Multinationals obscure our strong indigenous performance

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By Cormac Lucey

A century ago, the North was the economically advanced part of the island. This helped unionism mobilise against nationalism: opposing a united Ireland didn’t just involve rejection of Rome rule; it was also a renunciation of economic backwardness. In the ensuing hundred years, and particularly over the past 30 years, the relative economic situation has completely reversed.

This is largely down to a stupendously successful strategy of using low corporate taxation to attract foreign direct investment (FDI).

The Republic is now more advanced economically, and the north is trapped in backwardness of the economic, political and social varieties. As a result, social attitudes in the south have overtaken those in the north.

Those who voted last week against constitutional change, of course, will question whether we’ve overtaken the north or fallen behind it. Yet, in the context of west European democracy, the Republic is now in line on the issue of abortion whereas the north remains an anomaly.

In the world’s advanced economies, real economic output per head has grown about 2% annually over the past century. This allows us living standards more than seven times higher than those of our great-grandparents. It is this — and not greater virtue — which largely explains our greater social liberalism.

If rising incomes play an outsized role in the formation of domestic political opinion, then what do current trends suggest for the future? Last month the Central Statistics Office (CSO) published a comprehensive report on productivity in Ireland that offers some clues.

Productivity measures how efficiently an economy converts inputs into outputs. Productivity growth can be analysed into changes of labour productivity (how output grows relative to each hour of labour input), capital productivity (how output grows relative to each euro of capital invested), and multi-factor productivity (how output grows even with unchanged labour and capital inputs because of improved working methods).

Given constraints of labour and capital here, it’s really growth in multi-factor productivity (MFP) that explains today’s higher living standards compared with yesteryear.

Interestingly, labour productivity grew at an average rate of 2.1% between 2002 and 2008 but expanded annually by 6.6% in the years following 2008. This underlines the economic mirage that was the Celtic tiger: it was a bubble based on loose credit and the increased deployment of workers into lower productivity jobs in sectors such as construction, real estate and distribution, transport, hotels and restaurants.

The years that followed the crash, while very difficult, initially saw fewer workers working more efficiently, and that efficiency has been maintained even since a sharp fall in unemployment that began around five years ago.

Behind the pleasant overall figures, we find significant anomalies, however. For example, labour productivity grew by a 23.5% in 2015. That was the year Ireland’s GDP figure flew off the scale and Nobel laureate Paul Krugman described the impact of multinationals on our national statistics as “leprechaun economics”.

The CSO productivity has therefore separately analysed the domestic and FDI sectors in terms of their productivity. Within the FDI sector, rather pleasingly, between 2000 and 2016 labour productivity grew at an average annual rate of 9.7%. However, over the same period, output per unit of capital dropped significantly. Critically, MFP in the FDI sector declined at an average rate of 4.1% annually.

The bulk of that decline occurred in 2015 when MFP in the FDI sector dropped by a leprechaun-like 57.2%. It begs the question, does Official Ireland really understand what the multinationals are up to here?

Thankfully, the productivity picture in the indigenous sector is clearer and easier to grasp. Labour productivity grew by an average annual rate of 2.5% between 2000 and 2016, with the bulk of that growth occurring after the economic crisis hit in 2008. But capital productivity dropped 2%, meaning that MFP has grown by only 0.6% annually since the turn of the century.

The CSO also reports that Ireland’s domestic sector experienced the largest increase in labour productivity among the EU-15 — member states that joined prior to May 2004. This is a very positive picture for a sector often portrayed as the poor cousin of our FDI sector.

Labour productivity growth has not been uniform across the different sectors of the economy. Industry and information and communication have seen significant rises in labour productivity. Industry has become four times more productive in 2016 than in 2000. The information and communication sector is three times more productive.

Labour productivity in financial and insurance activities increased by just over 50%. However, productivity in public administration, education and health rose just 9%. Construction saw almost no change in productivity over this entire period.

Overall, it is almost impossible to work out what’s really happening in the FDI sector as a result of its transfer pricing, corporate re-organisation and intellectual property manoeuvres. Meanwhile Ireland’s domestic sector is making steady progress and, since 2000, has outpaced its west European neighbours. That’s something to be toasted with a glass of indigenously produced Irish whiskey.

Published in The Sunday Times (Ireland edition)
May 3rd 2018