Thursday, 19 August 2010

Holidaying in the financial sector

Michael Taft: Conor McCabe has produced an interesting and potentially disturbing set of figures over on Dublin Opinion. Based on World Trade Organisation data, he compares the exports per worker in the financial sector in the following countries:

Spain: $23,398
Italy: $15,492
Netherlands: $38,182

The figure for Ireland is, however, an astronomical $367,033. He goes on to ask whether these figures are based on a fiction – the same fiction we were fed only a few year ago:

‘Do you remember holiday homes? How every single unsold house in Ireland was a holiday home so there was nothing to worry about? That there was no bubble? In fact, we should keep on buying homes at inflated prices because there were no inflated prices? All those reports in the newspapers, all that property porn on RTE? We were told not to worry, that the purchases were real?’

So are the figures for Irish service exports this year’s holiday homes? We have to be cautious. One explanation could be that the Irish financial sector is more export-oriented than other EU countries which are dominated by home market activities – especially considering the presence of our IFSC. Still, an export of more than 10 times per other EU workers seems a tad on the high side.

The issue isn’t academic. If we are to have an ‘export-led recovery’ we must be confident that we can accurately measure those exports and that such measurements are robust enough to base future policy on. This calls for a critical approach that goes beyond the surface of headline figures. Are there other ways to compare our financial sector with other EU countries? Yes, courtesy of the EU Klems database. These comparisons mirror Conor’s figures:

We see that value-added per labour hour in the Irish financial sector is over 150 percent that of the Eurozone average; gross output is over 160 percent; while capital compensation – or profits (gross operating surplus) – is 250 percent of Eurozone average. Are these numbers credible? Or are we picking up something else – namely, transfer pricing activities (whereby the profits generated in other countries are counted as part of our GDP)?

Even if these numbers are capturing real economic activity, there are other reasons to be cautious about what the Central Bank Governor calls the ‘dynamism of Irish exports’. According to the CSO, financial/insurance exports increased by 47 percent between 2003 and 2007. During that same period employment increased by 17,000 jobs – or 4,250 on average.

The question is, will these exports return to that growth – a growth stimulated by a regime of financialisation that now seems like from another age; an age not plagued by credit constraints and substantial deleveraging? If anything, we may be heading into a period of considerable employment contraction if the IBOA’s fears are even partially realised.

And that’s if the exports figures are all above board.

Conor has opened up a new area of investigation and consideration. It’s about time we took a cold, hard look at some of the platitudes and easy assertions that pass for informed comment. Otherwise, we may end up with more empty assets, bankrupt policies and a future where recovery is statistical only.


Ronan L said...

The other point worth mentioning is that, per CSO figures on earnings, the only sector in the economy not to have seen a significant reduction in its paybill since 2008 apart from the public sector is finance.

The medicine being meted out to construction - a 33% fall in its paybill - is certainly not being applied!

Michael Taft said...

Ronan - yes, while hourly earnings (including bonuses) have fallen slighly faster than the private sector average according to the last CSO earnings report, employment has remained stable over the period Q408-Q409 (though that might change as more current data arrives).

The point here is that employment and earnings data throughout all sectors are relatively reliable. But can the same claim be made for value-added, gross output, exports and gross operating surplus? The data that Conor, which I followed up on, suggests it isn't. This clearly has implications for future policy.

Pavement Trauma said...

It would be interesting to see what the comparable figures per employee for countries where their financial service industries are mostly export orientated e.g. Luxembourg, Bermuda.

Michael Taft said...

Pavement Trauma - here are the Luxembourg numbers: VA per hour: €147; GO per hour: €918 per hour; Profit per hour: €90. I don't have the export figures (Conor was working with those). These numbers are well above both Ireland and Eurozone averages. Would you rely on those - given Luxembourg's financial sector model?

Tom McDonnell said...

Unfortunately the worker export figures for Ireland are so unreliable as to be completely meaningless.

Clever abuse of transfer pricing explains much of the wildness in the value added figures. It's known as the 'double Irish' strategy.

These handy how to documents explains how it is done:


Michael Burke said...

This is a very important distinction being made between real activity and purely tax domicile-shopping.

In the late boom year of 2005 the Gross Value Added (GVA) of the building and construction sector was €12.9bn and industry ex bulding was €33.6bn (2009 National incomes and Accounts, Table 4). By contrast the GVA of 'Other services', which includes financial services was €67.6bn.

If we turn to the separate Input-Output tables, the 3 categories of financial services (finance, insurance and related) comprised €32bn.

These are very large numbers and they are based on a fiction.

The CSO link provided by Michael Taft shows Ireland has a trade deficit in services with the US of some €17.4bn, whereas services trade with the Europe and the rest of the world is in surplus.

What explains this dependence, and lack of competitiveness vis a vis US corporates, who are themselves notoriously uncompetitive, hence the US has the largest trade deficit in the world?

Well, apparently this economy is awash with US advertsing and market research. Ireland imported €3.902bn from the US in this category in 2008, and exported €1mn. No, I hadn't noticed either.

A €3bn bilateral deficit also in R&D (surely making the case for govt. investment in R&D by itself?). €1bn in management services and an enormous €7.5bn defict in royalties.

Of course, these aren't real imports, just as the export total is artifically inflated. In fact, they are part of the same bookkeeping exercise to minimise the tax bill by laundering of costs, sales, and profits.

How appropriate that then Finance Minister Cowen announced the 12.5% corp. tax rate to US businessmen on Thanksgiving Day in 2000.

No benefit from any of this accrues to anyone in Ireand. But US businesses have good reason to be thankful.

Pavement Trauma said...

"No benefit from any of this accrues to anyone in Ireand. "

I wuold agree there are serious issues around Ireland being used as a tax laundry but it is not true to say the country does not benefit from this.

Presumably we get 12.5% of the profits as corporate taxes that we would not otherwise get. Is this not a benefit?

Re: Luxembourg figures, given the tiny size of the country it is safe to assume that the vast bulk of financial output is due to exports rather than the domestic market.

Antoin O Lachtnain said...

There are quite a few easy assertions here. Do you think these figures are "disturbing" or not? I do not. I think you are making a big fuss without any basis whatsoever, other than a comparison of two largely unrelated statistics. All the figures really prove is that (a) Italy has more bank branches than the Netherlands and that the Netherlands has more bank branches than Ireland, and that (b) Ireland has a substantial international financial services trade which (unsurprisingly) is not particularly labour intensive.

What does the IBOA's statement have to do with the internationally traded services? They are referring mainly to the part of the sector oriented at domestic business.

Michael Taft said...

Antoin O Lachtnain - maybe we shouldn't be too concerned about some of these numbers. However, when value-added per hour worked is 150% higher than Eurozone average; 160% higher with gross output and 250% higher with profits - there may be something more going on than just the number of bank branches or labour desnity. And when one considers these patterns are replicated in other areas of the economy dominated by multi-nationals (in particular, the chemical sector), what we are seeing is not real dynamic activity but real accounting activity. This has implications for policy based on export-led recovery.

Antoin O Lachtnain said...

You are comparing apples with oranges. You are comparing domestic financial services in Italy with internationally traded services in Ireland. You would need find some ratios for internationally traded financial services in another country and compare to those.

Let's say you are right and non-labour-intensive industries revenue can be discounted as fleeting or not real (I do not think you are completely right as I discussed above, and i do not think you are mostly right, but I do earnestly concede, I think you might be a little bit right). Would the obvious implication of what you are saying, if it is completely true, be that:

- the government stop borrowing money (because we will not be able to pay it back)

- we cut back public services to the bone (because we have no money to pay for them)

Michael Taft said...

Antoin - I'm not sure that I said non-labour intensiveindustries' revenue should be discounted. All I'm asking is how real are value added per hour worked figures in the Irish financial sector. I take it that there is a difference between export and domestic oriented activity. However, if one examines the UK financial sector, we find that it is consistent with Eurozone averages: value-added per hour: €74. This is an export oriented sector yet it is still well below Ireland's €102. Shouldn't this, at least, raise some doubts?

Antoin O Lachtnain said...

Michael: you are aggregating together the domestic and foreign businesses of the UK. The UK has a substantial domestic business because it is a substantial country. Ireland does not have substantial domestic business because it is a tiny country.

Foreign revenue
----------- -----------------------
Domestic Employment+ Foreign Employment

which is what you are going on will always be lower for a big country than for a small country, because the denominator will always be much bigger for a big country, because the number for Domestic Sector Employment will be proportionately large.

Of course you are right to be concerned about the foreign services sector in that we could lose this high margin business and the taxes that go with it. That is why we are doomed to strive for ever greater competitiveness.

Michael Taft said...

You may be right, Antoin. Any evidence you have to support this (e.g. breaking down the value-added per hour between export and domestic sales in the financial sectors in Eurozone countries) would be welcome. In the meantime, I'll do up some numbers on other MNC-dominated sectors.

Antoin O Lachtnain said...

I don't have figures for that obviously, but the IDA and IFSC Ireland (see should have some sort of figures for employment and revenues in the international sector.

But the big point arising out of your post which cannot be denied is that Ireland is an open, externally focused economy which is highly dependent on this trade for tax revenues. Whilst this is a truism, I don't know if as a nation we appreciate how true it is.

Michael Burke said...


the Bloomberg piece highlighted by Tom McDonnell demonstrates how we aren't dependent on trade, for the reason that none of it is taxed. The US MNCs hide the taxes from this jurisdction just as they do from the IRS, paying, in the case highlighted, just 2.4% tax here.

This is more than many others.

In 2009 total exports were over €148bn. Yet, even when combined with domestic output, total corp. tax revenues were just €3.9bn.

Antoin O Lachtnain said...

The tax take was low in 2009. That is not surprising, given that there was a global recession. The revenues were six billion two years previously. There are also at least 100,000 people employed by MNC's. This brings a large chunk of change into the country.

I am puzzled as to where you think we would get foreign trade in the short-term to support our standard of living were it not for internationally traded services.

Anyway, we seem to be violently agreeing that a large proportion of our exports come from relatively fragile and easily-lost businesses. OK, you don't think these are significant for Ireland tax-wise, and I do.

But the important difference is what we think should be done about it. I think we should retain as much as we can of these exports and tax revenue and grow our efficiency and ability to add value.