Thursday, September 01, 2022

Leprechaun economics continue to distort Ireland's statistics

In July 2016 American economist Paul Krugman dubbed the annual revision of Irish 2015 GDP (gross domestic product) "Leprechaun economics." The 2015 GDP had jumped to a stunning 26.3% on the 2014 data. In more recent times, the Irish ambassador to the United States, Daniel Mulhall, called the use of the word "leprechaun" by the Nobel Prize-winning economist"an unacceptable slur."

Ambassador Mulhall and Enterprise Ireland, which promotes indigenous exporters, have promoted the fiction that investments by Irish companies in the United States are among the top foreign investors there. In 2021 it seems that Irish-owned companies "by country of ultimate beneficial owner" had investments of $353bn in the US — even bigger than France.

The biggest born in Ireland company, CRH, has a market capitalisation of about €29bn and the fake Irish firms called Redomiciled Companies, foster the delusion of large investments by many Irish firms.

Global exports by Irish-owned firms in 2021 were €25.5bn: €4.5bn to North America and €5.9bn to the other 18 member countries of the Eurozone — an external market of 437mn people. The UK was the biggest market at €7.5bn.

The total Irish export value in 2021 was €568bn and Irish-owned firms engaged in merchandise and tradeable services accounted for 4.5% of the total. International transport and tourism & travel had minus net export totals.

Fairy tales of Irish economy obscure truth  —  a related sequel to the current story

In early 2017 the Economic Statistics Review Group (ESRG), a committee chaired by Prof Philip Lane (then governor of the Irish Central Bank and now the chief economist of the European Central Bank) recommended a Modified Gross National Income (GNI*) which incorporated 3 adjustments to the Irish National Accounts:

1) factor income of Redomiciled Companies (mainly US companies that become 'Irish' for tax reduction purposes by moving the headquarters to Ireland. The US typically remains the location of control and economic activity);

2) depreciation on R&D Service Imports and Trade in Intellectual Property (IP: in 2005 Apple and some other large multinationals made virtual moves of some IP to Ireland);

3) depreciation on Aircraft Leasing (Ireland is a global leader in aircraft financing and leasing. About 50% of the world’s leased aircraft are managed or leased from Ireland. Economist John FitzGerald (2015) found that they "employ a relatively small number of people in Ireland, they buy a limited range of services locally…" The Central Bank cites research in 2016 that employment was above 1,200 while the number of companies exceeded 30. In 2007 corporation tax amounted to about €300mn.)

The ESRG made one serious mistake. It did not also propose an adjustment to exports for fake overseas contract manufacturing.

Apple in particular did not need to find a crock of gold under a rainbow but it exploited the Irish advantage.

In the National Accounts of 2021 net merchandise exports (exports minus imports) amounted to €173bn. However, the value of net custom-tracked exports was a net of €55bn.

A fake amount of €118bn was added to merchandise exports that did not relate to economic activity in Ireland.

Foreign merchanting where goods are bought and sold outside Ireland were valued at €26.3bn (net exports). This value was added to the Irish National accounts.

Contract manufacturing called "goods for processing" by the CSO (Irish Central Statistics Office) amounted to €105bn in virtual exports while virtual imports were valued at €13bn — and a net €92bn was added to the Irish National Accounts. The two foreign balances amount to €118bn.

See how Ireland virtually exports iPhones to China!

Within the net custom-tracked exports, the biggest category in 2021 was 'Chemicals and related products' with a net export value of €77bn. There were actual exports of €103bn and imports of €26bn. Royalties/Licences amounted to €19bn. As this category has a low relative demand for domestic materials, tax avoidance is likely an explanation for the big surplus.

The net export value of €77bn compares with an overall total of €55bn

In services, net 'Computer services' (Google, Microsoft, Facebook etc) were valued at €162bn. Royalties/Licences for 'Information and communication' were at €70bn. There may be other categories which have a net export but there is likely still latitude for profits shifting.

In total 40% of multinational profits are shifted to tax havens each year. This reduces corporate income tax revenue by nearly $200bn.

Modified GNI* may also be polluted

Irish gross domestic product (GDP) increased by 13.6% in 2021 to €423.5bn. GDP in the EU27 grew by 5.4%. Denmark rose 4.9%; France 6.8%; Germany 2.9%; Sweden 5.1% and Switzerland (not in EU) added 3.7%.

Modified Gross National Income (GNI*) at current market prices rose from €200bn in 2020 to €234bn in 2021, which is a share of GDP, that rose from 53.6% to 54.9%.

At constant prices, real GNI* has risen by 15.4% in the year 2021.

Modified Domestic Demand (MDD) rose from the 2020 pandemic year to 2021 by 5.5%. Net National Income (NNI) is explained here.

The CSO says it's examining why Modified GNI* rose 3 times faster than domestic demand in 2021:

"Further analysis is needed to understand the change from 2020 to 2021, CSO’s initial findings suggest that MNE’s (foreign-owned multinationals) are having strong domestic effects on these de-globalised indicators through several factors. We are examining timing issues with profits, the build up of stocks after the pandemic, tax payments and in the case of NNI this indicator had been effected by substantially larger inflows of payments to redomiciled PLC’s in 2021."

It's clear that both GDP and Modified GNI* are not reliable indicators of Irish economic performance.

As for the leprechaun, he is a part of Irish folklore and as credible as Faust, the tooth fairy and Santa Claus.