Monday 21 May 2018

The €100bn business without borders...

World’s biggest per capita services exporters & Ireland’s top 10 services export markets 2014
World’s biggest per capita services exporters & Ireland’s top 10 services export markets 2014
Dan O'Brien

Dan O'Brien

A small island in a peripheral location is not an ideal place to prosper. Being distant from markets and sources of raw material adds to the cost of creating wealth.

Among many other things, that puts exporters at a competitive disadvantage. And as small economies can only get rich by exploiting the economies of scale that come with exporting, the costs of peripherality can be very high - something which was central to the national economic conversation in this country for so many decades in the last century.

But geographic handicaps can be overcome. In the decades following the Second World War, Japan became the first non-western country to reach rich-world income levels - despite being very far from its main markets. Even more notably, our neighbouring island spent decades in the 19th century as the workshop of the world.

Today, the costs of peripherally are lower than they have ever been. In the contemporary world it is often said that distance is dead. While that is not quite true, it is closest to being true in services markets.

The 'weightless economy' is one in which services can be provided in one place and consumed in another with little or no transport and communication costs. Services provided on-line are perhaps the best example.

Just before Christmas, the CSO published its detailed annual figures on Irish services exports and imports. To my knowledge these figures have never been written about in the mainstream media or by any economics bloggers. That alone is a reason to analyse them here.

An even better reason is the sheer volume of services exports, the value of which in 2014 exceeded a staggering €100bn for the first time - or more than €20,000 for every man, woman and child in the country.

Among my favourite factoids on the Irish economy is that for every $37 that crosses an international border anywhere in the world to pay for services, $1 goes to Ireland-based providers.

This factoid comes from figures in the World Trade Organisation's annual report. By that organisation's rankings Ireland has risen to become the 10th largest exporter of services in the world in absolute terms.

Just how disproportionate Ireland's world market share relative to its population can be seen in the first chart. Per capita, Ireland is ranked fourth in the world, with only the microstates shown in the graphic exporting more person.

And as the recent CSO release indicates, the astonishing growth in the traded services sector continues apace, surpassing €100bn in 2014, up 140pc in a decade. Last year will easily surpass the previous year, with receipts reaching €86bn in the first nine months of 2014 alone.

Ireland's three main categories are computer services, finance and insurance, and business services. The latter includes many things, such as professional services, operational leasing and R&D.

Computer services have experienced enormous growth in the past decade. Since 2008 alone they have doubled and now account for about half of total services exports. The presence of US tech firms, such as Apple, Google, Microsoft and Oracle, explains the upward trend.

This rapid increase has been met with plenty of scepticism from economists and other commentators. And for good reason. There is little doubt that these figures are inflated, in part by companies booking sales in Ireland to avoid tax.

Things are further obscured by the suppression of some data for reasons of commercial sensitivity. Interestingly, the breakdown of services exports to the US has two important figures suppressed by the statisticians on the grounds of confidentiality: exports of computer services and financial services.

While number crunchers the world over understand that people and companies will only give good information if they are confident they suffer no downside from doing so, it is significant that these two figures are suppressed.

The criterion for not revealing figures is that if a small number of companies - two or three - account for most of the total, the number is not published. This could be interpreted as further evidence that the accounting practices of just a tiny number of companies are having a large distorting effect on the headline figures.

But while the exaggeration in Irish services exports is real, so are the direct and indirect benefits for employment and taxes the multinationals bring to Ireland.

The very visible presence in Dublin of the IFSC is but one example. Financial services and insurance exports are among the most important exports. The sector took a hit during the financial crisis, but exports in both sectors have since surpassed pre-crisis levels.

American, Dutch, German and Italian institutions are among the biggest exporters in finance and insurance.

Interestingly, Italy is the largest destination for Irish insurance exports (see the second chart), as many Italian firms have escaped the difficult business environment and higher taxes of their home country to sell their services from Dublin.

By market, the UK is by far the largest destination for Irish-based services, as the second chart illustrates. In 2014, receipts from services sales exceeded €20bn. The aforementioned sectors feature strongly, but other sectors perform well, such as transport.

The size of exports to the UK underscores, if that were needed, the risk posed by a Brexit and uncertainty over the trading relationship that would exist between Britain and the EU, Ireland included, if the former voted itself out of the bloc.

Irish services exports go predominantly to Europe and North America - but there has also been moderate growth in Asian markets. Export growth in China has been fast, though from a very low base. By and large, this increase has been thanks to operational leasing, notably in aircraft.

Indeed, aircraft leasing is perhaps the great indigenous business success story.

A positive long-term legacy of Guinness Peat Aviation, Irish companies are world leaders in the field. Though probably not all aircraft, 'operational leasing' is a big part of Ireland's services exports, amounting to nearly €8bn in 2014.

There are many aspects of the sector worth exploring in greater detail, and this column will return to the subject soon. In the meantime, a recent paper by economists at the Central Bank may be of interest to those curious about the changing pattern of Irish exports.

Sunday Indo Business

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