Chart of the Week: Statisticians who live in glass houses …

Earlier this month it was reported that a delegation of EU statisticians is due to visit Dublin to run a fine-tooth comb through Ireland’s latest set of GDP statistics. As readers of Chart of the Week will no doubt recall, government statisticians last month revised their estimate of growth in 2015 from an already impressive 7.8%, to a literally incredible 26.3%. Such a substantial change was bound to raise a few eyebrows. But if there is any justice, then it is the EU’s own statistical framework, rather than any fat-fingered employee of Ireland’s Central Statistical office, that will be found wanting.

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The EU’s rules and regulations for the compilation of statistical data are enshrined in the European System of Accounts (ESA) 2010. ESA 2010 brought with it a number of important conceptual changes, not least of which was to the measurement of international trade. Previously, to be recorded either as an import or an export, a manufactured product had to cross an international border. Not so under ESA 2010. Instead, there merely needs to be a change of ownership. Imagine that a large computer manufacturer, with production sites across the US, moves its headquarters, for tax purposes, to Ireland. All raw materials purchased will now count as an import into Ireland, and all finished goods sold will count as an export from Ireland. This is true even though all economic activity continues to take place in the US, with not so much as a single silicon chip touching Irish soil. Moreover, to the extent that the production process adds value, exports will tend to exceed imports, boosting Ireland’s trade balance in an entirely meaningless way.

As our chart shows, there was a step change in Ireland’s trade balance at the beginning of 2015, from less than €10 billion, to more than €20 billion. Ireland’s overall GDP moved up in parallel. We cannot know for certain what caused this dramatic shift, however a decision by one or more large multi-national corporations to re-domicile themselves in the tax-friendly Emerald Isle would be a very strong candidate explanation.

With the introduction of ESA 2010 across the EU, attention has shifted away from the place in which factors of production are employed, towards the place in which the company with legal responsibility for those factors of production has chosen to set up base. Consequently, and in the case of Ireland in particular, that makes GDP even less reliable as a measure of a country’s standard of living than it once was.