Haven’t I been continuously promoting exports, and saying that exports are a wonderful way to increase your client base, that you can get so much help from government agencies, and that I am working to establish links to the UK?
Yet, our exports boom has also been called the “jobless recovery”. So what’s all the fuss about then? Once again, it is a matter of making the difference between macroeconomics and microeconomics. On a micro level, the level of your household or your business, exports are a very good idea and once again I want to encourage you to start exporting or export more.
That’s the level I am always positive and optimistic about, because that is the level at which you can take action.
But on the macro level, the level of the national economy, while there has been much talk of growing exports, I am not sure we have been looking at the numbers hard enough. What story do these numbers actually tell us?
Exports are good, yes, but our domestic economy still needs some work!
We do export far more than we import overall, and that number has been growing steadily, which is always good news. But trumpeting news of exports growth shouldn’t make us forget that our domestic economy is still going through a harsh contraction: consumer confidence is still low and of course, Budget Day doesn’t help that.
In addition, people don’t just spend or save based on their current circumstances, but rather the situation they anticipate they will find themselves in the future. And at the moment they are saving, not spending. That alone should tell us volumes about the state of our home economy. No, exports alone can’t single-handedly save the day, and we shouldn’t forget that.
Then I want to question a few assumptions that are regularly bandied about, like “The UK is our biggest trade partner”. The UK is one of our biggest trade partners only because it has one continuous geographical border around it. Indeed, we might do less trade with other single countries, but in terms of currency trading partners, the Euro area is a much, much bigger trading partner for Ireland.
Does this mean that I am backtraking on my strategy to export to the UK? Not at all. I’m simply pointing out a fact that is not always highlighted: we need to continue to nurture our trade relations with more than just the UK and US. And at the same time, I am enthusiastically working on exporting to the UK, because it makes a lot of strategic sense for my business at a micro level.
Not all exports are equal
Exports are not performing equally well across the board. Actually 90% of our exports come from foreign direct investment: their positive influence on the local economy might not be as “sticky” or as long-lasting as the influence of indigenous businesses. This is likely to happen in an open economy (one that engages in a lot of international trade) and an attractive FDI location, but we still need to make sure that at policy level, Irish SMEs are encouraged to go out there on the world stage, to protect themselves as well as the wider economy.
And as has been repeatedly pointed out, FDI needs to be wooed, which we have taken care of with internal devaluation, favourable regimes as well as building a high quality workforce. By working on bringing down our wages and the overall cost of doing business in Ireland, we have increased our value and our competitiveness.
Also, 50% of our products exports are thanks to pharmaceutical companies. Many of them also represent FDI. What’s more, exports results from pharma are slightly uncertain: although the latest merchandise projections point to growth, a lot of patents for medicines and molecules are expiring, which might adversely affect those results.
How much money does actually stay in the country?
Another thing we should pay closer attention to is – how much money generated from exports actually stays in the country. More than just heady exports figures, we need to look at the balance of payments. Because that’s where the actual better news is.
Our balance of payments came into surplus last year, for the first time perhaps since 1999. This is something that we lost sight of during the boom: at the time we took our eye off the ball and our balance of payments was in deficit, due to growing domestic demand – the opposite of what’s happening now.
FDI is often criticised for an artificial exports boost, that is soon cancelled out by profits being repatriated to the foreign company’s headquarters. But it seems that FDI businesses have been contributing their share to the Irish economy, after all: the first clue is in the corporation tax returns, and the second is the positive balance of payments; settling in Ireland, they had to have buildings built, they had to buy supplies and of course they hired a lot of people. Today 1 in 7 jobs in Ireland is down to FDI.
Services finally catching up
For the first time, the balance of payment for services is in surplus – this is more good news, and another driver of exports that we need to nurture. The technology sector is in no small part responsible for this, thanks to software and services sales.
This rise in service exports is also due to a change of governmental policy: Enterprise Ireland is now much more willing to talk to internationally traded service companies (like mine!), when in the past it focused solely on manufacturing businesses.
Because we built a world class expertise in this sector, some of the biggest investment companies all over the world are domiciling their funds in Ireland. This is another form of FDI. Those investment funds in Ireland are responsible for the management of assets worth over two trillion euros. Now by the very nature of the business, this money may well be coming to Ireland, but it isn’t spent: it is there to be stored. It doesn’t make its way into the economy.
On the upside, it still creates jobs: the more assets you have to manage, the more people you need to hire to manage, administer, service, audit those assets. Let’s take three examples, advertised on the IDA’s website: Fidelity Investments have been present in Ireland since 1996 and will potentially create 200 jobs in the near future, saying “We’re not here for any recession arbitrage, we’re here for the long haul” (in this video). Other companies are seriously thinking of expanding or creating operations in Ireland, like Clearstream, and Amanie Advisors.
Very interestingly, now that Ireland is the investment management hub of Europe (with Luxembourg), from July next year the AIFMD (Alternative Investment Funds Management Directive) will generate lots of new opportunities in this sector. This directive regulates hedge funds for the first time – and there is a lot of work to be done to comply with valuation, administration, custody, as well as a plethora of new policies and regulations to be implemented.
So here is my take on Ireland’s true international picture. While exports are wonderful from a microeconomic point of view for single companies, there has been too much talk of their growth, and not enough discussion of how much money actually remains in the economy, while the Balance of Payments tells us the real story. Also, the idea that “we’re closer to Boston than Berlin” just isn’t true: the Euro area is a huge market for Irish exports.
Our international picture is much improved, but the computation of economic growth masks the other issues that we should be working harder to solve: the mortgage crisis, the still staggering amount of debt, the cost of doing business…
Our domestic economy needs more attention and particularly from an outside perspective, we need to highlight the fact that despite the fact that we are out of recession, our domestic economy is still in the throes of its depth.
On the positive side, we have real good news. Our balance of payments is now in surplus, the indigenous service sector is indirectly getting a boost, our internal devaluation has been rewarded through more jobs and the AIFMD only bodes well for the Irish economy.
It’s important to be able to clearly identify what’s really going on in the economy and arm yourself with the knowledge before listening to one point of view or the other, as then you can make up your own mind.
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