Thursday, July 3, 2014

3/7/2014: Irish GDP Q1 2014: Riches of Drugs Trade & R&D 'Investments' Raining Upon Us


CSO published revised Quarterly National Accounts now in compliance with Eurostat latest requirements based on European System of National and Regional Accounts (ESA) framework. This resulted in an uplift in GDP and GNP figures due to two main sources:

  • ESA 2010 framework changed the treatment of research and development (R&D) expenditure. Per CSO: "Under ESA95, R&D expenditure was treated as an ancillary cost to the main production of an enterprise, while under ESA2010, R&D expenditure is recognised as capital investment." This is rather stretching: a business 'invests in R&D' and the outcome is either unsuccessful or successful. In the case of unsuccessful outcome, R&D allocation gets written off, so it does not register in business activity as a negative entry offsetting wages and purchases paid for in the process of R&D expenditure being undertaken. In case of success, the resulting IP or product are entered in either as new capital or new value added. Again, these are not netted against R&D spending, as far as I understand. So R&D spending as investment implies double counting the expenditure as value added over time. Looks questionable to me.
  • ESA also requires that an estimate for illegal activities should also be included in GDP calculations. This is not separated into a different line-item in QNA, so we have no idea where these additions were made. Also, significantly, it is unclear how imports of illegal goods and services are factored in - are these accounted for on gross imports side? Are these netted out of GDP calculations?

The adjustments resulting from these two changes are large. Overnight, 2013 GDP growth is now +0.2% as opposed to -0.3% before the above revisions kicked in. That's a swing of half of a percentage point!

More than that: In 2013, Irish GDP was supposed to have been EUR164 billion before the revisions. Hookers, illegal drugs, all other sorts of stuff that would land you in Mountjoy, plus R&D reclassifications pushed this to EUR174.8 billion - a full EUR10.8 billion richer we are not, but the Government now has a claim to make that we are and it is all thanks to the FG/LP 'leadership' and all this sort of publicity.

This is just meaningless. Country output comparatives and analysis across years and levels have been now rendered effectively bogus by the combination of
1) Massive tax transfers by the services sector MNCs
2) Massive profits shifting by the traditional MNCs
3) Estimates (or rather guesses) of the illicit trade activities; and
4) Politically correct treatment of R&D spending.

It is worth noting that in Ireland, R&D expenditure has been repeatedly questioned due to the suspicion that much of it (especially for indigenous companies) involves 'investments' in process and management R&D - i.e. activities that normally have nothing to do with invention or creation of anything new, but rather have more to do with marketing and sales.

With this in mind, one simply cannot ignore the National Accounts releases, so in the next few posts I will start analysis of the new, revised data.

Bear in mind, however, that today's 'gains' reported for Q1 2014 are artificial or superficial or plain bogus and have little connection to the reality on the ground. We are not made better off by counting cocaine sales and trips to 'Happy Endin' massage parlours and we are not being made richer by spending on R&D - we might get returns on that R&D, but these returns would count into the normal (pre-revision) GDP when they do take place.
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