HOW DO WE SOLVE THE COMPLEX PROBLEM OF LEPRECHAUN-PROOFING COUNTRY’S ECONOMIC DATA?
IRELAND is Europe’s new Rotterdam. For centuries the Dutch port has been a commercial hub with a vast hinterland spreading deep into Continental Europe.
All manner of business is conducted in and around the sprawling entrepot, as goods, services, people and capital flow in and out.
Dutch statisticians would have a very tough time measuring Rotterdam’s gross domestic product, or GDP. Irish statisticians have a very tough time measuring Irish GDP, for exactly the same reason.
Twenty years ago the Irish economy was much less complex. But the growing presence of multinationals, particularly since the mid-1990s, has caused GDP to diverge from a narrower measure of economic activity — Gross National Product — which excludes crossborder movements of company profits.
In most economies these two measures differ by a couple of percentage points, if they differ at all, but in Ireland the gap became huge, with GDP up to one quarter greater than GNP in recent years.
Then came ‘Leprechaun economics’. In 2015 both GDP and GNP measures showed eye-poppingly implausible growth.
That happened for a range of reasons, including multinationals moving assets and, in some cases, their entire headquarters to Ireland.
This hugely inflated both measures, triggering a rethink of how to assess the size of the economy.
Last Friday, the State’s statisticians published their stripped down version of GDP/GNP (in the interests of full disclosure: I was a member of the committee of economists and statisticians that the CSO convened to look into the design of the new measure).
Gross National Income* takes out aspects of the multinational activity that have little or no impact on what happens on the ground in the Irish economy, such as depreciation of airplanes that are flying around other parts of world but happened to be leased out of Ireland.
While the GNI* measure also shows very strong growth in the economy in recent years, further perplexing many people, it is almost one third lower than GDP. Last year, it was valued at €189bn. That has lots of implications. Perhaps the most important implication is what it says about the State’s solvency.
The Government owes €200bn, ie more than all the wealth created last year in the economy (excluding the distorting part of multinationals’ activity).
That is a whole lot worse than when measured against GDP, the most commonly used metric internationally and among those who lend to governments.
Let’s hope that GNI* does not cause them to rethink the amounts and the rates at which they lend to the Irish State.