Economic Letter: Is Ireland really the most prosperous country in Europe?

• Ireland is a prosperous country, but rankings based on per capita GDP data place Ireland much too high, according to former Central Bank Governor, Patrick Honohan in an Economic Letter.
• The distorting effects of multi-national firm activity on national statistics, as well as Ireland’s relatively high prices are the main cause.
• Modified data for 2019 provide an indication of the extent of re-ranking warranted: Ireland moves down from 2nd place in EU28 to between 8^th and 12^th.

Today the Central Bank of Ireland published an Economic Letter entitled ‘Is Ireland really the most prosperous country in Europe?’ written by former Central Bank Governor, Patrick Honohan.

The Letter explains that ranking Ireland’s economic prosperity based on Gross Domestic Product (GDP) or Gross National Income (GNI) tend to be misleading. This is because of the statistical distortions created by the activities of multinational corporations (MNCs) (particularly depreciation of intellectual property assets and the large aircraft fleets of resident leasing companies). Nevertheless GDP and GNI are the single indicators most commonly used in international league tables despite their known deficiencies.

Drawing on recently published international data that also correct for the relatively high price levels in Ireland, the Letter looks at a number of alternative series that are free of the MNC distortions. Replacing GNI for Ireland with the CSO’s special measure, GNI* pushed Ireland’s economic rank in the EU down from second in the EU, behind Luxembourg, to eighth.

An alternative aggregate national indicator of household welfare used in international comparisons is known as “actual individual consumption” (AIC). This measure adds together a narrower range of categories of consumption by households and spending by government on individual services such as healthcare, education and housing, and is therefore only a part of GDP. Ireland’s AIC per capita in 2019 was about 95% of the EU average, down from 115% in 2006-7. This placed Ireland behind not only the UK and all six of the original founder members of the EEC but also Austria and the three Nordic member states.

GDP and GNI neglect important social and environmental factors in prosperity.  But commonly cited measures such as the UN’s Human Development Index (HDI), which combines income with health and education indicators, also show an unrealistically high ranking for Ireland because GNI has a high weight in the index. Substituting GNI* for GNI in the Index by moves Ireland down the HDI global ranking from second to ninth place.

The Letter concludes that Ireland is a prosperous country, but not as prosperous as is often thought. Using GDP as a measure of national prosperity can mislead analysis of such matters as debt, carbon-intensity and inequality.

Notes

• The EU average figures for AIC included UK consumption as an EU member during the period studied.
• Patrick Honohan was the Governor of the Central Bank of Ireland from September 2009 to November 2015. The views expressed in this Letter are those of the author and do not necessarily reflect the views of the Central Bank of Ireland or the European System of Central Banks.