July 18, 2016
We are told that the Irish economy grew by 26 per cent in 2015. Fortune is indeed looking up in Ireland: unemployment is falling while retail sales, tax revenue and government spending are moving along at about 4 per cent. But a 26 per cent growth rate? American economist Paul Krugman was right to dismiss the figures as “leprechaun economics”.
We are, however, facing a new reality and have to redefine the relationship between small states and global corporations. The statistical anomaly in the Irish growth figures may trigger new thinking that could benefit everyone.
In 2015, Irish exports rose 34 per cent; investment was up 27 per cent and imports rose by 22 per cent. If these numbers were true, it would suggest that the average worker’s annual income had reached €130,000. You do not have to live in Dublin to realise that this is nonsense.
Any small country hosting big companies is in for these statistical surprises. Last year, Aengus Kelly, the Irish chief executive of AerCap, the world’s biggest aircraft leasing company, moved his fleet to Ireland. Valued at more than €35bn, it added enormously to the country’s capital stock. There has also been a surge in unusual multinational-driven exports.
Ireland’s gross domestic product figures do not represent the real economy. Using these data, it is impossible to set meaningful macro-policy targets such as government budgets or conduct accurate international economic and social comparisons.
Irish economists will have to find more accurate indicators for economic wellbeing. GDP accounting is at least 70 years old, constructed when there was little international investment, trade was restricted and capital controls were prevalent. Today, Ireland is just one of the small, open economies that compete for capital. In a world of globalised free trade, everyone is part of someone else’s supply chain; the difference in exposure to that is a matter of degree. The smaller you are, the bigger the exposure.
Multinational investment is going to continue, so unless the world abandons globalisation, the Irish example is a taste of things to come. In reality, the size of the proceeds from multinational activity that goes into Irish people’s pockets is modest. The take from wages and corporate tax is only a fraction of what goes back, as dividends and higher share prices, to the shareholders of companies operating in Ireland. So it is shareholders, rather than workers or the exchequer, who are winning.
Why not let host jurisdictions become shareholders in the companies that are making profits and distorting GDP figures? Rather than taking all the money in tax, to be frittered away in the next political auction, why not take some in shares and invest it? Why not treat wealth associated with foreign capital as an annuity that accrues annually, much like wealth connected to an oil find?
By taking shares in multinationals, Ireland could create a sovereign wealth fund linked to the performance of the best-governed companies in the world, which would provide for future generations. In 2012, US multinationals made $100bn profit in Ireland, on which they are supposed to pay 12.5 per cent tax, or $12.5bn. In fact, they paid $4bn.
Why not encourage multinationals to pay the difference between what they pay and what they ought to pay in shares? Shares are permanent wealth, whereas taxes are transitory income. This is also attractive because shares or share options are cheaper for the company than giving cash. They already give their employees share options, so why not their host country?
Imagine a Fortune 500 Irish sovereign wealth fund, diversified across sectors operating in the Irish economy, with stakes in corporations such as Google, Facebook, Apple, Pfizer, Intel, IBM, Microsoft and AerCap. That would be a 21st century crock of gold.