Taxes, bull and the Irish economy

bull-023Another week  another inversion. This time, passing almost unnoticed in the august torpor, one of the worlds largest meat companies, JBS, signalled that it would relocate its HQ to Ireland. It also noted that this HQ company would be controlled from an office park in Herefordshire.  The reasons for this have nothing whatsoever to do with anything real, all to do with favorable tax and legal reasons. This is unlikely to have any effect on GDP, unless of course JBS decide to start using intellectual property and patents to start to shuffle money around, thus creating “exports” from Ireland.

quotation-george-bernard-shaw-beware-of-false-knowledge-it-is-more-dangerous-than-ignorance-26-83-49At one level one might think that this is unlikely. Ranching and slaughtering and processing beef is not a particularity patentable business, being something people have done from time immemorial. But, theres always a but, what about our brand new Knowledge Box. The Knowledge Box allows for writeoffs for IP developed in Ireland. Such IP could of course then be used as part of the Great Chain of Not Being Taxed which has evolved.  Qualifying assets for our Knowledge box include marketing IP – brands and suchlike.  Indeed, although difficult it is possible to patent certain business processes and techniques. Bottom line – if you are a €30b company you can and will purchase the best advice the Institute of Chartered Accountants and the Law Society can provide. So, while this inversion in and of itself wont beef up GDP it raises the potential for same in the future.

fdi2014afig1Ireland has developed a business model over 60 years which is reliant, at least at the level of political economy, on the idea of foreign direct investment. There is nothing wrong with FDI. It’s a great way of transferring technologies over time. The workers and managers, suppliers and contractors to the FDI company gain experience in new methods and set up their own. There is reasonably strong evidence[1] for Ireland that the spillovers and linkages, the demonstration effects and competition effects of FDI have had a broadly positive and enhancing effect on Irish manufacturing.  The problem we have seen grow however is that more and more FDI may well not be manufacturing and thus jobs related but instead of the profit shuffling job-poor tax driven corporate inversion model.

Gross domestic product, GDP, is the standard metric worldwide for measuring how much is created in an economy. There is a handy comparison chart here. GNP, Gross National product measures how much of this is created by citizens and GDP is how much is created within the geographical boundaries.. There is a crucial difference here – things which get classed as created within Ireland but which never actually impact on our lives, like massive increases in aircraft leasing via Irish holding companies, these can increase GDP by massive amounts. Thus the 26% growth rate we saw recently, widely deridedas meaningless but accurate.

gdp%Our real GDP to GNP ratio has crept ever upwards over the last 20 years. In the true celtic tiger era of the late 1990s it was around 5-7%, having begun to emerge only in the middle 1980s. It now regularly is at 30% of more. Indeed, a simple extrapolation against time explains 66% of the growth of this ratio. We have created a situation where more and more the headline figure which everyone else in the world uses as a measure of national wealth, that has become meaningless. Commentators have known for some time that this is the case and have proposed alternatives. Patrick Honohan has recentlysuggested that we need to abandon GDP, and indeed GNP, as meaningful measures of whats really happening in the Irish economy.

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On an economic basis he is probably correct. These metrics don’t tell the story of what is happening on the ground, which is a slow but steady and hopefully sustainable recovery. But on another level he misses the point.  We have, uniquely almost, created an economic model which renders impossible measurement on the same basis as the rest of the planet. Its not even 2-11731-214136-herm-s-gold-taurillon-clemence-leather-birkin-weekend-bag-0a2f8as though we tax these flows, in fact it is that we really don’t that makes them flow so. Nor do they create wealth or jobs, outside yacht chandlers, retailers of fine german automobiles , sellers of upmarket brogue and purveyors of natty handbags to the legal and financial experts that act as valve operators for said flows.

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It is not the measurement that is out of line here. Its us. We need to have a national conversation on what sort of economy we want to have. There is no point in having booming but meaningless headline figures while have parents skipping meals to send children to avail of “free” schooling, while we have record numbers of people on waiting lists for public medical consultations, while we have record child homelessness and so on. An economy must serve society as a whole, not just the most ephemeral and loosely connected parts of same. These meaningless figures for GDP and GNP reflect a decision made not to have that. Instead, we  prefer to have a blindness. Perhaps we should replace the national anthem with this jaunty ditty. 

An extended version of an irishexaminer column 15 August 2016

[1] Barrios, S., Bertinelli, L., & Strobl, E. (2006). Coagglomeration and spillovers. Regional Science and Urban Economics, 36(4), 467-481. doi:10.1016/j.regsciurbeco.2006.03.001

Barrios, S., Dimelis, S., Louri, H., & Strobl, E. (2004). Efficiency spillovers from foreign direct investment in the EU periphery: A comparative study of greece, ireland, and spain. Review of World Economics, 140(4), 688-705.

Barrios, S., Görg, H., & Strobl, E. (2005). Foreign direct investment, competition and industrial development in the host country. European Economic Review, 49(7), 1761-1784. doi:10.1016/j.euroecorev.2004.05.005

Barrios, S., Görg, H., & Strobl, E. (2011). Spillovers through backward linkages from multinationals: Measurement matters! European Economic Review, 55(6), 862-875. doi:10.1016/j.euroecorev.2010

 

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