Ireland’s GDP growth of 2.66% in Q1 2010 needs some analysis. Technically, Ireland is out of recession, but does this prove that austerity is the path to robust growth?
It has to be stressed that one really needs to look at Irish GNP as well as GDP to get the whole picture about Ireland. GNP strips out the part of GDP that includes factor flows to foreigners, and in particular profit repatriation to foreigners. In other words, GNP gives a measure of the value of goods and services produced in a country that is earned by domestic institutions and individuals, and can be expressed in this way:
GNP = GDP + net foreign factor income.
Factor income is equal to the earnings on foreign investments minus payments made to foreign investors, and is a component of the current account.(1)
Although GNP and GDP are calculated differently and are different measures of national income, for many countries GDP tends to be very similar to GNP, with no significant difference (see “Output Volatility: GDP v. GNP”). However, there is a set of countries where this is not the case, and Ireland is in that set (for the figures on Irish GDP versus GNP, see here).
Professor Bill Mitchell has given an outstanding analysis of the actual situation in Ireland (Bill Mitchell, “The Celtic Tiger is not a good example,” Billyblog, July 5th, 2010). He demonstrates that Ireland’s GNP continues to plunge and fell by 0.5% in Q1 2010, even though GDP growth in Q1 2010 was 2.66%.
On the basis of the GNP figures, Ireland is still in recession. Moreover, since one definition of a depression is a fall in the value of output exceeding 10%, it is probably more accurate to say that in 2009 Ireland entered a depression both in terms of its GDP decline (10.1%) and its GNP contraction (14.1%) since 2008 (for figures, see here).
Irish GDP growth in Q1 2010 was mainly driven by exports, but the problem is that most of Ireland’s internationally-oriented export sector is foreign-owned.
This means that the foreign-owned sector recovered, while the domestic economy declined or stagnated (see “Irish Economy: No exit from recession in Q1 2010,” June 30, 2010).
It can also be noted that Ireland – just like Germany and other Eurozone nations – has benefited from the weaker Euro in export markets. But this surge in exports partly caused by Euro depreciation has nothing to do with Ireland’s austerity.
As Bill Mitchell has argued:
There are over 600 American companies with major operations in Ireland. As the Euro depreciates Ireland’s exports (pharmaceuticals, software, food and services) are increasingly cheaper and more attractive to its two major trading partners Britain and the US.
Bill Mitchell, “The Celtic Tiger is not a good example,” Billyblog, July 5th, 2010.
But both the UK and the US have had Keynesian stimulus, so even here the demand for Irish exports must have been influenced by, and related to, the Keynesian stimulus measures taken in both the US and the UK to increase aggregate demand. If the US and the UK had both pursued brutal austerity, would their imports of Irish goods have been significantly reduced? Undoubtedly, they would have been, and Ireland’s growth in Q1 would no doubt have suffered as well.
Yet again we can see that export-led growth in Ireland, as in the case of Germany in Q2 2010, has been influenced by global Keynesianism.
The truth about Ireland is that its domestic economy continues to decline, and that the profits earned by its foreign-owned export sector are – as you would expect – flowing to foreigners and not increasing domestic Irish GNP or per capita GNP. The most devastating proof of how misleading the GDP figures are is that Ireland’s unemployment rate continues to rise.
The most recent news is that estimated unemployment in August has risen to 13.8%, as compared with 12.9% in Q1 2010 (see “Irish recovery stutters as retail falls,” September 1, 2010).
Since unemployment in Ireland was 4.3% in 2007 when the recession struck, the Irish unemployment rate has soared by a shocking 220.93% since 2007 (for figures, see here).
Even if we take the worst estimates of US unemployment as calculated by John Williams of Shadowstats, the US unemployment rate rose from about 12% in 2007 to about 22% today, an increase of about 83.33% (for the figures, see here), which, while certainly very bad indeed, is nowhere near as bad as Ireland in terms of the percentage increase.
One has to ask: if austerity Irish-style is the path to recovery, then where are the new jobs and employment? Where is the growth in GNP? Where is the domestic growth?
Another consequence of the austerity and contraction is that thousands of young, skilled men and women are leaving the country in droves (see Liz Alderman, “In Ireland, a Picture of the High Cost of Austerity,” New York Times, June 28, 2010).
So apparently the path to prosperity in Ireland is: 13.8% unemployment, a 14% contraction in GNP since 2008, and a brain drain.
If this is what austerity brings, the argument for it is poor indeed.
UPDATE ON IRELAND
23 September 2010
Figures for GDP growth in Q2 2010 have just come out.
So what has happened?
Irish GNP (the real measure of the domestic economy) has fallen by 0.3% in Q2 and GDP has fallen by 1.2%:
Larry Elliott, "Irish economy faces double dip recession," Guardian, 23 September 2010.
Even with its austerity Ireland has no confidence from the markets: the Irish credit default swap rate has risen to 5% and yields on the 10-year bond have soared.
Moreover, the growth in Q1 2010 has been revised downward from 2.7% to 2.2%.
Perhaps the hapless advocates of austerity will complain that the cuts just weren’t large enough…
Meanwhile for those of us in the real world, we have yet more confirmation of the stupidity of austerity.
FOOTNOTES
(1) Note that the current account = balance of trade (exports - imports) + factor income (earnings on foreign investments - payments made to foreign investors) + cash transfers.
I guess this confirms one of your central arguments. Without a national policy to build and retain domestic owned businesses snd talent, most countries' economies are dependent on foregin investment. Today's foreign investment may become a decaying eyesore in a few deccades if a newer source of cheaper, and even "harder workring" labor comes on-line.
ReplyDeleteGovernments can only keep foreign investment by
keeping a currency from appreciating, which is why investment in government bonds is a bad investment. Therefore, it can be concluded thaat there's no incentive for governments to have strong currencies,large middle classes and other political amenities unless wages stay low overall.
Reply to Anonymous
ReplyDeleteThanks for your comments.
A domestic industrial policy is vitally necessary to promote manufacturing and prevent foreigners from owning too large a part of a country’s export sector.
Preventing the excessive appreciation of your currency is also necessary to protect the competiveness of all exports, not just ones produced by foreign-owned industries.
Why is investing in government bonds a bad idea? This does not follow at all.
There is no fast recovery under any possible action plan. This is a multidecadal process.
ReplyDeleteThis is to brutal to tell the unwashed masses but I think you're safe for it:P
Why is investing in government bonds a bad idea?
ReplyDeleteIt has a little bit to do with the fact that governments aren't profit driven. Governments, of developed countries in particular, have limited options in what they can do to raise revenue. Stimulus efforts with a potential economic payoff will take a long time, if ever, to affect tax revenue. The thought of raising taxes on individuals and businesses is firecely opposed. It's perplexing how some governments can promise a return while their tax revenue, remains stagnant at best. How can governments issue bonds that protect investors against inflation, like TIPS in the United States, right now, and promise a return? With revenue projected to remain stagnant or fall, in the United States, austerity remains one of the only tools the government has left to help pay for the interest. The other tool, is more borrowing, which compounds the problem, in my opinion.
I'm sure you have heard that some investors aren't expecting a return at all. Some probably lost some money in the stock market, and just want their remaining money to be "safe."
I've already outlined why currencies from developing countries may not be worth investing in. Here is the full story: Stong currencies have the effect of making wages higher. Every currency has an incentive to devalue itself , incremently, to help make its respective economy continue to appear attractive to foreign capital.
Strangely enough, currencies from developing countries aren't attractive to those buying and selling in the government bond market.
Thanks.
ReplyDeleteIt has a little bit to do with the fact that governments aren't profit driven.
The belief that something has to be profit-driven to be useful or beneficial to a nation is false.
Public infrastructure spending and education spending are highly beneficial to a country, but are normally not profit driven. Non-profit public infrastructure can actually increase economic activity: think of badly needed roads, harbours or railways that are used to transport commodities to world markets.
With revenue projected to remain stagnant or fall, in the United States, austerity remains one of the only tools the government has left to help pay for the interest.
I am baffled by the claim that austerity “helps pay the interest” on government debt. Has this worked in Ireland? The budget deficit has exploded.
Irish bond yields rise:
ReplyDeletehttp://www.cityam.com/news-and-analysis/record-yields-hit-ireland-bond-auction
"The belief that something has to be profit-driven to be useful or beneficial to a nation is false."
ReplyDeleteForeign investors don't invest in a country's government bonds because they necessarily care about that country's well-being. They may care little about whether a developed country like the U.S. has schools or roads. They just see a strong currency as being less risky than the stock market. Buying treasuries in bulk can help foreign governments keep a rival government's labor costs inflated.
Only Japan can say that the majority of its bonds are held by its own people. You might say that, "A-ha, but Japan's labor costs are high also" but that may be because Japan's population is shrinking and may not need or want as many industrial jobs. Services appear to be doing well there as in other developed countries.
Your general theory about industrial policy has a few examples, of governments supporting really awful companies that should have been allowed to die. History suggests that industrial policy only seems to have worked well within a context of a wartime economy in Western countries.It's unlikely that a wartime economy will make a return in Western countries. Demographic reasons would hinder a European attempt at a wartime economy, and democracy itself would hinder an American attempt at a wartime economy.
"I am baffled by the claim that austerity “helps pay the interest” on government debt. Has this worked in Ireland? The budget deficit has exploded. "
This is basic bath problem. One of two things may be the answer to an uptick in debt.
1. Government spending has not slowed but accelerated contrary to what has been
said.
2. Ireland's finance sector allowed everyone to live beyond their means. When credit dried up, so did the jobs created by that credit and therefore, taxable revenue.
Besides those two possible situations, I don't see a reason for why Ireland is in a recession, other than shrinking demand worldwide.
History suggests that industrial policy only seems to have worked well within a context of a wartime economy in Western countries.
ReplyDeleteIndustrial policy has a long and successful history. See here:
http://socialdemocracy21stcentury.blogspot.com/2010/06/industrial-policy-brief-comment.html
The East Asian economies like Taiwan, South Korea, and Japan used highly successful industrial policies to create industries.
See Ha-Joon Chang, Kicking Away the Ladder: Development Strategy in Historical Perspective, London, 2002.
Ha-Joon Chang, Bad Samaritans: Rich Nations, Poor Policies, and the Threat to the Developing World, London, 2007.
As for Ireland, it is the collapse in domestic demand that is the main reason for its depression. A fall in exports was certainly one factor, but not necessarily the most important.