09 Feb Ireland’s manufacturing sector achieves 20% growth in 2020
Danny McCoy, CEO, IBEC, explains a business model based on foreign direct investment that has brought an intellectual-property resource boom to the country
As CEO of Ireland’s largest lobby and business representative group, could you detail how Irish businesses been impacted by the annus horribilis that was 2020 and what have been some of the main lessons learned from the year?
In comparison to the Irish population, Irish businesses have a disproportionately large footprint. Ireland is a model of substance: an island nation on the western seaboard of Europe, with no natural assets, which suddenly finds itself perfectly placed to benefit from a global move to intangibility. There has been a dramatic change in the Irish economic experience over the last seven to eight years as a result of that phenomenon. Ireland is not a story about surviving austerity—yes we did survive austerity, because our business model was competitive, but it kept the traditional benefits of low-unit labor costs and high productivity, allowing us to export our way out of difficulties.
In the last seven years, we have seen the movement of capital into the country, mainly corporate balance sheet capital but we have also seen very significant investment in machinery and equipment. Building and construction have transformed society. And when you look at Ireland’s economy and society, all the hallmarks reflect a resource economy. We are experiencing a resource boom, where the resource here is intellectual property—it’s not an oil, gas or traditional natural resource boom, but nonetheless it is a boom. There is no other way you can describe it because no normal economy can grow by over 100 percent of gross domestic product (GDP) in that time frame.
Far too many make a very lazy assumption that the GDP measure in Ireland is distorted. It is distorted but other jurisdictions have similar distortions, although Ireland’s is probably a bit more pronounced. But there is a notion that GDP has gone up 100 percent while nothing else has gone up by that amount. In fact, gross national product (GNP) is tracking GDP; it has a similar growth profile. Also, household incomes have shown a significant rise: we see that median household incomes are now comparable to those in Luxembourg, way ahead of all other European Union (EU) member states and quite a significant proportion ahead of the UK, for instance.
During 2020, what we saw is a manifestation of something that has been building up over the last seven to eight years—that Ireland has actually been transformed. When the pandemic arrived with its unique characteristics—by which I mean that it has been differential in terms of its consequence for different businesses internationally, so tech companies, food producing companies, biopharma and medtech did very well, for instance. It will have caused some pressures in medtech because hospital systems are under pressure, but the demand for it will not go away and there is going to be a surge of growth as well.
Ireland was really exposed to these types of companies through the buildup of investment over recent years. Therefore, while most countries will have experienced a kind of a K-shaped recovery—in the sense that some sectors will be growing and some that have been surprised like hospitality, airlines and so on, will be nose diving—Ireland has been disproportionately exposed to the upward arm, rather than the downward arm.
When history looks back in 2020, Irish GDP is likely to have grown by about 3-4 percent. It will have a plus sign. This is the surprise part: not too many countries, apart from Ireland and China, will probably experience a positive outcome from the year on GDP measurement.
Can you go beyond that and say is this rate of growth is the same for every kind of metric? The answer is no. We now have some data for the first three quarters of 2020 and, when you look inside that K shape, this 3-4 percent growth rate includes a 20 percent growth in manufacturing, which is predominantly what people would describe as foreign direct investment. There is a nuance in that: some of those companies are no longer foreign because they have changed nationality and are now Irish, such as Medtronic, Ingersoll Rand and Allergan. These companies have their headquarters here. When their profits are repatriated, they go to Ireland, not from Ireland.
That is a very distinct story, which the media could pick up on. Much of the media is still talking about Ireland as a country with a gap between what was produced here and how much of that was owned here. You don’t have that gap significantly now. You don’t see the difference between GNP and GDP becoming explosive in the way that it would under those conditions. And that gets reflected in that the profits that are arriving here are really significant. I don’t have an estimate to hand, but it’s somewhere in the order of gross profits of about €250 billion, which is remarkable if you think that GDP itself is about €360 billion. There are gross profits of nearly €250 billion, with capital write-offs in the order of about €100 billion. You are looking at exposed net profits in excess of around €100 billion.
When you put Ireland’s famous corporate tax rate of 12.5 percent against that, you see that the Irish government, corporate-tax-wise, is getting €11-12 billion a year, which, in itself, goes a large way to financing the deficit that we see in our public finances.
The budget deficit could be €12 billion worse than the €19 billion that the Minister of Finance has been talking about. Without it, we would have had to have been more restrictive in how we could fund the businesses that have been dampened by COVID-19, and the employees who had to stay at home and not work.
I don’t know if there is any other jurisdiction that has been able to cocoon its businesses and its people to the same level and the same extent as Ireland’s system. And the little-identified reason for that is this business model has been such an effective generator of resources and cash over recent years. That has also ended up in the pockets of Irish households because we have seen this huge surge in disposable income growth over the last six or seven years—it’s in the order of a 5-percent rise on the average recurring income. If income growth continues with that kind of trend, it means that it will double in 12 years. These numbers are very rounded, but they are close and give you a sense of the scale. That is why we have ended up being so much further ahead of the UK, for instance; which is probably our nearest competitor. Ireland was able to afford to pay social welfare needs caused by the pandemic at €350 a week versus €100 a week in the UK.
In terms of the lessons that were learned from 2020, the first was that Ireland was incredibly strong going into 2020 and that strength allowed our society to hold together financially and economically. While COVID is very noisy, in the sense of very amplified noise in terms of its health consequences and its economic consequences, we see that the Irish signal still remains very strong.
When I said that 2020’s 3-4 percent growth in GDP was driven by the 20-percent increase in manufacturing, the corollary of that is that Ireland has also had the hardest lockdowns. That has to have some manifestation on the domestic side, and we see it as a 10-percent fall in economic activity in those sectors that are very domestically focused, mainly hospitality and aviation, which is quite big in Ireland in terms of Aer Lingus, Ryanair and aircraft leasing. Therefore, it is not that every sector has seen a boom—it’s the classic K shape, you see the 20-percent rise on the upward arm and a -10-fall in the downward arm. We have businesses that are experiencing an existential crisis and some of them may be zombie at this stage because they are on life support. We don’t know whether they actually will ever get back.
According to the Economic and Social Research Institute, Ireland could see a a 4.9-percent growth in GDP in 2021. What is your outlook for this new year?
The momentum going into 2020 was very strong. I thought that 2020 was potentially going to be one of the record years for Ireland. Most forecasters were looking at the Irish economy growing by about 5-6 percent in 2020 at the start of that year. I thought it was going to be a record year, potentially up to 15-20-percent growth, because of the momentum that was in the economy, and partly because there was a closing down in 2020 of a tax loophole that was called the “double Irish”. We had already seen balance sheets move into Ireland in 2019 that were precursors for a really strong and significant level of activity that actually came to pass. Some of those were amplified by the nature of the demand for the products of some of those companies in 2020, such as tech firms, biopharma and so on. The noise during COVID was being confused for the signal by people—but the actual signal was incredibly strong and that signal is the one I talked about, the 20-percent growth, which came true. The issue is that it was probably amplified, because some of those sectors will have to give up their exceptional gains, even if people go back to work. Some of those things will have to go down a little bit and, certainly in terms of growth rate, it won’t be possible to replicate such a significant growth rate on an elevated base.
I would not be at all surprised if you start to see a slowdown in some of the growth numbers out of Ireland in 2021-2022. But that will only be as result of having reached a very high base level, not a collapse in the level. Ireland, at some point, is going to start flatlining, because if we don’t, not only will we be the richest country in the world, we will be the largest country in the world. And so there has to be some natural constraints on a population of 5 million people and a small little bit of an island. So clearly, Ireland can’t possibly grow with the same momentum as it has experienced for the next decade.
Yes, the Irish economy will grow in 2021. Will it grow by exceptionally large numbers? No, it will be a small single-digit number. Will it continue to grow? That is my point: I think there will be some leveling off as a result of having had an exceptional 2020. Will it be the fastest growing economy? I have no idea, because all those other countries that saw -8-percent and -10-percent contractions in 2020 are going to have whopping growth rates when normality comes back—they’ll be at double-digits. Ireland will be the laggard with our 3-4-percent growth rate.
The strong performance of multinationals and exports has been said to be hiding a certain dichotomy in the Irish economic landscape, with domestic businesses and small- and medium-sized enterprises (SMEs) lagging behind. Do you agree with that, and what is being done to strengthen Irish SMEs and small businesses overall? How important are they for the economy?
Irish rates of entrepreneurship and Irish SMEs’ productivity are lower than in other jurisdictions. It is a problem, but it is not a problem with devastating consequences because that would assume that, if you gave somebody those stylized facts of an economy—low entrepreneurship and low productivity—they take the next step to say that the society is poor as a result of it.
Clearly, Ireland is not poor, its rich. So then you have to ask: is the low productivity and low entrepreneurship a result of the thing that made it rich? And the answer is yes, it is, because when you get the big FDI model that we have here, it is going to suck in the talent. And so they don’t need to become entrepreneurs when they can become entrepreneurial in a large entity. If you want to stretch the analogy further back, our British friends would have suggested that why the Irish were stupid in centuries gone by—the stereotype of ignorant Irish—is because they would educate a male that would enter the priesthood and not procreate technically, and you were throwing away the passing on of this gene of culture, intellect and so on.
If you think about it, it is a very similar idea in terms of the new kind of structure here that gives rise to this corporate phenomenon. If your model is built on an FDI model and you are the most successful entity on earth in doing that, one of the consequences is it’s going to suck the talent into that edifice and, therefore, the consequence for SMEs is they don’t actually need to be as productive to stay in business and to get rich, because we’re feeding off the model ship that is the FDI model.
Studies that point out that SMEs are behind the frontier in terms of productivity are right. It would be problematic if somehow you felt that our FDI model is going to disappear in a puff of smoke and leave us completely exposed. But then that presupposes that the intellectual powerhouse that has been driving this, the indigenous intellectual powerhouse of now third-generation business acumen, couldn’t turn its hand to becoming entrepreneurial and becoming productive SMEs. If Ireland has found itself in situation where it cannot actually transform, be adaptive and flexible if, somehow, the FDI model disappears, then that SME story people talk about is problematic. But I don’t think it is because it misses the big thing that is in the room.
We’re rich, happy and productive; our SMEs struggle but they don’t need to actually. Productivity is only about the volume. It doesn’t tell you anything about the price you receive. And it is the price you receive, your revenue and your wealth that matter. Because those SMEs are in a country that is thriving with big business, they get a lot of business out of that. They don’t need to be productive.
Aside from COVID, another big challenge that Ireland is faced with this year is Brexit, which became a reality on 1 January. How would you analyze the impact of Brexit on Ireland?
Brexit is by far the biggest thing that has happened in Ireland and in Irish society in a couple of generations. This will be a generational change. If we were in between Britain and Europe, it would have less impact. We are actually very exposed by being at the end of the pipe for all kinds of tangible things as well as the intangibles. Britain leaving the EU was always going to be complicated within the island beside it. The island is not whole, it is a divided island, shared with the UK. Brexit releases all kinds of dynamics that the Brexit deal was trying to accommodate with the Northern Ireland Protocol. The complexity of that for the business model is going to take quite a bit of time to deal with. You are already seeing it in the first couple of weeks in terms of experiences for Northern Ireland supermarkets. That is a problem they are having from being within the same custom arrangement as their home country—it is a UK problem they are experiencing. It is not an EU problem, it is an intra-UK problem and that is quite short term. But we are going to experience some of that as well. There will be short-term difficulties.
A lot of the assumption that Ireland is going to thrive long term is predicated on its position within the EU; that is a dynamic itself. Britain is going to be one of the biggest competitors to Ireland in the short term in terms of servicing the world, because Ireland and a lot of the Irish business model is not a model that is solely focused on serving the EU. Part of the story we talked about earlier is that Ireland has become a globalized hub. And Britain, likewise, is a globalized hub in lots of ways. It has managed to damage itself in the short term, but it will be back.
The competitive forces that are going to be unleashed by that significant country mean that we cannot work on the basis that the long-term Brexit is going to be beneficial to Ireland. Brexit is most likely to be generationally negative for Ireland. I don’t share the optimism. That means that you have got to change the way you react. Some of the reactions that we are going to require are that we are going to need to be very competitive vis-à-vis Britain. And some things we are going to be hampered by, while some things will work out. We even have to adjust in the short term. Britain is capable of going in a different route in terms of how its sources its supply of vaccines. Ireland isn’t, Ireland is restrictive. That is only one element. That may not prove to be the right strategy; but it gives evidence to the fact that, if you can’t be nimble and flexible like Britain will now be by being sovereign, that is going to bring competitive challenges. No sector is immune. Some of them will win. I just don’t know which they are, neither do they, because the rules are going to change.
What do you view as the main priority areas for the future? What kind of strategic moves or investments do you think the country should make in terms of infrastructure, education or other things?
Ireland and our society have to realize first of all that it has arrived at a place where it has strived to get to, dreamt about or hoped for. So, first of all, you have to realize that you actually have succeeded. We have got to change our mindset to say: actually, having been unlucky through time, having been an island within an island with no natural resources where the only thing we exported were people and cattle, we have now transformed ourselves in a couple of generations, thanks to our EU membership. Ireland has now become a wealthy society and the challenge for us is to maintain our wealth. Some of that requires changing our mindset. Things like, for instance, exports: should we continue to be the highest exporter in the world?
We are nouveau riche, we just arrived, but now this generation of Irish people has an opportunity to not have to emigrate again if we get it right. If we get it wrong, we will be back doing it again. For a first time, historically, our destiny is in our own hands. And we have the capacity, we have the infrastructure, we have the wealth to make it sustainable. Not just natural environment sustainability, but to make our society sustainable. We have difficulties with that, we have difficulties funding our state. We don’t put systems in place to actually pay our way in the state.
We have had good fortune that our business model has been a huge generator of profit taxes. When people complain about our profit taxes and so on, that could subsequently become a problem for us as well, domestically. If we rely on that source all the time, we fail to design our society to be sustainable and be self-financing into the future. This would have manifestations in that we have to let our cost base rise and justify it, we can’t be the lowest-cost place.
COVID has exposed precariousness. Our social welfare system is a poverty alleviation mechanism. It is not like that in most continental European countries, it is not a defined benefit pension scheme. If you are a single adult and you are earning €25,000 a year, and you lose your job, you probably end up getting about €13,000 in social welfare. You get a fair chunk, nearly 50 percent, probably higher than 50 percent replacement. If you are on €250,000 a year, you get exactly the same thing: €13,000. One is going down 50 percent, one is going down 95 percent. That is precariousness, and so we don’t have a welfare system. That is why, when people lost their jobs in Ireland, they left. If you are going to take the shocks in the future, if we don’t have a welfare system that can see us through to retrain and to actually adapt to the shock, if the only solution you have is to get out of here, then we will have failed as a generation. Part of what we need to do is address our social model, we have to become more European, not less European in that regard.
What is your final message to the readers of Newsweek.
Ireland is a frontier economy in the world as it is now. And the world as it is now, is one that is driven by intangible assets, which are intellectual-property-driven assets. Ireland’s location, tradition and openness to the world shows that those are the factors that other societies need to have to succeed. We developed those characteristics on the back of failure. But they actually proved to be, in this generation, the right characteristics to reap the benefits of the way the world had changed. I think that is a big lesson for the EU, which is struggling to find its place in the world because it is still the richest part of the world, but it’s not being adaptive. Not actually taking Irish values into the European model is probably the biggest lesson I would put out there. Rather than making other countries look like old Europe, how does old Europe look more like new Europe.