Ireland’s ‘Thriving’ Economy: A Lesson in Deceiving GDP

How Ireland managed to become one of the fastest growing economies during the pandemic

, by Devin Sean Martin

Ireland's ‘Thriving' Economy: A Lesson in Deceiving GDP
St. Patrick’s Day celebration, 2018 CREDIT: gdtography, Creative Commons

Coronavirus lockdowns have choked and starved virtually every economy in Europe, from local businesses in the Italian countryside to Europe’s mega-corporations. One country, though, has managed to evade 2020’s tyrannical economic raid: Ireland. The island nation is on track to be one of the fastest-growing economies in the world, all while seeing record high unemployment figures and a crippled tourism industry. On the surface, Ireland might appear to have achieved economic refuge in a world at war with a virus, but there is more to the Emerald Isle than meets the eye. Ireland’s economic success is more a credit to a legacy of low corporate tax and lucky geography than a mimicable strategy, but what should the rest of Europe make of Ireland’s profit?

Dual Economy

Gross domestic product (GDP) figures can be deceiving, especially in the case of two speed, or dual economies, like Ireland’s. A duel economy is where a nation has two distinct and separated economies that have little to no impact or consequence to each other.

On one hand, there is Ireland’s domestic economy, which, like most nations, consists of domestic industry, trade, and employment. This part of their economy is struggling no less than any other European country. Ireland had close to 20 per cent unemployment in 2020’s fourth quarter, despite entering the pandemic in great shape with just a 4.8 unemployment rate in February 2020.

On the other hand, there is Ireland’s foreign investment economy, which is almost solely responsible for the country’s inflated GDP value. Ireland has become a European hub of corporate headquarters for some of the world’s largest technology and pharmaceutical companies. The nation’s low 12.5 per cent corporate tax rate certainly contributes to this, but there are plenty of other countries with lower rates, like Bosnia, Kosovo, and Hungary. What makes Ireland special, in large part, is that it’s home to a highly educated, English speaking population. This creates an ideal environment for American technology and pharmaceutical companies to set up shop, as these industries require third and fourth level educated employees.

Ireland is also conveniently located between Europe and the United States, and before covid, offered frequent direct flights to and from America’s largest economic hubs, including California and New York.

Double Irish with a Dutch Sandwich

As is the case with most financial hot spots like Bermuda and Switzerland, outstanding economic accomplishment does not come without a healthy dose of tax loopholes, and Ireland is no exception. One of the most famous of these, and certainly the one with the best name, is the so-called “double Irish with a Dutch sandwich.”

The scheme involved a now abolished Irish law that allowed a company in Ireland, if owned by another foreign company, to pay the corporate tax rate of the origin country. In other words, a company in Bermuda, which has zero per cent corporate tax, could set up a subsidiary company in Ireland, take advantage of its educated, English speaking workforce, and funnel the profits back to Bermuda while paying zero tax. The “Dutch sandwich” portion of the name comes from an additional step where a company can licence its intellectual property rights, like logos and patents, to a subsidiary in the Netherlands, which offers zero per cent tax on profit from intellectual property revenue.

This scheme has done so much for the Irish economy that Apple accounted for about a quarter of the country’s entire GDP in 2017 by exploiting the loophole. The EU pressured the Irish government to close the double Irish in 2015, giving them until 2020 to phase it out. But the damage was already done; mega corporations had already dropped anchor in Ireland and are not going to leave any time soon.

If the major American companies that have exploited the double Irish over the past two decades decided to move their money back to the United States for reinvestment, they would have to count it as income and pay America’s 21 per cent corporate tax. Instead, the companies are forced to reinvest the trillions of dollars they have sitting in Irish accounts back into their enterprises in Ireland.

Can Europe learn from Ireland’s ‘success’?

Other European nations hoping to mimic Ireland’s economic prosperity will find no pot of gold up for grabs at the end of an Irish rainbow. Ireland’s high GDP value has mainly been based on benefit from grandfathered-in tax laws, English as a native language, and geography. However, it might be in the best interest of other European nations to stay as far away from Ireland’s economic scheme as possible.

Despite being ranked as having the sixth highest GDP per capita globally, Ireland does not appear anywhere near one of the worlds’ wealthiest countries on the ground. Ireland is still primarily an agrarian nation with plenty of poverty and unemployment. This is because Ireland’s foreign investment money, which makes up the vast majority of their GDP, does not land in the pockets of average Irish citizens. In fact, the money only benefits a tiny fraction of Ireland’s population, mainly focused around Dublin and Cork where these corporate giants employ high paying jobs.

This is the genesis of Ireland’s duel economy, which has thrust Ireland’s major cities into a housing crisis. The average cost to rent in Dublin is now over €3,600 per month, which is higher than Paris, Berlin, and Madrid. As the small sect of highly paid technology and pharmaceutical workers drive up the housing cost in Dublin and Cork, the more modestly paying jobs that actually support Ireland’s domestic economy are left in the dust.

Ireland’s eye-popping economic growth is merely a miracle of paperwork and not a blueprint for a pandemic hardened economy.

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