BONN TOPICS: JUNE 2001
Number 201
The Charme of the Irish Model
by Dr. Herbert Rudolf, managing director of the BHKS
The economic development lost its dynamic force in the big economic regions of the world. Since the second half of the past year almost all important national economies are lacking supply for their growth. Particularly the United States are suffering from the cooling. There the increase of production was practically stopped around the turn of the year. Principal reasons for this were the increase of the oil price and the progressive revaluation of the dollar. Both causes affected also the development in the Euroland. In 2001 experts estimate an increase of the Euro gross domestic product of about 2 1/2 % after 3 1/2 % in 2000.
The German economy will stand in this year and presumably also in the next year quite down on the ladder of the national growth rates, although with a growth of around 2 % still an acceptable result is reached, compared with not yet far back lying phases of stagnation or even decrease of the overall economic development. This statement still does not apply however to the range of the building investments. According to the scenario of the working group of German scientific research institutes e.V., just published, the building sector will still be the only economic sector which will not make a positive contribution for the development of the gross domestic product. In the opposite: for 2001 with something over -2 % (real and nominal, compared with 2000) a persistence of the contraction process which began in 1995 was announced. The weakest sector might remain housebuilding. Also in the public building domain much is not to be achieved because of the tight possibilities of financing of the municipalities. Perhaps the demand of the commercial enterprises for building investments could remain on previous year level. However the extent of the unoccupied commercial real estates particularly in East Germany will be a dampening factor.
If it is the fact that the German national economy has trouble to come out of the starting holes the question arises whether there are other countries, perhaps even in the Euro area, which have detached from the escort course of the faint-hearted. A view of the chart of the change rates of the BIP in Europe shows, that the EU member country Ireland delivers results since years which seem to come as from another planet. Thus the Irish national economy will increase also in this year again by almost 10 %. It might be worthwhile therefore in each case to analyze the substantial factors of the Irish story of success. In a second step it would have to be examined whether the basic factors are transferable to other countries.
A first view of the Irish economic data reveals that there exists, differently than in other countries, a large difference between the amount of the gross national product on the one hand and the amount of the gross domestic product on the other hand. At this stage one has to take into account that the political economists subsume under the term of gross national product all goods and services, which are produced by residents, thus Irish, while the gross domestic product measures all the goods and services produced in the inland, thus in Ireland. The Irish gross domestic product is approximately 20 % higher than the Irish gross national product. The comparable difference in Germany lies in the range of one per cent. Thus foreigners must gain very much more values than Irish do abroad. The reason for this is the Irish tax policy, which levies extraordinarily small taxes on enterprise yields. This led to the fact that a great lot of foreign enterprises did not only settle in Ireland. Also to a considerable degree global active enterprises are transfering their yields which were created in high taxation countries to Ireland in order to submit them there to the low-tax rates. Thus it became known that there is a factory for essences of Coca Cola in a place called Drogheda, whose employees are gaining a profit per head of approx. 2,5 million Euro.
The mentioned mechanism leads to the fact that the Irish treasury arrives at constantly rising incomes despite the low tax rates, which make it possible to lower further the tax rates on the one hand and to put on the other hand the developing surplus into a further improvement of the infrastructural conditions of the country, with the result that also those enterprises, which had to criticize the deficits of the Irish infrastructure formerly are convinced that things have improved in this field. Thus a spiral effect develops, which lifts the Irish national economy on higher levels step by step. If one refers the gross domestic product to the heads of the population then Ireland lies at present around 17 % over the average of the countries of the European union, compared with Germany, which lies around 6 % over this average. If one identifies prosperity to this number, as it is internationally usual to do so, then Ireland ranks meanwhile among one of the richest countries of the Euro area, although it was upon its entry in the year 1972 around 40 % below the European average.
The contract of Maastricht or other legal instrument of the European union do not foresee any measures which could forbid the Irish their success model. Indeed one could cancel the means from the European structure fund, because quite obviously the situation, which had originally led to their payment, is given no more. But what would change thereby? However the Irish model endangers the coherence goal of the European union, since the massive outfoxing of the actual European structure of tax rates leads to competition distortions also in Euro-land. Therefore a transmission of the Irish example on large national economies, such as Germany or France, would surely not be possible also from a number of other reasons, which are in line with the Balassa Samuelson effect. For smaller countries, particularly with underdeveloped national economies, the Irish procedure could serve at least for a limited time span as a model. What however is transferable to a large national economy, is the basic idea of the system: namely that high tax rates for enterprise yields, and in the consequence for a dependent income, and high tax receipts of the state are two pair of different boots. It is a really almost classical mistake in reasoning, which is by the way an indigestible leftover of the neo-classical political economy, that incomes of the state could be increased by rise of tax rates in expectation that "everything else remains equal" (the so-called "ceteris paribus-rule"). One of few decisive factors for a prospering development of national economies is therefore an optimization of the tax rates for enterprises just like for wage-dependent regarding tax receipts. At least this is shown by the Irish example impressively.