WE tend to think of ourselves as being a major capital importing country - the beneficiary of a major flow of external in vestment by foreign multinationals in industrial projects and other ventures such as hotels. In fact, however, we are also a capital exporting country, on quite a significant scale.
There has, of course, always been a substantial outflow of portfolio investment from Ireland and for some time past this has been supplemented by substantial direct Irish investment in financial and industrial projects outside the State. In recent years these investments have started to yield a very substantial return, which has in fact begun to contribute to our growth rate.
However, the scale and complexity of the flows of income between Ireland and the rest of the world including a two way flow of some £1.5 billion of interest on £25 billion of interbank loans in each direction between Irish and foreign banks blast year make it very difficult to track down the amount of, or increases in, the flow of income from Irish investments abroad.
Now, just as the outflow of profits from foreign multinationals which have invested here have to be deducted from our gross domestic product to arrive at a truer measure of our economic performance - gross national product - so also the profits earned by Irish pension funds, industrial and financial companies, and private individuals need to be added to what we produce at home to get a true measure of the annual flow of resources available to us, viz. GNP.
It is clear that much of this inflow comes from the very substantial holdings by Irish residents of external bonds and equities. And other foreign investment income represents a return on the £6.35 billion of foreign assets that Irish pension funds held at the end of last year - the value of which had risen by as much as one quarter in the course of 1995. However, at a guess, these pension fund investments probably did not account for much more than £250 million of last year's income inflow.
A more significant source of investment income must be the relatively new phenomenon of Irish direct investments outside the State, which have been growing very rapidly in recent years.
These include much varied items as the investments in the US and Britain by our two major banks; the takeovers of parts of the Northern Ireland food industry by coops here; other investments by large public companies such as CRH, Jefferson Smurfit and Glen Dimplex; exploration activity by Irish oil companies and investment by some State enterprises such as Aer Rianta.
The balance of payments figures do not separately distinguish either the outflow of capital that provided the initial finance for such investments or the return from these investments. But the balance of payments figures do show the scale on which Irish enterprises - mainly in manufacturing - are re investing profits earned from their initial investments. And, whereas in 1992 Irish firms re invested £126 million of profits earned abroad, by last year this figure had jumped to £512 million.
When the share of these profits remitted to Ireland is included, (and these remitted profits may have been and probably were quite small), the total profits earned abroad - from Irish investments in 1995 must clearly have exceeded by some margin this figure of £512 million profits reinvested abroad. And that means that the capital value of direct Irish investments abroad must now run into many billions - although just how many billions it is difficult to estimate.
Because profits re invested abroad are the property of those who undertake such investments, they are now regarded as part of the GNP of the country in which these companies are based, rather than as part of the GNP of the country where these funds are invested. Thus, in the case of the very large external investment in Irish industry not alone is the £4,052 million of repatriated profits to be deducted before arriving at our GNP figure - so also is the £1,383 million that these companies reinvested here last year.
But, so far as Irish companies investing abroad are concerned, the corollary of this is that not alone is the share of their profits that they remit to Ireland part of our G&P, so also is that part of these profits that is reinvested abroad. And the increase of £388 million between 1992 and 1995 in Irish firms' re investment abroad is thus part of our GNP increase in this period - when it accounted for almost a twelfth of our economic growth as measured by GNP.
However, for some reason this aspect of our recent economic growth has received relatively little attention - partly, I believe, because of the uninformative character and general opacity of our balance of payments figures. Given the scale attained by our direct investments abroad, and the magnitude of the return from them, these external investments now warrant more serious attention and research than they have hitherto received.
IN the past there has always been a tendency to regard the investment of Irish savings abroad as in some way undesirable. There has, indeed, been a prevalent view that Irish capital should be invested exclusively in Irish projects, employing Irish people at home in Ireland. This may be an understandable reaction - but if pushed too far it could be counterproductive to our long term interests.
The fact is that last year we saved £7 billion and we invested £6 billion of this at home. The decisions of those in charge of our savings that led to £1 billion of them being invested outside the State were motivated by their informed judgment of the balance of advantage, in terms of the return to be secured and the need to maintain sufficient liquidity. Beyond the £6 billion level, they judged either that they would secure a better return by investing the residue of savings abroad than by backing whatever other projects at home had not been selected by the investors of the £6 billion, or else they judged that it would be unwise to put too many eggs in one very small domestic basket, and that a spread of risks beyond Ireland was desirable in respect of this one seventh of Irish savings.
For the public authorities to have sought to second guess investors on these issues, by constraining them against their better judgment to invest some or all of this additional £1 billion of savings in Ireland - as used to be done in relation to insurance companies - would have been dangerous, and happily would now be illegal under EU law.
Moreover, (and this is a point worth returning to again), if in the long term we are to be able to make adequate provision for what is going to be a much larger older population by means of pensions - the payment of which out of domestic output in any given year necessarily constricts the share of resources remaining available in that year to those who produce these resources - it will be necessary to be able to draw on a flow of income derived from investments outside the State.
That said, it could, of course, be sensible for the Government to take any action that would reduce obstacles that may exist in the way of freely taken decisions to invest more of these savings in Ireland. This has, indeed, been the purpose of a study completed last July by Dr Peter Bacon, working on behalf of the Irish Association of Pension Funds and the Irish Association of Investment Managers, in conjunction with the Department of Finance.
One of Dr Bacon's conclusions is that if the State were to divest itself of £2 billion of its domestic assets to pension funds, the £4 billion likely to be invested abroad in the next four years could be halved. And the Exchequer could then use this £2 billion to reduce by over a fifth our foreign currency debt.
As things stand at present, Irish pension funds cannot safely increase their domestic investment. Given that our stock market is so small - with the top six stocks accounting for 60 per cent of the Irish stock market capitalisation and 70 per cent of market turnover, and with the liquidity of other stocks generally low - Irish pension funds cannot safely increase their domestic investments. Already, this report suggests, our pension funds are "overweight" in Irish stocks "probably by a significant margin". And it adds that the volatility of returns on the Irish market is high and that there "is a lack of exposure to key economic sectors".
This argument for increased privatisation of State enterprises clearly deserves consideration on its merits, free from ideological prejudices - in either direction.