More about the Irish Miracle

There was quite a controversy here last week when I posted this about the Irish economy.

In that posting, I quoted Sol Gradman, who said, among other things,

At the end of the day, Ireland isn't necessarily the right model. They have attracted investment and the country is thriving, and I'll tip my hat to them for that. But it's not based on local entrepreneurship, and the advantages can melt away fairly easily.

Recently, the Emirates Economist had an item that led to a related piece in the New Economist, which says much of the apparent Irish Miracle is the result of using GDP, not GNP, to measure output in the economy.

In most countries there is little difference between the two, but in Ireland GDP was almost 20% higher than GNP in 2004 according to [the UN's] Central Statistics Office. That's huge.

GNP is the value of final goods and services produced in a year by a country's nationals. It includes profits from capital held abroad, but excludes all repatriated profits and income. In Ireland, home of the multinational, a lot of that money goes offshore.

GDP is a good measure of the output that actually occurs within a given country. The potential problem to which many allude is that, as "Pooh" commented:

... things as "logistics, warehousing, and shipping" can easily be replicated elsewhere, especially when there is a tremendous will to do so and much of any advantage rests on the tax system.

In other words, the production of these services is valuable to an economy, but that production can easily and quickly shift elsewhere in response to changes in tax policy or changes in shipping costs or just about anything else. One would hope that economies base their growth on comparative advantage, not on pseudo-mercantilist policies.