by Frank Schnittger
Fri Dec 23rd, 2022 at 11:27:03 AM EST
The chart above probably does more to sum up the economic histories of Ireland and the UK in recent decades than any other. Taken from countryeconomy.com it compares Irish and UK GDP per capita growth since 1970. Of course, there is an argument that Irish GDP is somewhat inflated by the activities of global corporations located here, but what I want to focus on is the trend.
Irish and UK GDP per capita tracked each other quite closely until about 2001, with the UK consistently ahead, and quite markedly so from 1980 to 2000. (The scale in the graph above should actually be slightly further to the right). Ireland took the lead from 2001 onwards but the gap remained relatively constant until 2015. Both countries GDP/Capita took a hammering in the financial crash until about 2015 but since then UK GDP/capita has flatlined, at best, while Ireland's GDP/Capita has more than doubled.
In 2021 Irish GDP/capita was $100,129 compared to $47,508 for the UK and there is no sign of that divergent trend ending any time soon. Ireland's GDP growth rate was 13.5% in 2021 and is expected to be 7.9% in 2022 while the UK has entered a period of recession or GDP decline expected to last a least a year. Irish growth in 2023 is projected to be 3.2% although there are a number of downside risks which make that projection somewhat problematic. The course of the war in Ukraine and related energy and inflation crises being the most difficult to predict.
It must be stressed that there are many different measures of an economy's growth, and the Irish Central Statistics office has devised a measure called GNI* designed to strip out the effects of the activities of globalised companies in Ireland. Ireland has a GNI per capita, PPP adjusted, of $67k compared to the UK's $45k or only about 50% higher than the UK. And if you look at disposable family income per capita, depending on the precise measure chosen, the two countries are broadly comparable with Ireland only recently having caught up with the UK.
The other point to be borne in mind is that Ireland has only recently become a high income country and so the level of accumulated wealth is much lower than the UK. The UK has been a relatively wealthy country for a very long time and that position is only very gradually being eroded. The problem for many in the UK is that the income from wealth is very unequally distributed. Whereas Ireland's GINI index (measure of inequality) is close to the European average, UK society is significantly more unequal.
So, the bottom line is that while the Irish economy has been growing much more rapidly than the UK, that disparity is only slowly being translated into real disposable household incomes and accumulated wealth. The current disparity between Irish and UK incomes is nothing like as dramatic as the GDP/Capita chart above would suggest, so why choose it to open this piece? The question I want to ask is what has caused the dramatic divergence between Irish and UK GDP/Capita since 2015 whence UK GDP/Capita has flatlined while Irish GDP/Capita has doubled.
Part of the answer has to be that whereas the pandemic effected both economies, Ireland's economy actually thrived because it is the European base of 24 of the world's top 25 biotech and pharma companies. The pandemic actually helped many of them to dramatically increase their sales and profitability - as is reflected in Ireland's soaring corporate tax take. The prominence of the information technology industry in Ireland also facilitated many to work from home throughout the pandemic. These are not just brass plate tax avoidance schemes, but large scale manufacturing, service and R&D operations employing thousands of people in well paid jobs as well as supporting a large ecosystem of smaller Irish companies.
But the elephant in the room has to be Brexit. Whereas UK trade with Ireland has been relatively flat, Ireland's exports to the UK have boomed, particularly since 2020, and the picture with the EU as a whole is even worse. Brexit has also meant that Ireland became the only major English speaking common law jurisdiction within the EU, resulting in a lot of foreign direct investment, which might otherwise have gone to the UK, coming to Ireland instead.
There is, of course, absolutely no guarantee that these trends will continue. There must be a major question mark against the future revenue streams and profitability of the Irish high tech information technology sector in particular. A resolution of the protocol issue could result in a much more harmonious UK/EU trading relationship resulting in a significant uptick in the UK's economic performance. But a lot of damage has already been done: Bloomberg reports that Brexit has left the UK economy 5.5% smaller than it otherwise would have been, with the result that government and private finances are under extreme pressure.
And sometimes these negative trends can be self-reinforcing. The wave of strikes now hitting the UK economy can only exacerbate its economic decline if some resolution cannot be found quickly. The rapid increase in UK borrowing cannot but increase the interest rate at which Britain must borrow in future, thus putting the public finances under even more pressure. The poor press the UK is receiving abroad for its failure to honour treaty commitments freely entered into cannot improve its attractiveness as a country to do business with and in.
Something needs to change if this dramatic divergence in economic performance is not going to continue. This could be negative shocks in Ireland due to infrastructural constraints or its openness to the world economy, or positive developments in Britain's post Brexit economic strategy. So far however, the benefits of Brexit and the sunny uplands it was supposed to lead to have proved to be remarkably elusive. And Labour does not seem to be proposing a dramatically different approach to the Conservatives, despite UK public opinion rapidly coming to the conclusion that Brexit was a mistake.
Let me be clear: Ireland and the EU have many pressing problems. The war in Ukraine; the energy and cost of living crises; the refugee, housing and public healthcare crises; and the difficulty of meeting our climate change targets, to name but a few. But I wouldn't want to be where the UK is at right now: almost friendless in the world and with no clear economic strategy or astute political leadership that I can discern. Perhaps readers here can tell me different.
Crossposted from Slugger O'Toole, the leading N. Ireland political website.