Some Thoughts on Revival of  The Irish Economy

In the normal course of economic events, property sector growth is driven by the growth of the general economy. This course of events can by influenced by certain external and sometimes artificial policy and political events.  They are further influenced by demographics and inward migration.  However, when the property market becomes disconnected from general economic trends a property bubble results. 

Overall economic growth, especially in a small economy like Ireland, is a difficult for the Irish government to manage, as most of the economic influencers that impact the Irish economy are generated outside of Ireland, in the USA, in the EU and by other global influencers. 

On the other hand, Irish government policy alone can influence the property market.  Changes in tax policy, banking policy, interest rates, land regulation, formal and informal subsidies etc. can provide incentives to develop land,  sell houses, buy houses etc.  This can lead to a short term boost in cash in the market, tax revenues and wage/non-wage incomes.  However, to the degree that this increase in property activity is divorced from the other parts of the economy, it has been proven to be unsustainable.

Over the past 30 years, either by accident or design , the Irish government has been generally successful in growing the general level of economic activities.  This has come from three principal sources; 1. EU subsidies (in excess €10 billion), which have driven a massive infrastructure construction effort adding to real wage incomes, and thus consumer spending etc.; a friendly approach towards inward investment by foreign firms, in particular US firms (great tax treaties, low tax, essentially no rules re transfer pricing); the coming to fruition of strong pro-educational policies creating a highly qualified work force.  This has lead to a healthy growth in the “real economy”, year on year, for the past 30 years.

However, more sustainable and traditional (native) industries, especially agriculture, tourism and local manufacturing have been given short shrift by government policies, both in Ireland and within Europe.  Ireland has tied its future to globalism, to inward investment and public works and social service funded by corporate taxes on the Irish activities of foreign firms.

It is difficult to measure, but it is likely that the actual core “Irish”, that is native economic activity has declined over the past 30 years to near the point of extinction.  The social and political consequence of this have been the marginalisation of rural and less educated populations, the rapid urbanisation of the country, and a political outlook driven by external rather than internal affairs.

Measuring the true level of Irish economic activity has always been a problem. The generally accepted international standard is gross domestic product (GDP). The problem with GDP for Ireland is that it includes the undistributed profits of foreign-owned multinationals, which make up a large part of Irish economic activity (Apple, Google, Facebook etc.) This has the effect of artificially boosting the value of Irish economic output, since those profits belong not to Irish residents, but to the multinationals' overseas shareholders, and they do not have any real effect on domestic economic activity. 

It is for this reason that gross national product (GNP), which excludes undistributed multinational profits, has been the usually preferred measure of Irish economic output.  However, this is also skewed by the inclusion of the international revenues of Irish registered firms with most of their business overseas.  To get a true measure of economic activity those revenues should also be excluded-but that is difficult to do.  If one were to subtract from the statistics the tax-driven corporate activities of US technology and pharmaceutical companies based in Ireland; the global aircraft leasing sector, much of which is based in Dublin but which employs relatively few people; and “contract manufacturing”, in which goods are made offshore and never touch Ireland but are registered as Irish manufacturing activity for accounting purposes, we could derive the real state of Irish economic activity.  The Central Bank undertook such an exercise in the last weeks and determined that the “real” Irish economy was just €190bn, about one third smaller than the reported GNP figures. The lower figure was reached by excluding the profits of US companies with big operations in Ireland, such as Google, Microsoft and Pfizer, and the effects of the depreciation of the assets domiciled in Ireland by the aircraft leasing sector, for which Dublin is a global hub.  To get a measure of the size of this economy one can compare it to the economy of New York City (City only and not the surrounding area), the largest in the USA, which on the same measurement basis, is one and a half trillion, or eight times larger than Ireland.

It is this “real economy” which drives consumer demand, demand for housing office and retail space, construction and all of the other parts of the property sector, in a normal environment, absent the effects of “policy initiatives” such as tax breaks, tax credits, subsidies etc.  This real economy is still substantial, at $57 thousand dollars per capita which compare favourably with NYC’s $70 thousand per capita.

It has never been the case that the property sector alone, divorced from the real economy, can generate real economic growth.   Since an economy the size of Ireland’s cannot have any significant solely domestic component, the scope of Irish economic activity must be linked to European and world economic activity, and particularly to import demand for Irish information services and technology products.  In this setting, the Irish contribution to global economic activity is very small, hence to look at the economic history and prospects for Ireland one must look at regional and global economic trends. 

Ireland has successfully surfed these trends since 1990, growing rapidly in the upturns, and surviving most of the downturns.  The only catastrophe, in 2008-2010  was homemade, founded in a large part on Ireland loss of perspective of its place in the global economy.  In characteristic fashion, Ireland has recovered well from this error-but the economy still faces many challenges.  The first, and most dangerous is the resurgence of populism and protectionism in major economies.  While global free trade, driven by US policy since world war II, has been the norm, it cannot be assumed in the future.  If the Trumpian tendencies to roll back free trade, protectionism and anti-globalisation were to take root they would have a seriously negative effect on Irish economic growth.  The second threat is that the bulk of Irish economic activity is non-native.  Currently labour force issues, tax advantages and a favourable attitude towards multinational business keep these activities in Ireland.  A change in these factors would result in the rapid reduction in Irish economic activity.  It is not clear how much this fragility is understood by either the Irish population or its government.  High wage demands, a change in labour rules, a decline in the availability and skill set of the work force, an increase in tax on multinationals, material changes in tax treaties with the USA would have a very negative effect on non-native economic activity.