Here we go again. Central Bank governor Gabriel Makhlouf was quoted in the Financial Times on Monday as saying that much of Ireland’s 12.2 per cent economic growth last year comes from “real factories with real people”.
This led US economist Paul Krugman – the man who invented the Leprechaun economics tag in 2015 – to fire back saying Irish officials were “in denial”. In support of this he linked to an analysis in this newspaper on the latest Irish GDP figures.
Makhlouf appeared to be trying to make a more nuanced point than the FT headline – “Irish central banker defends runaway economic growth as ‘real’” – suggested.
The figures were partly due to companies making “stuff” in Ireland, including top pharma companies and long-established firms like Intel, he said. However, he accepted that the GDP figures were a poor indicator due to the fact that a lot of profits booked here by multinationals go back to parent companies.
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Both sides of the debate have a point. The activity of big multinationals here is very significant, has led to a rise in well-paid jobs and a big increase in tax revenue, which has in fact closely matched GDP growth in recent years.
But there is no question but that the GDP data is deeply distorted by the impact of the relocation of intellectual property assets here after 2015 and by factors such as contract manufacturing, where production overseas is undertaken on behalf of an Irish-based multinational subsidiary. The Irish economy performed well last year but its real level of expansion was nowhere close to the 12.2 per cent shown in the GDP data.
But there is no question but that the GDP data is deeply distorted by the impact of the relocation of intellectual property assets here after 2015 and by factors such as contract manufacturing, where production overseas is undertaken on behalf of an Irish-based multinational subsidiary. The Irish economy performed well last year, but its real level of expansion was nowhere close to the 12.2 per cent shown in the GDP data.
This coincidence of real economic activity, tax-driven structuring and statistical distortion is driven by international tax rules which encourage firms to locate intellectual property assets – copyrights, patents, licences and so on – where they have what is called " substance”, in other words real operations.
Irish multinational-land is thus a kind yin and yang, with really substantial economic activity sitting alongside assets moved to Ireland with a few clicks on a computer mouse on the US west coast or wherever.
