Forget any prospect that Ireland's parallel economies might finally merge.
e’ve long known there are two Irelands – one populated by multinationals and well-paid jobs, and a second domestic version that employs most of us on not-so-good salaries.
The first-quarter growth numbers released this month by the Central Statistics Office showed the chasm between the two. The ‘successful’ multinational part delivered stellar gross domestic product growth of 10.8pc, while the domestic economy contracted by one percent.
That’s the third largest quarterly gap on record between GDP and modified domestic demand which measures the local economy’s output.
Only the first quarter of 2015 (the era of Leprechaun Economics) and the first of 2021 (Covid) had wider disparities between the two.
This isn’t to disparage the role of foreign direct investment (FDI). After all there are now 275,000 multinational jobs here which pay on average one-and-a-half times the annual industrial wage.
Multinational firms also effectively financed Ireland’s Covid spending as they contributed €15.3bn in corporation taxes last year, and a lot more via their staff payrolls.
FDI is, as IDA Ireland chief executive Martin Shanahan said in January, a “core national asset that has a sizeable impact on the Irish economy and on society more broadly”.
Yet despite over a trillion euro and counting of foreign investment, spillovers to domestic firms have been limited.
In terms of productivity, the performance of the domestic sector is no better than the EU average in countries that don’t get much FDI. Also, most multinationals don’t tap into local firms to source their inputs because they are plugged into vast global supply chains.
While the headline number for research and development spending here is close to the EU average, that is largely due to the investment by multinationals who account for 70pc of the total.
So yes, domestic firms have in some ways benefitted from the presence of foreign firms that often sit at the cutting edge of technology and innovation, but on nothing like the scale proportionate to the levels of investment that have been seen here.
Instead of a debate about how to spread the benefits of FDI more widely, the discussion seems to begin and end on the threat to tax revenues. There’s also little honest acknowledgement of the pitfalls of FDI, particularly the role it plays in rising inequality.
The good news though is that others, even the most successful, cutting-edge economies are also asking those questions, so we don’t have to reinvent the wheel.
Technology and economic powerhouse California is trying to work out how to deal with issues like overpriced housing and rising educational disparities.
Sound familiar?
A recent briefing paper from the Stanford Institute for Economic Policy Research highlighted some of the issues and some potential solutions.
Some may be relevant here – looking to Estonia as a model to modernise and digitise public service, to Taiwan’s training programmes or to Boston’s infrastructure development of a biotechnology and innovation hub that brought firms and workers together with strong workplace, housing and public transport connections.
The Organisation for Economic Cooperation and Development (OECD) says that to help close the productivity gap local firms need to develop their skills to interact more fully with FDI firms. This would be helped by greater direct government funding of research and development in businesses, more labour mobility across firms and on-the-job training for workers, a particular weakness in a country that ranks poorly in IT skills.
The OECD also warns that the huge productivity gap between foreign and local firms “has tended to translate into gaps in wages, stoking Ireland’s very high level of market income inequality”. In other words, there is a big social dimension to FDI that is rarely discussed here.
In 2019, before all of distortions caused by Covid skewed economic data, FDI firms were paying, on average, €66,000 a year versus the then national average wage of €46,000, according to the IDA.
A study by Ciarán Nugent of the Nevin Economic Research Institute found that earnings for the top 10pc here are almost four times those of the bottom 10pc, the biggest gap by far in the European Union. It is an issue that Ireland – and its citizens – have chosen to address through the tax system.
Among rich nations, on average, taxes and transfers led to a 25pc reduction in income inequality while here, the reduction was 40pc, the highest among the OECD’s 38 member states.
Yet, as the OECD noted recently, “strategies focusing only on reshuffling income” are “neither effective nor financially sustainable, especially in the constrained fiscal climate that prevails today”.
After all no one likes paying taxes, especially in these inflationary times, and it’s an oft-repeated populist trick to call for the burden on the ‘squeezed middle’ to be eased. That doesn’t sound like an unreasonable idea at first, but underlying it is a dangerous path to hollowing out public finances and one that helped trigger the rise of Donald Trump and set Brexit in train.
We need a serious debate about the whole tax system from income to property and wealth taxes as well as employer social contributions and a discussion about just how much inequality we as a society are prepared to accept. If everyone were better off, for example, would higher levels of inequality matter?
The IDA’s well-honed offering is still attracting foreign firms with their well-paid jobs, and that is a good thing.
We need to take bold steps towards boosting local firms’ participation and productivity so as to help close that damaging income gap.
