Thursday 29 September 2016

Look closer: Our exports appear less than stellar

Published 12/04/2015 | 02:30

DOCKLANDS: It’s thanks to the broader pharma sector alone that goods exports have grown at all in the 21st century
DOCKLANDS: It’s thanks to the broader pharma sector alone that goods exports have grown at all in the 21st century

Among the most important differences between Ireland and the other countries that had to be bailed out was this economy's unusually large export sector.

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Among other things, it meant that even a modest increase in exports had a much bigger impact on GDP compared with the other troubled peripherals. This was crucial in offsetting the collapse in the domestic economy and providing an engine for growth.

That Ireland was "the fastest growing economy in the EU" last year was thanks largely to a surge in exports. But as much of that export growth was related to a statistical anomaly, it raises important questions about how headline export figures reflect real economic activity in the economy - and, ultimately, the degree to which they improve national well-being.

The importance of exports to the Irish economy and how they are measured are just two of the issues discussed in a timely recent paper* by economists at the Central Bank. It highlights some of the most important trends, noting that "services exports have become more prevalent; the export basket has become more concentrated; and the importance of trade in intermediate goods and services has risen."

Stephen Byrne and Martin O'Brien go on to ask even more fundamental questions - how do exports actually benefit the wider economy and how are the benefits changing as the composition of exports changes?

Let's start with the less cheery exporting stories. In the 1990s, a massive increase in the production of computer hardware was one of the hind legs which propelled the Celtic Tiger. A good share of the growth in total exports, which often exceeded 20pc annually, was accounted for by this sector. By 2001, IT equipment exports were worth more than €30bn and accounted for well over one-third of all goods exports.

Although it may not be well known, given the general sense of boom at the time, but the industry's manufactured output in Ireland then began to collapse. By last year IT exports were worth just €6bn - and are now relatively minor in the overall manufacturing mix.

Fortunately, as IT hardware production started falling early in the last decade, the pharmaceutical industry continued to increase its output, even if there have been a few (smallish) downward blips along the way.

And it has been thanks to the broader pharmaceutical sector alone that goods exports have grown at all in the 21st century.

The value of all other goods exports, when added together, have actually fallen over the past decade and more. Among other things, this has led to the aforementioned concentration of exports, with the pharma and chemical sector now accounting for more than two-thirds of total goods exports.

Another notable aspect of recent changes has been the halving of Ireland's market share of the global goods export market since the turn of the century. (A less concerning factor in that change is that much of the global growth in trade has taken place in the developing regions of the world in which Ireland has a limited presence, and will always likely have a limited presence owing to distance - geographical proximity is still a major factor in determining the closeness of trade relationships.)

If the rise of pharma is the big good news story in goods exports over the past decade, the rise of non-goods (ie, of services) has been the other major development, and one which makes Ireland highly unusual compared with peer economies.

Globally, services exports account for only around one-fifth of the total value of exports, despite services being the largest sector in most economies and accounting for more two-thirds of GDP in most developed economies (there is a near universal pattern in economic development that see services come to dominate output as per capita incomes rise).

In large part this is related to the less export-friendly nature of services exports - as the classic case of the barber illustrates, many services can only be consumed on the spot and cannot be provided at distance.

But the change in Irish services exports has been quite extraordinary, seemingly overcoming the problem of simultaneous provision and consumption.

In 2000, Irish services exports were in line with international norms, accounting for one-fifth of total exports. But by 2012, they had exceeded goods exports by value. Indeed, almost all of the growth in headline exports over the period came from services.

They caused Ireland's share of the world services export market to grow fourfold since the turn of the century. Among my favourite factoids about the Irish economy is that for $40 that is spent on traded services globally, $1 comes to Ireland.

Why has this happened? As the authors of the study note "to date, the shift to services exports in Ireland has not been driven by a significant shift in the import composition of our main trading partners."

So what has driven the massive eight-fold increase in the value of services exports in just a decade-and-a-half?

One factor relates to the technology sector. Much of the decline in manufactured IT hardware was replaced by services - for example, computer programmes that were once sold on CDs, and hence classified as goods, are now delivered electronically and classified as services (see chart).

But there is much more going on.

After computer services, the second biggest export is "business services". These are mostly related to the Irish subsidiaries of foreign companies servicing sister companies in Europe and beyond. While there is no doubt that there is very significant gain to Ireland from this activity, the headline export figures undoubtedly overstate it. Among the most interesting issues highlighted in the Central Bank paper is how and why this is so.

Traditional measures of exports simply count how much money is earned when goods and services cross borders. But this overstates global trade because many exports incorporate imports, which means there is a lot of double counting in aggregate regional and world trade figures.

More recently efforts have been made to measure the added value in exports so that a better understanding is gained of where wealth is really being created. And by this measure Ireland's export performance is much less stellar than the traditional export figures suggest.

"The domestic value added content of gross exports in Ireland is among the lowest in a selected group of our trading partners, with this disparity being most prevalent in the services sector," write Byrne and O'Brien.

Worse still, the authors note that "within the services sector itself there is evidence of a downward trend in the value added ratio in Ireland, falling from 81pc in 1995 to 53pc in 2009".

All of this is more than mildly concerning. At the very least it suggests that statisticians put a greater focus on the value added content of exports so that analysts and policy makers are not dazzled into complacency by the traditional measures of exports which flatter to deceive.

As an economy that depends on being well integrated into the world economy for its prosperity, there can never be any room for complacency on export performance.

* Changing Nature of Irish Exports.pdf

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