First of all, Selamat Hari Raya, Maaf Zahir dan Batin to all. I’m back from my annual Ramadhan break, and fully determined to blog more regularly from now on.
An interesting data release yesterday has the economics profession completely bemused – Ireland has just restated their 2015 GDP growth to 26.3% (!) from an initial estimate of 7.8% (excerpt):
In three days, Jim Power is due in London to brief the British-Irish Trade Association on the state of the Irish economy. Now, he has no idea what he is going to say.
The economy grew 26 percent in 2015, officials from the Central Statistics Office told a stunned room full of economists and reporters in Dublin on Tuesday. Previously, they had estimated growth of 7.8 percent.
“I’m not going to stand up and say the economy grew by 26 percent,” Power, an independent economist, said after the release. “It’s meaningless -- we would be laughing” if these numbers came out of China, he said.
The figure is mostly explained by the open nature of Ireland’s economy and its attraction to U.S. companies seeking access to a 12.5 percent tax rate. Among firms that have inverted to Ireland, mostly through acquisitions, are Perrigo Co. and Jazz Pharmaceuticals Plc. Corporations with assets overseas of 523 billion euros ($580 billion) were headquartered in Ireland in 2014, up from 391 billion euros in 2013, according to the statistics office.
That would probably make it the world’s fastest growing economy. We’re not talking about small potatoes here either, as Ireland’s economy generated €255 billion last year (in current terms). Paul Krugman is calling it “leprechaun economics”.
What’s behind this? In a couple of words – tax avoidance.
Much of the “increase” in GDP comes from FDI (specifically M&A) and “exports”. What happened was a slew of big companies transferred their assets to take advantage of Ireland’s low tax regime, and as a result, “investment” rose 26.7% while exports and imports rose 34.4% and 21.7% respectively. The industrial sector expanded by 87.3% (!).
None of this however is “real”, in the sense of economic activity taking place within Ireland itself, beyond the lawyers, bankers and accountants who manage the process. Companies like Apple and Google typically use tax havens to shield their earnings from taxes, even as the revenue is actually “earned” elsewhere.
This is really borrowing (or should I say, leeching away) GDP and tax revenues from everyone else, which lowers aggregate global taxes without much of an offsetting benefit. Moreover, there is the ethical argument that such corporate activity is taking advantage of other countries investment in infrastructure, local labour and social capital, without contributing to the upkeep of it.
Tax havens of course benefit, but not to the same extent as the increase in GDP, as this is really a shift in accounting rather than a shift in real economic activity. One example quoted was an increase in “imports” of aircraft for leasing (i.e. for re-exporting), aricraft which for the most part obviously never landed on Irish shores.
I’ve talked before about the ambiguity in FDI statistics and why GDP can be misleading. Chalk this one up as a prime example of why.