The Irish are rich in foreign investment
A country's GDP gives a better sense than GNP of its future economic prospects
By one measure, Ireland is one of the wealthiest countries in Western Europe. By another, it is in the middle of the pack.
What is going on, and why does it matter?
The different measures are GDP per capita and GNP per capita. GDP (gross domestic product) measures the value of what is produced in a country. GNP (gross national product) picks up how much of that value stays in a country.
If a nation has a lot of foreign direct investment, as does Ireland, GDP will exceed GNP by a considerable amount. According to the Irish government, the country's GDP is about 370 billion euros. Its GNP is less than 300 billion euros. The difference in GDP and GNP is largely accounted for by the outflow of profits to foreign-owned multinationals.
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This isn't just a story about Ireland. Many other nations have had significant differences between their GDP and GNP, including many developing nations and, at times, Singapore.
The conventional wisdom is that GNP is the proper measure of living standards, because domestic citizens do not have claims on the profits of foreign multinationals. That isn't wrong, but it is also an incomplete answer. When it comes to the future prospects of a country, GDP is a better indicator. Countries that have a high ratio of GDP to GNP are especially promising, though there are some caveats.
A relatively high GDP is a sign that a large number of foreign companies view the future of the domestic economy as bright. They are "putting their money where their mouth is."
In the case of Ireland, the country is now the only member of the European Union in which English is the main language not only for business but also for schools and public life. Foreign investors are drawn by that fact. They also see that Ireland is relatively underpopulated, and appears to be receptive to absorbing talented foreign immigrants. Furthermore, Ireland is ruled by mainstream parties and seems largely unaffected by the populism and nativism that are creating problems elsewhere in Europe.
All these realities are reason to be bullish. It is also reasonable to expect that the Irish government will be relatively friendly to business looking forward.
Some of the foreign investment in Ireland is driven by favorable corporate tax treatment, and there is a view that Irish corporate tax rates are too low for the benefit of Europe as a whole. I won't address that debate here. Focusing merely on the narrower question of its future economic prospects, Ireland's ability to credibly commit to pro-commerce practices is again a bullish sign.
The same can be said about Singapore, which also features favorable treatment of foreign multinationals and a reputation for beneficial economic policies.
Foreign direct investment also may improve the national security prospects for a country. This is probably more of an issue for Singapore than for Ireland, due to a greater potential for regional instability in Southeast Asia. The presence of so many major US corporations in Singapore makes it easier for the US government to consider Singapore a friendly nation, and it boosts the number and strength of the interest groups that will lobby for US support of Singaporean national security.
There are times to be wary when a country's GDP exceeds its GNP. When the foreign direct investment is in extractive resource industries, for example, it can be a sign of rent-seeking, political privilege and manipulation of domestic governance. It's more encouraging when the foreign investors are a diverse lot, with many in service industries such as technology and business consulting. Then foreign investment is more likely a sign of good prospects for human capital.
There are also countries in which GNP is much higher than GDP, such as East Timor during its times of receiving lots of foreign aid. I regard that as a bearish sign, just as I regard the higher GDP number as a bullish sign.
The main lesson is not to focus on GDP to the exclusion of GNP. The decisions of foreign investors say a great deal about where a country might be headed.
Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. His books include "The Complacent Class: The Self-Defeating Quest for the American Dream." @tylercowen
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.
