Irish Version of Gavyn Davies’ Graph

Tony Leddin and I have included a version of this type of graph in successive editions of our textbook The Macroeconomy of Ireland.
Here are two slides showing the data for Ireland from 1970 to 2009.

(It proved easier to post a link to Flickr than to go through to rigmarole of uploading via this site!)

Happy Christmas!

11 replies on “Irish Version of Gavyn Davies’ Graph”

Ok Brendan you asked for it since you are clearly the expert on this figure.

When the Irish domestic banks sell 130 billion euros worth of NAMA bonds and collateralized mortgages to the ECB for cash, but also enter a promise to purchase the same assets back at a later date plus interest (i.e., standard repo) where does that transaction appear in these figures?

Proper economists like Professor Brendan Walsh must sometimes wonder why they bother. In response to one economist bemoaning on another thread the absence of such graphs for Ireland, he goes to the trouble of creating and posting these two graphs. The response: 2 posts in 24 hours, one of which consists of the profound and moving words ‘google dropbox….very handy’. The thread on the Kilkenny Comedy festival had about forty responses in that time. Even the economist who was bemoaning on another thread the absence of such graphs for Ireland can’t be bothered to comment, which makes one wonder why he bothered to ask if such graphs existed for Ireland.

However, I can’t say that I am in the least surprised. When anything is posted here that contradicts the politically-motivated media/academia revisionist view of post-1997 economic history, it is invariably ignored. The conclusions that I make from these two graphs are as follows:

(a) The David McWilliams/Morgan Kelly theory that the Celtic Tiger was financed by foreign borrowing is bunk. The graph shows clearly that, averaged over the period of the Celtic Tiger, roughly from 1994 until about 2007/08, the balance-of-payments was more or less in balance. There was a small surplus from 1994 until around 2002/03, then a small deficit, and now, in 2010 Q3, back to a small but growing surplus again. In contrast, the US and the UK have been more or less in permanent balance-of-payments deficit over the past two decades. At its worst, around 2005/06, Ireland’s balance-of-payments deficit of around 5/6% was much less than in the early 1980s, when it was around 14%.

(b) In terms of balance-of-payments constraint on growth, Ireland in 2010 is at roughly the same point in the economic cycle as it was in 1989, and not 1982. In other words, no balance-of-payments constraint on growth.

(c) With even modest economic growth, the government deficit falls much more rapidly than economists predict at the time. Witness the period from 1986/87 to 1989/90 in the graph. At the time of the general election in February 1987, the budget deficit was seen as an insurmountable barrier to growth and incapable of solution. Hence, the FG/Lab wipe-out. Yet, the government deficit was virtually eliminated within 3 years. Not a single economist forecast that at the time. We are beginning to see a similar pattern emerge now. Ireland’s recession ended in Q4 2009. Between Q4 2009 and Q3 2010, real GDP increased by 1.6 per cent, which is not earth-shattering, but annualises to about 2.1%, so not trivial either. And we are now seeing the same effect as in the early part of the 1986/87 to 1989/90 phase beginning to occur, with tax revenues being above target and government spending being below target since late summer.

It seems to me you do not understand the components of BOP. I’m not sure I do myself, however, it seems reasonably clear that Capital flows into the country count as positive for BOP with interest and capital repayment counting as negative –
“Other investment covers assets and liabilities other than those classifiable to direct investment, portfolio investment or reserve assets. It comprises loans, currency and deposits, short and long-term trade credits, financial derivatives and other accounts receivable and payable. Derivatives cover over-the-counter (OTC) and exchange-traded contracts and include options, futures, swaps, forwards, etc. For BOP purposes, all
receipts and payments connected to financial derivative contracts (other than the values of transactions in the underlying commodities or financial instruments) are recorded in the financial account i.e., there are no entries in the current account other than related fees and service charges (not always identifiable). In principle, other investment transactions are valued at market valuation inclusive of accrued income. For loans, book values are accepted as a proxy for market values.”

So it is unsurprising we had a positive BOP during the bubble as massive capital was coming into the banks (in the form of bonds, deposits and derivatives) to be loaned out to the populance to buy bubble-price assets. Equally, the continued borrowing by the state is replacing this.

So much like your GDP growth excluding investment, your BOP figures excluding capital flows are a rather meaningless makey-uppy-number…


You are wrong. I suggest that you read the following.

Here is my brief description. Before someone with a PhD in Economics, and nothing better to do, comes along picking holes in my description, may I point out that (a) this is a blog (b) it is intended to be brief (c) I am addressing one person, hoganmahew, not delivering a lecture at Harvard (d) it is Christmas Eve.

The balance-of-payments can be divided into two parts:

(a) Current account.

(b) Capital account.

By definition, when both are included, the sum total must always be zero, for all countries and in all years. In other words, the balance-of-payments always balances. That is why it is called the BALANCE-of-payments.

When we talk about a country being in balance-of-payments surplus or deficit, it is the current account of the balance-of-payments that is being referred to, even if it is not always explicitly stated. I am sure that Professor Walsh will confirm that his graph refers to the current account of the balance-of-payments. So, NO, dear hoganmahew, capital transfers will NOT be included in the balance-of-payments graph that Professor Walsh put up. Therefore, my earlier analysis holds true.

A simple example will illustrate the point.

Country A exports 1 billion more than it imports, and so runs a current account surplus of 1 billion on its balance-of-payments.

Country B imports 1 billion more than it exports, and so runs a current account deficit of 1 billion on its balance-of-payments.

Country A lends country B 1 billion to finance its deficit.


Country A runs a capital account deficit of 1 billion on its balance-of-payments.

Country B runs a capital account surplus of 1 billion on its balance-of-payments.

When both current and capital accounts are included, the balance-of-payments is in balance for both countries. They each individually have zero surplus and zero deficit. Which, as I said above, must always be the case. But, we will still refer to country A having a balance-of-payments surplus of 1 billion and country B having a balance-of-payments deficit of 1 billion, because the terms ‘balance-of-payments surplus’ and ”balance-of-payments deficit’, as commonly used, mean ‘balance-of-payments current account surplus’ and ”balance-of-payments current account deficit’. I am sure that Professor Walsh will confirm that this is the case in relation to the graph he has put up for the balance-of-payments surplus/deficit, which I analysed in my previous post. It would be better if this was always made clear. I am as guilty as anyone in not doing so. I expect the reason the full terms are often not used is simply that they are a bit long-winded.

If you had taken the time to read the document that I linked to above, you’d see that the method actually used in Ireland to calculate BOP is different to the academic version in Wikipedia. From the CSO methodology document:
“Structure of the Balance of Payments accounts
The balance of payments presentation consists of three tables or accounts, the Current Account, the Capital Account and the Financial Account. The current account consists of trade in merchandise and services, income inflows and outflows and current transfers. The capital account covers capital transfers and the acquisition and disposal of non-produced, non-financial assets. The financial account is concerned with transactions in foreign financial assets and liabilities, distinguishing the functional type of investment i.e. direct, portfolio and other investment (including transactions in financial derivatives) and reserve assets.”

Irish BOP figures include foreign financial flows into the banks in the form of bonds and deposits. If you wanted to recalculate BOP according to the Wikipedia definition, I’m sure you could. I suspect you would find that absent financial flows into the country, that BOP during the bubble was deeply negative and that it was indeed flows of credit that fueled the bubble and not earned income.

While I agree with you that the current account is important in assessing the improvement of trade, it is not the only component of BOP. Capital is leaving the country, largely through the process of returning to its country of origin. The government is replacing some of that capital with foreign borrowings. The banks are replacing the rest with repo transactions. Those repo transactions will at some stage have to be repaid or, um, modified.

What is our net external asset/ liability position?

As far as I understand it the balance on the current account tells us the flow of borrowing/lending with the rest of the world. These borrowings seem to have been substantial during the worst of the boom but insignificant or positive during the proceeding years.

As far as i understand it this basic situation is not changed by whether or not the capital account is broken down into two components labelled financial and capital.

Is it possible that although we have not run large/very large current account deficits that our net external position has deteriorated in any event perhaps because investments we made abroad have lost money?

If our net external asset position is positive/mildly negative, what consequences does this have for ability to service our public and private external debt? Does it not imply that we are in pretty good shape as taken as a whole we could, at least in principle, meet all our foreign obligations by running down foreign assets?

Why is this statistic not more widely followed?

Some of the confusion in the discussion of Brendan’s graphs on this post and on the previous post is because they are not, in fact, showing the same information as in Gavyn Davies’ original graph (as the comments on his blog post show).

Brendan’s graph shows the distribution of the financing of domestic net investment between domestic and foreign savings. It has to do with the financing of real assets in the economy.

The Davies’ graph shows the financial balances of the three sectors which make up the US economy – the private sector, the government sector and the foreign sector.

Financial balances are what each sector has left over to invest in financial assets after it has undertaken physical investment. So savings balances are not the same as financial balances. The identity which Davies shows is that the private sector balance + government sector balance = foreign sector balance (where the sign of the foreign sector balance is changed to show the accumulation of financial assets by the foreign sector (i.e. when the country is running a balance of payments deficit) as a negative.

The CSO provides the data to show both graphs (i.e. sectoral financial transactions as in Davies and sectoral non-financial transactions as in Walsh) in its data releases Institutional Sector Financial and non-Financail Accounts, respectively. For the financial accounts, its Excel datasheet only goes back to 2003, and I have graphed the equivalent to the Davies’ graph below. Because comments on this blog do not accept images, you have to click on the external link to see it.

Because of the shortened time period, the graph does not throw light on what was happening during the first phase of the Celtic Tiger period. However, in the second phase, it shows the private sector (households and financial and non-financial companies) becoming increasingly indebted between 2003-07, offset by government saving and increased lending from the rest of the world.

Between 2007 and 2009, there has been a dramatic turnaround in private sector behaviour as the private sector starts to accumulate financial assets/pay down debt. This turnaround is greater than 20% of GDP and is clearly a contributory factor to the economic recession. Although the government of course has started accumulating liabilities through borrowing, the net result is that we are paying down some of our external liabilities.

The foreign sector financial balance is equivalent to the Balance on financial account in the CSO balance of payments statistics. It thus takes account of all elements of the balance of payments (current account, capital account and changes in reserve assets).

Thank you for the clarification. Those sectoral financial accounts were not available when we prepared the last edition of our textbook.
I think taken together the graphs now present a useful picture of what has been going on. It will be fascinating to update these for 2010.

Let me just correct the last paragraph in my earlier comment where I tried to define the foreign sector financial balance in a way that came out very garbled.

What I should have said is that the definition of the foreign sector balance is slightly different as between the savings and the financial balances graphs.

In the savings graph, it is the current external balance, or the balance on current account, from the balance of payments.

In the financial balances graph, it is the balance on financial account. This should equal the balance on current account plus the balance on capital account, but in practice it differs because of net errors and omissions which can be sizeable.

Thus, in 2009, the current account balance was -€4,893m and the balance on capital account was -€1,252m, for a total outflow of -€6,105m. However, the balance on financial account in 2009 was -€3,315m, meaning that our net claims on the rest of the world grew by that amount in that year, while the balancing item amounted to €9,419m. So the graph of sectoral financial balances that I posted shows that we were accumulating financial assets/paying down liabilities of the rest of the world in 2009, even if the large net errors and omissions figures suggests that this likely overstates the situation.

And I agree, Brendan, that the 2010 figures will be particularly interesting.


You have rather hit the nail on the head. The cumulated BOP does not equal the change in the net asset/liability position until gains/losses have been accounted for. A country which ran a zero current BOP every year but borrowed to finance losing investments ends up poorer, less credit-worthy and needs to de-leverage. The cumulative BOP deficit through the Bubble was not that large even by Irish historical standards. The perception that the Irish borrowed for a party is, to put it kindly, incomplete. The Irish also borrowed for a losing punt, on the Irish and international property markets. None of this matters in terms of policy options of course.

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