ECONOMICS: The publication of Ireland's Balance of International Payments (BOP) no longer generates as much investor interest as it once did, largely because cross-border currency flows have no relevance for the Irish currency, with the euro's external value determined by flows in and out of the euro zone as a whole.
Yet the data are still worth examining on a number of levels and we now have access to the figures for the whole of 2002, which have thrown up a number of issues.
At its simplest, a large BOP surplus or deficit can indicate the presence of a serious disequilibrium in an economy. For example, the US economy is currently running a BOP deficit of more than $40 billion (€37.3 billion) a month, with the annual total equivalent to 5 per cent of gross domestic product (GDP).
The deficit reflects the desire of the US to consume more than it produces, with foreigners willing to fund the difference. Some argued that the Irish economy was behaving in a similar fashion in the latter part of the 1990s, and "overheating".
The BOP data, however, show Ireland running small surpluses in these years, giving way to marginal deficits in 2001 and 2002. This broad balance on the BOP implies that the economy always matched what it consumed to what it produced so overheating was never an issue.
The existence of a balance on the BOP over a prolonged period is also remarkable given the scale of the flows involved. Merchandise exports alone amounted to more than €90 billion in 2002, with the outflow of investment income exceeding €50 billion, and hence not dissimilar to the annual total spent by Irish consumers.
The magnitude of these international flows also carries implications for Irish national income, as officially recorded, as small percentage changes can have a large effect on GDP and gross national product (GNP). This is particularly true of 2002 with some of the component parts of the BOP revealing unusual and surprising trends.
GDP measures the economy's output and, as such, includes the export of goods and services as captured in the BOP, with the value of imports subtracted, reflecting as it does the output of foreign economies.
In Ireland's case, the export figure normally exceeds that of imports but this differential grew from €17 billion to almost €24 billion in 2002, so adding more than 3 per cent to recorded GDP growth. Over half of the €7 billion rise was due to merchandise exports but some €3 billion came from the services balance, belying the claim that all of the export performance can be laid at the door of the chemical sector.
In fact, the export of computer services rose by €1.3 billion, to reach €10 billion, with some types of software sales now captured as a service export instead of on the merchandise account.
GNP measures the income of Irish residents so the GDP data are adjusted for international income flows, such as interest and dividends on investment. Again, some regular features are present, in that Ireland has run a sizeable deficit on income flows in recent years, which means that GNP has been lower than GDP.
Last year is again striking, however, in that the income deficit leapt to €25 billion from under €18 billion in 2001, which means that there will be an unusually large difference between GDP and GNP when the official 2002 national accounts are published.
It is not true to say, however, that this reflects a jump in multinational profit outflows, because the repatriation of multinational profits in 2002, at €14.8 billion, was only slightly higher than the previous year.
The answer lies partly elsewhere (a fall in the profits earned abroad by Irish firms) and partly in what the Central Statistics Office calls reinvested earnings. This is the residual between the reported profits of multinationals and that repatriated abroad. Although it stays in the State, it is also subtracted from GDP and this figure soared in 2002, from €11 billion to more than €16 billion.
Why did the multinationals retain more in 2002? Who knows. The money might be used to finance future investment, of course, which would boost GDP but there is no guarantee of this as, equally, it could be put on deposit.
From a BOP perspective, reinvested earnings is classed as an international capital inflow and recorded as foreign direct investment. Total foreign direct investment inflows in 2002 were €11.8 billion if one adjusts for the IFSC, which was slightly ahead of the 2001 figure and, as such, presumably a surprise to those claiming that Ireland is no longer an attractive home for foreign capital.
The overall picture of 2002 that emerges from the BOP data is fuzzier than often portrayed. Multinational profits soared, to €31 billion from €25 billion, in spite of the global slowdown, but they chose to repatriate a much lower proportion, retaining the rest in Ireland. This means that 2002 was a very healthy year for foreign direct investment, although most analysts put total investment spending growth in the economy in negative territory.
What should be clear is that GNP is affected by reinvested earnings, among other things and, as such, has no more claims than GDP to reflect the most accurate picture of national income in Ireland.
Dr Dan McLaughlin is chief economist at Bank of Ireland
