The globalisation of Ireland’s economy, brought into focus by the recent CSO revision later dubbed ‘leprechaun economics’, has raised questions as to whether GDP and GNP are still relevant indicators to judge our economy’s performance, writes David Whelan.
Speaking during October’s meeting of the Oireachtas Finance Committee the Director General of the CSO, Pádraig Dalton, faced questioning on the body’s methodology for calculating national economic output in the wake of Ireland’s ‘unreal’ economic growth spike for 2015. While a lot of attention was focussed on Dalton’s explanation that similar ‘unreal’ shifts were possible in the future, Dalton also brought into public consciousness the need for a move away from using GDP and GNP as headline indicators of economic performance.
What was interesting about the CSO’s 2015 national income and expenditure publication revision in July – which put Ireland’s GDP growth at a head-turning 26 per cent – was that it was not a mistake. Described by some as ‘farcical’, the CSO has been robust in their position that they did their sums correctly and in accordance to standards set by the UN, the IMF and as required under EU legislation (The figures were verified by EUROSTAT, the IMF, the UN and the OECD have not questioned the accuracy of the data).
These standards, set up to ensure global comparability both geographically and across time, are essentially the headline indicators of GDP and GNP. However, the global complexity of Ireland’s economy caused a distortion of those indicators. The level shift in GDP was driven by the relocations of entire balance sheets to Ireland. Balance sheets dominated by intellectual property categorised as intangible assets. Although the relocation of such property has been a growing trend in Ireland, the scale in 2015 was substantial, adding ⇔300 billion to Ireland’s capital stocks.
“Associated with the relocations were significant increases in contract manufacturing activity attributable to Ireland. When the net effect of sales of products produced abroad under contract were added to Ireland’s trade in goods, the balance of trade in goods and services in the national accounts doubled from ⇔35 billion to ⇔70 billion between 2014 and 2015,” explained Dalton.
Previously the payments made by Irish companies to non-resident parts of the company for things like research and developments have offset charges attributed to GDP but when the intellectual property is located in Ireland, the full effect is attributed to GDP. For this reason GNP is often seen as a better measure of the underlying level of economic activity in Ireland but as Dalton explained: “Additionally, the capital assets in the relocated balance sheets have also led to significant increases in the estimates for depreciation of assets in the national accounts. As a result of this increase in the depreciation charged in Ireland, foreign direct investment profits attributable to the rest of the world are reduced. These profits are a major part of the difference between GDP and GNP. As an indictor, it [GNP] is now also elevated by these relocations.”
The concern around GDP and GNP is not new, according to Dalton. In fact, it stretches back to the 1940s when the metric’s creator, Simon Kuznets, was of the view that, post-recession of the 1930s, focus on measuring economic activity should shift back to an income measure rather than a production and output measure. The debate on that issue in this country has been going on since the 1980s.
“At that time, the globalisation activity everybody was talking about was profit repatriation and transfer pricing. Things have moved on considerably since then and now we are talking about contract manufacturing, corporate inversions, relocation of assets and so on. What has happened since then is that from time to time, events will tend to resurface the debate. Certainly, the publication of our figures last July resurfaced the debate in this country in a very real way.”
Dalton added that moving the narrative away from GDP and GNP is a conversation that needs to take place beyond the statistical community. “Current practice will not be changed by statisticians, however, because we measure what we are told to measure. The debate must happen elsewhere.” He described moving away from how the European community assess their economies as a “difficult battle” and suggested that how Ireland has dealt with the conflicting theories is regarded as a case study for how other countries might proceed.
The fact is that the CSO already does provide other measures of economic growth, such as the net national product (NNP) measurement (which excludes depreciation and profit transfers) and showed a growth rate of 6.4 per cent for 2015, personal consumption and expenditure, which was up 4.4 per cent and employment, which rose by 2.2 per cent. Dalton explained that work is already under way to improve these indicators. “There are indicators that are already there that would be very useful. We might have to improve the frequency. We only produce some of them annually and I think we might have to do some work to start producing them quarterly. Some additional breakdowns of the data would be very useful as well. They are all the things that we are currently working on. We are not trying to pre-empt the work of the expert group. I am sure they will come forward with some additional indicators. We have already started thinking about this ourselves.”
The cross-sectoral expert group has been convened by the CSO to discuss how best to meet user needs with national users and international observers represented. It met six times before the end of November 2016 and a report is scheduled to be published on the CSO’s website.
Looking forward, it’s unlikely that the EU-wide model of using GDP and GNP as headline indicators will change in the short-term. When asked about the potential timescale, Dalton responded: “That is difficult to answer because we do not control the process. The precursor to integrated European social statistics, IESS 2010 was IESS 1995. That might give… a sense of how long it can take to change global standards. There is certainly a new urgency that we are consciously aware of at a European level.”
In the meantime, the assessment of Ireland’s GDP and GNP is likely to remain unstable while intellectual properties are still included in the statistics. Dalton alluded to this when asked whether the 2015 spike was a one off. “I would say it is unlikely that we will see another 26 per cent increase,” he said. “However… the relocation of IP did not just happen in 2015. This has been a trend that we have seen in Ireland for very many years. The difference in 2015 was the absolute scale of it. I might eat my words and I had better be careful because I am on record, but it is unlikely that we will see a change of that scale again. It is possible that we will see another of what we would call a level shift in the level of GDP or GNP, as long as the environment that gave rise to the current level shift continues to pertain in Ireland.”
Dalton’s colleague in the CSO, Jennifer Banim, added weight to the belief that the indicator will continue to fluctuate. She told the committee: “We have seen increasing globalisation activity attributed to the Irish macroeconomic statistics in recent years and our anticipation is that, given what is happening with Brexit…it is likely this amount of change and complexity in the national accounts is going to increase and develop. That is why the work of the expert group and the international statistical community to move beyond GDP, if I may use a cliché, is critical.”