March 6, 2014
Want to check an economy's health? Forget the IMF and count Irish pubsPosted in Behavioural Economics · 61 comments ·
Look at the chart for the latest from January 2014 and notice which cities scream crisis.They are Kiev and Istanbul.
Now that President Putin has made a fool of the West and proved a point, which is that Russia is the top dog in the region, let me share with you a story about Kiev and how it spawned the Irish Pub Index of financial crises.
Years ago, I found myself in Kiev’s Irish pub, Kitty O’Shea’s, facing a bit of a dilemma. I was working for a French bank and was charged with explaining what was going on in Russia and Ukraine.
Having met the IMF, World Bank andEU delegations, along with consultants and other bottom-feeders, it struck me that these rarefied bureaucrats hadn’t a rashers what was going on in the place. They were typical economists: removed, distant and naive. You wouldn’t give them a post office account to open back home.
One of the barmen in Kitty’s was a different kettle of fish – a typical Irishman with a roguish sense of humour. We got talking about Irish pubs in Eastern and Central Europe. He knew the market, the demographics, who had money in Kiev and the ratio of expats to locals. He explained how to get import licences and how to weed out crooked ‘drifter’ Irish barmen.
He knew how to defer tax payments, how to spot a good site and a decent landlord. He knew where to source furniture locally, how to deal with local tradesmen, who to pay first, and how to ‘incentivise’ officials.
He outlined his marketing strategy and which local movers and shakers to target as regulars. He advised about avoiding the mafia. He emphasised the importance of the brand and the significance of local aspirations. This barman was a mine of information.
He offered advice on pricing strategies. He had figured out how to borrow in pounds, hedge his local currency risk and stay on good terms with the bank – quite an achievement. That evening, he outlined the basics of running a cash business in a foreign country.
After a few pints, it struck me that the opening of an Irish pub in a developing city could tell you more about what was going on in the economy than a glossy economic report. The opening of an Irish pub tells you who is investing where, why and at what price more accurately than statistics about inflation, budget deficits or trade deficits. With that in mind, the Irish Pub Index was born.
The theory is that wherever you see an Irish pub it reveals economic vibrancy, particularly in developing economies where official statistics tell you nothing. So the more Irish pubs per head of population, the easier it must be to do business. The easier it is to do business, the richer the city is likely to be. Therefore, if you want to get a snapshot of how a place is doing economically, forget the IMF, the World Bank, the large consultancies, and check out the bars.
Ultimately, the more Irish bars a place has, the richer it should be and the smaller the risk of a financial or political crisis. That at least was the tipsy ‘theory’ I formed in Kitty O’Shea’s.
Next morning, Guinness in Dublin provided me with the information on Irish bars around Europe, and the Irish Pub Index of Economic Development began to emerge. Amazingly, in practice, it was even more accurate than in theory. The foreign cities with the most Irish bars per head were indeed the richest in Europe.
Luxembourg had the most Irish bars per head, and it was also the richest city in Europe. The cities with the most Irish bars in descending order matched almost exactly the richest cities and financially safest in the European income league. Even more valuable, the Irish Pub Index is predictive.
The Pub Index reveals fascinating on-the-ground insights into who is spending, what brands are rocking, where investment is being made and what parts of the town are up-and-coming. In short, it tells us in advance what economic statistics will only pick up in hindsight. Over the past few years, the Irish Pub Index has proved to be a much more accurate indicator of GDP five quarters ahead of time, than any complicated IMF, World Bank or Central Bank econometric model.
I update it every quarter. Look at the chart for the latest from January 2014 and notice which cities are screaming crisis according to the Irish Pub Index. They are Kiev followed by Istanbul, the two emerging market cities that have seen financial, civil and economic upheaval in the past few weeks!
As Flann O’Brien might say, in economics as well as life, “the pint of plain is your only man”.
David McWilliams writes daily on international economics and finance at www.globalmacro360.com