The Celtic Tigers sounds like a franchised US baseball team. Such is the current euphoria in this country that some commentators are beating themselves on the chest and chanting in mercurial mantra-like fashion "we are the tigers my friend". Tiger iconography seems to dominate every newspaper report on the Irish economy.
In a recent paper "The Celtic Tiger The Great Misnomer", published by MMI Stockbrokers, I argued that the use of the Celtic Tiger metaphor for the Irish economy is inappropriate because it is creating an atmosphere bordering on self-delusion.
This self-delusion manifests itself in the belief that the Celtic Tiger is an indigenous Irish phenomenon. To my mind the "tiger" is predominantly a high-tech multinational tiger nurtured in a special tax reserve by Celtic tax poachers. Most of the multinationals are US-owned so the more appropriate metaphor is the US High-Tech Tiger with the Celtic Face.
A great part of Ireland's impressive economic growth performance has been due to the growth in exports. Examination of the statistics shows that more than half of Ireland's merchandise exports emanate from five high-tech sectors: computers, computer software, chemicals, pharmaceuticals and soft-drink concentrates (colas).
During 1990-1996 the nominal growth in Irish GDP was 55 per cent. If one excludes the exports of these five high-tech sectors from the GDP statistics, then the GDP would have grown by only 23 per cent. This technique, albeit a somewhat crude one, shows the extent to which our growth performance is dependent on the high-tech multinationals (MNCs). Remove them from the Irish growth equation and a very different economy appears.
The MNCs are dominating Irish manufacturing performance. The most recent Census of Industrial Production (1995) shows less than 30,000 people employed by foreign-owned MNCs in the five high-tech MNC sectors produced £8.5 billion, more than half of Ireland's net manufacturing output. Contrastingly, Irish-owned companies employing 117,000 workers could only produce £3.8 billion of net output.
The sluggish performance of the Irish-owned companies relative to the high-tech MNCs is further exemplified by comparing net output per person for the MNCs and the Irish-owned companies in each of the five high-tech sectors. In 1995, the cola concentrates sector produced a net output per worker of £829,000 for the high-tech companies as compared with £36,000 for the Irish-owned companies. For computer software the MNCs recorded net output per head of £456,000 as compared with £38,000 in the Irishowned companies.
The statistics appear to show a dual manufacturing economy with the "tiger" firmly embedded in the MNC sectors. But even here one is dealing with something of a paper tiger. A great part of the difference in productivity between the MNCs and the Irish-owned companies is due to the transfer pricing practices of the MNCs accountants.
Because of the low 10 per cent rate of corporation tax here for manufacturing companies, they are transfer pricing through the Irish economy. This practice involves minimising the cost of imports and maximising the cost of exports so as to generate sizeable profits on the Irish operation and so benefit from the low rate of corporation tax. The accountants are therefore attributing a significant part of the technological genius of their Silicon Valley specialists to Irish workers in order to minimise corporate taxes.
This does not mean that we should reject the MNC contributions to employment and output. The opposite is the case. They have helped generate a new spirit of confidence in the economy and the expenditure of their employees has contributed enormously to the growth of the services sector.
Their contributions to corporation tax have been instrumental in making this tax the largest source of taxation after income tax, VAT and excise duties.
There are a number of important implications arising from the MMI report.
The first is that the Irish pound should not be revalued given the sluggish performance of the indigenous labour-intensive Irish manufacturing sector. This sector needs as much help as it can get before the exchange rate is locked into the Euro.
Second, corporation tax will have to be reduced to the 12.5 per cent rate over a shorter period than currently envisaged. This is necessary to remove the accusations of tax discrimination by other European Union members. The acuteness of the unemployment crisis in Continental Europe will increasingly focus attention on Ireland's discriminatory corporate tax regime every time an MNC decides to shift from the Continent to Ireland.
Third, further significant reductions in income tax are needed to encourage part of the Irish diaspora to return and to encourage higher levels of participation from the resident labour force.
Accelerated tax reform, with respect to both corporation tax and income tax, is necessary both to solidify the presence of the MNCs in Ireland and to help develop the domestic economy. Otherwise the US-owned Celtic Tigers franchise, as is the case with the baseball teams, may decide to relocate to other more benign tax locations.
Antoin E. Murphy is Associate Professor of Economics, Trinity College Dublin.
