13 member states only, including Ireland, and for certain years going back to 2013-2016.

There is also a problem in including zero employee firms as typically they are 1-person operations which never grow.

In the period 2009-2017, the number of Irish zero employee firms grew by 60,000 to 156,000.

Last May I produced the chart below which shows that Irish employer (at least one employee) SME firms have one of the lowest ratios of exporters in Europe.

In 2019 the OECD used by my 2007 SME exporting firm estimate for Ireland at 6.3% of total SME employer firms compared with 6.6% for Greece — see Page 71 here in OECD report on Ireland.

My latest estimate is 7.5% for Ireland but that includes foreign-owned firms.

Data for domestic firms are grim.

According to the Central Statistics Office (CSO) in 2014 in respect of 2012, "Foreign-owned SMEs generated significant amounts of GVA (gross value added) given the number of persons engaged in these enterprises. GVA per person engaged in foreign-owned SMEs which were engaged in international trade was under €169,100. The figure for foreign-owned SMEs that were solely engaged in the domestic economy was over €131,400. The equivalent figures for Irish-owned SMEs were much lower compared to foreign-owned SMEs at over €55,300 (engaged in international trade) and almost €30,500 (engaged solely with the domestic economy)."

Tax avoidance by foreign firms may have been a factor

Irish SME goods exports to the EU-28 were the lowest at 51% while Slovakia at 91% had the highest.

Eurostat data in respect of 2016 show that Irish-based SMEs had the lowest percentage of SME goods exports to other EU-28 member countries.

Denmark's SME exports to all countries were at a ratio of over 38% of total goods exports while Ireland's level was 16.6%.

There are also indirect SME exports through domestic sales to large firm exporters.

The Netherlands as a world food leader

The Netherlands is the world's second-biggest agri-foods exporter. It also is a leader in food technology.

The Dutch are growing vegetables with far less water and pesticides than if production was happening in the soil or open air. They grow 6m tonnes of potatoes annually compared with the Danish output of 1.8m and Ireland's output of 278,000 tonnes.

Some critics claim that the food is bland.

Last May I published the following article:

Dutch food innovation lessons for Ireland

In the period 1990-2018, greenhouse gas emissions fell 21% in the EU-27; 19.3% in Denmark; 11.4% in the Netherlands and they rose by 13.6% in Ireland.

Belgium's level is likely exaggerated as Brussels is Europe's air freight hub
UN's Food and Agriculture Organization 2019

Denmark vs Ireland

Denmark is a good comparator economy for Ireland with populations of 5.8m and 5m respectively. Both economies have evolved from 1955 when two-thirds of the Nordic economy's export income came from agricultural products while the Central Bank of Ireland noted in 1977 that in 1955, food, drink and tobacco made up 68% of Irish exports.

Britain was a key market for both countries and Danish firms had ended Irish dominance of the British bacon market in the early years of the 20th century. Henry Denny & Sons, now owned by the Kerry Group, which had begun operations in Waterford in 1820, in 1894 invested in a pork-processing venture with a German firm in Jutland.

By 1957 the number of people employed in Danish industry overtook employment in agriculture. However, agricultural exports remained Denmark’s main source of foreign currency.

In 1960 Ireland's exports to the UK accounted for 75% of the total value while Britain was Denmark's leading exports market with a 27% share followed by West Germany at 20%.

The six-country members had begun their European Economic Community (EEC) in 1958 and in 1960 seven other European countries including Denmark and Britain established the European Free Trade Association (EFTA), which had a focus on cutting import tariffs.

A year later EFTA had cut tariffs by 30%.

In 1961 the UK, Denmark and Ireland applied to join the EEC and Norway submitted an application in 1962.

On January 1, 1963, Ireland, at last, made its first move to cut import tariffs. The first cut was of 10% as there were fears in Dublin that Ireland's EEC application could be rejected because of the backward economy. Such a development would result in missing out on the significant Common Agricultural Policy subsidies.

General Charles de Gaulle (1890-1970), the French president, arrives in London with his wife Yvonne, for a state visit in 1960. In November 1962, de Gaulle hosted Harold Macmillan (1894-1986), the British prime minister, at the Château de Rambouillet — the French presidential retreat near Paris. The French president told Macmillan that the UK would have to end its “special relationship” with the US if it was serious about joining Europe. It was reported that the British PM burst into tears. “This poor man, to whom I had nothing to give, seemed so sad, so beaten,” de Gaulle told his cabinet. “I wanted to put my hand on his shoulder and say to him, as in the Édith Piaf song, ‘ne pleurez pas, milord’ (don’t cry, my lord).”

On January 14, 1963, General de Gaulle, at a press conference at the Elysée Palace, delivered an Exocet missile to the aspirants for membership of what was then commonly known as the European Common Market. He said:

"England in effect is insular, she is maritime, she is linked through her exchanges, her markets, her supply lines to the most diverse and often the most distant countries; she pursues essentially industrial and commercial activities, and only slight agricultural ones. She has in all her doings very marked and very original habits and traditions...It must be agreed that first the entry of Great Britain, and then these States, will completely change the whole of the actions, the agreements, the compensation, the rules which have already been established between the Six, because all these States, like Britain, have very important peculiarities. Then it will be another Common Market whose construction ought to be envisaged; but one which would be taken to 11 and then 13 and then perhaps 18, would no longer resemble, without any doubt, the one which the Six built."

De Gaulle resigned in April 1969 and on January 1, 1973, the EEC Six became Nine with the entry of Britain, Denmark and Ireland.

Denmark had the highest national income per capita among the Nine based on GDP and it was second in Europe after Switzerland.

Ireland was the poorest country in Western Europe.

The year 1973 was the last of the 1950-1973 remarkable postwar economic recovery in Europe.

Data from Angus Maddison (1925-2010), the renowned British economic historian show that Greece was the star performer, growing an average annual compound real GDP rate of 6.2%; West Germany and Italy grew 5% and Britain just 2.5%.

Denmark and Ireland both grew an annual average of 3.1% in 1950-1973 but in both 1950 (6,943/3,453 in 1990 international dollars) and 1973 (13,945/6867) Danish GDP per capita was double the Irish rate.

In 2019 Danish GDP per capita was the highest in the EU-28 (excluding Luxembourg because of its population distortion).

It was at least 39% above the Irish rate (after stripping out some multinational distortions: see here) and 49% above the British level.

A proxy for material standard of living based on the individual consumption of public and private goods and services adjusted for pricing differences shows that in 2019 Denmark was 20% ahead of Ireland.

In 2018 Ireland had the 5th highest public debt per capita among rich countries after Japan, US, Italy, Belgium and ahead of Greece and France.

In 2019 the Irish gross government debt ratio was 100% of adjusted economic output while the net debt rate was 85%.

Denmark's gross public debt was 30% of GDP in 2019 and the net debt rate was 11% of GDP.

Ireland had a gross debt to income ratio of households of 121% in 2018, helped by bank sales of non-performing loans. The ratio was 234% in Denmark. According to the Danish national bank, "Danish households differ from households in most other countries in that they have very large pension wealth. This means that many Danes can look forward to relatively high income after retirement, which reduces their need to be debt-free when they retire."

Ireland has one of the worst pension coverage rates for private-sector workers among rich countries.

Denmark in the World Bank's flagship annual publication Doing Business 2020 on business regulations in 190 economies Denmark is ranked at 4th position in the world and 1st in Europe. Ireland has a 24th global rank.

Regulations affecting 12 areas of the life of a business are covered: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, resolving insolvency, employing workers, and contracting with the government.

Despite the presence of significant affiliates of global firms, Ireland has a low rate of patenting. 1) The European Patents Office (EPO) has 38 member countries and in 2019 Switzerland had 8,249 resident patent applications; Netherlands 6,954; Denmark 2,404 and Ireland 878. 2) The UN's World Intellectual Property Organisation (WIPO) administers the Patent Cooperation Treaty (PCT) patent which can provide protection in up to 153 countries. In 2019 Switzerland had 4,610 PCT resident patent applications; Netherlands 4011; Denmark 1,452 and Ireland 642.

Denmark has the 6th rank in the Global Innovation Index 2020 sponsored by the World Intellectual Property Organisation, Insead Business School France and Cornell University of the US — see caveats here for Ireland, with significant distortions resulting from massive tax avoidance by US firms.

Ireland has 4 native companies including 2 banks in the top 2,500 global business R&D spenders in 2018 while Denmark has 30 indigenous companies.

In the 1970s following the quadrupling of the oil price by Arab suppliers, rising inflation escalated to annual rises of over 20% in several countries.

Denmark had experimented in the use of wind power to generate electricity in the 1890s and in the 1970s a new era of wind power rather than nuclear power began.

Wind accounted for 47% of Denmark’s power usage in 2019, the country’s grid operator Energinet said this year, up from 41% in 2018 and topping the previous record of 43% in 2017. Danish companies exported wind technology and services valued at €8.9bn in 2019.

European countries are global leaders in utilising wind power but Denmark is far in front of nearest rival Ireland, which sourced 28% of its power from wind in 2018 according to data from industry group WindEurope.

Denmark, in stark contrast with Ireland, has the highest European participation in dual education covering education and workplace training for young people in a wide range of job categories.

Last year an Oireachtas committee noted that the lifetime learning participation rate in Ireland was about 7%, "well below the EU average (11%) and significantly behind the top performers including Denmark (31%), Sweden (29%) and Finland (25%).

On food, a decade ago the Irish government made an unsourced claim that Ireland produces enough food to feed 36m people, which would rise to 50m by 2020 — to make sense this metric should be on a net basis.

A Danish agriculture agency's estimate is 15m and the estimate for New Zealand has fallen from 100m to 40m in recent years (nevertheless this year the journal Nature stated 40% of NZ adults and 20% of children live in a household with severe to moderate food insecurity.)

In 2019 Irish agri-food exports/imports were valued at €13.6bn/€9.3bn giving a surplus of €4.3bn. The Danish trade was €16.2bn/€10.6 resulting in a surplus of €5.6bn — Danish primary output was also higher than Ireland's.


The key issue is the over-reliance on foreign-owned firms which is evident in Britain, Ireland and Israel. People working in the FDI sectors do well while the rest of the economies have low productivity, limited innovation and low wages.

Britain has over 30,000 foreign-owned firms from a total of 2.5m firms but these overseas firms account for 57% of total UK company turnover (sales) while Israel has about 360 foreign-owned research centres but linkages to the rest of the economy are weak.

FDI is important in particular for low to middle-income countries.

Ireland has 1,550 exporting FDI firms.

American multinationals in 2018 spent 85% of their research spending in the US.

The data on Irish indigenous exporters in the first part of this article, suggest that Ireland has the potential to end the long underperformance of Irish owned firms.

It would take many years to expand the number of home-grown exporters. About 40% of exporting enterprises traded exclusively with the UK in 2016 according to the CSO.

Low innovation and entrepreneurship are also huge challenges.

However, if this isn't the time to retool Ireland's economic engine, waiting for a possible decline in FDI would be a reckless gamble.