The fable of the frog and Ireland's response to Brexit

The Chinese have a fable of a contented frog looking at the sky from a deep well. However following the visit of a turtle from the East Sea, the frog realises the insignificance of its world. In Ireland sixty years after the first tax incentives were introduced to boost exports, Brexit provides a warning for smug Irish policy makers that Ireland's economic model needs to be adjusted to changing horizons.

This week the Central Statistics Office highlighted the tale of two Irish economies with its shocking upgrade of Irish annual growth in 2015 to 26.3 per cent. In the real world, Eurostat, the EU's statistics service, last month reported that the Irish average individual standard of living in 2015 was lower than Italy's despite the latter's almost decade of recession. Ireland was also below both the EU28 and EA19 (Euro Area) averages. Eurostat compares individual consumption of public and private goods and services in each member country, adjusted for price differences.

For decades Irish governments have used data that are distorted by the foreign direct investment (FDI) exporting sector, to mask the persistent underperformance of the indigenous international sector. Excluding foreign-owned firms, Ireland 's export performance is among Europe's worst despite employing almost as many people as the FDI sector.

World Bank data show that Ireland's exports as a ratio of gross domestic product was at 29.5 per cent in 1960 — before Ireland had a significant FDI sector. In 2015, indigenous exports including inward tourism and transport, was at a ratio of 16.5 per cent compared with 30.1 per cent for Greece — which is Europe's worst exporter with a low reliance on foreign investment, according to European Commission research.

Even more shocking is the low number of exporting firms in Ireland. Denmark with a population of 1 million higher than Ireland's, has about 30,000 exporting firms. Ireland has over 4,000 including about 1,200 foreign-owned exporters. In 2014 the population ratio per exporting firm was 187 in Denmark; 236 in Germany; 550 in France and 1,150 in Ireland.

Food and drinks sector

With Brexit looming, the indigenous-dominant food and drinks sector is dependent on the UK for more than 40 per cent of its exports. In 2015 the euro had weakened by 10 per cent compared with sterling.

Both the food and drinks sector and the FDI-dominant chemicals and medical devices sector each have direct employment of about 47,000 but crucially the food and drinks sector sources most of its material inputs in Ireland — excluding overseas "contract" manufacturing, the value of exports of chemicals and medical devices are almost six times that of the food and drinks sector but while there is a big net trade surplus in the former, it is mainly profit shifting for tax avoidance purposes.

In recent years, the traditional Irish food and drinks surplus with the UK has evaporated. A quarter of British food exports are shipped to Ireland, double the exports to its second biggest customer France and a low sterling rate in coming years will benefit imports to Ireland while damaging Irish exports to the UK.

Irish agricultural land is among the highest priced in the world making it difficult for young farmers to thrive in the sector. The number of Irish annual sales transactions has fallen as low as 0.2 per cent of agricultural land compared with a peak of 2.1 per cent in 1978 and Irish agricultural land prices are about quadruple French prices.

In June 2015 Alan Matthews, professor emeritus of European agricultural policy at Trinity College, said most beef farms in Ireland are not financially viable without EU subsidies. He recommended that they switch to forestry.

In 2014 a University College Dublin study ranked Denmark as the top food innovator in Europe and it concluded: "Ireland has a number of truly world class innovative companies, however the problem is there are simply not enough of them and there are too few new innovative companies emerging from which world leading companies could emerge."

The Netherlands is the world's second biggest agri-foods exporter after the US and the second biggest beer exporter after Mexico.

Impact of distorted data

Distorted data boosted by tax avoidance sustain fairytales of success that hinder realistic assessments of Ireland's strengths and weaknesses.

This month it was reported that Ireland had jumped 10 places into the top ten countries in a global innovation ranking. However, the poor patent filing record tells a different story. Over 50 per cent of IDA Ireland client companies are research and development (R&D) inactive and typically, Ireland's top 50 exporters do not file any patents in Ireland or Europe. Business provides little funding to third level research compared with other developed countries.

US data on investment in Ireland is flattered by tax avoidance: $311 billion in investment in Ireland supports 108,000 jobs while $115 billion into Germany supports 613,000 jobs.

The American Chamber of Commerce in Ireland claimed in a 2015 report that Irish companies employed 141,500 in the US and both the Brookings Institution, a Washington DC think-tank, and IDA Ireland, fell for this misleading statistic. Only about 6 of the 26 listed "Irish" companies on the Nasdaq stock market are in fact Irish.

In March 2014, at a meeting in the Oval Office with Enda Kenny, taoiseach, President Obama commented: "And there is tremendous investment by US companies in Ireland. There’s tremendous investment here in the United States by Irish companies" — the president was misinformed.

With the exception of CRH, the building materials group, most of this investment in the US is by American firms with Irish tax residencies — six of these "Irish" companies had a combined global payroll of 624,500 in 2014 and inclusion in Ireland's national accounts distorts both gross national income and the current account.

The biggest Irish corporate spenders on R&D according to the European Commission are also American firms spending outside Ireland.

Brexit has prompted a typical reaction from policy makers and the big professional firms. Ready-made jobs can again be delivered from elsewhere with some more tax incentives.

However these are short-term responses and behind the superlative headline data are: the second-highest percentage of low pay in the developed world; poor adult skills according to the Organisation for Economic Cooperation and Development (OECD), and despite low corporate and social security taxes, and no requirement to provide workers with occupational pensions, an underperforming indigenous sector.

Absent a vigorous indigenous sector with the competence to export internationally, reliance on low innovation jobs in both Irish and foreign firms will ensure that Ireland will not become a wealthy country.

Pic on top: EU Leave campaign's cartoon to highlight its Brexit campaign claim that the UK can magic up significant new export business outside of Europe.

Enda Kenny, taoiseach, discusses Brexit with Angela Merkel, German chancellor, Berlin, 12 July 2016