Service Exports: This Nation’s Saving Grace?
There’s a whole new narrative around exports at the moment, in the Irish Times anyway, which is effectively a mouthpiece for the government’s economic policy at present and as good an indicator as any of where the Right’s head is at when thinking about this particular stage of the Irish depression.
Michael Taft wrote about this narrative turn in relation to manufacturing exports yesterday and highlights how 85 percent of inputs in the Chem/Pharm sector are imported providing very little in terms of job creation:
“increased exports may create jobs downstream - but in other countries, not in Ireland.”
Also, there is an acceptance within government, although unacknowledged in press releases, that export led growth will not have any impact on the domestic economy.
“Even the Department of Finance has accepted that GDP driven by net export growth will not be tax-rich.”
However, while none of this was mentioned by Brian Lenihan or in the Irish Times editorial on Saturday, Dan O’Brien in Friday’s paper did acknowledge that the good numbers from manufactured exports don’t tell the whole story.
“A huge €18.3 billion flowed into the country in the April-June period in payment for services rendered internationally.
This is important because on the goods exports side, too much of the growth has been concentrated in just pharmaceuticals and chemicals.
While there is no downside to selling billions worth of pharma products to all and sundry, export success needs to be broad based if it is to be felt where it matters most - job creation.”
However, it is the services export numbers that offer greatest hope, he argues:
“A breakdown of the services exports numbers offers hope on this score. Companies in most services subsectors are winning new business abroad.
As Ireland is the second largest per capita exporter of services in the world, such strong, broad-based growth in an area where we have real and proven competitive advantage can only be very good for employment. It makes existing jobs more secure and raises the chances of fresh hiring so that strong new demand can be met.”
It always strikes me as odd that no one wonders why an econmy as small as Ireland’s is the second largest per capita exporter of services in the world.
Here’s a breakdown of what services exports are exactly, taken from an article on FinFacts about the growth in services in 2008:
1. Business services included:
- trade related services for aircraft, engine and power station maintenance, repair and installation.
- aircraft and ship leasing and chartering.
- legal, accounting and management consultancy.
2. The second largest service export sector is computer services, and sales - according to the CSO this involves the sales and purchases of software transmitted electronically. (This figure excludes embedded software in pcs (personal computers appear as part of merchandise exports).
3. IFSC companies makes up 33% of total services exports, which is broken down into:
- Financial services
- Insurance services
- Miscellaneous services
I’m taking a long shot here, but I imagine that despite the year-on-year increase, there are limited opportunities for job growth in these sectors, particularly as most of the companies involved are located here largely to reduce their overall tax liabilities.
However, Charlie Fell was also looking at the service export numbers for rays of hope on Friday:
“The notion that Irish export performance has been decidedly poor since joining the euro is also without merit. Analysis by Proinnsias Breathnach, a senior lecturer at the National Institute for Regional and Spatial Analysis at NUI Maynooth, demonstrates that Ireland’s export growth rate from 2000 to 2007 was superior to that of 19 of the 29 other members of the OECD. Furthermore, the State’s share of world exports increased over the period, a trend that persisted during the “great recession”, as Irish exports held up relatively well.
Our share of goods exports did drop following the dot.com collapse and continued its descent as energy prices soared, but this has been easily offset by a more than doubling of our share of services exports. The idea that Ireland joined the euro at an overvalued rate is simply not supported by the evidence.”
Let us roll back a bit. Proinnsias’s paper was written at a time when the main argument from economic commentators was that Ireland’s economy was ‘uncompetitive’ because of the “international differences in unit labour costs” - see the quotes from the likes of Morgan Kelly and John Fitzgerald at the beginning.
Proinnsias paper showed that unit labour cost has very little effect on the competitiveness of Ireland’s exports, which were quite high, certainly when compared internationally. This is because the markets that these services served where not competitive themselves:
“For a start, a large proportion of Irish merchandise exports consists of intermediate goods destined for further processing, frequently by other branches of the Irish-based firms in question. According to UN trade data, Ireland’s ten largest four-digit export sectors accounted for almost 60% of Ireland’s merchandise exports in 2007, and over half of the value of these sectors’ exports consisted of intermediate products (e.g. chemical compounds, electronic components, drink concentrates).
In total, over half of Ireland’s merchandise exports arise in the chemicals and pharmaceuticals sector which is dominated globally by a relatively small number of major multinationals (most of which have an Irish presence). Due to their sheer size and control of patents, these firms do not operate in truly competitive markets and tend to be highly profitable - profits as a percentage of revenues for pharmaceuticals firms in the US Fortune 500, on average, are typically 4-5 times greater than for other firms (expenditure on R&D goes nowhere near explaining the difference). This high profitabilitty makes Ireland’s low corporation tax rate very attractive while making the firms in question less concerned about costs than in more competitive sectors.
Oligopoly is also a feature of other Irish export sectors. Microsoft (whose main Irish subsidiary had a turnover of €11.3bn in the year to June 2008 - the equivalent of 7.5% of Ireland’s total exports in this period) is an obvious example, with profits amounting to 30% of revenues in 2008, over six times the average for Fortune 500 firms (the profit margin on Windows and Microsoft Office is reputedly of the order of 80%). Google, whose Irish operation has enjoyed spectacular growth since it was established in 2003, had a 2008 profit rate which was only slightly less than Microsoft’s.
Apart from oligopolised markets, a large proportion of foreign-owned operations in Ireland are largely involved in providing services to other units of their parent companies - they are not selling in open markets. This applies to units engaged in R&D and software development for their parent firms or providing centralised support services for affiliate units elsewhere in Europe and adjoining regions, and to IFSC operations providing insurance and treasury management services to affiliates. It is impossible to quantify the extent of such activities, but they certainly make up a substantial proportion of service exports which in 2008 accounted for 42% of total exports.”
This is important information to remember when thinking about how exports work in Ireland. Proinnsias, as far I can see from the paper, did not discuss the relationship between this manufacturing and service exports and the real economy, except to suggest that by investing in R&D and education, thereby providing a highly skilled, educated workforce, we can reinforce one of the pillars upon which foreign direct investment is based. But in addition, this should lead to the establishment of indigenous companies that are able to produce or at least feed into the highest growth market in the global economy.
At the moment, however, the service exports sector, which is completely dominated by MNCs provides only marginal employment out of the total work force and apart from legal and financial services, construction and architectural companies, avails of hardly any Irish services. Yet the output from these companies is referred to as ‘our’ exports, and their phenomenal value is used to hide the fact that there is very little opportunity for growth in the Irish economy without investment.
Indeed, as the present model stands the situation is further weakening the economy. In a recession, the small amount of tax these companies pay undermines the ability of the country to continue to provide the well-educated workforce that is supposed to attract them here in the first place.
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Comment by: Pope Epopt
Sep 28th 2010 at 08:09
I remember, many years ago, trying to debunk the notion that Ireland was the biggest software exporter in Europe with the facts about the tax avoidance vehicle for the Macroshaft monopoly. The ostriches dived for the sand.
The fact that tax arbitrage based MNC exports is all this intellectually and financially bankrupt government has left in it’s armory is deeply worrying. I imagine the price for going to the European Rescue Fund will be tax harmonisation.
Compounding a disastrous banking intervention with this ‘export’ strategy could well send us back to the 50s, never mind the 80s.
Comment by: Donagh
Sep 28th 2010 at 09:09
How intellectually and financial redundant can be found here, with this little press release poppet issued today:
From what I can see here it intends to boost already booming Irish exports by encouraging more foreign direct investment, and that this will create jobs, even though exports from the companies already here are Irish only in the geographical sense and these companies have up to now only employed up to 7% of the Irish workforce.
At the same time they do everything to cripple the indigenous economy which employs the majority.
Meanwhile back on earth….
Although I haven’t been able to find out news about that abandoned activation of a eurozone rescue package elsewhere yet.
That Goldman Sachs note contradicts one issued last week which said that it was all but inevitable, maybe not now, but certainly in the New Year.
It’s a bit like the banks around the time of the bank guarantee. They were all ‘it’s a liquidity problem’, while everyone else was saying, “no, dude, it’s a capital problem”. Still they whined, ‘it’s a liquidity problem, just give us a couple of months, we’ll be right as rain” – to which the reply was “It’s a capital problem, man. In a couple of months you’re going to be coming back to us”.
The problem with the banks has infected the sovereign. Ireland needs capital to invest not liquidity to borrow.
You’re not the first person to tell me that this ‘export’ strategy could well send us back to the 50s….
Comment by: William Wall
Sep 29th 2010 at 09:09
I get the feeling, stronger every day, that Ireland is like a tulip flower that has held together too long. One breath and the petals come apart simultaneously. If you listen you can even hear the tiny pop as the whole thing cracks open.