Irish exports have increased by 6% during 2010.  This is higher than the rate of import growth which stands at just 1%.  Resulting from this, Ireland’s trade surplus has increased from around €39 billion in 2009 to approximately €43 billion in 2010.  The overall value of our exports now stands at a little over €84 billion.  This is undoubtedly good new for our economy and indeed it is the only factor which has prevented our economic decline from being worse than it already is due to a deterioration in domestic consumption, investment and government expenditure. 

However, we must ask the question where is this export growth coming from?  Is it sustainable?  And can it drive an economic recovery?  Worryingly, analysing the figures at the sectoral level would raise serious concerns.  The main exporting sectors in the Irish economy in 2010 were medical and pharmaceutical products (which accounted for 28% of our exports), organic chemicals (which accounted for 23% of our exports) and computer equipment (which accounted for 5% of our exports).  These three sectors account for 56% of Irish exports and are mainly comprised of multinational companies.

Looking in closer detail at these sectors the exports of computer equipment are actually down 60% from last year.  A substantial part of this dramatic decrease is likely the result of the withdrawal of equipment manufacturing from Ireland by Dell in Limerick.  This may have had a substantial impact on this sector, as exports have fallen from over €10 billion in 2009 to just over €5 billion in 2010.  This could act as a worrying omen of things to come.

As a small open economy, with a low corporate tax rate and access to the European single market, Ireland is ideally positioned to reap the benefits of acting as an export base for multinational companies accessing the European market.  However, as was observed in the Dell case, these multinational companies can transplant their operations should a more attractive location become available and the withdrawal of these multinational firms can have a substantial impact on Ireland’s exports.  Should some of the larger medical, pharmaceutical or organic chemical companies in Ireland move their operations elsewhere this could have a dramatic negative effect on Ireland’s export sector.  The reliance of Ireland on multinational exports and the ability of these companies to move their operations raises serious concerns as to the sustainability of Ireland’s export performance and whether it can in fact drive an economic recovery.

A recent report by the Royal Society entitled Knowledge, Networks and Nations (available here) suggests that China is the second most innovative country in the world, followed by the US.  It also suggests that China will overtake the US as the world’s most innovative country by 2013.  If this is correct it will be viewed as a huge boost to China’s competitive position and future, long term, economic growth potential.

However, the measures used in the report to deduce this finding are questionable.  One might ask what is the metric they are basing this finding on?  Surprisingly, the metric is not a combination of factors conducive to innovation such as the one comprised by the European Innovation Scoreboard but is instead a single factor.  Innovativeness is measured solely as the number of academic publication made by each country in a given year.  Figure 1 is taken directly from the report and shows that in the two periods considered China has progressed from producing 4% of the world’s academic publication to 10% of the world’s academic publications.  This has moved them up the ranking to second position, behind only the US.

However, are academic publications really the best gauge of a country’s innovativeness?  Surely the measure of the worth of an innovation is its contribution to economics growth.  But what effect does an academic publication have on economic growth?  Some may have an impact should they be applicable to commercial application.  However, it is easy to ask the question if it is possible to apply the discovery commercially why would it be published for all to see?  Also, equal weight is allocated to each publication.  What of standards?  Some innovations produce higher returns to others.  Similarly, different journals possess different ranking with some being more exclusive than others.

When analysing citations, which the report attributes as a possible indication of quality, the UK is ranked as the world’s number two (see Figure 2).  This, the authors conclude, suggests that while China has increased the pace of its innovation, these innovations are still not of the highest quality.  However, can citations really be viewed as quality?  There is a propensity for individuals to cite themselves in their research, building upon what they have previously done, which would imply a self-reinforcing quality of citations.  If a country produces a high number of papers, subsequently the authors will leverage off these past papers generating a higher citation count.  Overall, the application of this method as a measure of the innovativeness of a country would appear deeply flawed.

The latest Quarterly National Household Survey (QNHS) indicates that unemployment in Ireland is continuing to grow.  In Q4 of 2010 a seasonally adjusted total of 16,200 people lost their employment.  While this is slower than the rate of job losses the previous quarter (which were 26,800) it is still a sign of the declining economic situation prevalent in Ireland.

Worryingly, it is not only increasing unemployment which is a problem but the fact that the nature of unemployment is changing.  Increasingly the number of people unemployed is comprised of those which can be classified as being long term unemployed.  Figure 1 shows that since the height of the economy’s growth in 2007 the proportion of the number of people who are classified as long termed unemployed has increased.  Long term unemployment is classified as people who are unemployed for a period longer than a year.  These individuals are most likely in sectors where there has been a dramatic decline in employment which may be structural in nature. 

Further to this, there is an increasing trend in long term unemployment among the younger members of the Irish population.  Figure 2 displays this trend.  It can be noted that, of the individuals who are aged between 15 and 24 and unemployed, almost a third of these have been unemployed for over a year.  This is a worrying trend and something will only continue to worsen based on the current economic situation.

Most groups within the government and opposition hold a clear position that Ireland’s corporate tax rate should be left at its current level and have opposed every motion by Irish and EU commentators to raise the rate of corporation tax.  However, standing apart from their companions is the United Left Alliance (ULA).  This group opposed the current corporate tax level and has been a strong advocate for raising corporate tax.

One of the more worrying promises made by this group is their statement that they will increase corporation tax so as to capture more of the share of profits made by multinational companies.  While this is possibly quite a populist policy it has the potential to create extensive damage to the Irish economy.  The basis for the increase, according to the ULA, is the fact that these multinational companies are still making a profit.  This is said almost as if these companies are committing a crime by being efficient and generating revenue in these trying economic times.  The ULA seem oblivious to the fact that, by making these profits, these multinational companies are able to provide sustainable and steady employment to a large number of people while also contributing substantially to our economy and government tax receipts. 

Should Ireland raise its corporation tax rate this would prove detrimental.  These large multinational companies are located in Ireland specifically because they can make a profit here.  It is our low cooperate tax rate which has attracted these firms to Ireland and it is this low tax rate which retains them in this country.  Should the tax rate be increase, it does not matter whether this is by 1% or by 15%, it will send a signal to these companies that Ireland is no longer committed to providing stable, low cooperate tax rates for multination enterprises.  And what effect do we expect this to have?

This will discourage investment by these firms in our economy and will result in a relocation of firms from Ireland to other countries.  Take the example of a well know computer manufacturer in Limerick in recent years.  While still making a profit operating in Limerick, a better opportunity presented itself in Eastern Europe.  Despite having a plant and facilities already well established in Limerick, this firm uprooted and left Ireland with significant job losses occurring as a result.  It was not that there was anything wrong with the Irish plant, it could just be done cheaper somewhere else.

An increase in the corporate tax rate by any Irish government would result to a similar situation occurring.  Overnight, it would become more expensive for these firms to operate in Ireland.  Could we expect these firms to accept this and continue to operate in Ireland even though other countries would now offer them a higher profit margin?  I don’t think this is realistic.  These firms will leave Ireland for more competitive economies.  And, given that foreign multinationals are among the few firms in Ireland actually generating employment, we should ask ourselves do we really wish to chase these companies away?  

Irish GDP fell by 1% in 2010.  This decrease in GDP is worse than was forecast by the Department of Finance for the most recent budget and worse than the ESRI predicted in their Winter Quarterly Economic Commentary.  This has negative implications for Irish debt to GDP ratio and is a continuing sign of the still struggling Irish economy.

It would appear that the main cause of the decline has been the domestic economy with domestic consumption falling 3.4%, investment falling 29.4% and government expenditure falling 6.2% in 2010.  These figures show the continuing decline in the domestic sectors of the Irish economy.  The fall in GDP would have been much worse had it not been for the success of Irish exports.  Exports have risen 9.4% in 2010 while imports have only risen 7.4%.  Our net exports for 2010 have increased.

From these figures it is clear that Irish export success has been masking the worrying decline in the domestic economy.  However, a substantial component of Irish exports is comprised of the exports of multinational, not indigenous Irish, companies.  These multinational companies are mainly in the areas of software and pharmaceuticals and chemicals.  This makes our export success, the only positive story in our economy, dependent on a relatively small number of sectors which are subject to potential outside shocks.  If, for example, cooperation tax were to be increased would these companies still remain in Ireland?  It is hard to envisage that they would stay.  And if these companies were to leave and exports were to suffer this would have further negative implications for Ireland’s economic recovery. 

In the current economic downturn, we hear a lot of discussion revolving around the issues of whether Ireland is competitive or not, how we can be competitive and why competitiveness is important.  We are told that becoming competitive is the way to return to economic prosperity.  In essence the importance of being competitive lies in the fact that if you are competitive you can attract large multi-national companies or stimulate indigenous businesses.  These in turn generate employment and pay taxes.  Benefiting not only the people directly employed by these firms but also society through a higher tax take.

The overwhelming focus of the discussions on competitiveness in Ireland revolve around the cost of labour.  Essentially, that the cost of employee wages is too high.  In the build up to the last budget, a lot of emphasis was placed on the minimum wage.  Some argued that this was too high and must be cut, while others suggested that to cut the people who were on the lowest pay scale was unjust.  Regardless of the arguments, in the end the minimum wage was cut.  But will this really make a big difference for Ireland’s competitiveness?  Are we now more attractive than we were before to large multi-national companies or to budding Irish entrepreneurs who wish to start a business in Ireland?  That depends on whether the only factor which concerns these businesses is wages. 

In reality, to a lot of start up businesses or to multi-national firms, factors other than wages also play an important role in deciding whether or not Ireland is a good place to start a business.  The cost of rent is an important element which determines value for companies.  What difference do slightly lower wages mean if companies can not afford to pay their rent?  Another factor is access to credit.  This is a particular problem in Ireland with numerous reports suggesting that bank’s willingness to lend money is falling.  Finally, what about government stability?  The uncertainty generated by Ireland’s inability to balance its budget raises a lot of concern in would be investors.

Therefore, while the reduction in the minimum wage may result in some increase to our competitiveness and attractiveness, there are still a number of other factors which must be addressed.  The high costs of commercial rents, the inability to access money through business loans and the uncertainty in Ireland are all combining to have a negative impact on our competitiveness, and a slight reduction in the minimum wage is not going to be sufficient to balance this out.