GDP: An unsophisticated measure of a nation’s well-being

Ireland’s economy is now growing at its fastest rate in seven years, according to the latest Quarterly National Accounts [1]. The figures, published by the Central Statistics Office, show the economy expanded by 7.7 per cent in GDP terms in the year to the end of June. Gross Domestic Product (GDP) estimates are frequently used to measure the economic performance of a country or region. The more familiar use of GDP estimates is to calculate the growth of the economy from year to year and, indeed, more recently from quarter to quarter. The pattern of GDP growth is held to indicate the success or failure of economic policy and to determine whether an economy is ‘in recession’. But where does the concept, and the related Gross National Product (GNP),come from and what is actually measured?

GDP is an estimate of market throughput, adding together the value of all final goods and services that are produced and traded for money within a given period of time. It is typically measured by adding together a nation’s personal consumption expenditures (payments by households for goods and services), government expenditures (public spending on the provision of goods and services, infrastructure, debt payments, etc.), net exports (the value of a country’s exports minus the value of imports), and net capital formation (the increase in value of a nation’s total stock of monetized capital goods) [2].

President Roosevelt’s government used the statistics to justify policies and budgets aimed at bringing the US out of the depression. As it became more likely that the US would become involved in World War II, there was a concern about whether this would jeopardise the standard of living of US citizens who were just beginning to recover from the depression. GDP estimates were used to show that the economy could provide sufficient supplies for fighting World War II while maintaining adequate production of consumer goods and services [2]. It thus can be thought of as a measure of the potential fighting capacity of a nation at a given time.

The concept of GDP was developed by Simon Kuznets for a US Congress report in 1934, but even in this report Kuznets warned against its use as a measure of welfare. At the time it was conceived, GDP was a useful measure but the emphasis on growing GDP and economic activity is now leading the world back toward the brink of collapse. It is time for new goals with a broader view of interconnectedness among long-term, sustainable economic, social, and ecological well-being [2]. To this end I wish to reproduce a portion of a speech given by Robert Kennedy at the University of Kansas, on March 18, 1968. As governments struggle to measure wellbeing in other ways, it’s useful to look back at what then US Presidential candidate said about how this key dataset falls short:

“Even if we act to erase material poverty, there is another greater task, it is to confront the poverty of satisfaction – purpose and dignity – that afflicts us all.

Too much and for too long, we seemed to have surrendered personal excellence and community values in the mere accumulation of material things. Our Gross National Product, now, is over $800 billion dollars a year, but that Gross National Product – if we judge the United States of America by that – that Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage.

It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl.

It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman’s rifle and Speck’s knife, and the television programs which glorify violence in order to sell toys to our children.

Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials.

It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile.

And it can tell us everything about America except why we are proud that we are Americans.

If this is true here at home, so it is true elsewhere in world.”

NB. Gross Domestic Product (GDP) and Gross National Product (GNP) are closely related measures. GDP measures the total output of the economy in a period i.e. the value of work done by employees, companies and self-employed persons. This work generates incomes but not all of the incomes earned in the economy remain the property of residents (and residents may earn some income abroad). The total income remaining with Irish residents is the GNP and it differs from GDP by the net amount of incomes sent to or received from abroad.In Ireland’s case, for many years past, the amount belonging to persons abroad has exceeded the amount received from abroad, due mainly to the profits of foreign-owned companies, and our GNP is, therefore, less than our GDP. (Central Statistics Office, Cork)

[1] Burke-Kennedy, E. and Minihan, M. (2014). Irish economy growing at fastest rate in seven years. The Irish Times, Thursday 18th September 2014.
[2] Costanza, R., Hart, M., Posner, S. and Talberth, J. (2009). Beyond GDP: The need for new measures of progress. The Pardee Papers/No. 4/January 2009. Boston University, Boston, MA.
[3] Marcuss, R.D. and R.E. Kane. (2007). US National Income and Product Statistics: Born of the Great Depression and World War II. Bureau of Economic Analysis: Survey of Current Business 87(2): 32-46.

Have we fashioned another unique Irish bubble?

As a country Ireland has suffered more than most from the international financial crash of 2008 chiefly due to an over-reliance on the construction sector. But I fear that another unsustainable economic bubble has now been shaped. (Re)building an economy focused on one industry and model is a high risk strategy, a case of all eggs in one basket. For Ireland, over the past number of years our government has promoted the country as the main European headquarters and destination for largely US-based ICT corporations and industries. But alas, these firms may not be here for the indigenous educated flexible workforce and ideal working environment but rather the very generous corporate tax rate on offer.

My concern is that many of these companies are in Ireland because we facilitate tax avoidance. At present, Ireland has a corporate tax rate of just 12½% but it has been reported that some major organisations pay much less than this [1], although the department of Finance disputes these figures. Nevertheless, even the government’s own recently commissioned report maintains that Ireland’s corporation tax averages out “at just under 11%” [2] (corporate tax rates across the EU ranged from 10% to 35% [3]). These powerful corporations have found our leaders readily available to meet and listen to their needs [4] resulting in the country being at the centre of a controversial storm over multinational tax avoidance due to aggressive tax strategies deployed here by the likes of Apple and Google. Last year US senators John McCain and Carl Levin publicly stated Ireland was a tax haven after it emerged Apple paid taxes of just 2% on its foreign earnings in 2012 [5]. The ‘double Irish’ is a tax avoidance strategy that multinational corporations use to lower their corporate tax liability. The strategy uses payments between related entities in a corporate structure to shift income from a higher-tax country to a lower-tax country [6].

Moreover, Google continues to be our biggest exporter [7] but I pose the question; what does Google make and how can it be appropriately quantified? While I acknowledge they build/create software such entities are very difficult to define in terms of where they are built or assembled. Code can be downloaded and uploaded from any destination in a matter of seconds/minutes so who can really tell what components have emanated from where? And exporting these products takes place virtually not in trucks and ships leaving Dublin port. Furthermore, in which jurisdiction are profits created and is it right that such profits that do not emanate from here are washed through Ireland? Seamus Coffey, a lecturer in economics at UCC, maintains; “Google does not generate its massive profits from 2,000 or so sales staff based in Dublin. These are replaceable and moveable without any significant cost or loss to Google” [8]. This suggests a very flexible and highly mobile workforce with limited ties to Ireland. Should conditions change or opportunities to move to another European city be provided how many of these workers will dig in their heels to stay?

But surely we have a well-educated workforce to sustain this sector if others leave? On closer inspection this may not be the case. Our universities have begun to fall behind our European neighbours in term of OS rankings [9]. In its ICT Skills Audit, the non-profit training promotion agency Fastrack to IT (FIT) estimates that there are 4,500 vacancies in Ireland’s ICT sector [10]. These are not being filled, because of “the severely limited supply of suitably skilled applicants”. Furthermore, Irish students fall far below their EU counterparts when it comes to learning and speaking other languages. The end result is that multinational ICT companies, attracted here by our corporation tax rate, are forced to recruit staff from overseas to fill their Irish offices [11] and many of the multinational ICT companies have expressed concern at this skills shortage even as they establish new operations here [12].

That said, the importance of the digital economy to Ireland at present is significant. The ICT sector in Ireland attracts global investment with nine of the top ten US ICT companies operating here. There are over 200 IDA supported ICT companies, directly employing approximately 36,000 people, which represents 22% of total exports, estimated at €35 billion [13]. At present, these employees live and pay tax in this country but broad questions must be asked about this sector and how sustainable it is in the long-term. The continued success, or otherwise, of this sector, moreover, may not lie in our hands. Pressure for tax reform is now coming from our European partners [14] the OECD [15] and the US [16]. Many of these proposals aim to ensure that corporate profits are taxed where economic activities generating the profits are performed and where value is created.

As a country we have form and panache when it comes to creating unsustainable economic bubbles. Those who lived through the recession of the 1980s remember the closure of the massive FDI factories (largely built with the aid of huge tax concessions) across the country leaving many communities decimated. Our most recent bubble, fuelled by the construction sector and cheap credit, is still vivid and the hurt continues right across our society. Once again, as with previous ‘miracles’, we have no champions that question a strategy that places our recovery in the hands of large globalised corporations. I suggest that relying on the goodwill of such organisations to stay on the peripheral of Europe once fairness has been restored to the European tax system is foolhardy. I hope I’m wrong, but my gut feeling says otherwise.

[1] RTÉ. (2012). Effective corporation tax rate may be only 6.5%. Wednesday 24th October 2012. [Available from]
[2] The Department of Finance. (2014). Effective Rates of Corporation Tax in Ireland. Technical Paper, April 2014. [Available from].
[3] European Movement Ireland. (2014). Just the Facts – Irish Corporate Tax. [Available from].
[4] Ross, S. & Webb, N. (2012). The Untouchables: The people who helped wreck Ireland, and are still running the show. Dublin: Penguin Ireland.
[5] Carswell, S. & Keena, C. (2013). Questions remain for US senators over tax law. The Irish Times, 17th October 2013. [Available from].
[6] Darby, J.B. (2007). International “Tax Planning: Double Irish More than Doubles the Tax Saving”, Practical US/International Tax Strategies 11(9), 15 May 2007.
[7] Irish Exporter Association. (2014). Information and Communications Technology (ICT) continues to dominate Ireland’s exports. [Available from].
[8] Coffey, S. (2014). The great corporation tax debate. The Irish Independent, 22nd April 2014. [Available from].
[9] The Guardian. (2014). QS world university rankings 2014: top 200. [Available from].
[10] Fastrack to IT. (2013). FIT ICT Skills audit launched, highlighting shortage of suitable job applicants in key tech fields. [Available from].
[11] McCabe, S. (2013). Lack of language skills hurts our employment chances. The Irish Independent, 15th October 2013. [Available from].
[12] Whelan, G. (2013). Open minds, open hearts, open Ireland. Forfás White Paper. [Available from—WHITE-PAPER.pdf].
[13] IDA Ireland. (2014). Information & Communications Technologies. [Available from].
[14] Bettendorf, Leon, Michael P Devereux, Albert van der Horst, Simon Loretz, and Ruud A de Mooij (2010). Corporate tax harmonization in the EU. Economic Policy, 63:537-590.
[15] OECD. (2014). Centre for Tax Policy and Administration: BEPS – Frequently Asked Questions. [Available from].
[16] McCabe, S. (2104). Obama plans to axe tax advantages for US firms investing here. The Irish Independent. 8th May 2014. [Available from]

The Queen’s Speech, Dublin | 18th May 2011

Queen Elizabeth II and the Duke of Edinburgh made their first state visit to the Republic of Ireland from 17th May to 20th May 2011, at the invitation of the President of Ireland Mary McAleese. It was the first visit by a British monarch to the Republic of Ireland since 1911 and the visit was seen as a symbolic normalisation of British-Irish relations following the signing of the 1998 Good Friday Agreement. She also delivered a widely praised speech on the 18th of May on the history of relations between the two countries and she offered her sympathy and regret to all those who had suffered from centuries of conflict between Britain and Ireland in a powerful and personal address to the Irish nation. This Wordle of her speech proves an interesting visual of the actual speech content, the emphasis she placed on certain words, and the message she attempted to get across to her audience.