Is Ireland really the second wealthiest nation in the world?

Slugger O'Toole quotes the newly published Human Development Report 2005, which claims that Ireland is the second wealthiest nation in the world:

When all factors were taken into account Ireland rose two places to eighth in the Human Development Index, leapfrogging the US, Japan, Belgium and the Netherlands but falling behind Luxembourg and Switzerland.

Surely some mistake, many of you must be thinking? And you would be right. Every year the Human Development Index comes out with some surprising move up or down, and almost every year it turns out the reason is dodgy number crunching at the UNDP.

There is a long and fascinating debate in the comments to Slugger's post, but the nub of it is this: the UNDP used Gross Domestic Product (GDP) rather than Gross National Product (GNP). In most countries there is little difference between the two, but in Ireland GDP was almost 20% higher than GNP in 2004 according to their Central Statistics Office. That's huge.

GNP is the value of final goods and services produced in a year by a country's nationals. It includes profits from capital held abroad, but excludes all repatriated profits and income. In Ireland, home of the multinational, a lot of that money goes offshore. As Wikipedia notes:

GDP is a better measure of the state of production in the short term. GNP is better when analysing sources and uses of income.

They really should have used GNP. Just goes to show, its not only Polly Toynbee who gets confused by GDP measures! What's galling about the UNDP mistake is that the problems with using GDP for such rankings are well known. In March, for example, an article in the OECD Observer pointed out:

Ireland is another country where GDP has to be read with care. Ireland's position has risen up the GDP per head rankings since 1999, and is now in the top five countries in the OECD. ...But does GDP per head accurately reflects Ireland’s actual wealth, since all that inward investment (and foreign labour) generates profits and other revenues, some of which inevitably flows back to the countries of origin?

Another measure, Gross National Income, accounts for these flows in and out of the country. For many countries, the flows tend to balance out, leaving little difference between GDP and GNI. But not so for Ireland, as outflows of profits and income, largely from global business giants located there, often exceed income flows back into the country. This means that in a GNI ranking, rather than being in the top five, Ireland drops to 17th. In other words, while Ireland produces a lot of income per inhabitant, GNI shows that less of it stays in the country than GDP might suggest.

GNI in Ireland is very similar to GNP, so the key point remains. Surely the UNDP ought to know this stuff? Or, as Brad DeLong might mutter, why oh why can't we have better UN statisticians?

Comments

[Edward Hugh]

Well it's not only the UN that has done this, Eurostat too could be counted in the club. Probably this is pretty standard practice and it is only the relatively anomalous situation of Ireland that has lead to the controversy (the UK of course has the issue but the other way round).

The bottom line though is surely that Ireland has enjoyed extraordinary economic success in recent years, as I discuss in my post 'Europe's Tiger'.

[Edward Hugh]

Similar issues also arise in a different way with Luxembourg (which often heads many of the lists).

"The high level of GDP per capita in Luxembourg is partly due to the large share of cross-border workers in total employment. While contributing to GDP, they are not taken into consideration as part of the resident population which is used to calculate GDP per capita."

In this case it is not multinational corporations, but migrant workers who produce the distortion. In fairness, at the end of the day, as I'm indicating, it may be a little unjust to single out the UN here. Take a good look at the OECD and the IMF first.

[Mark T]

Years ago doing country risk analysis for a UK clearing bank, we always considered the GNP rather than GDP stats for this exact reason. Seems like a few basiscs have been forgotten!