Friday, January 17, 2014

17/1/2014: Goods Exports: A Story of Irish Tax Arbitrage Mode of Growth?

I covered monthly and annual trends in Irish Trade in Goods statistics yesterday (, noting that

  1. Irish exports of goods are continuing to shrink - not grow at a slower rate, but grow at a negative rate - over 2013
  2. Irish trade surplus in goods is now in negative growth territory for the third year in a row.
  3. Past resilience of Irish trade in goods statistics was predominantly down to the collapse in imports.
In the past, I have argued that we are likely to witness further deterioration in external balance for Ireland once the domestic economy moves back into growth cycle (imports of consumer goods and capital goods will all rise). Given the overall problematic situation with domestic disposable after-tax income, this implies that we can lose the only pillar supporting our debt sustainability (external balance) if capex ramps up, while employment creation and wages growth is lagging. In other words, a jobless recovery on foot of capex expansion can end up being a pyrrhic victory for Ireland.

To see this, consider imports/exports ratio in the economy (to remove monthly volatility, we use half-yearly aggregates):

Following a large jump in the ratio of exports to imports on foot a significant decline in imports, we are now running below the historical trend. This suggests that our exports of goods are becoming less, rather than more, tax-efficient (which, of course, is consistent with pharma sector decline in our exports of goods). Good news is that this means our exports are also potentially becoming better anchored to real value added carried out in this economy, and less tax arbitrage-driven. But the bad news is that at the same time, exports growth rates are collapsing:

And the decade-averages, shown in the chart above are telling this story.

This is worrying... doubly so because what is taking place of our good exports is the 'success' story of our ICT services sector, which is growing on foot of tax arbitrage. We are replaying the same 'advantage' as before - instead of developing successful, value-added based exporting model we are just switching from one tax arbitrage play to another. ICT manufacturing tax arbitrage of the 1990s gave way to Pharma tax arbitrage play of the 2000s, which is now giving way to ICT services tax arbitrage play of the 2010s... 

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