Ireland is a miracle. This is the first conclusion that could be drawn from the Celtic economy if abstract figures for GDP or public debt are analyzed in isolation. The Irish will end up this year being 20% richer than before the covid (Spain will not reach precovid levels until 2023), at least for statistics, thanks to an economy that is almost tripling the average growth of the euro zone.
In addition, the official GDP per capita of Ireland will continue to be one of the highest in the world, almost doubling that of the United Kingdom and putting land in between with Switzerland, something that does not fit too much with the reality that is perceived when taking a walk through the streets of Ireland or talking to its inhabitants. What is behind this strange miracle?
When everything is based on GDP
GDP-based analysis of the Irish economy is spectacular. The economy saved 2020 with positive growth, while the activity collapsed in the rest of Europe or in the neighboring United Kingdom. From the Fitch agency they highlight the remarkable economic strength of Ireland during the covid-19 pandemic, which has led the agency to double its forecast for real GDP growth for 2021. “We expect Irish GDP to be more than one 20% higher in real terms this year compared to its pre-pandemic level, making Ireland the fastest growing economy of all rated sovereigns during that period. “
The European Commission also highlights in its latest forecasts the good performance of the ‘Celtic tiger’. GDP will advance 14.6% this year, while the ratio of public debt to production will fall in the coming years until it is assumed just over 50% in 2023, thus being one of the few countries that still complies with the stagnant rules of the Maastricht Treaty (debt below 60% of GDP). For example, public debt in Spain public debt will continue to be above 115% of GDP in 2023.
However, all these data that ‘adorn’ the health of the Irish economy create a kind of trompe l’oeil that hides a different reality, not totally opposite (it is true that the Irish economy is competitive and the standard of living of the population is high ), in which you can see how multinational companies play a fundamental role when artificially inflating GDP and all indicators that use total production as a base or ratio.
A half miracle
Fitch analysts Malgorzata Glowacka, Michele Napolitano and Mark Brown explain that the reality is that much of the recovery is “driven by the prominent sector of foreign multinational companies.” What does that mean? Much of Ireland’s economic production is not enjoyed by its citizens through higher incomes. The activity of multinationals increases the economic ‘pie’But when it comes to handing it out and eating it, the Irish only get the crumbs (through higher tax revenue and creation of quality jobs).
GDP can be measured from three different sides: that of spending, that of supply, and that of income. To understand what is happening in Ireland, it is more enlightening to analyze GDP from the income side, which is the sum of the wage bill (all wages in the economy), the gross operating surplus (business profits, self-employment income, interest , rents …) and taxes net of subsidies on production and imports. As GDP accounts for all these income generated domestically without taking into account their ‘nationality’, the profits and taxes paid by multinationals are reflected in Irish GDP, although part of these profits then travel in a second phase of distribution to others. countries in the form of dividends.
This has generated a curious situation in the country. When analyzing GDP from the income side, the gross operating surplus and mixed income represents 67.4% (compared to 40% in the Eurozone), while wages only represent 27% of the pie of GDP (compared to 50% of the Eurozone). The rest, up to 100%, are taxes on production. In other words, Ireland’s GDP is mainly made up of business profits (also interest, rents …) that do not directly permeate the population residing in the country.
Why don’t those benefits directly increase the income of the Irish? Many of the companies that have been established in Ireland for years (attracted by low taxes: the type of Companies is 12.5%), are subsidiaries of multinationals. These firms repatriate a good part of the profits obtained in Ireland in the form of dividends (taking advantage of double taxation agreements).
More or less, business profits are accounted for as GDP in Ireland (they inflate it), but they do not affect the disposable income of the Irish in the same way, since this money goes to the regions where the headquarters of the companies are established, increasing income available in those countries (especially that of the shareholders or owners of those firms) or investment.
From Ireland itself the GDP figures are being questioned. Patrick Honohan, Governor of the Central Bank of Ireland until 2015, released a report this year questioning GDP data as an indicator of the well-being of his country’s population: “Most people know that Ireland is not the world’s largest economy. prosperous Europe “.
This economist explained that “although Ireland’s economy has stagnated during the pandemic, its GDP has probably performed better in 2020 than most other advanced economies. This will consolidate the apparent leadership position of Ireland’s GDP in Europe. This apparent strength is largely due to the continuous increase in exports of pharmaceutical products and information technologies generated by multinational companies, and masks the sharp collapse of employment and economic activity in most sectors “, warned this expert .
Anyone who has been following the Irish economy is well aware that there are serious deficiencies in GDP as a measure of economic well-being, especially due to the activities of multinationals. Therefore, the ranking that places Ireland at the top of its class is clearly misleading, says this expert.
“When we delve into the available data on the most relevant parts of per capita income and consumption, we find that Ireland’s relative international position is ranked eighth and twelfth place in the European Union, much lower than commonly assumed. This drop in the ranking comes not only from eliminating the distortions of the multinationals, but also from taking into account the fact that consumer prices in Ireland are relatively high, “said Honohan.
Fitch experts confirm this point in their report, explaining that “Ireland’s economy has expanded at an extraordinary rate during the pandemic due to the excellent export performance of foreign multinational companies, particularly in the pharmaceutical and technology sectors. of the information”. Although GDP is well above 2020, the employment rateFor example, it is still two points below pre-covid levels.
Therefore, some indicators that may be more suitable for analyzing the Irish economy are the disposable income of families, individual private consumption or also the gross national product or GNP (which takes into account the nationality of the factors of production instead of the place where they produce, as does the GDP). While in other countries these indicators are strongly related to GDP per capita (allowing this indicator to better reflect the well-being of the population), in Ireland this is not the case.
Gap between GDP and disposable income
A good example of this disparity can be seen when comparing the data for GDP per capita in purchasing power parity or PPP GDP (eliminates the distortion of different prices in the economy) with those of household disposable income. According to Eurostat, Ireland’s PPP GDP is € 62,700, being the richest economy in Europe, according to this indicator. On the contrary, the adjusted disposable income of households in PPP leaves Ireland with 21,877 euros, below the average of the euro zone, but also in countries such as Italy or very close to economies such as Spain (20,831 euros of income available per capita).
The OECD analyzed this strange phenomenon in the Irish economy in 2015, when GDP soared more than 20%. The note then warned that the disposable income of households is a better indicator to know the well-being of the population, given the high distortion that multinational companies caused in the GDP. “High levels of GDP do not necessarily mean high levels of (net) income flowing to the residents of an economy. This is because some of the income generated by production non-residents can be repatriated, for example, in the case of income generated by subsidiaries of multinational companies “, warned the OECD note.
“As a conclusion, Ireland’s GDP is artificially inflated by the flows used by multinational companies when they try to improve their tax planning. There are secondary effects of these activities on the Irish economy beyond tax revenue, and the pandemic they have set in motion. It highlights the disconnection between GDP and (adjusted) GNP more than ever, since purely national economic activity has been interrupted by social distancing measures, “say Fitch economists.