What’s weird about Ireland’s GDP?

IN 2015 IRISH GDP grew by an astounding 24.5%. It shot up by another 15% in 2021, when the average growth rate in the euro area was just 5.9%. Alas, no Celtic brew had supercharged the productivity of Irish workers. Those staggering increases were the result of changes in the ways official statisticians calculated national-income data and multinational firms accounted for their intellectual property, assets and profits. That makes Ireland’s economic data hard to interpret. At times, it even warps euro-zone averages. How big is Ireland’s economy, really?

International agreements oblige Ireland to publish economic data according to common standards. But these standards make little sense in Ireland’s case—notably when totting up GDP, which measures the value of goods and services produced in a country. Ireland’s generous corporate-tax regime has made it a hub for multinational tech and pharmaceutical companies. These firms generate much of their income in Ireland, inflating its GDP, but funnel that money to their headquarters (or shell companies) abroad. Those incomes should not be fully counted when measuring the size of Ireland’s economy.

In years past economists relied on gross national income (GNI) for a more accurate measure. GNI counts the total income received by a country’s residents, which means it excludes profits sent abroad. But it no longer reflects the Irish economy either.

To understand why, first look to the skies. Before co-founding Ryanair, now Europe’s biggest airline, in 1985 Tony Ryan, an Irish entrepreneur, started an aircraft-leasing company in the 1970s. It helped to make his country the centre of the industry. His firm crashed spectacularly in 1992, but others still dominate. Every two seconds, an Irish-owned aircraft takes off somewhere in the world, according to PwC, an audit firm. New statistical conventions that came into force in 2015 count these planes as imports into Ireland when they are bought and as part of the country’s capital stock thereafter, even if they never enter Irish airspace. Aircraft-leasing firms earn a hefty income, but their profits are tempered by the annual depreciation of the planes. However, because GNI is based on profits before depreciation is subtracted, this huge capital stock inflates the measure.

Intellectual property creates an even bigger problem. Between 2013 and 2015, in an effort to prevent the reshuffling of profits to tax havens, members of the OECD, a club of mostly rich countries that includes Ireland, agreed on new principles for taxing companies. So that they could continue to benefit from Ireland’s favourable tax system under the new rules, many multinationals moved business units, and sometimes their headquarters, to Ireland, together with their intellectual property (IP). At the same time, statisticians changed the treatment of research and development (R&D) spending, counting it as capital investment rather than expenditure. Newly Irish multinationals buying R&D services from abroad, often from subsidiaries, or shifting patents to Ireland thereby increased the country’s capital stock by €300bn ($333bn) in 2015, a 57% year-on-year increase.

Just as leased aircraft depreciate, so does IP: patents run out and innovation makes older technologies obsolete. This too is not captured in GNI—and there is a further twist. Whenever IP is used to make goods abroad (via a process called “contract manufacturing”) the output counts as Irish, because the Irish firm remains the “economic owner” of the goods. In the past this was offset by the fact that firms paid licence fees for IP they held abroad. But after multinationals moved their IP to Ireland, that offset no longer occurred.

What to do? A crude solution would be to exclude sectors of the economy that are dominated by large multinationals. But these sectors do add something to Ireland’s economy, through employment and taxes, even if standard accounting overstates their contribution. Two measures provide better alternatives.

The first looks at domestic demand: consumer and government spending as well as investment, disregarding imports and exports. Investment still needs a Gaelic adjustment—money spent on IP and leased aircraft that have little connection to the domestic economy need to be excluded. The result is “modified domestic demand” (MDD), which is regularly reported. But it has drawbacks, not least the exclusion of international trade.

The second solution is to use a modified version of GNI, called GNI*. This incorporates the adjustments used for MDD, but retains imports and exports. To account for the distortions caused by leased aircraft it excludes imports that are the mirror image of the excluded investment, such as planes. It also subtracts the depreciation of aircraft and foreign-owned IP. And it excludes the retained earnings of firms that have relocated to Ireland. This is the best available measure of the Irish economy. It stands at €249bn, compared with Irish GDP of €475bn. In 2015, GNI* declined slightly, while in 2021, GNI* and GDP grew similarly.

But what about the euro zone? There is no bloc-wide GNI* to filter out Irish distortions. Kicking Ireland out of the zone’s official figures, as some have proposed, feels unsatisfactory. Some of the profits that are booked in Ireland represent economic activity elsewhere in the bloc. Euro-zone aggregate GDP may therefore be closer to the truth than a superficial look at Ireland’s outsized contribution suggests. ■