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How Did Ireland Become the Most Productive Country in the World?

The 2008 financial crisis threw the world into disarray, the global markets faltered, the labour productivity dove. Reignition of the European economies involved bailouts, strict austerity measures, and restructuring of several large banks’ balance sheets. As the years have progressed, the Eurozone recovery has started to look positive. One of the stand out recoveries has been staged by Ireland. From 2010 to 2017, GDP increased by an average of 4.8% year on year.[1] However, one thing that particularly catches the eye with Ireland’s recovery is the sudden jump in labour productivity.

In December 2013, Ireland became the first country to exit the Eurozone bailout programme after three years. In such bailout programmes it is often a key requirement for the country to take austerity measures, which Ireland did: about €20 billion spending cuts and €12 billion tax increases.[2] Yet by 2014, Ireland had made fiscal adjustments and introduced job stimulus packages. Increase in government spending and the termination of austerity measures was a defining moment, creating a sense of euphoria in the population.

During the same period, Ireland oversaw an increase in labour productivity of 59%;[3] a staggering jump – as demonstrated in Figure 1. Some advocate that austerity measures may have adverse effects on employees’ motivation. For example, it is argued that here in the UK, initiatives such as the infamous 'Back to Work' scheme have heightened fear and anxiety in the population, which, in turn, potentially caused a decrease in productivity over the course of such austerity measures.[4] At the very least, the Irish government’s strategy has eliminated the possibility of these adverse effects.


Figure 1  Labour Productivity (GDP Per Hour Worked, US Dollars)

figure-1


Was the financial recovery together with its arguably lasting effects on the morale of the population enough to justify this significant increase? What also could have propelled this huge jump is tax inversion. 

Corporate tax inversion is about making a company become a subsidiary of a new parent company located abroad in a lower-tax country, while keeping its material operations in the same high-tax country of origin. It is a strategy often used by corporations to reduce tax burden on income.

Ireland’s corporation tax rate is currently just 12.5%; one of the lowest of all developed economies. Comparably, the US tax rate was around 35% up until the recent changes made this year.[5] It is therefore not surprising that Ireland has lately become a tax haven, especially for large US companies. Today, over 700 American corporations – such as Apple, Intel, Boston Scientific, Allergan, Dell, Google, Hewlett Packard, Facebook and Johnson & Johnson – are operating in Ireland. 

This is the result of numerous policies adopted in Ireland to lure foreign direct investment. For instance, in 2014 there was a spate of tax inversion deals, which meant more businesses arriving in Ireland; hence, more jobs. Irish labourers have arguably benefitted on the back of these businesses coming in as they have brought with them new technologies and managing practices, which can cause technology clusters, providing efficient routes to work. It can be claimed that this process has increased overall labour productivity in the country. After all, more than 155,000 people are now directly employed by American firms in Ireland and US firms indirectly support a further 100,000 jobs in the Irish economy, in total ccounting for 20% of employment in Ireland.[6] 

Ireland’s story may strengthen the argument that implementing low corporate tax has positive consequences on an economy. This motivates the question: why aren’t more countries implementing low corporate tax strategies?


Countries must consider two fundamental questions before replicating the Irish government’s tax strategy: will a new policy attract enough foreign investment and does the new foreign investment outweigh the trade off of lowering the tax of already established companies?

Clearly these factors worked out favourably in Ireland’s specific context. Yet the applicability of Ireland’s economic model to other countries is questionable as is its sustainability. While the introduction of infrastructure and new technologies brought over by foreign companies could be beneficial, if a country became too reliant on the revenue generated by foreign companies, and these companies then decided to relocate to a more competitive tax rate country, the economic ramifications could be devastating.

It must also be underlined that granting tax benefits can even be illegal. In August 2016, the European Commission has concluded that Ireland granted illegal tax benefits of up to €13 billion to Apple. The selective treatment allowed Apple to pay just 0.005 per cent tax on its European profits in 2014, for instance. That is why Ireland was ordered to recover the unpaid tax from Apple, plus interest.[7] Similarly, the European Union has decided that Amazon should pay €250m to Luxembourg after receiving years of illegal tax treatment.[8]

In this article it is shown that general positivity in a country can have beneficial macro-economic effects. That is, when a country’s economy looks positive, it increases employability and labour productivity. Another key observation is that mutually beneficial partnerships with multinational corporations can be helpful to develop new infrastructure, technologies and knowledge in a country. Both strategies have been implemented in Ireland. Yet it should be emphasised that both positive and negative effects of foreign direct investment must be carefully assessed before imitating the Irish corporate tax regime. Positioning a country as a tax haven and relying on dodgy tax avoidance practices may have some benefits in the short-term but it is doubtful that this strategy can be sustainable for any economy.

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[1] World Bank Data (2015) GDP Growth (Annual %)
[2] W. Roche, A. Prothero & P. O'Connell (15 Oct 2017) What Has Ireland Learned From Austerity?
[3] OECD (2018) GDP Per Hour Worked – US Dollars, 2008-2016)
[4] New Statesman (6 Oct 2015) Cut Off: How Austerity Relates to Our Mental Health
[5] OECD (2018) Table II.1. Statutory corporate income tax rate - Corporation Income Tax Rate
[6] American Chamber of Commerce Ireland (2018) Key Facts
[7] European Commission (30 Aug 2016) Ireland gave illegal tax benefits to Apple worth up to €13 billion
[8] The Telegraph (4 Oct 2017) EU orders Amazon to pay £220m in unpaid taxes

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Christopher Richards is currently studying Business Mathematics and Statistics at the London School of Economics. 

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About the author

Christopher Richards is currently studying Business Mathematics and Statistics at the London School of Economics. 

The views and opinions expressed in this article are those of the author(s).

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Inquisitive university students and recent graduates are welcome to collaborate with our team to produce insightful articles.