The Irish economy's ranking most likely lies somewhere in the middle ground, not as good as many would think but not as bad as many may feel, writes Joe Cullen
If you believe all you read from comparative international commentators, Ireland is simultaneously ranked among the wealthiest countries in the world, while remaining the poorest of the rich when other measures are used. Neither characterisation is fully true but nevertheless both can be quite easily supported by international data comparisons. So where exactly has the Celtic Tiger left the Irish economy in terms of its relative living standards?
In 1987, to much consternation, the Economist magazine characterised Ireland as the "Poorest of the Rich" alongside an image of a beggar on the street. By 1997, the Economist proclaimed Ireland as "Europe's Shining Light", having caught up and even surpassed many of the previously more developed nations.
The OECD ranks Ireland fourth in the world in terms of Gross Domestic Product (GDP) per head. This measure of income per head is adjusted for price differences across countries to reflect what your income can buy. It is the most commonly used measure in assessing countries' relative income and in turn living standards.
Using this measure, the Irish economy has seen a dramatic move up the international league table, with most of the surge occurring in the latter part of the 1990s. Even in 1995, Ireland was still ranked lowly in 19th place. This indicates that not only did the Celtic Tiger bring about convergence, but it also enabled the economy to surpass all but three countries in terms of income per head.
It is indisputable that Ireland has seen a huge improvement in living standards during the Celtic Tiger period, but it is highly contestable as to whether Ireland has reached the echelons of the fourth richest country in the world. So, why may we have flattered to deceive?
One reason is that the use of GDP exaggerates our relative prosperity as it fails to strip out the unusually high level of multinational profits that accrue in Ireland, which do not necessarily go to domestic residents.
Gross National Product (GNP), which is a measure of incomes accruing to domestic residents, currently accounts for only about 82 per cent of GDP. Among EU countries Portugal is our closest comparator in this divergence with a ratio of 98 per cent, making Ireland a complete outlier when compared to other developed nations.
Because of the comparative indifference between the two measures in an international context, GDP is generally used for international comparisons of growth, wealth and prosperity.
If we use the GNP measure, the result is dramatic with Ireland slipping down to 17th place, while the ranking of the vast majority of other countries is unchanging. Although GNP per capita has increased significantly over the period, the fact that Ireland was ranked 19th in 1995 indicates that the change in the State's relative position internationally has been greatly exaggerated.
Although the use of GNP is a better indicator of actual income accruing to domestic residents, it like GDP can be quite volatile and can be a poor indication of actual consumption within the economy.
Savings are currently quite large for Ireland, given the resources that are being set aside for much-needed investment in infrastructural improvement. In 2003, investment as a proportion of GNP was around 28 per cent. This is compared to a ratio of 16 per cent in the UK and 19 per cent for the EU as a whole.
In many of the more developed European economies investment has been put in place in the past, thereby leaving more resources available for present-day consumption and therefore improved standards of living. This current diversion of resources from consumption towards investment, even if much required, is another reason why we may not feel as wealthy as some indicators would have us believe.
However, although income per capita and consumption may be used as measures of living standards, it is clear that many other factors also affect our quality of life and are not necessarily captured in our aggregate macroeconomic indicators.
For instance, a measure that tries to take account of some of these other factors as well as income per head is the UN's Human Poverty Index. This index seeks to amalgamate measures of life expectancy, knowledge, income per capita and social exclusion into a single summary measure.
Despite the obvious caution needed when using a measure that tries to summarise such a highly complex and multi-dimensional phenomenon, the indicator yet again suggests that Ireland's ranking is further down the international league table than the measure of GDP per capita would suggest.
In fact Ireland, in 2003, ranked in 16th position among a number of the richest countries. This seems consistent with Ireland's GNP per capita ranking and suggests that, in fact, the Republic remains among the "poorest of the rich", even if significant progress has been made in absolute terms. However, these rankings among the lower divisions of the international league are probably unwarranted.
As Prof Brian Nolan of the ESRI has pointed out, much of the poor performance in the Human Poverty Index is due to an unjustified over weighting of illiteracy in the index, on which Ireland, not uncontroversially, is deemed to fair poorly.
So where exactly is our relative position internationally? It is clear that we are not as rich as some would have us believe. We are flattered not only by the unusual structure of our manufacturing sector but also because of previous policy lapses, which mean that current resources are being used to eradicate significant infrastructural and social deficits.
Much of these shortfalls have been already eliminated by many of our more perceptibly wealthier comparators. Ireland's ranking most likely lies somewhere in the middle ground, not as good as many would think but not as bad as many may feel.
• Joe Cullen is an economist at the ESRI