We’re not as rich as we have been told to think we are

Patrick Honohan shows how GDP inflates the value of Ireland’s economy

In gross domestic product  terms we rank among the richest nations in the world but is this a fair reflection of the economy?

In gross domestic product terms we rank among the richest nations in the world but is this a fair reflection of the economy?

 

The “real feel” in the Irish economy has never quite matched the eye-watering growth numbers that tumble out each year.

In gross domestic product (GDP) terms we rank among the richest nations in the world, but is this an accurate reflection of the economy here?

The latest global standings show Ireland’s per capita GDP comes in at fifth highest of 182 countries, or third (after Qatar and Singapore) if we exclude countries with population of less than half a million. Within Europe, we are ranked first. But does anyone really believe we’re that rich or that prosperous?

Transactions

We know GDP is distorted by multinational transactions and therefore tends to exaggerate our economic performance, the question is by how much?

In a research paper, published on Thursday, former Central Bank governor Patrick Honohan explains some of the anomalies that arise from using GDP as a measure of economic output.

First there’s multinational profits, which have bolstered Irish GDP for years, but which tend to flow out to “foreign parents”.

More recently the statistical noise has come from intellectual property (IP) assets, such as patents, being relocated here and aircraft fleets, stationed aboard, but acquired by leasing companies here. It was these things which led to the 26 per cent jump in GDP in 2015, later derided as “leprechaun economics”.

Measure

Honohan shows that by using a bespoke measure of national income, namely GNI* (modified gross national income), which weeds out these phenomena, Ireland’s ranking in the wealth stakes tumbles.

In 2019, GNI* was about 40 per cent below the level of GDP. “If we simply substitute this modified series for GDP (or GNI) to make an international comparison we find that Ireland in 2019 was not in second place in the EU (behind Luxembourg) but instead appears in eighth place,” Honohan says.

But his bubble-bursting exercise isn’t complete yet. He highlights that an alternative measure known as “actual individual consumption” shows the State’s active individual consumption per capita in 2019 was about 95 per cent of the EU average. So we’re not even, at least by this measure, average in EU terms.

This places Ireland behind not only the UK and all six of the original founder members of the European Economic Community (EEC) but also Austria and the three Nordic member states, Honohan tells us. So it seems when we abandon GDP we’re ranked not first but between 8th and 12th in the EU, “ a lot lower than is commonly presumed,” he says.

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