Sunday, August 22, 2010

Economics 22/8/10: Fundamentals of investing in IRL Inc - IV

This is the last post in the series of four that presents fundamentals comparatives between Ireland, Switzerland and Luxembourg. The first post (here) covered analysis of current account dynamics, the second post (here) dealt with General Government balance, third post (here) highlighted differences in GDP and income. This post deal with residual fundamentals such as inflation, unemployment and population.

In terms of inflation we are not doing too well. Since 2000 Ireland remains expensive. More expensive than Switzerland, despite our massive bout of deflation. This, of course, does not account for the fact that Swiss residents get much better quality public sector services than we do, for less money spent. But that's a matter of a different comparison that I touched upon earlier (here, here and here).

So Chart 12 shows our inflation performance.

Chart 12:

You wouldn't be picking Ireland for your investment if you were concerned with real returns or with effects of inflation on economy's ability to carry debt.

If population growth is really a longer term dividend, we should expect Ireland Inc to overtake Switzerland by now in terms of
prosperity (Chart 13). After all, our 1980s and 1970s'-born cohorts are currently at the peak of their productivity. But recall per capita GDP... so far, there isn't really any evidence that growth in population leads to higher growth in GDP once scale effects are taken out of equation.

Chart 13:

Would you have invested in Ireland's debt if you were thinking about Ireland's ability to repay on the basis of lower costs of unemployment and greater proportion of labour force at work? Take a look at Chart 14.

Chart 14:

Well, not really. Swiss and Lux make for a much more compelling
case here and not just in the current crisis environment.

here's our real problem that is not a function of cyclical dynamics, but a structural one. Our employed are carrying much greater burden of providing for the rest of our population than Switzerland (Chart 15).

Chart 15:

Factor in that Irish public sector is larger, in relative-to-population terms than Swiss... and you have an even greater discrepancy in terms of the true earning capacity of the Irish economy.
Which brings us to the issue of productivity and back to the topic of exporters carrying the burden of the entire economy out of the recession. Apart from the construction boom, economy-wide income per person working is lower in Ireland than in either Switzerland or Lux since the 1980s. Even at the peak of the largest real estate bubble known to any other European country in modern history, our 2008 GDP per person employed was still not that much greater than that of Switzerland (Chart 16).

Chart 16:

May be, just may be it was because our wealthy developers all wanted a fine Swiss watch, while no Swiss investors wanted our bungalows in Drogheda or apartments in Tallaght? which is the same as to say - the Swiss are productive to the point of the rest of the world wanting their goods and services. We are productive only to the extent of the rest of the world wanting goods and services produced by MNCs and few indigenous exporters based here. But their productivity is high in gross terms and low in net terms (recall current account analysis in the first post). Unless we can dramatically increase the number of exporters while simultaneously upping the net value added in their operations to Swiss levels, there's no chance external trade can carry this economy out of the recession.


Fungus the Photo! said...

Ireland has attempted to emulate both exemplars by going into banking in a big way. How is that working out?

Please tell us why you cannot discuss the IFSC debt!

The get there quick approach has failed, predictably. Dedication to quality is the only way. I smile as I type that! The Irish and quality! Hmmmm..... Honesty is vital to quality. Without it, we play credit games. We know how they go by now, right?
Rigour is next. We managed to educate Europe centuries ago, but now we have grade inflation.
I see no hope except for exports based on expert knowledge of use of English and dishonesty. Hollywood for example is storytelling, with cultural control of the world as a spin off.
Short cuts and strokes abound, so: go into the Nigeria email market? I suggest they set up dummy accounts in Luxembourg, to preserve the Irish ethos?
We have no shortage of accomodation and attractive young people, so brothel keeping? With a discount for those in holy orders?
Legalize drugs as well?

Unknown said...


All that is well and good except for the fact that the Irish aren't really any good at the following that you mention:

1. Attractive young women
2. Those in holy orders being interested int eh opposite sex
3. A significant proportion of the population able to handle the legal drugs available (such as booze) in a way that does not end up with a knife fight in Limerick (or track suits going nuts in Dublin, or.....)

However, I must admit that your idea for relocating Nigerian email centres to Ireland is a good one. There are some other possibilities as well, such as:

a) start another famine - the aid from NGOs would provide much more in services than our current civil service. The added benefit is that NGOs are used to dealing with corruption, etc....and that what is left of the productive sector within the country (I assume one is you) would find more fertile fields elsewhere and give to the NGOs...

b) Get the Government to stop messing around and get on with what they want anyway....a 100% tax rate....this will have much the same effect of a famine in terms of people leaving....but may not work as well as a)

c) install a crazy dictator that believes that the US is the great Satan, let the CIA in to take him out and then get lots of US aid....there would be no shortage of takers in Irish public life for that job.....just read the Irish Times....

These are just a few ways that Ireland can improve its situation in addition to your Nigerian call centre idea.