The latest report from the National Competitiveness Council (NCC) come as a reality check to the succession of bright Irish economic data releases we have seen recently. The NCC argues that while the economy has made progress, a concentration on a small number of large companies to drive growth, exports and tax revenues is concealing serious weaknesses and vulnerabilities.
In a nutshell, it says we should be worrying not only about the risk of an old-style boom-and-bust cycle but also about our reliance on “a small number of highly productive large companies”. It is an underlining of the warning from the council over the summer when it cautioned that the economy was flying “on one engine” into an uncertain period.
The latest report is notable for the bluntness of its conclusions. The NCC's chairman, UCD professor Peter Clinch, says: "The vulnerabilities in the fabric of the Irish economy, coupled with the challenging global environment, endanger the sustainability of the economic model." And the key to these vulnerabilities, the council says, is the concentration of economic activity which means that "the sustainability of Ireland's growth trajectory is under considerable threat".
Key to the NCC analysis is the State’s reliance on a small number of highly productive firms and sectors to drive economic growth and tax revenues. This leaves us vulnerable to a series of looming international risks, from Brexit to international tax reform and the threat of trade warns – and from the more prosaic risk that something goes wrong in a few of the sectors or companies involved.
According to the report, “our heavy dependence on the performance of a narrow base of firms and economic sectors, the narrow range of products exported and the reliance on a small number of export markets pose a serious concern”. It points out that the State’s economic output is more and more reliant on industry, which has a 36 per cent share of value added in the economy, twice the European Union average. In turn this is dominated by a few sectors, particularly pharma. The council warns bluntly that it “is concerned that in the face of an uncertain global environment, a potential decline in the multinational footprint could undermine the sustainability of our economic model”.
Exports concentrated
The data it presents is not new, though seeing it all put together is striking. Irish exports are very concentrated in terms of markets, it says, to the EU,UK and US, making us one of the less diversified exporters internationally. Exports are also very concentrated in terms of sectors, with chemicals accounting for 55 per cent of goods exports. Meanwhile the top 15 companies account for 90 per cent of total goods exports – and the top five account for almost a third of exports.
In contrast to this small group of highly productive multinationals, Irish-owned exporters generally have a narrow range of products and markets – food accounts for half of Irish-owned exports by value.
The NCC also points again to the concentration of tax revenue – and particularly tax revenue growth – on a small number of big multinationals. The Republic’s reliance on corporation tax is higher than the international average and within this almost €4 out of every €10 comes from the top 10 companies. Shocks affecting any of these could have an impact on overall receipts, the NCC points out.
The policy recommendations echo earlier work from the NCC – boost competitiveness, create room for manoeuvre in the public finances, put spare resources towards investment and urgently work to increase productivity and export diversification in Irish-owned industry.
The unbalanced nature of the Irish economy and the slower speed of development in the indigenous sector has been an issue for years, of course. Ironically, the last few years have seen an acceleration in inward investment, including a massive movement of intellectual property assets here. These assets have limited links to real activity in Ireland – their movement is a result of international tax planning – but they have boosted the corporate tax base.
So rather than moving away from our multinational concentration, the economy has doubled down on its reliance on foreign investment. We have been used to counting the pluses of this investment, which are considerable, but the NCC’s point is that placing our bets on such a small number of companies also carries significant risks.
