In the same week almost as the Central Bank revealed Irish households have a record €125 billion in savings, a new report from the former Central Bank Governor, Patrick Honohan, argues that Ireland is not as rich as we think it is.
Is Ireland actually a rich country?
That’s the question being asked by the former Central Bank Governor, Patrick Honohan, who argues that the way we measure and compare the wealth of different countries makes Ireland appear far more rich than we actually are.
When assessing a country's wealth, economists and governments usually look at Gross Domestic Product or GDP.
GDP is an economic figure which measures the entire value of goods and services produced in a country. And when looking at GDP data alone, Ireland is the second wealthiest country in the entire 27-nation EU, just behind Luxembourg, which is pretty impressive!
But does this tell the whole story?
Just using GDP to measure a country's wealth has its limitations, particularly in Ireland due to the large number of big, foreign multinational firms that operate here.
Apple, Facebook, Google, Microsoft, LinkedIn, Pfizer and Allergan are just some of the huge foreign firms that operate here. The majority of the world’s entire supply of Viagra and Botox come from plants in Cork and Mayo respectively for example!
Given Ireland's small size, these huge operations boost our GDP data but also give a false impression of our wealth as most of the profits these companies make are repatriated back to their (largely American) owners.
The high cost of everything in Ireland also needs to be factored in when discussing our wealth.
Gross National Income (GNI) is therefore sometimes used to measure wealth in Ireland as it isn’t distorted by foreign company profits. This is because GNI only measures the value of Irish goods and services produced in Ireland (and also outside of Ireland by Irish companies with operations abroad). More importantly it doesn't include the income of foreign multinationals that is sent abroad.
In most countries GDP and GNI are quite similar - but not in Ireland.
It’s a bit complicated, but in recent years Ireland's GNI figure has become a bit distorted also due to how intellectual property assets (such as patents) on things like iPhones, laptops or software are treated.
To counteract this, the CSO came up with a new and more realistic measure of wealth for Ireland a few years ago; a modified version of GNI to take account of Ireland's somewhat unusual economic conditions; GNI*. In 2019, GNI* was about 40% BELOW the level of GDP here, which would make Ireland only the EIGHTH richest country in the EU.
Still not bad and close to the top quartile in terms of wealth in the current 27-nation block.
However another measure of wealth is Actual Individual Consumption (AIC). Roughly speaking this seeks to measure the wealth of households by looking at how much they consume and takes account of prices. This figure is better at measuring the wealth of just households (as opposed to businesses for example). And by this measure Ireland ranks only 11th richest in the EU and also behind the UK.
Looking at AIC, in terms of consumption per capita we are closer to Cyprus, Israel and Italy in terms of wealth, than to the United States, Switzerland or Norway (which is where the GDP comparison would put Ireland).
It's not all about money
Another broader measure of wealth is the Human Development Index (HDI) from the UN, which combines income with health and education indicators. By this measure Ireland ranks second in the world, behind Norway. But this index includes GNI and if we used GNI* instead we’d be ninth.
In conclusion, Ireland is still a very prosperous and wealthy country, but not as prosperous as is often thought according to the Central Bank because of the inappropriate use of misleading, albeit conventional statistics.