McKinsey: Ireland needs to rethink its economic strategy

15 September 2014 Consultancy.uk

Ireland is the 14th most ‘connected’ country in the world, driven by a strong performance in knowledge-intensive flows of services, concludes a new research from McKinsey & Company. Yet as the country recovers from the crisis and returns to growth, it stands at a crossroads. The consultants urge Irish policy-makers to radically rethink how and where it plays the cross-border game in order to seize the opportunities offered by an increasingly complex global marketplace.

In the report ‘Capturing the value of Ireland’s global connections’ McKinsey & Company has tracked the flows of goods, services, finance, people, and data and communication that move in and out of Ireland. The results reveal that from 1990 to 2007, combined flows both in and out of Ireland grew from $64 billion to $1.4 trillion (€47 billion to €1 trillion). This represented an annual growth rate of approximately 20%—twice the global growth rate. The tremendous spike after 2002 was primarily driven by a real estate market that attracted huge inflows of foreign capital, which plunged in the wake of the financial crisis. In 2012 the value of all flows across Ireland’s borders was worth $476 billion (€348.5 billion), equivalent to 226% of GDP.

McKinsey - Economic Flows Ireland

Financial flows
The analysis highlights the massive impact financial flows have on Ireland’s economy. Over the past 15 years the value has grown from a base of $39 billion (€28.6 billion) in 1995, to just over $1 trillion (€0.7 trillion) in 2007 before plummeting to negative $30 billion (€22 billion) in a wave of capital flight in 2009. The financial flows have recovered after 2009 , driven by a robust FDI – Ireland ranks among the top 15 recipient countries globally – and equity inflow, although coming nowhere near the record-breaking pre-crisis levels.

McKinsey - Financial Flows Ireland

Services flows
From a flow of services perspective, Ireland is heavily weighted towards knowledge-intensive services, while the share of labour- and capital-intensive flows remains much lower. The main components of services flows are computer/information exports, business services exports and imports, and royalty imports. In particular the last element can be regarded as a unique characteristics – Ireland’s royalty and licence fee

imports are three times higher than those of any other importer in the world. “Ireland has become one of the leading jurisdictions of choice for establishing special-purpose vehicles for intellectual property securitisation,” write the authors.

McKinsey - Services Flows Ireland

Flows of goods
An exporter of machinery and equipment, computers, chemicals, pharmaceuticals, and agricultural products, Ireland ranks 29th in the world for inflows and outflows of goods. Between 2002 and 2012, however, its 3%

annual growth in trade lagged well behind the Western European average of 8%. R&D- and knowledge-intensive goods constitute the vast majority of the island’s trade flows.

McKinsey - Flows of Goods Ireland

Benchmark

Based on the performance on the above areas, also including flows of labour, data and communication, Ireland ranks 14th in the world for overall flows. Ireland’s position in the so-called ‘Connectedness

Index*’ is relatively high, yet at the same time volatile. As a small, open economy, Ireland is largely a ‘waypoint’ for global flows rather than a source or a final destination, and as a result it is highly dependent on continuously attracting and retaining foreign decision-makers.

According to McKinsey, Ireland currently stands at a crossroads. On the hand the firm should cherish and further build upon its strengths, yet on the other hand the government is urged to revise its economic strategy, if not it risks losing competitive ground in the wake of the changing nature of the marketplace and intensifying competition. The key advice focuses on extracting more value of the flows that move in and out of its borders, in such a strategic manner that lowers the country’s long term dependency on volatile flows. Other recommendations for policy makers include deepening Ireland’s ties with the rest of the world, lowering the reliance on low tax rates to capture investors (too easily replicated by other countries), capitalising on still-untapped digital potential and increased focus on the core issues of education, skills, infrastructure and quality of life.

Top 20 McKinsey Connectedness Index

“Today the global economy is more digital and interconnected than ever before. Countries are exchanging fast-moving, high-value flows of people, goods, services, capital and data, and they’re increasing at an exponential rate,” says Conor Jones, a partner in McKinsey’s Dublin office. “By rethinking its global strategy, Ireland can take advantage of this global phenomenon in a way that creates greater economic stability and lasting benefits at home.”

* The Connectedness Index evaluates the connectedness of a country by looking at the size of both inflows and outflows relative to its GDP or population, and its share of global flows. The benchmark compares the performance of 131 nations.

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