In the two years since the Central Statistics Office shocked us with the revision to the 2015 economic growth figures, the Irish economic community has spent an inordinate amount of effort on statistical contortions to address what were perceived distortions.
A normal economy can’t grow its gross domestic product by a quarter in volume terms in a single year, let alone by a third in value terms. Therefore Ireland is either not normal or is distorted by the economic data requiring efforts to find a reality that “feels right”.
One attempt at this is the “gross national income star” (GNI*) measure, although this too is proving inconvenient in its high-growth trajectory if managing to reduce the level of activity.
For some time I have argued that this is the new normal, and that Ireland is in fact a frontier resource economy. In the past decade the corporations that now lead global stock market valuations have also been deemed not normal, dominated as they are by intangible assets and replacing the tangible asset-driven oil behemoths of just a decade ago.
Intangible assets in the form of intellectual property like patents, copyrights and software, along with goodwill and brands, are increasingly attracting the highest valuations on corporate balance sheets.
Ireland has this intangible resource in abundance. Only time will tell if it sustains it but right now this is a global reality where conventional accounting and economic analysis are struggling to adapt.
Certainly, it is worthwhile parsing the data to reveal that Ireland has vulnerabilities to behavioural changes of a small number of corporations in terms of exports, corporate taxation and GDP growth, but we are misinterpreting the changed global paradigm along with the opportunities and threats already inherent for Ireland.
Substantial activity
This intangible asset resource boon of the past few years is overlaid on an Irish economy of true substance. This substance reflects the OECD global tax rules definition of having a corporate tax strategy underpinned by substantial activity.
A lot of people would have been sceptical of Ireland’s ability to demonstrate this substance. Clearly in terms of world-leading clusters, Ireland has such substance. Sectors with global footprint ranging across medtech, biopharma, fooddrink and financial services all attest to this phenomenon.
Our economy has never been at a higher watermark. Employment levels are now returning to the peak as inflation remains subdued. Purchasing power of disposable income has never been higher in the history of the State.
The official figures for Ireland show that we are growing disposable income at 5 per cent a year. But what we are observing is a form of private affluence developing against a public infrastructure that is not keeping pace.
In the words of Galbraith, it’s a “private affluence, public squalor” dilemma in the making. This is a classic phenomenon of resource economies. Countries like the Netherlands, that found natural gas supplies in the 1970s era of high fuel prices, managed to squander the opportunity.
The sector that finds the resource is instantly productive. This resource sector can pay higher wages and higher rents, absorbing these in its profitability and productivity without the need to pass on in higher prices. Other sectors must compete for workers and property, so are faced with higher wages and rents but can’t justify these higher costs with their productivity.
They pass these costs on as higher prices or reduced profitability. While the resource stays valuable, or the intangible assets remain in Ireland, the economy continues to thrive. However, once the resource moves or becomes less valuable the competitiveness erosion is revealed and the economy stagnates or has a cost base that can’t be sustained.
Competitiveness erosion
Private affluence has many manifestations in the Irish workplace today through demands for higher wages, along with rising rents.
This significant competitiveness erosion will become exposed once demand settles down, as it ultimately will do in an economic cycle. Our supply side, if we are not vigilant, will be eroded – and much faster than during the Celtic Tiger phase.
So, yes, we must hail the good things that are happening in the economy, but we also have to acknowledge that with these come pressures.
How do we alleviate these pressures? With the rising population, we need to increase our public capital infrastructure and quickly. This will increase demand in the short term – risking overheating. But that could be addressed by dampening household demand through special saving incentive account-type initiatives.
One example is the decline in our higher education global ranking. This could be partially addressed by more funding through a bond issue in such a scheme with hypothecation of international student fees to repay.
Another priority should be connectivity. Certainly deliver on national broadband targets but also complete the all-island motorway network, increase airport capacity and, with a confidence in a future beyond Brexit, start now to plan for the bold ambition of a tunnel to the UK linking Ireland to Europe.
Ireland is in a very unique situation. We need to acknowledge this and act accordingly. The challenge remains age-old: to avoid “dreadful marches to delightful measures”.
