Don’t be fooled by our positive GDP figures

On Wednesday, an Irish media website carried a headline to the effect that Ireland has the fourth-highest national income per head in the EU.

It went on to say we have this status despite being in receipt of a bailout and suffering an economic collapse. This might be interpreted as suggesting that because of its wealth, Ireland should not be in crisis or in receipt of a bailout.

This headline is reminiscent of another headline run by a serious broadsheet back in September 2005 which read — Ireland 2nd Wealthiest Country in World. Back then, those sorts of headlines helped us all get carried away with ourselves and believe that we were in a much stronger position than we actually are. We were wrong then, and we would be equally wrong today to believe that this headline reflects life on the ground in Ireland.

Those headlines back in 2005 and earlier this week were based on the latest statistics from the EU statistical agency, Eurostat, measuring GDP per head of population, adjusted for the cost of living in the countries being compared. The latest figures show that Ireland’s GDP per capita is 27% above the average for the 27 EU member countries, giving Ireland the fourth highest GDP per capita.

It is important to carefully interpret all data before jumping to any conclusions, but particularly data of the type released by Eurostat this week. GDP per capita is a very crude measurement of the wealth and wellbeing of a nation and needs to be treated with extreme caution. GDP seeks to measure the total value of all goods and services produced in a country in a given time period regardless of who owns the factors of production used to produce the output. The reality in Ireland is that a significant proportion of the factors of production are owned by overseas interests, namely multinationals.

There are obviously a lot more foreign multinationals operating in Ireland than Irish multinationals operating overseas, so there tends to be a significant net outflow of profits from Ireland. These flows in and out are called “net factor income from the rest of the world”. Not all of the factor flows are due to profits being repatriated — some flows are accounted for by factors such as interest paid to foreign investors who lend to Ireland, but profit flows do account for the bulk.

In 2011, the net factor income flows out of Ireland totalled a massive €32.6bn, out of a total value of €156.4bn for GDP. When this €32.6bn is subtracted from GDP, we are left with GNP (gross net product). This totalled €123.9bn in 2011. GNP is a much better gauge of what is really happening on the ground in the economy and is a much better gauge of the real wealth of the country. Unfortunately, GDP is the international standard of measurement and few countries have the sort of discrepancy between the two measures we have here in Ireland.

GNP per head of population would provide a better indication of economic activity in Ireland. However, even GNP per capita also has to be treated with caution. It tells us nothing about how that national income is distributed amongst the population. For example you could find an African economy rich in valuable natural resources, but 5% of the population might control 90% of national income. Likewise, the per capita measure tells us nothing about issues that affect our quality of life such as the quality of health and education, crime rates and infrastructure. In Ireland’s case for example, while we might have a high GDP per capita, our education system, particularly at the second level, is being destroyed by cuts.

The GDP per capita figures released this week do not reflect this, but any government politician who uses these statistics to flatter their status should be given the appropriate response. That response is too vulgar to put in print.