It is extraordinary that journalists and commentators continue to publicise figures for Irish Gross Domestic Product which give a quite misleading picture of the resources available to us in Ireland each year. For GDP includes profits exported by multinationals, and, because of our special Irish corporate tax provisions, these account for almost 20 per cent of value added in Ireland each year, writes Garret FitzGerald.
A much better way to assess our economic performance is in terms of the proportion of this value added in Ireland that remains after deducting the profits exported by multinationals. This is what is known as Gross National Product, or GNP.
Now, the OECD in Paris publishes economic data on all of its member-states and adjusts such data to allow for differences in the purchasing power of the currency of each country. This makes possible valid comparisons of national performance in GNP terms.
While the OECD has published these data only up to 2002, it is possible to update the figures by allowing for recent changes in output and population.
The table (right) sets out these estimates of the purchasing power of GNP per head in the present year.
From this it emerges that the purchasing power of Ireland's GNP is now fractionally above the EU average, and, in output terms, Ireland now out-ranks Germany and Italy, as well as Spain, Greece and Portugal.
Moreover, leaving aside the special case of Luxembourg, our per capita output level is less than 10 per cent below that of the most prosperous EU member-states: Denmark, Austria, the UK, the Netherlands and Belgium.
For a country that as recently as 15 years ago fell short of the EU average per capita output level by almost 40 per cent, this is quite a remarkable achievement. But, one may wonder, has this catching-up process now come to an end, or can we reasonably look forward to gaining even further ground vis-à-vis our partners in the years immediately ahead?
Last year's medium-term review by the ESRI projected an increase of almost 50 per cent in Irish GNP between 2004 and 2012, and a population increase of just over 10 per cent in this period. If we assume that the GNP and population of other EU countries grows at much the same rate in the next eight years as it did between 1993 and 2001, then the ESRI's projection for our economy would bring Ireland up to an output level similar to that of the other best-performing EU states in 2012.
Of course, none of this is guaranteed. Apart from anything else, we just don't know to what extent our loss of competitiveness in recent years will now inhibit us from achieving our potential.
These same OECD statistics show that whilst between 1997 and 2002 inflation in Ireland reduced our purchasing power by no less than 22 per cent, none of the other 14 EU states experienced a drop of more than 5 per cent in this respect during these years. This striking loss of competitiveness vis-à-vis the rest of the EU is clearly a serious matter - and one that reflects very badly upon the management of the economy since 1997. In fairness it has to be said that it would have been almost impossible to have come through a period of such exceptional economic growth without a somewhat faster inflation rate than those of other less dynamic economies. But the scale of the deterioration in our competitiveness during these years went far beyond anything that could be explained by the Celtic Tiger.
In the late 1990s we were approaching full employment, for unemployment fell rapidly, from over 10 per cent in 1997 to 3.7 per cent in early 2001. In those circumstances, and with participation in the euro also looming up in January 2002, (after which we would no longer have a devaluation option to offset inflation), the prime object of our economic policy, especially in 1999 and 2000, should, of course, have been to control inflationary pressures.
Instead, the Minister for Finance, Charlie McCreevy, chose that precise moment to boost public spending by well over one-quarter during these two pre-euro boom years, (which, of course, were also two pre-election years). The foreseeable consequence of this grossly irresponsible policy at the height of a boom was a 15 per cent increase in consumer prices in the three years that followed the first of these disastrous budgets - which was over double the inflation rate of the rest of the EU. This clearly puts us at a disadvantage vis-à-vis our euro partners and the United Kingdom. When combined with the increase of almost 40 per cent in the value of the euro against the dollar since early 2001, this greatly weakens our capacity to export to the United States.
It is, of course, too soon to assess how this will affect the inflow of US industrial investment to Ireland, at a time when central and eastern Europe, as well as South Asia, are starting to draw such investment away from our shores. However, recent IDA reports of a recovery in the flow of such investment here from the low level of a year or two ago are encouraging.
Moreover, it has to be said that we no longer have the kind of labour supply situation that enabled us to increase employment by 4.5 per cent a year between 1993 and 2001. So we do not need, and could not, in fact, accommodate, a flow of investment on the scale of the Celtic Tiger years.
An economic growth rate of 5 per cent a year, as projected by the ESRI, remains a possibility. So we cannot rule out some further catch-up which could conceivably raise our per capita output level to near the top of the European scale within the next eight years.