*1.A PARADOX FOR POOR NATIONS ------------------------------------------------------------------------
2. Europe Hasn't Outgrown 'That '70s Show' By BRIAN
M. CARNEY WSJMay 9, 2005; Page A23
3. We'RE RICH, YOU'RE NOT. END OF STORY
*4. Colombia Needs an Irish-Style Economic Tonic
By MARY ANASTASIA O'GRADY
5. The Chinese Menu (for Development)
6. MOBILE PHONES ARE HELPING THE THIRD WORLD DEVELOP
*7.The Celtic Tiger: Secret of Success Unveiled By
Hans Labohm Published 03/28/2005
*8. Latin American right-wingers did not implement
market-based reforms. Wednesday, March 30, 2005 ~ 7:43 a.m., Dan
Mitchell Wrote:
9. Taxing times Mar 21st 2005 From The Economist Global
Agenda
10-.The Next Great Wave of Growth
By JEREMY J. SIEGEL WSJMarch 23, 2005; Page A14
11. Regime Change at the World Bank By ALLAN H. MELTZER
March 18, 2005; P
12. Beating the 'Resource Curse' With Transparency
13. Venezuela Announces Plan To Seize More Lands
*14. Seeking Latin America Growth Some Economists
Argue Government Policies May Be the Solution
*15. THE EUROPEANS UNION'S GROWTH GAP
16. Another victory for tax competition
17. International bureaucracies threaten global
prosperity. Richard Rahn's Washington Times column
18. German economist urges tax increase
19. Sweden may raise taxe
20. Sweden wins Booby Prize for highest tax burden.
21. Blame Mexico's PRI-Era Monopolies for Slow Growth
By MARY ANASTASIA O'GRADY January 28, 2005; Page A9
22. As Europe Cuts Corporate Tax, Pressure Rises on
U.S. to Follow
*22. Foreign aid undermines economic growth in poor
nations. A former World Bank economist explains why good intentions often
yield bad results:
23. The Aid Flood By KEITH MARSDEN
WSJ January 27, 2005
24. More proof that lower tax rates wor
25. Will America become the Argentina of the 21st
Century? Richard Rahn explains that the United States is slowly slipping
in world freedom rankings.
26. Push Privatization in Hong Kong By ANDREW WORK
WSJ January 31, 2005
27. Corporatism, Entrepreneurship and Faith
28. Push Economic Freedom in China By JAMES A. DORN
WSJJanuary 27, 2005
29. BRAZIL NEEDS TAX CUTS TO IMPROVE ECONOMY
*30. Even the OECD recognizes the low-tax Irish miracle.
*31. Ireland wealthier than the US and fourth in global
'richest' league By Ben Quinn WSJ 17 January 2005
*32.Flat and Happy . . .By ALVIN RABUSHKA WSJ January
12, 2005; Page A10
33. The Post-Saddam Boom By GLENN YAGO and DON MCCARTHY
WSJ January 13, 2005; Page A12
34. Social Darwinism, French Style
35. Irish and Slovak officials explain important role
of better tax policy.
*36. Globalization and 'Contract Culture'
37. Flat-Tax Club
*38. Hail Estonia!
1.A PARADOX FOR POOR NATIONS ------------------------------------------------------------------------
In developing countries, ordinary people face great obstacles
establishing small businesses and becoming entrepreneurs, says the World
Bank. Often, they are unable to find funding or they are smothered by
the bureaucratic hassles of establishing an enterprise. Their forgotten
fate illustrates how the poorest countries are often the ones where it
is hardest to get a new concept or product to market.
The World Bank's annual survey catalogues the hazards
of starting a business in 145 countries and found in many poor
nations heavy regulation and red tape impedes enterprise. Consider:
o In Mozambique, it takes 153 days
to start a business but only two
days in Canada.
o Enforcing a contract in Indonesia
can cost more than the
contract's actual value but doing the same in South Korea costs
just 5.4 percent of a contract's value.
o It took 50 days to establish a new
business in the Philippines at
a cost of 20 percent of the country's average per capita gross
national income, compared with eight days and 1.2 percent of per
capita income in Singapore and 33 days and 6.7 percent in
Thailand.
The World Bank's central finding indicates how poor countries
with the greatest need for entrepreneurs to speed growth and
create jobs also put the most obstacles in their way.
Corruption is a large part of why these bureaucratic
logjams persist: The more roadblocks there are, the more opportunities
for underpaid government officials to secure kickbacks.
But there are other impediments to regulatory overhaul.
For example, the World Bank notes that trade unions prevented
Peru from reducing mandatory severance payments, while for
years, notaries in Croatia have stalled its efforts to simplify
procedures to start businesses.
Source: James Hookway, "A Paradox for Poor Nations,"
Wall Street Journal, May 9, 2005; and "Doing Business in 2005:
Removing Obstacles to Growth," World Bank, September 2004,
Oxford University Press.
For text: http://online.wsj.com/article/0,,SB111560500592027898,00.html
For World Bank Report: http://rru.worldbank.org/Documents/DoingBusiness/DB-2005-Overview.pdf
For more on Economic Freedom and Growth: http://www.ncpa.org/iss/int/
A Paradox for Poor NationsInventors Face Big Barriers WhereEntrepreneurs Are Most Needed
By JAMES HOOKWAY
Staff Reporter of THE WALL STREET JOURNAL
May 9, 2005; Page A20
MANILA, Philippines -- The Philippines has produced its share of inventions and hoaxes. There is a homemade karaoke machine that predates its Japanese-made counterpart. There also is a car supposedly powered by water, not to mention a fluorescent lamp reputedly devised by a certain Mr. Flores.
But retired bus driver Pablo Planas, inventor of the Khaos Super Gas Saver, has an edge over other Filipino inventors: Somebody actually is manufacturing his fuel-saving device for cars and motorcycles.
"I was one of the lucky ones," Mr. Planas says at the office of his benefactor, a wealthy property developer who stumbled across Mr. Planas's invention 30 years after he built his first prototype and decided to put it into production.
Mr. Planas's experience sheds light on an often overlooked aspect of developing economies: The difficulties that ordinary people face in trying to establish small businesses and become entrepreneurs. Sometimes ideas like Mr. Planas's are unable to find the funding needed to bring them to life. But often they are smothered by the bureaucratic hassles of establishing an enterprise. Their forgotten fate illustrates how the poorest countries are often the ones where it is hardest to get a new concept or product to market.
The World Bank has begun an annual survey cataloging the hazards of starting a business in 145 countries. It discovered that, in many poor nations, heavy regulation and red tape impede enterprise. It takes 153 days to start a business in Mozambique, for example, but two days in Canada. Enforcing a contract in Indonesia can cost more than the contract's actual value; doing the same in South Korea costs just 5.4% of a contract's value.
The Philippines exemplifies the World Bank's central finding: Poor countries with the greatest need for entrepreneurs to speed growth and create jobs also put the most obstacles in their way. Corruption is a large part of why these bureaucratic logjams persist: The more roadblocks there are, the more opportunities for underpaid government officials to secure kickbacks. But there are other impediments to regulatory overhaul. The World Bank report noted that trade unions prevented Peru from reducing mandatory severance payments, while notaries in Croatia for years have stalled its efforts to simplify procedures to start businesses.
Mr. Planas's 30-year struggle to put his fuel-saving device onto the market shows how governments of some developing countries still overlook the needs of small businesses even as they court multinational companies and outsourcing firms.
While many other Asian countries have produced successive generations of self-made business leaders since World War II, those who dominate business and innovation in the Philippines are either foreigners or well-entrenched local business families, such as beer-and-tobacco tycoon Lucio Tan. With the possible exception of Tony Tancaktiong, founder of the Jollibee Foods Corp. fast-food chain -- a kind of Philippine McDonald's -- few others have joined the country's wealthy elite in decades.
The upshot is that the Philippine economy is unusually shallow in terms of vibrant home-grown commercial enterprises. Electronics parts made here by foreign companies account for 70% of all exports, largely because there are few indigenous products to export except bananas, fish and furniture made from local timber.
Former Trade Secretary Cesar Purisima, in an interview before his recent appointment as the Philippines' finance secretary, says the country's business culture is flawed. "Traditionally, Filipinos have sought high-paying jobs in banks and corporations rather than setting out on their own," Mr. Purisima says. "We have to try to change that and make it easier for entrepreneurs to emerge."
For the Philippines, excessive regulation and the banking system are two big obstacles to local entrepreneurship. The World Bank's business survey found it took 50 days to establish a new business in the Philippines at a cost of 20% of the country's average per capita gross national income. That compares with eight days and 1.2% of per capita income in Singapore and 33 days and 6.7% in Thailand.
Philippine banks traditionally have been more reluctant to lend to up-and-coming entrepreneurs than banks elsewhere in Asia, economists say.
Indeed, Mr. Planas's break came not through a bank loan -- he repeatedly was turned down for funding -- but through a chance encounter with an adventurous investor. Like many good inventions, Mr. Planas's fuel-saving device operates on a simple principle. By precisely regulating the mixture of oxygen and fuel burned in a car's engine, he cut down on fuel use and carbon-monoxide emissions in the combustion process. And the device is inexpensive to make; it retails in the Philippines for about $100.
But, the 67-year-old Mr. Planas says, banks were unwilling to take the risk of supporting an unknown businessman. He didn't have sufficient land or other property to offer as collateral.
To remedy the problem, he began distributing and installing free samples of his device to minibus-driver friends to generate word-of-mouth buzz about the invention. That didn't work, either.
Then, early last year, a friend introduced Mr. Planas to someone who had accidentally come across a sample of his contraption: a real-estate developer named Jerry Acuzar. Mr. Acuzar was sufficiently impressed with Mr. Planas's prototype to invest three million pesos, or about $55,500, of his own money, to start production.
Mr. Acuzar's business and marketing savvy helped to smooth Mr. Planas's way past the bureaucratic obstacles to establishing a business. In November, their new company, Inventionhaus International Corp., signed agreements to export the device to several countries under the brand name Khaos, the Greek goddess of air.
So far, Mr. Planas's company has created 135 sales and manufacturing jobs in the Philippines. "I've waited 30 years for this," Mr. Planas says, smiling through thick spectacles for a well-wisher aiming a camera on a mobile phone. "If this is what I have to do to promote my invention, then so be it."
Write to James Hookway at james.hookway@awsj.com
2. Europe Hasn't Outgrown 'That '70s Show' By BRIAN M. CARNEY WSJMay 9, 2005; Page A23
BRUSSELS -- Is the European "social model" doomed? It's a question that comes up with increasing frequency as unemployment across Western Europe has climbed into the double digits and economic growth has ground to a virtual halt across much of the Continent.
Updated GDP figures for the euro zone are due out this week, and growth rates are expected, once again, to disappoint. Last month, both the European Commission and the European Central Bank cut their annual growth forecasts for the euro zone to 1.6% from 2%, and that ugly word recession is in the air.
The European Union's much-ballyhooed "Lisbon Agenda" -- which was supposed to revive growth in Europe -- was really not an agenda for reform at all. It was, instead, simply a statement of nice things the EU would like to see happen to the European economy to help it compete with the U.S. -- such as raising employment levels, increasing R&D spending, and so on.
Unfortunately, but not surprisingly, almost none of those things have happened, and halfway through the 10-year timetable of "Lisbon," the European economy is in at least as bad a shape as it was when Lisbon was announced in 2000.
Given that Europe's streak of economic underperformance can now be measured in decades, perhaps a better question to ask is: Why does anyone think that a system of generous welfare benefits, high taxes and harsh restrictions on hiring and firing would ever produce anything like a dynamic, growing economy? Why does anyone assume that there is such a thing as a "European model," rather than just a collection of ill-conceived policies having a predictably depressing effect on the economy and job creation?
Of course, Europe did have growth, once. Indeed, for 25 years or so after World War II, European growth was something of an economic miracle, bringing countries like Germany out of hyperinflation and poverty into the first rank of world economies. Along with Germany, Britain, France and Italy rank among the world's biggest economies; and the European Union, considered as a whole, rivals the U.S. for the title of the world's largest economy.
In other words, per the conventional wisdom, Europe had low unemployment and high growth in the past, so it can again. Unfortunately, the argument is wrong. A fundamental change occurred in Europe between the salad days of the 1950s and '60s and today, and Europe never recovered. In a word, the 1970s happened.
In 1965, government spending as a percentage of GDP averaged 28% in Western Europe, just slightly above the U.S. level of 25%. In 2002, U.S. taxes ate 26% of the economy, but in Europe spending had climbed to 42%, a 50% increase. Over the same period of time, unemployment in Western Europe has risen from less than 3% to 8% today, and to nearly 9% for the 12 countries in the euro zone. These two phenomena are related; in a country with generous welfare benefits, rising unemployment increases government spending rapidly.
But here a third element enters the picture, creating a feedback loop that explains why the Continent will never regain the halcyon days of postwar growth. As spending goes up, higher taxes must follow to pay for those benefits. But those taxes, usually payroll taxes, must be collected from a shrinking number of workers as jobs are cut. This in turn increases the cost of labor and decreases the benefit of working rather than collecting unemployment or welfare checks. As Martin Baily, a former head of Bill Clinton's Council of Economic Advisers, has described, this can lead to a spiral of rising taxes and falling employment, especially when welfare payments are high, as they are in most of Western Europe.
The result is predictable -- more jobs are lost, the tax base shrinks, and taxes must go up further to pay for yet more welfare benefits, making work less attractive and not working more attractive.
In the 1970s, unemployment went up everywhere in the developed world. But on the Continent, it never went down. Britain and the U.S. both saw major economic reforms in the early 1980s and subsequently recovered from the '70s. The Continent did not, and it's endured the pain of that lost decade ever since. As the nearby chart shows, growth has gone up a little at times, then back down, but unemployment in Continental Europe has remained stuck in a narrow range for three decades.
Western Europe jumped the track and fell into an economic ditch in the 1970s along with the rest of the world. But the Thatcher and Reagan reforms that pushed Britain and the U.S. back onto the rails were never tried on the Continent, and most of those countries have been spinning their wheels ever since.
Rather than ask whether the "model" is doomed, it would be better to question how it ever attained the status of a model at all. The welfare state worked in Europe for two decades because so few people needed it; growth was strong, employment high and actual benefits paid were low. When the world economy hit a speed bump following the collapse of the Bretton Woods arrangement in 1971, both government spending and unemployment went up, and the system of incentives and benefits now enshrined as the "European model" was tested and found wanting. The result is permanently higher unemployment and taxes, a nasty mix.
In the U.S. and the U.K., a combination of tax cuts, labor-market reforms and deregulation starting in the 1980s broke the downward spiral in which the Continent still finds itself. In the 1990s, the U.S. added welfare reform to the mix. Unfortunately, the prospects for Europe are not particularly bright right now. German unions -- and even some members of the German government -- have in recent weeks taken to denouncing American capitalists as "locusts" and "bloodsuckers." Italian Prime Minister Silvio Berlusconi, perhaps the only politician in Europe who counts Ronald Reagan as a hero -- and admits it -- just had his coalition emasculated by special interests at home.
Sadly, it appears as if Europeans will be watching reruns of their own version of "That '70s Show" for years to come.
Mr. Carney is editorial page editor of The Wall Street
Journal Europe.
3. We'RE RICH, YOU'RE NOT. END OF STORY
------------------------------------------------------------------------
When disposable income is adjusted for cost of
living,
Scandinavians are
the poorest people in Western Europe, says
international accounting
and consulting firm KPMG... TIMBRO/NEW
YORK TIMES
Despite popular belief, Norway is not the richest country
in the world,
says Bruce Bawer, a freelance writer based in Oslo. In
fact, he says the
economic reality of life in Norway is far different than
the perception
of affluence, which Norwegians themselves believe and
want you to
believe, too.
In order to uphold their image of superiority, Bawer
says Scandinavians
often stereotype the United States as a nation divided,
inequitably,
among robber barons and wage slaves, with armies of the
homeless and
unemployed. However, numerous studies strongly suggest
otherwise:
o Timbro, a Swedish research
organization, compared the gross
domestic product
of the 15 European Union members (before the
2004 expansion)
with those of the 50 American states; the only
European country
with an economic output per person greater than
the United States
average was Luxembourg, which ranked third,
just behind Delaware
and slightly ahead of Connecticut.
o KPMG, the international accounting
and consulting firm, found
when disposable
income was adjusted for cost of living,
Scandinavians were
the poorest people in Western Europe; the
leaders on the list
were Spain and Portugal, two of Europe's
least regulated
economies.
o Johan Norberg, a Swedish economist,
says that in the last 25
years, economic
growth has been 3 percent per annum in the United
States, compared
to 2.2 percent in the European Union; the gap in
purchasing power
is constantly widening between the United States
at $36,100 per capita
and the EU at $26,000.
While these studies confirm Bawer's suspicions, he says
references to
Norway as the world's richest country still continue
and this is
obviously one misconception that will not be put to rest
by a measly
think-tank study or two.
Source: Bruce Bawer, "We're Rich, You're Not. End of Story."
New York
Times, April 17, 2005; and Fredrik Bergstrom & Robert
Gidehag, "EU
Versus USA," Timbro, June 2004.
For NYT text (subscription required):
http://www.nytimes.com/2005/04/17/weekinreview/17bawer.html
For Timbro study:
http://www.timbro.com/euvsusa/
For more on International: Economic Growth:
http://www.ncpa.org/iss/int/
4. Colombia Needs an Irish-Style Economic Tonic
By MARY ANASTASIA O'GRADY
April 8, 2005
BOGÓTA -- In an address to a mournful nation here on Saturday, Colombian President Alvaro Uribe likened His Holiness Pope John Paul II to a "gladiator of democracy." Mr. Uribe recalled an audience he once had with the head of the Catholic Church. Colombia, he said, with "its difficulties and tragedies, its possibilities and unique people, occupied a special place among the concerns and affections of the Pope."
Surely, the feeling was mutual. It's hard to think of another country in Latin America where the Pope's message to "be not afraid" in the face of tyrannical terror so powerfully resonated. Colombian security has been greatly enhanced under Mr. Uribe's courageous leadership, and though the war is far from over, he must now address another of the Pope's great concerns: the poor. Indeed, as the president himself has said, the resolution of the conflict is not purely military. To secure the gains of democratic security, Mr. Uribe needs to deliver free-market capitalism.
To that end, Mr. Uribe need look no further than Ireland, a Catholic nation once hopelessly mired in poverty, dominated by socialist thought and somewhat fatalistic toward what seemed a hopeless plight. It is true that Ireland wasn't fighting a guerrilla war in 1987 when it began to think outside the box of conventional wisdom, but its fiscal picture was no less grim. Spending cuts helped, but it was the adoption of a rather unorthodox approach to tax cutting that gave the country an almost surreal boom. At the end of the 1990s, Ireland had a higher GDP per capita than Great Britain or Germany.
If Ireland can be the Celtic Tiger there is no reason why Colombia can't become the South American Puma. It is the perfect Latin American candidate for the job, with a popular democratic leader, a sophisticated business community, and a prime location in the region. It is equally distressing to note that if Colombia loses the opportunity it has to make big changes with this president, a return to left-wing populism and guerrilla domination is almost certain.
Mr. Uribe has already put the country on the right path by greatly improving security. Moreover, the World Bank report "Doing Business in 2005" ranks Colombia among the top performers world-wide in deregulatory reform at the micro level. The president's proposal now in congress to cut entitlement spending through pension reform is also constructive.
In 2004 Colombia grew at about 4%. Yet that pace of growth is not sufficient to seriously reduce the ranks of the poor and secure the president's other gains. To do that Colombia needs to bring down its debilitating tax rates. Mr. Uribe has been discouraged from doing this by both the local "experts" and by the U.S. government. The U.S. ambassador here is known to complain that Colombia's effective tax burden of 21% of GDP means that Colombians are not paying enough for government.
This is ridiculous. The Colombian tax burden is roughly equivalent to Chile's. If the U.S. wants to be constructive, it should point out that a top marginal rate equivalent to more than 38% on corporate profits and individuals, and a 16% value-added tax, are impediments to growth. It is doubtless true that these rates and the complexity of the Byzantine tax code, some of which Mr. Uribe has made worse, invite enormous evasion and discourage economic activity. A lower, flatter code would most likely expand revenues.
U.S. pressure on tax collection is of a piece with the standard static analysis that says that since Mr. Uribe has been unable (some say unwilling) to cut spending sufficiently, taxes have to be high and collection methods draconian. But interestingly enough, this is not the path that the Bush administration has taken to deal with the U.S. deficit. Expecting Colombia to swallow this bitter medicine reflects the soft bigotry of low expectations directed at a lesser-developed U.S. ally.
Benjamin Powell, a George Mason University Ph.D. candidate in economics, detailed the Irish experience in the Cato Journal's Winter 2003 edition. The parallels with Colombia are impressive, beginning with the disaster that Keynesian policies wrought in the 1973-1987 period.
Much of what Ireland first tried when it faced budget deficit problems will be familiar to Colombians, including tax hikes that managed to cut the primary deficit in half but also suffocated growth. By 1986 the debt-to-GDP ratio was 116%. "High levels of government debt, interest payments, and expenditures put the Irish government in a precarious fiscal position," Mr. Powell explains.
Unable to raise taxes further, the government began in 1987 to cut spending. The reduced size of government together with a relatively open trade policy produced a welcome return to respectable growth. By 1989 Ireland's economy was growing at 4%. "That level of growth was impressive compared with the 1.9% growth between 1973 and 1986 when the government had been pursuing activist fiscal policies," Mr. Powell explains.
But spending cuts had their limits and Ireland -- like Colombia today -- was still far short of the minimum and consistent 6% GDP growth needed to actually move people out of poverty. From 1990 through 1995 GDP growth averaged 5.14%. But the "tiger" growth came in the latter half of the decade. From 1996 through 2000 the average rate of growth was a mind-boggling 9.66%.
What differentiates those two periods is the change in Ireland's tax regime. In 1996 the corporate tax rate was 40% but by 2000 it was down to 24%, making Ireland a magnet for capital. There was "also a special 10% corporate taxation rate for manufacturing companies and companies involved in internationally traded services," Mr. Powell explains. When the European Union pressured Ireland to eliminate the special 10% rate, it obliged but lowered the standard rate to 12.5% in 2003.
Naysayers will claim this is politically impossible in
Colombia. But what's missing in Colombia is an application to supply-side
growth of the kind of unyielding commitment that Mr. Uribe applied to security.
Should he change course, the Irish miracle would be the best blueprint.
5. The Chinese Menu (for Development)
By DOUGLASS C. NORTH
April 7, 2005; Page A14
In the years since the end of World War II, we, and other developed nations, have devoted immense amounts of resources to the development of poor countries. The result has not been a success story. This is puzzling, since during that time we have learned a great deal about the process of economic and political change: not only the underlying source of economic growth -- productivity increase -- but also the factors that make for such increase. And in the past several decades, as economists have become aware of the role of institutions in providing the correct incentives for economic growth, we have incorporated an understanding of the significance of well-specified and -enforced property rights as key structural requirements in that process.
Despite our increased understanding, the record at promoting development is not impressive, largely because we fail to see the importance of open-access political systems as well as open-access competitive markets. Yes, the world has gotten richer, the percentage of the world's population subsisting on less than a dollar a day has fallen, and there have been a few spectacular success stories, most particularly China. But sub-Saharan Africa remains a part of the world where per capita income has absolutely fallen, Latin America continues to have stop-and-go development, and the efforts at promoting development by the World Bank have been, to put it politely, nothing to brag about.
Yet none of the standard models of economic and political theory can explain China. After a disastrous era of promoting collective organization, in which approximately 30 million people died of starvation, China gradually fumbled its way out of the economic disaster it had created by instituting the Household Responsibility System which provided peasants with incentives to produce more. This system in turn led to the TVEs (town-village enterprises) and sequential development built on their cultural background. But China still does not have well-specified property rights, town-village enterprises hardly resembled the standard firm of economics, and it remains to this day a communist dictatorship.
What kind of a model is that for the developing world? It is not a good model and it is still not clear what the outcome will be, but the Chinese experience should force economists to rethink some of the fundamental tenets of economics as they apply to development. Two features stand out: 1) While the institutions China employed are different from developed nations, the incentive implications were similar; and 2) China has been confronting new problems and pragmatically attempting new solutions.
Two implications are clear. First, there are many paths to development. The key is creating an institutional structure derived from your particular cultural institutions that provide the proper incentives -- not slavishly imitating Western institutions. Second, the world is constantly changing in fundamental ways. The basics of economic theory are essential elements of every economy, but the problems countries face today are set in new and novel frameworks of beliefs, institutions, technologies, and radically lower information costs than ever before. The secret of success is the creation of adaptively efficient institutions -- institutions that readily adapt to changing circumstances. Just how do we create such an institutional framework?
Institutions are the way we structure human interaction -- political, social and economic -- and are the incentive framework of a society. They are made up of formal rules (constitutions, laws and rules), informal constraints (norms, conventions and codes of conduct), and their enforcement characteristics. Together they define the way the game is played, whether as a society or an athletic game. Let me illustrate from professional football. There are formal rules defining the way the game is supposed to be played; informal norms -- such as not deliberately injuring the quarterback of the opposing team; and enforcement characteristic -- umpires, referees -- designed to see that the game is played according to the intentions underlying the rules. But enforcement is always imperfect and it frequently pays for a team to violate rules. Therefore, the way a game is actually played is a function of the underlying intentions embodied in the rules, the strength of informal codes of conduct, the perception of the umpires, and the severity of punishment for violating rules.
It is the same way with societies. Poorly performing societies have rules that do not provide the proper incentives, lack effective informal norms that would encourage productivity, and/or have poor enforcement. Underlying institutions are belief systems that provide our understanding of the world around us and, therefore, the incentives that we face. Creating institutions that will perform effectively is, thus, a difficult task. Effective performance entails the creation of open-access societies -- the essential requirement for the dynamic market that Adam Smith envisioned. Let me illustrate from the contrasting histories of North and South America.
North America was settled by British colonists bringing with them the property-rights structure that had evolved by that time in the home country. Because the British did not regard the colonies as critical to their own development, they were allowed a large measure of self-government. In the context of relative political and economic freedom with a setting of endless resource opportunities, the result was the gradual evolution of an open-access society in the decades following independence.
Latin America, in contrast, was settled by the Spanish
(and Portuguese) to exploit the discovery and extraction of treasure. The
resultant institutional structure was one of monopoly and political control
from Madrid and Lisbon. Independence in the 19th century led to efforts
to follow the lead of the United States and constitutions were written
with that objective. The results, however, were radically different. With
no heritage of self-government (political and economic), the result was
a half-century of civil wars to attempt to fill the vacuum left by Iberian
rule. It also was the creation of political and economic institutions dominated
by personal exchange that led to political instability and economic monopolies
that persist in much of that continent to this day, with adverse consequences
for dynamic economic growth.
* * *
The perpetuation of open-access societies like the United States in a world of continuous novel change raises a fundamental institutional dilemma at the heart of the issue of economic development and of successful dynamic change. By uncertainty, we mean that we do not know what is going to happen in the future, and that condition characterizes the world we have been creating. How can our minds make sense of new and novel conditions that are continually occurring? The answer that in fact has proven successful in the case of the United States and other open-access societies is the creation of an institutional structure that maximizes trials and eliminates errors and, therefore, maximizes the potential for achieving a successful outcome -- a condition first prescribed by Friedrich Hayek many years ago and still the prescription for an adaptively efficient society. Such an institutional structure is derived from an underlying belief system that recognizes the tentative nature of our understanding of the world around us.
What about China? China partially opened competitive access to its economic markets. But China is barely halfway there. The society is still dominated by a political dictatorship and, as a result, personal exchange rather than impersonal rules dominate the economy. How will China evolve? It could continue to evolve open-access economic markets built on impersonal rules and gradually dissolve the barriers to open political markets. . . . Or the political dictatorship could perceive the evolving open-access society as a threat to the existing vested interests, and halt the course of the past decades.
Mr. North, a Nobel laureate in Economics in 1993, is the
author, most recently, of "Understanding the Process of Economic Change,"
published in January by the Princeton University Press. He is a professor
at Washington University, St. Louis, and the Bartlett Burnap Senior Fellow
at Stanford's Hoover Institution.
6. MOBILE PHONES ARE HELPING THE THIRD WORLD DEVELOP
------------------------------------------------------------------------
In developing nations, mobile phones can serve many purposes
--
especially if infrastructure is underdeveloped. They
can reduce
transaction costs, broaden trade networks, and substitute
for costly
physical transport, says the Economist.
For example:
o In Zambia, Coca Cola distributors,
dry cleaning firms, gas
stations and dozens
of other shops use mobile phonesfor financial
transactions.
o Fishermen and farmers can
check prices at different markets
without traveling
-- preventing wasted journeys.
Consequently, mobile phones can boost growth considerably.
Researchers
analyzed telephony and economic growth in 92 countries,
both rich and
poor, between 1980 and 2003. They found:
o An increase of ten mobile
phones per 100 people boost gross
domestic product
(GDP) growth 0.6 percentage points.
o Long-run growth in the Philippines
is a percentage point higher
than in Indonesia
because there are 27 mobile phones per 100
people in the Philippines,
while there are only 9 mobile phones
per 100 people in
Indonesia.
Because of these clear economic benefits, there is booming
subscriber
growth. In several sub-Saharan countries, subscriber
growth exceeded 150
percent last year. There are now eight mobile phones
for every 100
people in Africa, up from three in 2001.
Source: "Calling across the divide," Economist, March
12, 2005.
For text:
http://www.cass.cn/webnew/yanjiusuo/cms/show_News_e.asp?id=6094
For more on International: Growth and Technology:
http://www.ncpa.org/iss/int/
7.The Celtic Tiger: Secret of Success Unveiled By Hans
Labohm Published 03/28/2005
E-Mail Bookmark Print Save
TCS
Friday, April 1, 2005 ~ 10:36 a.m., Dan Mitchell Wrote:
Less government led to the Irish Miracle. A Techcentralstation.com
column explains that Ireland's remarkable leap from poverty to prosperity
occurred largely because of less taxes and smaller government. Thanks to
tax competition, other governments in Europe may be forced to do the right
thing:
Europe's economic performance
is nothing to get excited about. Yet one European member state seems to
defy the law of economic gravity: Ireland - the Celtic Tiger. Workforall,
an independent European think tank, based in Belgium, has compared the
economic performance of various European economies -- particularly Belgium
and Ireland -- over the period 1984 - 2002. They found that there were
surprisingly large differences in economic growth and GNP p.c. (Gross National
Product per capita). Belgian real growth over this period of 18 years amount?ed
to 42%, while Ireland achieved 167%! Consequently, the Celtic Tiger has
moved to the top of the European league: from one of the poorest to one
of the most prosperous countries. What is the secret of its success? ...The
most striking conclusion was that 93% of the differences between growth
performances could be explained by govern?ment spending and tax levels.
...in 1985 Ireland made a u-turn. It drastically lowered the tax burden.
All wasteful government spending was eliminated. In three years time public
spending was reduced by no less then 20%. The result was that Ireland entered
a period of explosive GNP growth, averaging 5.6% from 1985 to 2002. This
is rough?ly three times the Belgian growth rate. The boom went hand in
hand with the creation of new jobs, which was far in excess of that in
Belgium. ...the authors venture the thought that a 1% reduction in government
spending will lead to an additional annual growth of 0.6%.
http://www.techcentralstation.com/032805E.html
Europe's economic performance is nothing to get excited about. Yet one European member state seems to defy the law of economic gravity: Ireland - the Celtic Tiger.
Workforall, an independent European think tank, based in Belgium, has compared the economic performance of various European economies -- particularly Belgium and Ireland -- over the period 1984 - 2002. They found that there were surprisingly large differences in economic growth and GNP p.c. (Gross National Product per capita). Belgian real growth over this period of 18 years amount?ed to 42%, while Ireland achieved 167%! Consequently, the Celtic Tiger has moved to the top of the European league: from one of the poorest to one of the most prosperous countries. What is the secret of its success?
The authors of the study, Eric Verhulst, Paul Vreymans and Willy De Wit, have performed a multi-regression analysis, trying to establish the relative weights of 25 possible causes of growth differences, including age structures, education levels, inflation, number of annual working hours, interest rates, the ratio between direct and indirect taxes, the size of the public deficit, the impact of the accession to the EU etc. etc.. The most striking conclusion was that 93% of the differences between growth performances could be explained by govern?ment spending and tax levels.
In 1985, the Irish economy was in a shambles. It was facing excessive budgets deficits and minimal growth. Its GNP p.c. amounted to only 65% of the Belgian level. In addition, Irish unemployment stood at 17% against 10% for Belgium. Until 1985 both countries followed similar Keynesian policies of deficit spending. In 1983 Belgian public spending even exceed?ed 50% of GNP.
Excessive spending triggered a vicious circle of continuing rises of the tax burden and public debt. The graphs above show that until 1980 Irish public spending followed the same path as that of Belgium, with similar growth performance. However, in 1985 Ireland made a u-turn. It drastically lowered the tax burden. All wasteful government spending was eliminated. In three years time public spending was reduced by no less then 20%. The result was that Ireland entered a period of explosive GNP growth, averaging 5.6% from 1985 to 2002. This is rough?ly three times the Belgian growth rate. The boom went hand in hand with the creation of new jobs, which was far in excess of that in Belgium.
Because of its awe-inspiring rise in prosperity Ireland has now more resources available for all sorts of social, cultural and environmental initiatives than Belgium does.
Contrary to the basic tenets of Keynesianism, the study showed that deficit spending and lower?ing interest rates had no positive effect whatsoever on economic growth. More generally, the authors venture the thought that a 1% reduction in government spending will lead to an additional annual growth of 0.6%. This figure by and large confirms the outcome of similar IMF studies.
But can the Irish model be emulated by other (European) countries? What about the fallacy of composition? One could argue that some formulas which perform well on a small scale, are not successful on a larger scale. For instance, the theatre visitor whose view is hampered by the hat of the lady before him, will be able to gain a better view by rising. But if all people will follow his example, his initial advantage will vanish. But I don't believe that this is true in this particular case. Anyhow, it is not what Adam Smith has taught us: economic exchange is a positive sum game.
It that all there is to say? I don't think so. Because
Ireland belongs to the Anglo-Saxon world with English as its main language
and its shared values, such as (economic) freedom. These assets may give
it an edge over many continental European countries as regards direct foreign
investments. But it seems to me that these extra advantages do not detract
from the central conclusion of the study: reduction of taxes is conducive
to growth.
If you are a producer or reporter who is interested in
receiving more information about this article or the author, please email
your request to interview@techcentralstation.com
negherlands think tank http://www.workforall.org/
8. Latin American right-wingers did not implement market-based
reforms. Wednesday, March 30, 2005 ~ 7:43 a.m., Dan Mitchell Wrote:
With the possible exception of Chile, Latin American
nations seem stuck on an economic treadmill. Occasional pro-growth reforms
inevitably are offset by harmful government intervention. So-called right
wingers in the 1990s certainly failed to implement genuine liberalization,
as an expert from the Independent Institute writes:
Behind this tilt is popular
frustration with the failures of the 1990's, a decade of reform under governments
of the right that were supposed to catapult the region toward development.
Despite the success of many of these governments in curbing inflation,
that development failed to happen. Instead of decentralization and the
creation of a free, competitive economy and strong legal institutions open
to all, crony capitalism and authoritarianism grew. Countries replaced
inflation with new taxes on the poor, high tariffs with regional trading
blocs, and, especially, state monopolies with government-sanctioned private
monopolies. ...In order to compete with economies that have undergone reform
in East Asia and Europe, Latin America's left must dismantle corporatist
states that hamper enterprise among those who are not close to government
and, through legal privilege, mock the notion of equality before the law.
Many companies that were privatized in the 1990's (telephone service in
Mexico and Argentina, and electricity in Peru) still have effective monopolies
and are in cahoots with regulators. Getting rid of these privileges could
help to persuade the poor to embrace the idea of economic freedom. Significantly
reducing high sales taxes that were set in times of fiscal profligacy would
lift a burden from the poorest citizens. Slashing the bureaucratic requirements
that force citizens to spend up to 80 percent of their annual income if
they want to set up a private company would also help to empower would-be
entrepreneurs.
http://www.independent.org/newsroom/article.asp?id=1483
9. Taxing times Mar 21st 2005 From The Economist Global
Agenda
Germany’s chancellor has proposed a cut in corporate income tax. This might put Germany in a slightly better position to counter “harmful” tax competition from other European countries, but tax reform alone will not revive its flagging economy
A LITTLE over a decade ago, Americans were being bombarded with books threatening precipitous economic decline if they did not drop their hypercapitalistic ways and adopt the German “stakeholder model”, which allowed labour and capital to work harmoniously for economic growth. Nowadays, anyone coming across such a book could be forgiven for concluding that its authors were daft. German GDP growth has not broken the 2% barrier in four years, and unemployment is at levels not seen since the 1930s. In desperation, Germany seems ready to look to the hypercapitalists for ideas: Gerhard Schröder, the chancellor, has proposed a cut in corporate income tax, to 19% from 25%.
This is not quite as large a concession to big business
as it sounds. The proposed change is designed to be revenue-neutral; what
it gives in lower marginal rates, it takes back by closing loopholes, particularly
the ability of companies to charge losses in previous years against current
income. Germany currently has the highest corporate tax rates in Europe,
but it also has some of the most generous allowances. Consequently, the
corporate levy raises only 2.9% of total tax revenue, compared with as
much as 20% in other rich countries (see chart).
Germany's economy
Chancellor Gerhard Schröder under pressure once again
Mar 10th 2005
Germany’s jobless
Feb 2nd 2005
Corporate governance in Germany
Jan 27th 2005
German labour-market reform
Dec 29th 2004
The alternative minimum tax
Nov 25th 2004
Corporate tax in the EU
Jul 22nd 2004
Corporate tax
Jan 29th 2004
Corporate tax
Jan 29th 2004
Tax and accounting scams
May 8th 2003
Charles Grassley's misguided corporate-tax agenda
Feb 20th 2003
Germany's government posts Chancellor Schröder's proposed changes to the Agenda 2010 reform programme (all in German). The Tax Foundation posts “Fundamental Tax Reform: The Experience of OECD Countries”. The EU and OECD have information on taxation.
Corporate Japan Mar 23rd 2005
Reforming the United Nations Mar 21st 2005
The European Union leaders’ summit Mar 22nd 2005
Central Asian unrest Mar 23rd 2005
The Buttonwood column: bond markets Mar 23rd 2005
About Global Agenda
But while the proposed tax cut may not do much to bring Germany’s ailing economy back to life, the announcement has nonetheless made economic observers sit up and take notice, for it seems to signal that the German government may be conceding defeat in the battle over “harmful tax competition”. Along with France and Belgium, the Germans have been leading the attacks on the practices of European Union members—primarily Ireland—who charge low rates of corporate income tax. For years they have been calling for tax harmonisation among members, code for forcing low-tax countries to raise their rates. The OECD, a club for rich countries, has also got involved: in 2000 it published a blacklist of 35 nations it identified as havens for large companies looking to shrug off their rightful tax burden.
Nonetheless, tax competition remains a bigger problem for European countries than for the rest of the OECD. In fact it is Japan and America, not Germany and France, which have the highest corporate taxes. It is probably not a coincidence that both are heavyweights without comparable counterparts in their region—Canada’s population is only a tenth of America’s, and Japan has no neighbours at all in the same GDP class. Geography thus insulates them, to some extent, from the consequences of high corporate taxes.
In Europe, on the other hand, efforts to keep taxes high have suffered a number of setbacks. Ireland is not merely recalcitrant, but is setting an example for the new kids on the block. Ireland’s stunning GDP growth—from 70% of the EU per-capita average in 1990 to 136% in 2003—has made the EU’s new entrants determined to emulate it. In large part, it seems, that means lower tax. Hungary has set corporate tax at 16%, Slovakia has a flat 19% levy for corporate and personal income, and Estonia levels no tax at all on reinvested profits. The companies of “Old Europe” have responded by moving production eastward.
Germany’s new tax cut will not put it in a position to compete with such low rates. The effective rate of its federal and local corporate tax will fall only to 32.7% (from 38.7%), still a hefty bite out of profits. It will, however, bring the rate in line with other rich countries, such as France and the Netherlands—and in Germany’s weak economic state, every little bit helps.
Europe has been in a long process of tax reform since the 1980s, when Margaret Thatcher and Ronald Reagan led the way with sweeping changes to their tax codes. Back then, top marginal rates of 70-80% were not uncommon, and tax laws everywhere were riddled with decades-worth of accumulated deductions. Mrs (now Lady) Thatcher and Reagan slashed top rates and eliminated many deductions, creating tax codes with lower marginal rates on a much broader tax base. This, it is generally agreed by economists, is a recipe for faster economic growth, and over the past two decades continental Europe has followed suit.
That hasn’t meant a lower tax burden overall. On the contrary, taxes as a percentage of GDP grew steadily throughout the OECD from the mid-1970s to 2000, falling only during the recent recession.
Now, however, tax reform may have entered a new stage. Even as the global economy recovers, its imperatives are making it harder for countries to levy taxes as they would like, particularly on capital. Freer trade makes it much easier for companies to move to low-tax locations (it is not much good relocating your factory to Hungary if your goods face a 50% tariff going back to the home country). And faster communications make it ever easier to locate new services abroad.
It’s about more than tax
Does this mean that rich countries with fat welfare states
are doomed to a “race to the bottom”, slashing spending on social programmes
in order to keep their tax rates attractive? Probably not. More likely,
taxes will simply fall more heavily on labour, which is less mobile than
capital. Sweden and Denmark, which have the heaviest tax burdens in the
OECD as a percentage of GDP, are among the least dependent on corporate
income tax for revenue.
Moreover, while taxes are an important factor in corporate
decisions about where to put facilities, they are not the only, or even
the biggest, one. Germany’s corporate-tax burden may be twice the rate
levied in some Central European countries, but its wage costs are six times
as high. And though the recent Hartz reforms have begun to stir Germany’s
sclerotic labour market, the country is still widely regarded as a difficult
place to do business. As long as hiring and firing are wrapped in a thicket
of red tape, it will take more than a tax cut to induce companies to create
jobs.
10-.The Next Great Wave of Growth By JEREMY J. SIEGEL WSJMarch 23, 2005; Page A14
Fed Chairman Alan Greenspan raised interest rates for the seventh consecutive time yesterday, and signaled that more aggressive increases may be on the horizon. Although the financial markets shuddered at the prospect, this is actually good news. Raising rates demonstrates a realistic and upbeat assessment of growth prospects not only in the U.S., but around the world. Our economy no longer needs artificially low interest rates that have caused bubbles in both commodity markets and housing prices.
Bond yields surged with the Fed's mention of inflation "pressures," but growth pessimism still enshrouds most bond investors. Last month, the yields on the government 30-year inflation-protected bonds, a favorite investment for retirement savings, fell to a record low of 1.5%, and even after yesterday's increase, they remained below 2%. Yields are still near their lows in both Europe and Japan. It was not long ago, in early 2000, when inflation-adjusted yields were almost 4.5%, three times their current levels. What compels investors today to take such a dim view of the future and lock up their money for 30 years for such puny returns?
Pessimists maintain that these low yields are a justified manifestation of the demographic crisis facing the world's developed economies. In 1950, there were seven potential workers aged 20 through 65 for every retired person in the U.S. By 2050 this ratio is expected to fall to 2.6. In Japan and Europe, the aging of population is far more dramatic -- the number of workers may even fall below the number of retirees. It is sobering to consider that by the middle of this century, the most populated five-year age bracket in Japan and many European countries will be 75 to 79. Aging boomers, embracing the conventional wisdom that growth will slow markedly in the coming decades, are content to secure their savings at whatever rate they can, fearing the worst.
The news media -- dominated by talk of Social Security's insolvency problems -- reinforce this pessimistic view. So do the dismal economic forecasts put forth by our government agencies, such as the Social Security Administration, that predicts that long term GDP and productivity growth in the U.S. will fall below 2%. Projections made for Japan and Europe are equally, if not more gloomy.
But these naysayers are taking a far too narrow view of the world. While growth in Europe and Japan is slowing, growth in the developing world is accelerating. The expansion of China, India and other developing countries will have a huge impact on world capital markets.
The reason is simple. Today's capital markets are global. Capital flows to those countries offering the best returns and away from countries where returns are low. Right now the central banks of China and India are buying large quantities of U.S. government bonds, keeping our yields low. But fast-growing firms in India and China will be increasingly tapping the U.S. capital markets, increasing the demand for our funds and driving our interest rates higher.
Cross-country capital movements are already accelerating. Last year Lenovo, China's top computer producer, acquired IBM's personal computing business. Recently, Lakshmi Mittal of India acquired the assets of Bethlehem Steel and LTV Corp., to form the largest steel company in the world. This is just the beginning of an explosion in global mergers and acquisitions that will draw capital from all parts of the globe.
As these Asian countries grow, their markets will become more liquid and their currencies more convertible. Bondholders in developed countries who are unhappy with the return on their domestic bonds will be drawn to these foreign powerhouses, lifting rates throughout the developed world. Faster productivity growth will in turn increase the return on equity capital and support higher stock prices.
What we see happening in China and India is no blip on the screen. By 2050 China is projected to have about 1.5 billion people, nearly four times the 400 million inhabitants projected in the U.S. If China were to achieve half the per capita income of the U.S. by the middle of this century (putting it on the same relative footing as Portugal and South Korea today), the Chinese economy would be almost twice the size of the U.S. economy.
Is this possible? Most certainly. Over the last 40 years, Japan went from 20% of the U.S. per capita income to 96%, Hong Kong from 16% to 70%, and South Korea from 11% to nearly 50%. China could reach 50% of the U.S. per capita income level by 2050 with a productivity growth rate of 3% a year above the U.S. Over the past 25 years, China has done much better than this, achieving a per capita growth rate almost six percentage points above the U.S. India can attain 50% of the U.S. per capita income by the middle of this century by growing 4% per year faster than the U.S., a rate I believe is well within its reach.
The developed world is already operating at the forefront of the technology frontier, and can, at best, increase long-term productivity to 3% or 3.5% per year. Even attaining this level would be a notable achievement. But the developing world need only replicate existing technology to achieve far more dramatic increases in growth.
Furthermore, the developing countries have a far younger population profile, a key factor that generates the workers needed to increase world output. Only China, as a result of its one-child policy, is threatened with an aging population. But even in that country, there is no labor shortage as millions of workers are being released every year from the state-owned enterprises into the more productive private sector.
Today the developing countries, despite comprising 87% of the world's population, produce less than one-quarter of the world's output measured in dollars. It is likely that by the middle of this century, they will produce over half the world's GDP. Indeed, the growth of these economies will become the dominating factor in the world's capital markets.
Investors should not succumb to the pessimistic forecasts of government agencies and others who bemoan the aging of the U.S. population. Chairman Greenspan is finally showing the markets that our historically low interest rates are unjustified. Those pessimists currently buying bonds to protect themselves against the widely predicted economic downturn will soon be sorry that they bet against growth.
Mr. Siegel, professor of finance at the Wharton School
of the University of Pennsylvania, is the author, most recently, of "The
Future for Investors," just out from Crown Publishing.
11. Regime Change at the World Bank By ALLAN H. MELTZER March 18, 2005; Page A12
President Bush's nomination of Paul Wolfowitz to lead the World Bank is an inspired choice. It suggests that the president's commitment to spreading democracy is not merely rhetorical. It shows also that he recognizes that democracy involves more than the ballot box. Institutional reforms that encourage development of markets, the rule of law, protection of human and property rights, and openness to trade -- all these sustain democracy by giving people opportunity, hope and higher living standards.
Competitive markets and rule of law help to reduce corruption, a problem everywhere but especially acute in developing countries. World Bank estimates suggest that $1 trillion a year is paid in bribes in all countries. Even a small fraction of this would do a lot to improve living standards if spent productively. Democracy, a free press, and the rule of law are an antidote to bribery and corruption.
The World Bank could, and should, play a leading role
in making the case for democracy, improved living standards and the quality
of life in the poorest countries of the world. As part of its efforts to
spread democracy around the world, the U.S. and its friends must encourage
the Bank to set standards for countries that receive its assistance. It
should require evidence that loans do not go to tyrants and dictators and
that they are used effectively. Democracy and institutional reform do not
guarantee good outcomes; they increase the probability of a good outcome.
* * *
Paul Wolfowitz is exceptionally bright, engaging and imaginative. He knows the developing world and many of its problems from his very successful service as U.S. ambassador to Indonesia. At the time, Indonesia had rapid growth, rampant corruption and cronyism; the latter problems are repeated in many countries. He knows how to function, and get things done, in a large bureaucracy, as his service as undersecretary of defense demonstrated. In these positions and others, he demonstrated a rare ability to introduce new approaches and make them work.
The Bank faces plenty of challenges. It is a dysfunctional organization. It has hundreds of programs but little understanding of which are effective, where they work well, and why. At present, it does not need a development expert to lead it. It has in its ranks some of the most knowledgeable members of that tribe. What it lacks is effective leadership -- someone who asks for, and gets, answers to critical questions, and who marshals the Bank's resources to achieve a limited number of important goals.
Development assistance works best when local officials commit to making it work. The success stories are rarely, if at all, the result of outside experts leading the way. The critical word is "incentives." If a local leader wants to improve living standards and the quality of life, the Bank can provide support and technical assistance. It must give up the myth that it can negotiate some conditions on its loans and expect them to be implemented. It doesn't happen unless local leaders choose to make it happen. Often they take the money and run from reforms.
Poverty has declined dramatically in the last decade. The decline is most striking in Asia, especially China and India. Market opening, private investment, and protection of property rights contributed much to the improvement. Local political leaders made many of the reforms that sustained development. Where these spurs to growth and development are weak or absent, as in sub-Saharan Africa, poverty has often increased despite repeated World Bank loans and foreign aid.
The Bank has lent $15 billion-$30 billion a year for many years. That's a lot of money in countries where many people live on $1 a day or less. Yet in many of the Bank's client countries, after years of lending, numerous villages lack potable water, sanitary sewers, rudimentary education and immunization against common childhood diseases like measles. The Bush administration, to its credit, fought for monitored grants to work on some of these problems. It introduced the idea of pay for performance -- more money comes if projects are completed. Countries have an incentive to make projects succeed.
One of the most effective incentives is to stop lending to countries that achieve little. Also, the Bank should stop lending to countries with investment grade ratings. Countries like China can borrow in the capital markets at interest rates that are not much higher than the rates at which the Bank borrows. Lending to investment grade countries and to countries that achieve little should be reallocated to poor countries that undertake to raise their living standards. Of course, the Bank should continue to provide technical assistance to countries that do not borrow. Private consultants charge for their services. The Bank should do the same in countries that reach investment grade.
A perennial problem in development lending is to know how the country used the loan. Money is fungible. Projects with the highest social or economic return may be used to get a loan from the Bank, but they would have been done in any case. The Bank's loan supports the project that is at the margin, that would not have been done without the loan. This is a smaller problem for countries that cannot borrow in the capital markets or from international lenders.
In 2001, President Bush recommended, and got, agreement to replace loans with monitored performance grants to very poor countries. That program should be expanded. Its objective is to achieve minimum standards in very poor countries without burdening them with debts that the poorest have been unable to discharge. The emphasis should be on monitored performance. The loans that the grants replaced were highly concessional -- up to 75% grants. The important change is the incentive to perform and succeed.
The Bank needs many internal changes to become a more successful development bank. Staff incentives should reward development. Almost 15 years ago, the Wapenhans Report recognized that the Bank rewarded lending, so officers and staff had a strong incentive to make loans. Nearly a decade later, the congressionally sponsored International Financial Institution Advisory Commission reached the same conclusion. This should change. Staff should be rewarded for developing programs that raise living standards and improve the quality of life.
Some years ago the Bank adopted a matrix form of organization. Technical experts in substance or subject matter share responsibility for programs with country experts. This increases finger-pointing and reduces responsibility for success and failure. The Bank should continue to draw on the different skills and sources of information, but centralizing authority and responsibility would improve performance.
The responsibilities of the Bank and several regional development banks overlap. A new administration at the Bank should consider devolving some of its responsibilities to the regional banks so that it can concentrate on the most difficult problems such as effective development in sub-Saharan Africa. The Bank has developed technical expertise in many areas. These should become a resource for the other development banks, but implementation in Asia or Latin America should become the responsibility of the regional banks.
Paul Wolfowitz can help to reduce poverty and spread democracy by replacing command and control with incentives to reach those goals.
Mr. Meltzer, professor of political economy and public policy at Carnegie Mellon University, is a visiting scholar at the American Enterprise Institute.
12. Beating the 'Resource Curse' With Transparency
By JEAN LEMIERRE
March 18, 2005
Resource-rich and yet among the poorest countries to emerge from the former Soviet Union, Azerbaijan and Kyrgyzstan are breaking new ground as part of the global campaign to promote greater transparency in managing resource wealth.
Azerbaijan on the Caspian Sea has offshore oil and gas fields and related pipelines it is currently developing with international partners, led by BP. Central Asia's Kyrgyzstan depends on gold mines, the largest of which is owned by Canadian-based Centerra Gold, for about 10% of its GDP. The European Bank for Reconstruction and Development has financed these projects and is among the international and local entities encouraging greater transparency and improved governance in state and private enterprise across the region.
These two young states are at the vanguard of a fledgling movement among poor nations with valuable hydrocarbon and mineral wealth to publish the revenues received from their multinational partners. It is much hoped that greater transparency and accountability in the resource sector will enhance reform in other aspects of these countries' transition to market economies based in well-functioning democracies.
Revenue reporting is vital in combating corruption and what is known as the "resource curse." Many countries seemingly blessed with oil, gas, precious metals and minerals and other high-value nonrenewable resources have suffered macroeconomic destabilization from huge and rapid inflows of resource revenues, particularly for oil and gas. Some governments have squandered such revenues. This is easily done when taxes and royalties paid to government by mining and logging companies are not reported publicly via the legislature as would be normal in developed democracies.
Experience shows that citizens of such countries can end up worse off than previous generations when corrupt elites use the revenues to stifle necessary reforms, to suppress dissent and to promote their own ethnic groups and cronies. The result, as seen in parts of Africa in particular, can be civil unrest, even outright war.
Azerbaijan and Kyrgyzstan are still in the early stages of post-Soviet resource development. Along with their multinational partners the two countries have adopted the "publish what you pay, publish what you receive" principle that underlies a number of complementary approaches promoting transparency. Greater transparency and accountability regarding the receipt of revenues increases the likelihood they will be used for sustainable economic development.
The voluntary Extractive Industries Transparency Initiative (EITI), conceived by the U.K. government, is helping to establish standards for greater openness in resource exploitation. The EITI 2005 conference in London today will discuss progress in implementing the initiative and next steps in strengthening and broadening it.
The EITI approach starts with the resource companies that pay revenues to government in return for access to a country's natural resources. In the EBRD's countries of operation, BP and Centerra are world leaders in their commitment to publicly reporting the amounts they pay to governments. Step two is for governments to report what they've received. The resulting data, ideally assessed by independent auditors, is then published widely. The public is then better equipped to hold government accountable for its use of those revenues.
Kyrgyzstan was the first country to report revenues under the EITI, an important step forward in its national anticorruption effort. Azerbaijan's painstaking and inclusive approach to establishing its reporting process won it a great deal of credit even before it issued its first revenue report this week. A coalition of 32 local NGOs, and all resource-extracting companies in Azerbaijan, have signed a memorandum of understanding with the government as to how natural-resource revenue reporting should be carried out.
There are many routes to achieving transparency. BP's
and Centerra's openness regarding revenue reporting has promoted reciprocal
transparency by some governments with which they work. The international
community -- the World Bank, the EBRD, the IMF, donor governments, nongovernmental
organizations -- has also promoted transparency both within and alongside
the EITI. In the resource-rich former Soviet Union, complementary results
include:
• Stabilization funds in Russia, Kazakhstan and Azerbaijan
that are designed to enhance economic management in the face of huge inflows
of oil and gas money; these have also enhanced transparency.
• Azerbaijan's State Oil Fund, modeled on the Norwegian Oil Fund, for transparent and accountable long-term management of oil revenues.
• The Kyrgyz government's decision to dedicate revenues from the sale of its majority interest in the Kumtor gold mine to its new Centralized Poverty Reduction Fund.
• New corporate governance codes such as that introduced in Russia with assistance from the EBRD and donors.
• The commercialization and restructuring of state-owned
resource companies as part of loan conditions (e.g. EBRD's transactions
with Petrom in Romania and the State Oil Company of Azerbaijan).
Many corporations and governments realize that good governance and transparency bring concrete benefits such as better access to international capital on improved terms. Poorer countries more dependent on international financial institutions and donors for financing will find that a record for transparency will only help when they seek new loans, debt restructuring/forgiveness and increased donor aid.
Corruption often seems an intractable issue. But in terms of natural resources, we are making headway via a number of complementary approaches. By setting standards that still allow individual countries to tailor-make their own approaches to revenue reporting, these transparency initiatives can help to turn natural resources into long-term benefits for the good of current and future generations, which are their true owners.
Mr. Lemierre is president of the European Bank for Reconstruction and Development.
13. Venezuela Announces Plan To Seize More Lands
DOW JONES NEWSWIRES
March 15, 2005; Page A18
CARACAS, Venezuela -- Some landowners facing Venezuelan government plans to officially seize their property are vowing to fight the first land confiscations since President Hugo Chavez took office six years ago.
The government during the weekend announced it would seize parts of four large estates after finding irregularities in their ownership status. It questioned the legitimacy of their land titles and said the lands aren't being used productively enough.
Members of Venezuela's Branger family, which owns a cattle ranch and nature preserve, said they would appeal the decision and prove their rightful ownership of the land. Agroflora, a subsidiary of Britain's Vestey Group, owner of a top meat-producing ranch in the southeast, said it still is awaiting official notice from the National Land Institute of the seizure.
The Land Institute said it will seize 110,000 hectares, or about 270,000 acres, of farmland, including portions of the Hato El Charcote, the 32,000-acre ranch owned by Vestey, and El Pinero, the Brangers' cattle ranch. All that land once belonged to the state, so the government will "recover" it, the Institute said. An Institute spokeswoman said there are no plans to compensate those currently controlling the lands. But those affected by the decision will have 60 days to appeal.
Business leaders denounced the move as illegal. "This decision has no basis [in law]," said Jose Luis Betancourt, president of the Fedenaga cattle-ranchers association, in a televised broadcast. "This must go through a [proper] judicial process."
Mr. Chavez, who says he is pursuing "socialism for the 21st century," has vowed to break up large landholdings as part of his strategy to revamp land tenancy and encourage agricultural production.Venezuela's 2001 land law forces owners of agriculture-ready land deemed "idle" by authorities to follow government-dictated production plans or face taxes and possible expropriation.
Write to Dow Jones Newswires editors at djnews@dowjones.com
Democracy, Yes, But That's Only a Start george malloen
wsj
March 8, 2005; Page A21
Two recent news photos send a dual message. One is of protesters in Beirut demanding that Bashar Assad remove his Syrian troops from Lebanon. The other is of suspected terrorists confined by barbed wire in an Iraqi detention center.
Both the demonstrators and the detainees are young. For the former, the world lends its support. The latter are looked on with fear. The former are fighting for political freedom. The latter are fighting against it.
The detainees are worth noting, however. They are healthy youths who in a different kind of society would have been wage earners aspiring to better themselves and start families. They would be providing the productive labor that an economy needs for growth and the spread of prosperity. Instead, they have been engaged in murder and mayhem.
What does it take to pacify such people? Or to rephrase the question: What does it take to transform a sick society?
Certainly, the establishment of democratic norms is the beginning. The people of Iraq knew that instinctively when they braved terrorist threats to go to the polls and elect their representatives to a national assembly. The young people of Beirut know that as they demand that Syria move its troops and secret police so that an honest election can be held.
Even the remaining dictators of the Mideast are coming to understand that people power is a potent force and that the wisest course is to try to deflect it rather than meeting it head-on. That's why Egypt's Hosni Mubarak suddenly decided to let other political parties contest the forthcoming presidential election, with certain qualifications. And it is why both Mubarak and Crown Prince Abdullah of Saudi Arabia are demanding that Assad yield to the troop withdrawal demands.
George W. Bush, defying the doubters and cynics in his own country and Europe, is promoting freedom and democracy as the core of U.S. foreign policy. He has rejected sophisticated theories that Arabs are somehow different and hence incapable of governing themselves in the way that the advanced societies of Christendom have learned to do. We will now see, with the experiment in Iraq, who is right. But so far what we know is that Arabs have just as deep a thirst for political freedom as anyone else.
A dawning realization of that truth explains why grudging praise for the Bush policy is now popping up in strange places like the editorial page of the New York Times or the utterances of Democratic partisans. Of course the "freedom policy" is sound. Why wouldn't it be? It is the essence of what the American experience has to offer the rest of the world by way of example.
But there is more to the American example than that, and the other part is less likely to be acknowledged by Bush critics and even some of his friends. The American experiment had at its center not only democracy but a liberal, free enterprise approach to economic policy. It involved not only letting people speak and vote freely but also to enjoy legal protections for private property. Those safeguards are explicit in the Fifth Amendment to the U.S. Constitution. They form the basis for a key element of American political and economic development, the ease with which anyone can start a business venture and have it protected by law.
The American Revolution was not a sans-culotte uprising as in France. It was primarily a rebellion of property owners, some of whom, like George Washington, were wealthy planters. They resented "taxation without representation" and the conniving efforts of the greedy English nobility to claim the ownership of land in the New World that the colonists had tamed and put to good use. Out of these beginnings grew broad ownership of private farmland. On that solid base, other private ventures sprouted and grew and free market competition evolved. A powerful economy was the result, with millions of people enjoying sufficient economic security to freely exercise the political rights guaranteed by the Constitution.
Building a society with both political freedom and broad economic independence in the Middle East will be a daunting task. It wasn't easy even in the U.S. Despite broad ownership of real property, an influential element in American politics still pushes for ever greater restriction by government of economic freedoms.
In that broad swath stretching from the Mediterranean eastward, colonialism was not replaced by property rights but by various forms of socialism, which gave rise to dictatorships in places like Egypt, Syria and Iraq. Democracy survived socialism in India, and that country now is finally emerging from that sickness and achieving vigorous growth. The question now is whether democracy will produce the same result in Iraq and perhaps later in Egypt, Syria and other Arab lands.
Certainly Arabs had a long tradition of private commerce before colonialism and socialist autocracy. So the genes are there. But it is not clear that even the American bureaucrats who are trying to midwife the transition in Iraq understand the importance of economic freedoms that allow businesses to thrive. They mean well, but their whole experience, by and large, is in the realm of government efforts to "engineer" economic growth, rather than the freeing up of individual creative talents. Mr. Bush's background equips him to understand this, but there are limits to what even a president can do to change ingrained patterns of thought.
We'll get some clue to whether the vital economic transformation is occurring when we see fewer Arab young men idling on street corners and more of them applying their skills and energies to the building of businesses and productive farms. The men in the detention camps are there because they didn't want to let go of the power and ill-gotten wealth that a dictatorship awarded them in purchase of their souls. They are fighting a losing battle but that makes them no less dangerous.
As to the youths in Beirut, they are trying to reclaim
a once-prosperous city destroyed by evil politics. It is indeed a hopeful
sign that so much of the world now sees the need to expunge that evil and
give them a chance to live decent lives.
14. Seeking Latin America Growth Some Economists Argue Government Policies May Be the Solution
By BOB DAVIS
Staff Reporter of THE WALL STREET JOURNAL
February 23, 2005; Page A15
In 1989, a young Venezuelan economist, Ricardo Hausmann, flew to Washington to meet with other economists and hammer out a set of proposals to remake Latin America. Called the "Washington Consensus," the economic manifesto identified government as a roadblock to prosperity, and called for dismantling trade barriers, eliminating budget deficits, selling off state-owned industries and opening Latin nations to foreign investment.
Latin America took that advice and during the following decade shucked many of its protectionist ways. Nevertheless, the region slipped further behind Asia and the industrialized world, while poverty remained high.
"Deep reforms; lousy growth," says Mr. Hausmann, who is now at Harvard University. "There must be something wrong with the theories of growth."
Mr. Hausmann and a handful of development economists are rethinking the free-market orthodoxy for Latin America. They argue that government isn't any longer the main drag on growth; indeed, it may often be the solution. They advise governments to subsidize entrepreneurial projects throughout Latin America, in the hopes of developing new businesses and igniting growth. Given Latin America's history of subsidies lining the pockets of the rich, they also are devising policies to help governments limit political influence.
Even restricting free trade is an option. "Industrial development for 200 years has involved the selective use of trade protection, and it wasn't captured by special interests," says Columbia University economist Joseph Stiglitz, a Nobel laureate.
The new approach -- Mr. Hausmann calls it economic "self-discovery" -- has been attacked as naive and faddish by economists who say Latin America needs another round of reform, including cleaning up government corruption and easing labor-law restrictions. But this isn't simply an academic debate. Should Mr. Hausmann's ideas become accepted in development circles, they could affect the dispersal of billions of dollars in development loans, and influence economic policy making in the region. Populist leaders who have won power in Argentina, Venezuela, Uruguay and elsewhere may be especially willing to try new policies.
Some development agencies are intrigued. The World Bank is working with Mr. Hausmann and two Harvard colleagues to assess the economies of 11 poor nations. The Inter-American Development Bank commissioned them to write a development program for Uruguay's new leftist government. A private El Salvador development agency is lobbying the Salvadoran government to start a subsidy program along Mr. Hausmann's recommendations.
Latin America's rich natural resources and vast agricultural lands have long sparked hope the region would develop into an industrialized power. Through the 1970s, Latin American nations sealed their borders to protect domestic industries, but that largely produced bloated, inefficient firms. The region suffered so badly during the debt crisis of the 1980s that a new generation of economists and government officials, frequently educated in the U.S., persuaded skeptical leaders to make deep structural changes.
After receiving his doctorate in economics at Cornell University, Mr. Hausmann, now 48 years old, returned to Venezuela and skewered government plans to subsidize aluminum-industry expansion. The government went ahead anyway and chalked up heavy losses. But market-oriented policies remained controversial. Street riots broke out when a reformist government won power in 1989 and pledged to slash the budget deficit by raising gasoline prices. Three years later, a military officer, Hugo Chávez, staged a failed coup. (Mr. Chávez was elected president of Venezuela in 1998.)
Mr. Hausmann , a long-time foe of Mr. Chávez, took a turn as Venezuela's planning minister in 1992 to push through restructuring measures. In 1994, he became the Inter-American Development Bank's first chief economist, and pressed Latin nations to embrace Washington consensus-style measures. A slender man with slicked-back hair, a piebald beard, and a flair for the dramatic gesture, he also urged Latin American nations to adopt the dollar as their local currency. That would limit Latin governments' power over monetary policy, attack inflation and ease the repayment of huge foreign debts, he reasoned.
Argentina didn't go that far, but it did anchor its currency to the dollar -- with disastrous consequences when its currency began to appreciate in value in 2001 and its exports became uncompetitive. Mr. Hausmann then abruptly changed course and urged Buenos Aires to default on its dollar debt and make repayments in pesos instead to stabilize the economy. Domingo Cavallo, Argentina's then-finance minister, says Mr. Hausmann's advocacy had a "destabilizing effect" because it was embraced by industrialists and media elites who simply wanted to wash away their dollar debts.
Argentina rejected his advice, although it defaulted anyway in December 2001. Mr. Hausmann defends his policy flip-flop. "The role of the scientist isn't to commit to consistency but to the perception of truth," he says.
Around the same time, Mr. Hausmann was rethinking many of his other recommendations, too. As he prepared for a session on Latin America's long-term growth prospects in 2001, he says, the facts hit him: A decade of reform had failed to produce growth. Indeed, the region grew more quickly during the protectionist years of 1950 to 1980 than in the reform decade of the 1990s. "Our theory was the obstacle to growth was the lack of reforms," he says. "The reforms were here. The results were disappointing."
After leaving the bank at the end of 2000, he struck an alliance with another U.S.-educated economist from a developing nation, Turkish-born Dani Rodrik. Mr. Rodrik was a critic of the market-oriented policies Mr. Hausmann had been pushing, and was notorious in free-trade circles for a study he did disputing the link between trade liberalization and growth.
The two agreed that what was most needed for development wasn't market liberalization, but entrepreneurial investment. Government subsidies, credits and grants could spur such investment. "It's a messy policy," Mr. Rodrik acknowledges. "But it's not any messier than other policies we do," such as trade liberalization, which requires changes in labor laws and financial regulation to be effective.
Searching for the sources of economic growth, they produced a series of studies with unorthodox results. Fewer than 20% of the episodes of sustained economic growth between 1957 and 1992 could be attributed to economic-reform programs, they estimated.
In El Salvador they found the main impediment to growth was listless entrepreneurs. Their solution: subsidies to help pay for new projects. In Uruguay, they found the problem was inefficient government investment programs. Their solution: put the country's president or vice president in charge of a broad subsidy effort. (Not all their recommendations involve industrial policy. In Brazil, they found, high interest rates are inhibiting growth, so they urge a traditional program of deficit reduction.)
The two say that economic orthodoxy blinds economists to the big role government planners played in the success of China, South Korea and Taiwan, even though they had corrupt business and government officials. Industrial policy worked, Messrs. Hausmann and Rodrik argue, because the government forced companies to export and compete against some of the world's most productive companies. Why shouldn't Latin America benefit from government help too?
They add that even Chile, renowned as a free-trade beacon, benefited from government policies to build a salmon industry and boost fruit and vegetable production. The pair worry that agreements worked out at the World Trade Organization may limit the ability of nations now to subsidize new ventures.
But Moisés Naím, a former Venezuelan minister of industry who now edits "Foreign Policy," says such prescriptions are naive. "In Latin America, picking sectors for development has a very sad story of creating poverty, inequality and thievery," he says.
At a recent World Bank discussion, a country economist for Bangladesh blanched at industrial policy. "I'd be very scared of putting it in place" in a country with high levels of corruption, he said. Mr. Rodrik argued that managing industrial policy isn't any more difficult than managing privatization.
Roberto Zagha, an economic adviser at the bank, says he was pleased with the debate. For years, development ideas have been stuck in a rut. "This forces us to think of different hypotheses," he says.
Write to Bob Davis at bob.davis@wsj.com
15. THE EUROPEANS UNION'S GROWTH GAP
------------------------------------------------------------------------
In March 2000, European Union leaders agreed to the so-called
Lisbon
Strategy, which envisioned the EU economy surpassing
America's by 2010.
This won't happen, says Investor's Business Daily (IBD).
Although the
EU's population and economy is larger than America's,
the EU is much
less dynamic:
o Since 1991, output has grown
27 percent faster in the United
States than in the
EU -- a big difference.
o And despite the hundreds of
billions of dollars the United States
has spent fighting
terror since Sept. 11, 2001, the gap is
widening.
o Comparing gross domestic product
(GDP) per capita and GDP growth
rates, TIMBRO, a
Swedish free-market think tank, found that
Europe lags behind
the United States.
o A study last year by the U.S.
Labor Department pegged real
per-capita GDP in
the United States at $34,960 in 2003, a full 24
percent higher than
the $26,698 average in Europe's biggest,
richest countries.
EU powers seem to have gotten the message, says IBD.
Earlier this month,
the Lisbon Strategy was quietly amended. Gone is the
bombast about the
EU economy's overtaking ours.
In its place is a much more modest and realistic goal:
to create lots of
new jobs and cut into Europe's chronically high unemployment
rate. That
rate is now 9 percent and higher in key countries such
as Germany.
That means hard work -- and even harder thinking, says
IBD. The EU
welfare state will have to be pared back radically. So
will punitive
rules that make it expensive for companies to hire workers
-- and
impossible to fire them once they're hired. Equally important,
the EU
must slash taxes.
The European Union isn't really an economic superpower.
It may be large,
but it's not dynamic. If it does what's needed, however,
it can be both,
says IBD.
Source: Editorial, "EU's Growth Gap," Investor's Business
Daily,
February 22, 2005.
For text:
http://www.investors.com/editorial/issues.asp?v=2/22
For TIMBRO report:
http://www.timbro.com/euvsusa/
For more on International: Institutions and Growth:
http://www.ncpa.org/iss/int/
Monday, February 21, 2005 ~ 10:29 a.m., Andrew Quinlan
Wrote:
16. Another victory for tax competition.
In a decision sure to cause heartburn in Paris and Brussels, Singapore
has announced that it will be lowering its top income tax rate to 20 percent.
Singapore wants to stay competitive with Hong Kong, proving yet again that
tax competition promotes better public policy. This presumably also will
increase pressure for lower tax rates in Australia, New Zealand, Japan,
Korea, and Taiwan.
Singapore yesterday offered
new incentives to retain its status as a leading Asian business centre,
including cutting its top personal income tax to 20 per cent by 2007 to
attract skilled foreigners and multinational companies. ...Corporate tax
remains unchanged at 20 per cent. After last year's reduction from 22 per
cent, business had been hoping for further cuts in the corporate tax rate
to bring it closer to Hong Kong's 17.5 per cent. The top income tax rate
would gradually fall from 22 per cent to 20 per cent over the next two
years but it would still be above the personal tax rate of 18 per cent
in Hong Kong, seen as a main rival to Singapore for foreign investments.
http://news.ft.com/cms/s/db61d2e0-821b-11d9-9e19-00000e2511c8,ft_acl
=,s01=2.html
Friday, February 11, 2005 ~ 10:12 a.m., Andrew Quinlan
Wrote:
17. International bureaucracies threaten global
prosperity. Richard Rahn's Washington Times column is an excellent
review of how international bureaucracies have become impediments to world
economic growth - often by pursuing policies directly at odds with their
charters. Instead of subsidizing these destructive bureaucracies, Dr. Rahn
writes that the the U.S. government should work to curtail the pernicious
activities of organizations such as the OECD:
Are you aware we are increasingly
regulated and even taxed by international organizations that are undermining
the protections guaranteed by the U.S. Constitution? ...From the end of
World War II, many new multinational organizations have been created, most
with the ideal of promoting world peace and prosperity in one form or another.
...These organizations' professional staff quickly learn they are largely
in charge of setting the agenda and operational structure. ...Bureaucrats,
being bureaucrats, tend to want enhanced power and budgets. They can increase
power by "mission creep," expanding the original purpose, which requires
more staff and money. ...The following are a few examples of the problem.
...The World Bank has a 50-year record of mismanagement, and by lending
almost exclusively to governments, it has ended up primarily promoting
statism rather than free markets. This undermines economic growth and saddles
poor nations with repaying loans that should have never been made. The
International Monetary Fund (IMF) has a long record of insisting countries
increase taxes, which has stunted rather than promoted economic growth.
And the IMF's willingness to bail out states that have been fiscally mismanaged
probably added to the systemic risk of world finance by diminishing the
penalties for countries that behave badly. The Organization for Economic
Cooperation and Development (OECD) charter includes responsibility for
promoting policies that "contribute to sound economic expansion" and "extend
the liberalization of capital movements." Yet, it now promotes limiting
tax competition, which will undermine economic growth in its member states
and the world at large. And it promotes blanket information-sharing that,
by reducing privacy protections, will weaken the free flow of capital.
...Both our liberties and our pocketbooks will face continued danger unless
adequate oversight is brought to the international institutions. Our elected
representatives need to wake up before it is too late.
http://www.washingtontimes.com/commentary/20050210-084104-2880r.ht
m
Tuesday, February 8, 2005 ~ 8:27 a.m., Dan Mitchell Wrote:
18. German economist urges tax increase. There
is a common-sense rule which states: "When you are in a hole, the first
thing to do is stop digging." Unfortunately, that lesson is not being learned
in many of Europe's welfare states. A supposed economic expert in Germany
has just endorsed higher taxes to help finance a continuation of welfare
state policies. This would help ensure that Germany remain stagnant:
A key German economic policy
expert has suggested that the government should increase its sales tax,
in a bid to maintain revenues and to avert a potential "crash" in state
funding. Speaking to Der Spiegel magazine, Bert Ruerup, who is due to assume
the chairmanship of Germany's panel of five economic 'wise men' in March,
stated that an increase in the 16% sales tax could be undertaken as part
of a wider package of reforms aimed at financing the health and social
security system. ...Ruerup warned that if no action was taken, state finances
"will if anything crash into a wall in a few years".
http://www.tax-news.com/asp/story/story_open.asp?storyname=18815
Link to this Blog Entry
Tuesday, February 8, 2005 ~ 7:51 a.m., Dan Mitchell Wrote:
19. Sweden may raise taxes. Even though Sweden
already has the democratic world's most oppressive tax system, Swedish
politicians are considering a tax hike. This is bad news for the nation's
struggling business community. Don't be surprised to see a continued migration
of labor and capital to other countries:
Despite the fact that taxes
in Sweden already account for half of its GDP, new Finance Minister Pär
Nuder has indicated that the government may ...consider raising tax rates
to fund the country's extensive social security system. In an interview
with the Financial Times, Mr Nuder explained that the country's increasingly
wealthy electorate rejected the notion that higher taxes will damage national
competitiveness, and were demanding higher investment in schools, hospitals
and other public services. ...We are talking about a gradual raise in taxes.
If you look around the corner, in five to 10 years we have to slowly increase
the tax rates," he added. Figures released by Eurostat, the European Union's
statistical office, last month show that Sweden's tax burden in 2003 was
51.4% of gross domestic product, the highest in the EU, and significantly
above the EU average... "It is unthinkable to increase the world's highest
tax rates and be competitive in the global economy," Krister Andersson,
tax spokesman for the Confederation of Swedish Enterprise stated, according
to the FT.
http://www.tax-news.com/asp/story/story_open.asp?storyname=18807
Wednesday, February 2, 2005 ~ 9:59 a.m., Dan Mitchell
Wrote:
20. Sweden wins Booby Prize for highest tax burden.
Beating out vigorous competition from Denmark, Belgium, and France, Sweden
has the dubious honor of being the most heavily-taxed nation in the European
Union. The European Union statistics department also reports that Ireland,
Slovakia, and the Baltic nations have the lowest aggregate tax burdens.
It is no coincidence, of course, that this latter group also is a good
list of Europe's fastest-growing economies:
In 2003, the overall tax
burden (i.e. the total amount of taxes and social security contributions)
in the EU252 stood at 41.5% of GDP, compared with 41.3% in 2002. After
an increase from 42.4% in 1998 to 42.9% in 1999, the tax-to-GDP ratio declined
steadily from 1999 to 2002. In all ten new Member States, the tax-to-GDP
ratio was lower in 2003 than the EU15 average (41.8%). Among the Member
States there were substantial differences in the total tax burden. In 2003
Sweden (51.4%) recorded the highest tax-to-GDP ratio, followed by Denmark
(49.8%), Belgium ( 48.1%), France (45.7%) and Finland (45. 1%). The lowest
ratios were observed in Lithuania (28. 7%), Latvia (29.1%), Slovakia (30.9%),
Ireland (31.2%) and Estonia (33.4%). ...Looking at the different types
of taxes4 reveals significant differences in the structure of taxation
systems between the Member States. In 2003, Poland (19.7%), Slovenia (20.8%)
and Slovakia (23.2%) recorded the lowest shares of direct taxes in the
total tax burden, compared to the EU25 average of 31.6%. On the other hand,
Denmark (59.6%), the United Kingdom (42.0%) and Finland (41.0%) had the
highest shares of direct taxes.
http://epp.eurostat.cec.eu.int/pls/portal/docs/PAGE/PGP_PRD_CAT_PRER
EL/PGE_CAT_PREREL_YEAR_2005/PGE_CAT_PREREL_YEAR_200 5_MONTH_01/2-28012005-EN-AP.PDF
21. Blame Mexico's PRI-Era Monopolies for Slow Growth By MARY ANASTASIA O'GRADY January 28, 2005; Page A9
Mexico's economic outlook this year is the rosiest it has been since President Vicente Fox took office in July 2000. This week Bear Stearns Global Emerging Markets Watch reaffirmed its 2005 forecast of 4% growth and lowered its inflation forecast by one percentage point to 4.1%.
The improvement is good news for both Mexico and the U.S. but as Mexico's Minister of Finance Francisco Gil Diaz noted in a visit to Washington this month, the growth number is well below the country's potential of 6% or 7% annually.
It is also well below the growth rate that economists say a developing country needs to seriously chip away at poverty. As such it is probably too little, too late to reverse the generalized view among many Mexicans that Mr. Fox's presidency has been a great disappointment.
As the chief executive, Mr. Fox will have to take the blame for the underperformance of Mexico's economy and it is true that his reluctance to spend political capital to lead may cost him his legacy. Yet it is worth pointing out that during the Fox administration, Mexico's fiscal and monetary condition has improved dramatically.
For the record, it must also be noted that the real drain on growth is from Mexico's "monopoly problem." Some high-ranking officials have been known to whisper that the grip of public and private monopolies on the economic infrastructure is worse than 10 years ago. Those monopolies are staunchly defended by the old-line Revolutionary Institutional Party (PRI) party in congress, Mr. Fox's main opposition.
Still, there are major achievements. The macro news that has gone largely underreported is that this year Mexico has dramatically flattened its tax structure and continues to bring down both corporate and individual marginal tax rates. This is no small feat in a political system that that for 70 years under the PRI managed little but the refinement of populist demagoguery. Notable too is the fact that a decade after the 1994 peso crisis, the independent central bank has earned international credibility under the skillful guidance of Guillermo Ortiz.
Yet despite good macro management, robust growth is unlikely to take off while monopoly pricing in key sectors -- electricity, cement, fixed-line telecommunication services and domestic air services -- hampers Mexico's competitiveness in international markets.
The irony here is that the beneficiaries of such mind-boggling privileges to price as they please -- Carlos Slim of Telmex comes to mind -- often use their wealth and lives of leisure to lecture the rest of us about how to help the poor. As Reuters reported in November, Mr. Slim "is a frequent guest of Latin American presidents with whom he shares his ideas on how businesses can flourish as the region struggles with high unemployment, weak economies and extreme poverty." One wonders if competition ever comes up in those fireside chats.
Mr. Fox has been unable to dislodge Mexico's powerful oligarchs but history will judge him well on at least one score: His choice of Mr. Gil Diaz for treasury secretary. While a host of other supposedly top-line economists around Latin America have driven their economies underground and their governments into bankruptcy with Rubinomics, Mr. Gil Diaz, a University of Chicago economist, has fought hard for lower, broader and simpler taxation.
To be sure, the tenacious Mr. Gil Diaz has lost his share of battles. Again this year efforts to lower the value added tax, while broadening it to include food and medicine were defeated in congress. But as the chart nearby shows, the Hacienda (Treasury) has made important strides in lowering corporate tax rates. This year there is also a provision to allow for more accelerated depreciation.
For individuals, top marginal rates have been coming down since Mr. Fox put Mr. Gil Diaz at the helm. Now they are being simplified. In 2006, according to Hacienda, "a single tax rate of 25% will apply to all taxpayers with annual income up to 2.5 million pesos ($22,000)." Over that amount, there is one more tax rate of 29%. In 2007, the top marginal tax rate will move to 28%. Even Hong Kong, which boasts a "flat tax," has three rates.
Hacienda has made no secret of its supply-side logic: "Tax collection efficiency gains on income and value added taxes are expected to compensate the cost of the reduction in income tax rates and the added deductions to the asset tax base." In other words, lower, flatter tax rates provide a broader base, not to mention less incentive to evade taxes or avoid more income, and therefore yields.
Now if only the Fox government could do something about Mexico's monopoly problem. The Telmex curse on Mexico has almost become a cliché. Deregulation meant that Telmex was supposed to grant access to the network for other carriers at competitive prices. But Mr. Slim has famously used court injunctions to block competition. Analysts say that Telmex still controls 95% of the fixed-line market in Mexico which explains telephony rates that add to the cost burdens of Mexican producers, lowering their competitiveness. Slow network expansion and high prices have had obvious negative repercussions to the development of e-commerce.
Electricity and air transportation monopolies are a further drag on the economy. Cintra, controlled by the government, owns the Aztec skies and has the pricing power to prove it. The country's electricity supply is still in government hands and lacks investment to meet the economy's needs. Nevertheless, Mexico's congressional dinosaurs seem ready to let the whole country go dark rather than allow competition in the energy market. Mexican cement prices are equally out of whack, with Mexico's Cemex holding 60% of a market dominated by only two producers.
Mr. Fox has pioneered the new Mexican era of pluralism
and his presidency is not likely to be remembered for much more than that.
But setting the record straight is important. Historic tax cuts belong
to the Fox government, monopoly protection for the rich has been preserved
by Mexico's leftist holdouts from another, backward era.
22. As Europe Cuts Corporate Tax, Pressure Rises on U.S. to Follow
By GLENN R. SIMPSON
Staff Reporter of THE WALL STREET JOURNAL
January 28, 2005; Page A2
Tax competition could force lower corporate tax in America. The Wall Street Journal has a thorough article on the worldwide shift to lower tax rates. Tax competition is the driving force, and even US policy makers are being pushed in the right direction:
BRUSSELS – European countries have been steadily slashing corporate-tax rates as they vie for foreign investment, potentially adding to pressure on the U.S. for similar cuts as it weighs a tax overhaul.
Following the lead of Ireland, which dropped its rates to 12.5% from 24% between 2000 and 2003, one nation after another has moved toward lower corporate rates with fewer loopholes. The Netherlands, the second most popular European target for U.S. investment, recently joined the movement, lowering its corporate rates by three percentage points to 31.5% and simplifying its tax structure.
The corporate-tax cutters of recent years stretch from Portugal, where the rate has dropped 10 points to about 27%, to Austria, down nine points to about 25%. Even Germany, which has Europe's highest rate and has bitterly opposed the plummeting tax rates elsewhere in the region, has done some dramatic trimming -- from as high as 56% six years ago, according to data from KPMG LLP, to 38.3% last year.
Germany's trims leave the standard U.S. rate -- about 40% including average state taxes -- above that of every country in Europe, according to separate studies by the Organization of Economic Cooperation and Development and KPMG.
Many large businesses, especially with the U.S.'s complex tax structure, use loopholes and shelters to pay far less than the national rates suggest. And the U.S. has recently done its own targeted cutting, such as lowering the tax on manufacturers last year in compensation for a lost export subsidy. But even the effective U.S. corporate-tax rate -- what is paid after all the deductions -- is above Europe's average, by as much as 10 percentage points, according to one analyst.
The upshot is that Europe, long known for steep and complex taxes on corporations, is more and more likely to prompt U.S. companies to expand there rather than at home, tax experts say. Shifting revenue -- and some of their operations -- to lower-tax countries is the single biggest way American companies avoid paying U.S. rates, bringing down their effective taxes.
"We are living in a global economy and we compete in a global economy, and if our corporations are competing against societies that don't tax their corporations as much, we have to consider that," says John Breaux, a former Democratic senator from Louisiana and the co-chairman of a new White House-sponsored tax-reform panel, in an interview.
The European tax rivalry has accelerated with the European Union's expansion this year to include Eastern European members like Poland, which cut its corporate rates to 19% from 27% last year. Poland now hosts a half-dozen facilities of Delphi Corp., an auto-parts supplier based in Troy, Mich., whose chief executive is involved in lobbying for lower U.S. taxes and a simplified code.
Earlier this month, Amazon.com Inc. announced it would establish a European operations center in Ireland. EBay Inc. established its European base in low-tax Switzerland. Hewlett-Packard Co. last year set up a major research-and-development center in Ireland, allowing it to take advantage of low taxes on royalties from intellectual property. Kellogg Co. and Lucent Technologies Inc.'s Bell Labs division also set up major facilities in Ireland last year.
The latest addition to the tax-cutting club, the Netherlands, is a top U.S. trading partner and recipient of more than $180 billion in annual investment by American companies. After its recent cuts in corporate rates, it expects to shave another point in 2007. Then, says Dutch Finance Secretary Joop Wijn, who is visiting the U.S. this week to tout the changes, "I am going even lower."
Bush administration officials have saluted the corporate-tax cutting in Europe. Last November in London, Treasury Secretary John Snow said of the Irish government, "I applaud them and believe they ought to be emulated."
The last major drop in the U.S. corporate-tax rate was in 1986 in a radical round of streamlining and rate reductions. Since then, U.S. tax law has become riddled with deductions and shelters. Influential corporate groups such as the Business Roundtable, citing recent tax-rate cuts by U.S. trading partners, now are lobbying the White House panel for rate cuts even if it requires eliminating some business tax breaks.
"We're looking for a tax system that permits U.S. companies to operate on a level playing field with foreign competitors, both at home and abroad," said J.T. Battenberg III, who heads the Roundtable's fiscal-policy task force and is CEO of Delphi.
Others also question whether this fight among European nations for foreign investment involves genuine economic competition. "It is very obvious that the profits taxed in Ireland are not all made in Ireland," says policy analyst Guillaume Durand of the European Policy Center, a Brussels think tank. In a study last year, analyst Martin A. Sullivan of the nonprofit journal Tax Notes estimated that U.S. companies in 2002 made $26.8 billion in profits in Ireland, a huge sum for a country of just four million people. The companies paid an 8% effective tax, according to Commerce Department data.
Three years earlier, before most of Ireland's tax cuts, U.S. companies reported $13.3 billion in profits there. In Mr. Sullivan's analysis, in 2002 U.S. companies had an effective tax rate of 9% in Portugal, 9% in the Netherlands, 12% in Belgium, and 13% in Spain.
Europe's longstanding reputation as antibusiness is no longer "justified," says Mr. Durand. "It is a very difficult business to compare aggregate levels of taxation, but by all measures, as a general trend it is very clear that capital is much more taxed in the U.S. than in Europe, and labor and consumption are much less taxed."
Talking about standard, statutory corporate-tax rates can be misleading because loopholes mean many companies pay less. "The rate matters, but even more important is what you tax. So if we only tax half of corporate profits, the rate is not nearly as significant as you might think," notes Robert S. McIntyre of the Washington group Citizens for Tax Justice, which is funded by organized labor. U.S. corporate taxes were equal to less than 2% of U.S. gross domestic product in 2001, he notes, and only two countries -- Germany and Iceland -- had a lower ratio of corporate taxes to national output. "If low corporate taxes make us competitive, then we've got them," Mr. McIntyre says.
General Electric Co., for example, reported paying an effective tax rate of 19% last year on world-wide income, compared with 26.7% in 2003. GE attributed the lower rate largely to foreign sales; about half of its $152.36 billion in 2004 revenue came from overseas. For the fourth quarter, GE's tax rate was 16%, compared with 26% in the year-earlier quarter.
Jane Gravelle, a tax expert at the U.S. Congressional Research Service, estimates the "effective" rate in the U.S., after deductions are taken into account, at 32% in 2001, the most recent figures she has studied.
This year, the effective tax rates of many U.S. companies are expected to decline because of a one-time tax holiday on overseas profits. Margie Rollinson, an international tax expert at Ernst & Young, who estimates the U.S. effective tax rate at about 10 points higher than the European average, said the law behind the tax holiday is viewed by many tax professionals as possibly readying the political ground for more cuts in the U.S. corporate rate. "There are many people speculating whether that is a precursor to a lower tax rate in general," she said.
The European reduced rates have in many cases been paid for by eliminating deductions. According to tax studies, European governments are getting about the same revenue as before the changes. But the lower flat rates are still attractive to companies.
Ms. Rollinson said companies often note in their annual 10-K reports effective tax rates dramatically lower than the official rate because Generally Accepted Accounting Principles allow companies to report their tax rate based on their world-wide profits, and profits from abroad are taxed only when they are repatriated. "For book purposes their 10-K will show a rate much lower," Ms. Rollinson says. If they were ever to return the money to the U.S., they'd pay U.S. rates, but that anomaly doesn't have to be shown in the reports -- making their picture look healthier.
In Europe, the new competitive environment, combined with the 2001-03 recession, clearly rattled the Netherlands. Holland was once known as something of a tax haven for its network of advantageous tax treaties and cooperative revenue officials, but tax-law changes reduced those benefits. The Dutch government's concerns may have peaked last year, when the European operation of U.S. software maker McAfee Inc. decamped to Ireland.
In a barnstorming tour of the U.S. that began Monday in New York, Mr. Wijn, a 35-year-old former venture-capital executive at ABN Amro Holding NV, has been pitching the new Netherlands tax policy to dozens of American tax lawyers, accountants and corporate tax directors. Altogether, he planned to meet with 28 U.S. companies.
American companies have favored Holland for selling to
Europe's more than 400 million consumers because of its efficient ports,
location close to population centers, and highly educated, English-fluent
work force. But now "there is a sense of urgency that [the tax climate]
has to improve, that we are in competition with countries like Ireland
and do lose direct investment from the U.S. to countries like Ireland,"
said Amsterdam tax lawyer Fred de Hoos of the U.S. firm Baker & McKenzie.
Sunday, January 30, 2005 ~ 1:00 p.m., Dan Mitchell Wrote:
22. Foreign aid undermines economic growth in poor
nations. A former World Bank economist explains why good intentions often
yield bad results:
But once the immediate
needs of the victims are met, the long-term impact of foreign aid must
be considered. More is not necessarily better. Aid agencies have a duty
-- to recipients, donors and taxpayers alike -- to use the funds as effectively
as possible. They should prevent resources being siphoned off by corrupt
officials and aid contractors. They should avoid creating "backwash" effects
on survivors and their fellow citizens when the flood of foreign aid crowds
out potential domestic suppliers. They should strengthen, not undermine,
development mechanisms and institutions. And aid agencies should not exaggerate
the problems faced, or the benefits resulting from their own efforts, just
to ensure a piece of the action and a continued flow of funds. Without
diminishing the scale of the tragedy, the number of persons affected should
be rigorously checked. There are already reports that the number of refugees
in Aceh camps has been significantly inflated by local officials seeking
more aid. ...If housing, food, health and education services are supplied
free or below cost to refugees for prolonged periods, they may lose the
motivation to return to their former jobs or seek new activities. The recently
exposed abuses associated with the U.N.'s refugee program in the Palestinian
territories and its Oil for Food program in Iraq should be taken as a salutary
warning. ...The free goods and services given by foreign donors reduce
the demand for domestic producers and distributors. They pre-empt the opportunities
for indigenous enterprises to move into new markets. Incomes generated
by national responses to disasters are retained domestically. And they
are eventually diffused through local communities, stimulating higher employment
and consumption levels. When aid programs are based largely on inputs from
outside the region, many of the secondary and tertiary benefits remain
overseas.
http://online.wsj.com/article/0,,SB110679477511737651,00.html?mod=opin
ion&ojcontent=otep (subscription required)
23. The Aid Flood By KEITH MARSDEN WSJ January 27, 2005
The horrific scenes of the impact and aftermath of the killer waves shocked the world and induced a surge of international solidarity. Pledges of assistance top $3 billion. Scores of well-motivated aid agencies, official and private, are on the ground providing emergency relief. And the navies of India and the leading powers are lending a valuable hand.
But once the immediate needs of the victims are met, the long-term impact of foreign aid must be considered. More is not necessarily better.
Aid agencies have a duty -- to recipients, donors and taxpayers alike -- to use the funds as effectively as possible. They should prevent resources being siphoned off by corrupt officials and aid contractors. They should avoid creating "backwash" effects on survivors and their fellow citizens when the flood of foreign aid crowds out potential domestic suppliers. They should strengthen, not undermine, development mechanisms and institutions. And aid agencies should not exaggerate the problems faced, or the benefits resulting from their own efforts, just to ensure a piece of the action and a continued flow of funds.
Without diminishing the scale of the tragedy, the number of persons affected should be rigorously checked. There are already reports that the number of refugees in Aceh camps has been significantly inflated by local officials seeking more aid.
Lessons must be learned from experience. That's particularly true for the EU, the world's biggest aid donor. This is not the first time that distant nations and peoples have opened their hearts and wallets after seeing distressing images of starving and mutilated children in Africa or stone-throwing youths in Palestine. Large volumes of foreign aid have been disbursed to these countries. Net aid as a percentage of gross national income has topped 47% in Sierra Leone, 42% in the Palestinian territories and 30% in Eritrea during the last decade. Yet according to the World Bank, per capita household consumption has fallen by 7.3%, 5.1%, and 2.9% a year in these three countries respectively since 1990.
If housing, food, health and education services are supplied free or below cost to refugees for prolonged periods, they may lose the motivation to return to their former jobs or seek new activities. The recently exposed abuses associated with the U.N.'s refugee program in the Palestinian territories and its Oil for Food program in Iraq should be taken as a salutary warning.
Net aid flows to sub-Saharan Africa have reached nearly $20 billion annually. Foreign aid topped 10% of national income in 31 countries around the world in 2002. But the results are generally disappointing. African consumption levels have risen by a paltry 0.1% annually. Millions more are struggling to get by on less than $1 a day. Aid has hindered rather than helped the development process in some countries.
Donors should recognize that the five hardest-hit countries -- Indonesia, India, Thailand, Sri Lanka, and Malaysia -- have vigorous economies. They have all performed well historically, despite temporary setbacks in the late 1990s due to misguided financial policies (and, in Indonesia's case, a high level of corruption as reported by Transparency International). Their national incomes have risen at average annual rates ranging from 3.6% to 6.2% since 1990. Real consumption per head has grown by 2.4% to 4.3% a year since 1990. Yet foreign aid averaged only 0.5% of their total income in 2002, or less than $3 per head of their combined population (1.4 billion). It was highest in Sri Lanka at just $18, or 2.1% of its gross national income in 2002.
Economic growth has generated far more resources, public and private, to pay for substantial improvements in social indicators than has foreign aid. But in a press release dated Jan. 25, Unicef reported the creation of a "Tsunami Water and Sanitation Fund," and appealed for a further $763 million. In justification, Unicef says: "Many of the children affected by the tsunami lacked access to safe water and sanitation before the waves hit. Across South Asia, only 35% of people have access to a basic toilet."
The World Bank paints a different picture. It reports that toilet access rates were much higher in the three most affected countries -- 96% in Thailand, 94% in Sri Lanka and 55% in Indonesia in 2000 -- and they have all seen substantial improvements since 1990. Access to safe drinking water has jumped to 84% in India, 78% in Indonesia and 77% in Sri Lanka.
Yet Unicef claims that "many children in the region -- particularly girls -- are denied their right to education because they are busy fetching water or are deterred by the lack of separate and decent sanitation in schools." Again, other sources describe a different reality. World Bank/Unesco data show that 100% of girls in the relevant age group completed primary school in Sri Lanka and Indonesia in 2000-2003.
Other aspects of tsunami aid programs are equally dubious. Does it make sense for donors to buy high-priced European- or American-made clothing, tents, bottled water, purification plants, medicines, earth-moving equipment, transport vehicles and basic foodstuffs -- and send them by expensive air freight to the disaster zones?
Most of these essential supplies are produced at lower cost within Indian Ocean Rim countries, and are readily available in dispersed outlets throughout the region. For example, India is a major producer and exporter of medicines and construction machinery. Thailand exported $15 billion worth of agricultural products in 2003, including basic foods like rice and fish. Indonesia's textile and clothing exports were valued at more than $10 billion.
Malaysia has the civil-engineering experience on site to build the world's second-highest skyscraper and a modern highway network. Sri Lanka has 8,000 qualified physicians. The human skills, management capacities and equipment required to reopen roads and other communication channels, and to organize and execute reconstruction projects, are available within each country or the region as a whole.
The free goods and services given by foreign donors reduce the demand for domestic producers and distributors. They pre-empt the opportunities for indigenous enterprises to move into new markets. Incomes generated by national responses to disasters are retained domestically. And they are eventually diffused through local communities, stimulating higher employment and consumption levels. When aid programs are based largely on inputs from outside the region, many of the secondary and tertiary benefits remain overseas.
Wouldn't it be better to transfer a significant proportion of emergency aid funds directly to the families of disaster victims in the form of cash payments? They are in the best position to determine their priorities, and to select the appropriate suppliers. For major public works projects, donor funds should be earmarked for local civil engineering contractors. Investment credits should be channeled through domestic banks for the reconstruction of houses, hotels and other buildings.
Receipts from international tourism totaled $22 billion in the five most severely affected nations, and contributed as much as 7.9% of national income in Malaysia and 6.4% in Thailand in 2002. It is important that foreign tourists continue to visit as the money that visitors bring will speed up reconstruction and help preserve jobs.
Rich nations should also boost their imports of goods and services from the tsunami-hit countries as well as other developing nations. A tripling of exports from Asian developing countries since 1990 has been a force behind their rapid progress.
It is not too late to reconsider aid disbursement plans and strategies. There should be a thorough discussion of the options in parliaments and the media. The track record of aid agencies shows they do not have all the answers. Without a reform of aid practices, raising aid levels will simply generate further waste and weaken proven development processes.
Mr. Marsden has worked as an economist for the World Bank
and the U.N. in nine Indian Ocean Rim countries.
Sunday, January 30, 2005 ~ 5:45 p.m., Dan Mitchell Wrote:
24. More proof that lower tax rates work. During
congressional debate last year, opponents of good tax policy said that
lower tax rates don't affect behavior. They are mysteriously silent now
that billions of dollars are flowing back to the US because the tax rate
was slashed from 35 percent to 5.25 percent:
Drugs manufacturer Eli
Lilly has become the latest company to announce the repatriation of billions
of dollars in overseas earnings under the temporary tax break legislated
as part of the American Jobs Creation Act. ...{the company reported}
the expected repatriation to the United States of $8 billion of eligible
overseas earnings in 2005. Under the AJCA, firms with substantial profits
earned abroad are encouraged to repatriate the income at a temporary rate
of tax 5.25% instead of the usual 35%, a move which lawmakers hope will
spur domestic investment. Eli Lilly's announcement follows the decision
by pharmaceutical firm Johnson & Johnson to repatriate $11 billion
in foreign income.
http://www.tax-news.com/asp/story/story_open.asp?storyname=18721
Monday, January 31, 2005 ~ 10:24 a.m., Dan Mitchell Wrote:
25. Will America become the Argentina of the 21st
Century? Richard Rahn explains that the United States is slowly slipping
in world freedom rankings. If this trend is not reversed, America may
become like Argentina - a rich nation that becomes poor by allowing government
to become too much of a burden:
Our Founding Fathers and
other political thinkers recognized that free peoples most often lose their
freedoms not in one sudden blow, but by the endless erosion of liberties
they once had. As a student in biology, you may have learned that if a
frog is put in a pot of water slowly brought to a boil, the frog will not
be aware of what is happening until it is too late. There is increasing
evidence Americans, like the frog, are having their liberties slowly boiled
away without realizing it. Our very disturbing drift from freedom is reflected
in the 2005 edition of the Index of Economic Freedom just published by
the Heritage Foundation and the Wall Street Journal. A decade ago, the
U.S. was rated as the fifth-freest economy, this year it has dropped out
of the top 10 to No. 12 - and we once were the role model for the world.
...The U.S. is on a government taxing, spending and, most of all, regulating,
binge that in the long run is incompatible with a free and prosperous society.
We now know poor societies can become prosperous within two generations
as a result of free market economic policies coupled with the rule of law.
We also know rich societies can quickly become poor. Look at Argentina,
which was the seventh-wealthiest country on the planet in the early 1900s.
Because of the socialist policies of the Peronists (i.e., excessive government
spending and regulation, coupled with a decline in the rule of law) beginning
in the 1930s, Argentina has become a poor country mired in crisis. Without
a change in direction, the same fate eventually will befall the United
States. ...Our freedoms are eroding because too many Americans fail to
understand the consequences of encouraging the political class to try to
protect us from all real and imagined ills - whether it be a terrorist,
a disease (including eating too much and aging), bad weather, a more efficient
competitor, our own personal financial stupidity or irresponsibility, or
a cigarette smoker. Just remember: Every time you vote for a politician
who promises to make the government do more for you, he also is saying
that same government will make you less free and ultimately poorer.
http://www.washingtontimes.com/commentary/20050129-095132-5873r.ht
m
26. Push Privatization in Hong Kong By ANDREW WORK WSJ January 31, 2005
At a recent breakfast with the authors of The Wall Street Journal-Heritage Foundation 2005 Index of Economic Freedom, Hong Kong Financial Secretary Henry Tang reaffirmed his government's commitment to a broad program of privatization. He offered assurances that the proposed privatization of Hong Kong's Airport Authority is on track. The concern had been that recent setbacks to Hong Kong's plans to sell off other assets would derail any further privatizations. Mr. Tang promised that that will not happen.
His resolution is reassuring. However, the Hong Kong government needs to rethink its strategy in light of recent events, especially the difficulties it has encountered in listing Link REIT, which aims to be the world's largest real estate investment trust. The Hong Kong government is relatively inexperienced in executing these transactions and some leeway must be allowed for learning. Its greatest strength may lie in experimenting with innovative solutions that could make Hong Kong a world leader in privatization. The administration needs support and advice, rather than constant criticism.
Lessons and guidelines learned from elsewhere can minimize problems. Specifically for Hong Kong, privatization must be complete and accompanied by deregulation, a robust legal framework, and public education.
The most important factor is that privatization must be accompanied by deregulation and complete asset transfer to the private sector. California saw the results of partial privatization of its energy sector, resulting in blackouts and shortages. Price controls killed suppliers who had to buy wholesale at market rates. Providers and consumers both suffered. So too did politicians -- at the ballot.
Asian governments proclaim their privatizations and public-private partnerships by making market offerings, while retaining control through large ownership stakes and regulation. In Hong Kong, the new Convention Centre (85% government owned), Disneyland (75%) and the Mass Transit Railway Corporation (76%) spring to mind. In Malaysia, Telekom Malaysia. In Singapore, Temasek controlled companies abound.
Governments that regulate and own so-called privatized firms face more heat than if the firms were not privatized. Accusations of rigging the game through regulation to enrich private-sector partners are endemic. In Hong Kong, concessions made to developers in the sale of a housing project, Red Hill Peninsula, opened the parties to accusations of collusion. The public questioned the government's intent in quietly removing technical contractual barriers to demolishing 2,470 unused flats and 494 car park spaces.
Another project, involving the creation of a major cultural hub in Hong Kong's West Kowloon area, has become a political landmine. By setting restrictions on the use of land after it passes into private hands, the government has come under political fire from every community group who believe their agenda should be pressed on the investors-to-be. If the firms in question had free rein in using these assets, the public wouldn't be harassing the government about their ultimate end use.
Partial privatizations are undertaken to raise funds, but miss short-term revenues and a greater long-term opportunity. The earlier a firm is fully exposed to market conditions, the greater the chance it will generate taxable profits that will, in turn, raise government revenue. Furthermore, competition leading to multiple players can expand the industry, creating yet more tax revenue for governments.
Also, regulations setting prices or acceptable profit margins negate the principal benefits of privatization -- increased efficiency in pursuit of higher profits. To quote the Asian Development Bank 2000 report "Developing Best Practices for Promoting Private Sector Investment in Infrastructure,": ". . . partial privatization framework[s] based on formal contractual mechanisms may restrict the private sector partner's ability to respond flexibly to unexpected market developments." California power is a perfect example.
A robust legal framework is needed to put private interests beyond the hands of government. The ADB report shows that a strong legal framework gives investors confidence. Recent events in Hong Kong have demonstrated how the lack of a clear legal framework can have serious consequences. Small investors lost thousands of dollars in interest when the Link REIT listing was delayed, after legal ambiguities provided an opportunity for two disgruntled public-housing tenants to challenge it in the courts.
Building this framework, industry by industry, will require the support of Hong Kong's Legislative Council. The process must be transparent and explain the benefit of legislative initiatives. It is vital this education extends to the general public.
Hong Kong has discovered its socialist streak and willingness to defy the establishment. Much opposition is automatic and not grounded in an understanding of economics. Even when opposition is warranted, socialist cures can be worse than the disease. The biggest long-term barrier to privatization is a perception that it transfers public wealth to a select few. Public education encompassing the benefits of privatization must be proactive and part of a comprehensive effort to explain free market principles to citizens. In the world's supposedly most economically free city, many are more familiar with Mao and now Che Guevara, who is championed by the recently elected Marxist legislator Leung Kwok-hung, popularly known as "Long Hair," than with Adam Smith or Milton Friedman.
Hong Kong has asserted its intention to move ahead. It needs the best financial, legal and political minds Hong Kong has to guarantee that privatization is open, fair, comprehensive and accepted. By providing support and encouragement, we can help the Hong Kong government to develop the legal framework and public support needed to bring the benefits of full privatization and deregulation to all Hong Kongers.
Mr. Work is the executive director of the Lion Rock Institute,
a free-market think tank focused on nongovernment solutions to Hong Kong's
challenges.
27. Corporatism, Entrepreneurship and Faith
By SAMUEL GREGG
January 31, 2005
If Western Europe is to become an entrepreneurial society,
it requires a cultural revolution.
In a world saturated by polls, one occasionally encounters
findings that reveal something meaningful about different cultures. This
can be said of recent findings produced by the European Commission about
entrepreneurship in the European Union and the United States.
The survey indicates that almost twice as many Americans (28%) as Europeans (15%) are contemplating starting their own business. Moreover, the gap is increasing. In America, those considering starting a business increased by percentage points since 2003, compared to only percentage points in the EU.
In the same survey, 61% of American respondents affirmed that they would prefer self-employment. By contrast, only 45% of Europeans agreed. The figures were especially low in Finland (28%) and the Netherlands (33%). Job security was the prime reason Europeans gave for preferring being employed by a company rather than being their own masters.
Commenting on the poll, the European Commission stated that a major reason for the EU's weak entrepreneurial culture was European entrepreneurs' difficulty in finding sufficient financial backing from banks. Another reason mentioned was fear of failure.
There is validity to these explanations. Other causes include the EU's stifling regulatory environment and crippling taxes, which disincentivize potential entrepreneurs. Then there are the notoriously bloated welfare systems that even some left-wing European politicians concede have contributed to Western Europe's culture of welfare dependency.
There are, however, less well-known factors contributing to Europe's entrepreneurial malaise. First, there are the "corporatist" arrangements installed throughout Western Europe by Social Democrat and Christian Democrat governments following World War II.
Partly inspired by certain schools of Christian social thought, corporatism seeks to reduce social tensions -- what France calls le fracture social -- by corralling business leaders and employees into confederations of employer associations and workers' councils that, under government supervision, negotiate everything from salaries to pension benefits.
These systems proved successful at neutralizing radical left-wing elements within West European trade unions. Gradually, however, they became engines for stagnation. They have, for instance, a vested interest in more regulation. Growing regulation gives corporatist bodies reasons to build empires of bureaucrats to help employers and workers negotiate their way through the jungle of rules and by-laws.
The same regulations give corporatist bodies every reason to discourage anyone who suggests that reducing regulations might encourage the emergence of new businesses built by entrepreneurs.
There is, however, another element that explains various differences between America's business culture and Europe's. Put simply, it concerns Western Europe's increasingly secularist -- that is, practically atheist -- moral culture.
The classic definition of a practical atheist is one who lives and acts as if God does not exist. Though we do not often think about it, practical atheism has very real implications for society, including business.
It is difficult for people with atheistic mindsets to be what John Paul II calls "people of hope." Those with no hope have only the present. They have no compelling reason to be interested in the future -- for themselves or for others. Why should those who refuse responsibility for the future, or those who do not concern themselves with it because they will have departed this life in 30 years' time, care about unsustainable levels of welfare dependency, paralyzed labor markets, or crippling regulation?
The idea that there is something wrong with foisting the payment for one's present comfort onto future generations (as many Western Europeans seem content to do) is incomprehensible to secularist minds. For if we believe that all that matters is our own present satisfaction and that no one owes anything to others, then it does not seem unjust to mortgage the future of others -- even our own children. The same deadly logic lies just beneath the surface of Lord Keynes' celebrated quip that "in the long run, we are all dead."
It is easy to oversimplify. While Americans are commonly regarded as more religious than West Europeans, America has its fair share of practical atheists. Nonetheless, people of faith -- real faith -- are people of hope. They are realists, but not pessimists. They are prudent risk-takers, but not inordinately afraid of taking risks. They care for the needy, but not for welfare dependency.
If Western Europe is to become an entrepreneurial society, it requires more than greater access to capital. It demands nothing less than a cultural revolution: one that not only sweeps away corporatist structures and complaisant attitudes towards regulation, but also relights the fire of hope that only comes from the virtue of faith. And that is the work of evangelization.
Mr. Gregg is director of research at the Acton Institute.
28. Push Economic Freedom in China By JAMES A. DORN WSJJanuary 27, 2005
Many of U.S. President George W. Bush's critics have scoffed at the freedom message he sent in his second inaugural address and asked, what about China? It is too large and too important a country to marginalize, let alone attempt regime change. But as Mr. Bush surely knows, there's no need for either. The surest path toward freedom is to increase economic liberty. And on this score, China is well on its way.
China is a prime example of how economic liberalization has increased living standards and improved relations with the U.S. It was not accidental that Condoleezza Rice decided to exclude China when listing countries that pose a threat to U.S. national security at her Senate confirmation hearings last week.
President Bush is certainly correct in saying that the future of civilization depends on preserving and spreading freedom -- and that an "ownership society" is essential in reaching that goal. Private property is a fundamental human right and a bulwark against tyranny.
The lack of well-defined and protected private property rights in China, and the absence of a proper system of rule of law, are the primary sources of corruption. Freedom and justice cannot expand in China until property rights are protected by law.
Economic life is politicized in China because there is still no proper separation between the government, Chinese Communist Party, and the market. The state dominates capital markets, controls most investment funds, has a monopoly on development rights for rural and urban land, and crushes dissent.
That's not to deny that there have been improvements in recent years. Since the economic reforms began in 1978, ordinary people have gained much more personal and economic freedom than under the old regime of central planning. China has also become one of the most dynamic economies by opening its trade sector and allowing experiments with various forms of ownership. The emergence of a private market has transformed the lives of millions of people who otherwise would have remained stuck in stagnant state-owned enterprises. Technology and the market have combined to increase the range of choice and, hence, individual freedom.
As the size of China's market sector continues to grow, there's a growing recognition that economic growth can no longer be micromanaged by the state. The idea that government must minimize its role in economic growth is one that flows naturally from the notion that a free market is a "spontaneous order," based on voluntary consent. All that the state needs to do for such an order to function properly is to protect individual and property rights.
Younger scholars in China are coming to realize this, and are familiar with the ideas of Friedrich Hayek and other market liberals. For instance, in an article in the "China Business Weekly," journalist Jia Hepeng cited Hayek and wrote, "The government's direct interference with the market is often inefficient, because its bureaucratic character makes it slower to react than market players. As a result of this inefficiency, deeper involvement of the government could destroy the spontaneous order of the market."
Hayek's ideas are highly relevant to the expansion of freedom in China. If China's leaders insist on maintaining centralized control over investment planning, limit the expansion of private ownership, and fail to let natural market forces determine the rate and direction of economic development, China's continued economic expansion will be at risk. Moreover, at some point, Beijing will have to choose between maintaining the status quo and embarking on real political reform that secures property rights, freedom, and justice.
In 1987, at the 13th National Congress of the Chinese Communist Party, Zhao Ziyang called for "strengthening the socialist legal system" as "a fundamental guarantee against a recurrence of the 'cultural revolution.'" A year later he proposed a "shareholding system" to convert state-owned enterprises into market-oriented entities, and predicted that "without reform there will be no way out for China." What he meant, of course, is that without eventual political liberalization, free markets would be suffocated by the state.
China's accession to the World Trade Organization has
been beneficial for the global economy, U.S.-China relations, and the advancement
of legal reforms. But the party's reluctance to recognize Zhao's contributions
following his death last week has reminded everyone of the stark contrast
between the shining new skyscrapers in Beijing and the darkness of the
official campaign to suppress the voices of those who call for freedom.
As a moral principle, freedom means we must respect private property rights as a fundamental right. As a practical matter, when private property rights are protected by law, individuals are free to trade for mutual gain and held responsible for their behavior.
The ethical basis of the market system is often overlooked, but not by those like Zhang Shuguang, an economist at the Unirule Institute in Beijing, who were deprived of their economic liberties during the era of central planning. He compares the coercive nature of planning with the voluntary nature of the market and concludes: "In the market system ... the fundamental logic is free choice and equal status of individuals. The corresponding ethics ... is mutual respect, mutual benefit, and mutual credit."
Those nations that have failed to adopt freedom as a first principle have also failed to realize its benefits. They have ignored the great liberal idea, as articulated by Frédéric Bastiat in the mid-19th century, that "the solution of the social problem lies in liberty." Or, as President Bush stated last week, "There is no justice without freedom."
Justice requires abiding by the rule of law and limiting government to its legitimate tasks -- namely, the defense of persons and property. We can help reduce tyranny by making the case for free trade and free people. If we can help promote the continuing expansion of free markets in countries such as China, the future of freedom will be brighter.
Mr. Dorn is vice president for academic affairs at the Cato Institute.
29. BRAZIL NEEDS TAX CUTS TO IMPROVE ECONOMY
------------------------------------------------------------------------
Brazil requires structural reforms, such as deep cuts
in taxes, in order
to sustain long-term growth and broad economic development,
says Thomas
McLarty III, president of Kissinger McLarty Associates.
While Brazil's national income is expected to rise by
about 5 percent
this year, the high cost of doing business, caused in
part by the
redundant and onerous tax system, remains a drag on the
economy. For
example:
o Brazil's auto manufacturers
pay five times more tax than their
U.S. competitors.
o Brazil's 60 percent duty on
imported merchandise delivered by
express companies
such as UPS is so high that it has caused
recipients to refuse
delivery.
Overall, Brazil's tax burden during the first half of
2004 was about 38
percent of national income -- up 1.2 percentage points
from the same
period a year ago.
McLarty says companies must spend vast amounts on lawyers
just to
understand the nation's Byzantine tax system. Those that
do not are
pushed into the informal sector --fully 40 percent of
the Brazilian
economy is off the books and outside the normal tax structure.
Source: Thomas F. McLarty III, "Brazil's Stellar Performance
Will
Brighten With Tax Cuts," Investor's Business Daily and
Council of the
Americas, December 17, 2004.
For text:
http://www.counciloftheamericas.org/coa/publications/opeds.html
For more on Economic Freedom and Growth:
http://www.ncpa.org/iss/int/
Friday, January 21, 2005 ~ 12:10 p.m., Dan Mitchell Wrote:
30. Even the OECD recognizes the low-tax Irish miracle.
The Organization for Economic Cooperation and Development has just
admitted that the Ireland is now the world's fourth-richest economy. The
Paris-based bureaucrats say this is a "remarkable development," but sensible
people see Ireland's growth as the logical consequence of free-market tax
policy:
...an analysis by a major
international body last week ranked Ireland as the fourth wealthiest economy
in the world, behind Luxembourg, Norway and the US. The rankings, compiled
by the Organisation for Cooperation and Development in Europe (OECD) in
conjunction with the European Union's statistical agency, were based on
Gross Domestic Product (GDP) figures from 2002. The OECD described Ireland's
entry into a category of high-income countries as a "remarkable development."
http://www.belfasttelegraph.co.uk/news/story.jsp?story=601596
31. Ireland wealthier than the US and fourth in global 'richest' league By Ben Quinn WSJ 17 January 2005
Ireland is now wealthier than the US and is on course to become the world's third richest economy, according to a leading economist.
Economic wealth per head of population surpassed that of the US for the first time late last year.
"We are richer than both Boston and Berlin," said Bank of Ireland chief's economist, Dan McLaughlin. "We surpassed Berlin in the millennium year and, now in early 2005, we are richer than Boston."
The analysis is based on an increase in Irish economic wealth to €36,100 per head of population ($41,500), at an exchange rate of $1.15, which has surpassed the US figure of $40,100. The current exchange rate for the euro is $1.31.
And an analysis by a major international body last week ranked Ireland as the fourth wealthiest economy in the world, behind Luxembourg, Norway and the US.
The rankings, compiled by the Organisation for Cooperation and Development in Europe (OECD) in conjunction with the European Union's statistical agency, were based on Gross Domestic Product (GDP) figures from 2002.
The OECD described Ireland's entry into a category of high-income countries as a "remarkable development."
Mr McLaughlin added: "For most of Ireland's modern history, Irish people went to the richer country in America and sent back remittances to poor relations back home.
"Now, we have US companies in Ireland sending remittances in profit cheques back home."
However, Fine Gael's Finance spokesman Richard Bruton sounded a note of caution, while agreeing the economy has been growing at a "phenomenal pace".
He warned that the traditional manufacturing section was in "sharp decline".
"We are pricing ourselves out of the market by becoming, what is colloquially described as a rip-off country," he said.
"Overall we have to watch over costs across many areas, no longer just wage costs. Anti-competitive practices are resulting in high margins.
It is not just down to workers getting too much, it is down to people who own businesses taking too much."
He added that the focus of competitiveness was no longer just on minimum wage.
Meanwhile, the business and employers' association, IBEC, has rejected trade union calls for a substantial increase in the minimum wage from €7 per hour to €8.75.
The Irish Congress of Trade Unions (ICTU) has stated its position in a formal request to the Labour Court.
The raise would bring the minimum wage to 60pc of the average industrial wage, according to ICTU.
However, IBEC Director Brendan McGinty said that it was
"wholly unrealistic" to contemplate any adjustment to the rate of the national
minimum wage at the moment.
Back | Return to top | Printable Story
32.Flat and Happy . . .By ALVIN RABUSHKA WSJ January
12, 2005; Page A10
Alvin Rabushka of Stanford University's Hoover
Institution helped launch the flat tax in the early 1980s. His idea hasn't
taken root in America, but Dr. Rabushka explains in the Wall Street Journal
that Eastern European nations are providing a great lesson about the benefits
of tax reform:
Will we ever get real tax reform? For decades, economists, journalists and politicians have been discussing the pros and cons of a flat tax, sales tax, and VAT as alternatives to our federal income tax. One commission after another has conducted hearings and one Treasury secretary after another has overseen studies. Little by way of simplification and reform has come of these efforts. Interest groups and partisan politics have blocked real reform. Every year, Congress further complicates the tax code.
President Bush has just established another commission of nine distinguished members, but it will encounter the usual obstacles. A new round of hearings is not needed. A better approach is for the members to visit the eight countries in Central and Eastern Europe that have adopted the flat tax in the last 10 years and study their experience.
Estonia was first, implementing a 26% flat tax in 1994. The relatively high rate was set to balance its budget, a requirement of its new constitution. Since then, buoyed by strong economic performance, Estonia has eliminated the corporate tax on retained earnings, taxing only distributed profits. This year the rate has been lowered to 24% and will fall to 20% in 2007.
Next, in 1995, was Latvia with a 25% rate. But Russia is the big story. It took the tax reform world by storm in 2000 with a 13% flat tax, replacing its previous three-bracket system that topped out at 30%. The results: the economy has enjoyed four years of sustained growth. Real (inflation-adjusted) ruble revenue from the personal income tax rose 25.2% in 2001, 24.6% in 2002, 15.2% in 2003, and 16% in the first half of 2004. At the end of just four years, total receipts have more than doubled -- despite, or rather because of, a reduction in the top rate from 30% to 13%. The share of consolidated budget revenue received from the personal income tax increased from 12.1% in 2000 to 17% at the end of 2003. It has become the third largest source after corporate income tax and value added tax.
After a pause of three years, the flat tax resumed course. In 2003 Serbia implemented a comprehensive 14% flat tax on personal and corporate income. Not stopping at 14%, Serbia has stated its intention to further reduce tax rates in the near future. Taking a page from Russia's playbook, Ukraine implemented a 13% flat tax in 2004, replacing five brackets ranging from 10% to 40%. Dividends and interest on bank deposits are taxed at an even lower 5% rate beginning 2005. News reports suggest that Ukrainian officials consulted with their Russian colleagues. The advice they received was that incentives and revenue would rise and that the underground economy and tax evasion would decline.
In 2004 Slovakia implemented a 19% flat tax on both individual and corporate income. The measure passed by a vote of 85-48, and garnered the support of some opposition deputies. The 19% flat tax replaced five brackets from 10% to 38% and a corporate rate of 25%. It greatly simplified the previous system which included 90 exceptions, 19 sources of income that were not taxed, 66 items that were tax exempt, and 27 items with their own specific tax rates (e.g. bank interest, honoraria, etc.). Once the corporate tax is paid, dividends received by individuals are tax free.
Georgia's Mikhail Saakashvili was inaugurated as president on Jan. 25, 2004. Five days later he stated that one of his economic priorities was to introduce a new flat-rate tax system. On Dec. 22, 2004, by an overwhelming vote of 107-11, Georgia's parliament approved a 12% flat tax on personal income, replacing the previous system of four rates from 12% to 20%. The flat tax, which took effect on Jan. 1, 2005, reduced the size and weight of the old code by 95%.
In an election held on Dec. 13, 2004, Trajan Basecu, Bucharest's mayor, won a surprise victory as president of Romania. In his campaign he promised to work for a 16% flat tax on both personal and business income, to replace a complicated system of five rates ranging from 18% to 40% on personal income and 25% on corporate income. The first act of his new government on Dec. 29 was the adoption of the flat tax as pledged, effective Jan. 1. Opposition parties in other Eastern European countries, such as the Czech Republic and Poland, have promised to enact a 15% flat tax if they are elected.
Where else is the flat tax under consideration? China, of all places. In November 2003, I was invited by the Ministry of Finance to Beijing to discuss personal income tax reform. A Chinese translation of my book, "The Flat Tax," was published in May 2003 by the China Financial & Economic Publishing House, with a preface by Vice Minister of Finance Lou Jiwei. In recent years, several Chinese professors of public finance have written on the economic and fiscal benefits of reducing China's top rate of 45%, some suggesting a flat 20% rate. Beijing is likely to announce preliminary steps on personal income tax reform in the March 2005 budget.
The flat tax is even spreading to Western Europe. In March 2004, Marjo Matikainen-Kallström, a Finnish member of the European Parliament, announced that she would seek the leadership of the National Coalition Party in Finland, with a vision for a flat tax. Her statement was that a flat tax would cut Finland's high marginal tax rates, thereby retaining top Finns and attracting new expertise to Finland.
Spain's government of José Luis Rodríguez Zapatero is considering a flat tax. Miguel Sebastián, director of the Economic Office of the Prime Minister, favors one and has co-authored a paper titled "A Proposed Reform of Tax System in Spain." His co-author, Manuel Díaz-Mendoza, is currently an adviser on taxation in the Prime Minister's Economic Office. They recommend a 30% flat tax on personal income in place of the current complex system with its top marginal rate of 45%. Even the socialist government of Gerhard Schroeder is reviewing a flat tax for Germany. In July, a Finance Ministry panel of 29 academics proposed a 30% flat tax on all personal and corporate income. It would replace the current personal income tax with a top rate of 45% and an effective corporate rate of 38.3%.
If the new Bush commission cannot arrange a road trip to Central and Eastern Europe to see firsthand the success of the flat tax, perhaps it might do the next best thing -- invite the finance ministers, prime ministers, and economic experts of these countries to testify.
Mr. Rabushka is the David and Joan Traitel Senior Fellow
at Stanford's Hoover Institution.
33. The Post-Saddam Boom By GLENN YAGO and DON MCCARTHY WSJ January 13, 2005; Page A12
With the rules of the Middle Eastern political and economic game fundamentally changed since the fall of Saddam, investors who are not persuaded by media herd behavior are valuing more highly than ever the prospects for regional reforms and future growth. The conventional wisdom about the Mideast is ubiquitous in the press, but largely unjustified from an economic perspective. A search of newspaper and magazine stories in 2004 reveals more than 3,338 articles including the words "Middle East" and "war and terrorism"; only 102 stories linking the "Middle East" with "growth" and "recovery" can be found.
Yet definitive policies to normalize the Middle East have made regional and global market investors bullish, repatriated capital exported (or that had fled) from the region, and encouraged a sea change in foreign direct investment. The end of Saddam's regime sent a major, unconfused market signal after the West's years of disinterest in the Middle East as a Levantine backwater. Subsequently, every major capital market index in the Middle East has risen.
Regionally, stock markets rose over 30% in 2004 and represent a market capitalization of $470 billion. This has been accompanied by a surge in regional property values and a higher number of tourists. The main Egyptian equity index has increased 165%, while that of Saudi Arabia has gone up by 158%. The Saudi market's stellar performance is especially striking given the great amount of attention paid at the moment to that country's security problems. Israel's leading index has risen by 32%, the benchmark index of Kuwait's exchange by 73%, Jordan's by almost 60%, and that of the United Arab Emirates by 110%.
This upsurge in capital investment extends to Iraq. Since June 24, 2004, the Iraq Stock Exchange (ISX) opened and replaced the old Baghdad Stock Exchange, which was government-run and characterized by corruption and irregularities. An independent securities commission and depository center were established accompanied by the early emergence of a fixed-income market. The old exchange's trading activity pales in comparison to the ISX's performance so far.
Saddam mortgaged his country's future to fund his tyrannical regime and delusions of regional grandeur. The World Bank estimates that Iraq currently has external debts of around $120 billion owed to other governments. With Iraq's GDP at $34 billion, debt is 350% of GDP. An economic stumbling block to development and reconstruction is a restructuring of that debt. With this in mind, former Secretary of State James Baker made the rounds of Iraq's creditors appealing for debt forgiveness with substantial results.
The Paris Club (consisting of sovereign creditors from Russia, the U.S., Western Europe and Japan) has already agreed to an 80% write-down of nearly $40 billion of debt. Another $50 billion was lent by members of the Gulf Cooperation Council comprised of Saudi Arabia, Kuwait, Qatar, the UAE, Oman and Bahrain. The two largest creditors, Kuwait and Saudi Arabia, have signaled that they will enter debt restructuring negotiations in the near future, the UAE and Qatar announced they plan to forgive the bulk of $7 billion owed their countries. In all likelihood, $80 billion to $90 billion of Iraq's total debt will eventually be forgiven. This good news is already being reflected in these markets.
The fall of Saddam was a harbinger for increased foreign direct investment into the Middle East as well. Until recently, the region attracted less than 1% of global FDI and only 4% of FDI directed at the developing world. The average annual amount of FDI for the three years preceding the war (1999-2002) was only $6.7 billion. According to our research, FDI for the entire Middle East since regime change in Baghdad will be up 76% or $4.8 billion to an average of $11.5 billion for the 2003-2005 period. Overall, Middle Eastern countries are striving to make their economies more attractive to foreign investment. Nowhere is this more apparent than in Iraq. A new foreign investment law was passed on September 2003 permitting 100% foreign ownership of firms in all sectors of the economy aside from oil and other mineral extraction. Profits from foreign investments into this previously highly centralized, state monopoly economy can now be repatriated freely from both tax and capital controls.
Skeptics might suggest that this is all due to soaring oil prices. This is only partially correct, as it is not just the stock markets of oil-rich countries that have appreciated, nor have they been the only ones benefiting from increased foreign direct investment flows. Most of the Mediterranean Middle Eastern countries are not energy rich, yet nearly all that have felt the heat, if not always happily welcoming the light of a changing Middle East, have displayed robust equity-market growth.
Neither is this performance simply based on expectations of growth. On the contrary, the entire region has seen generally robust growth after decades of economic stagnation. The per-capita income in Arab countries grew at an annual rate of 0.5% over the past two decades -- less than half the global average. Despite vast natural resources, a good educational system, adequate skilled labor and plenty of capital, which has largely been exported from the region, the standard of living in the Arab East has declined relative to the rest of the world. With very high birth rates, the region's labor force is increasing by over 3% a year -- the fastest rate in the world.
With 80 million people living in poverty and 15% to 20%
unemployment rates, the urgency of economic growth and job creation to
absorb the growing labor force is vital. This past year, Iran and Saudi
Arabia -- the region's two largest economies by purchasing power -- grew
by 6.2% and 6.4%, respectively, in real terms. The next largest economies,
Egypt and Israel, also grew, but less rapidly at 1.8% and 1.3%. Israel's
growth, while lower than some of its neighbors, is itself quite remarkable
given its current security problems. Israel's recovery after two years
of contraction bodes well for the Palestinian economy. The smaller economies
of the region are also growing. Of particular note is the impressive performance
of Kuwait and the UAE, both of which grew more than 6% last year in real
terms.
* * *
Of course, Middle Eastern economies, while improving, still lag other markets, especially in one key area: access to capital for entrepreneurs. IPOs have been few and far between, regional companies are overly dependent upon bank debt, secondary market conditions remain largely unfavorable, bond markets are embryonic and illiquid and venture capital is generally unavailable. If small and medium-sized businesses are to flourish, the control of capital by a small number of regional banks saddled with a high level of nonperforming loans will need to be decentralized.
The lack of access to capital reflects serious challenges that remain. But when one looks at the success these countries have had in growing their markets in the past two years, and the reforms they are starting to make to open up their markets, the news from the region is hopeful. Too much focus is spent on the challenges facing the region at the cost of realizing its potentials. Beyond the smoke and tears, a new Middle East may yet emerge through enhanced capital flows to finance a future for entrepreneurs with hopes and dreams to build their countries and create jobs to save their youth from terrorism.
Mr. Yago is director of capital studies and Mr. McCarthy
a research analyst at the Milken Institute.
34. Social Darwinism, French Style
By BRIAN M. CARNEY
January 10, 2005
What you see depends on where you stand, so it isn't surprising that if you ask an old-style industrialist what your country needs to shape up its economy, the answer is -- more old-line industrial giants.
French President Jacques Chirac asked the CEO of France's oldest industrial conglomerate what France should do to get its economy back on track. The answer -- surprise! -- is that France needs to do more to support and encourage growth and innovation at France's traditional industries. So last week the French president duly announced the creation of an industrial policy agency which will be provided with $2 billion over three years to boost French industry.
Jean-Louis Beffa, the chairman and CEO of Saint-Gobain, itself the product of Louis XIV's own industrial policy, is expected to make his report public this week, but he's already been speaking out on its finer points. France should look to Japan, Mr. Beffa avers, for a model of how to structure its economy. That Japan is only now awakening from almost 15 years of stagnation that was largely the result government-guided resource misallocation seems to bother Messrs. Beffa and Chirac not at all. Mr. Chirac sees his new agency as one that will give birth to Europe's next Arianes and Airbuses.
Perhaps he should be thinking about how to create the next Microsoft or Cisco instead. The trouble with trying to pick winners and give them the funds they need to succeed lies not so much in who gives them the money as in the impossibility of knowing in advance who the winners are going to be. This is not a question of skill; the best manager in the world is as likely as not to be wrong -- about what their customers want, what they're willing to pay for it, etc. -- close to half the time.
Companies spend a lot of time and money on customer research, "opposition" research and market analysis to try to improve this percentage. But at the end of the day, the only way to know for sure whether a product will sell is to put it out on the market and see if someone buys it. There are no sure things. This fact is of fundamental importance to understanding the operation of a free market.
The private sector plays this game better than the government for two reasons. It is not because governments are "stupid" and businesses are smart; there are plenty of badly run, blundering companies in the world and there are plenty of smart public servants. No, private businesses succeed in putting profitable, innovative products on the market because: 1. Companies are sensitive to price signals; and 2. There are lots of companies and their employees competing for sales and profits.
As consumers, we tend to think of prices as the little stickers on the things at the supermarket. But if you are a computer or consumer-products maker, prices are your connection to the outside world. By moving them up or down, you discover what customers are willing to pay, what price might induce a competitor's customer to switch, which customers are extremely price sensitive and which less so, and so on. This information is not just nice to have; it's essential -- because it's the only really solid information a business has on the preferences of its customers.
Government tends to work at a handicap in this regard because it gets very little pricing information about the value of its services. Taxes aren't paid by choice and expenditures generally do not have the discipline of having to generate a return on investment. Of course, taxpayers are customers of a sort, and they vote, but not very often. And when they do, the noise-to-signal ratio is often too high to determine just what it is they want for their money or how much they're willing to pay. But that's a topic for a different column.
Consumer choice works, of course, only when there are a lot of competitors for a consumer's favor. Over time, free markets provide what people want because a lot of different businesses are out there trying to give it to them. Any one particular venture may get it wrong, but the sheer number and variety of firms competing makes it more likely that someone, somewhere, will come up with the next big thing. When they do, they'll know it because customers will beat down their doors to buy it and they'll have to expand production or raise prices or both.
Which brings us back to Mr. Beffa's notion that the French taxpayer's money would be best spent trying to "strengthen the strong." Since France has a certain number of established and successful companies, and those companies by their sheer mass are capable of creating large numbers of jobs at once, Mr. Chirac, the argument goes, would spend his money best by supporting those companies' attempts to innovate.
Now, if you are the CEO of a company three centuries old, the idea of commandeering state resources to fund your own research has, no doubt, a certain appeal. The state cannot replicate the market -- although Jimmy Carter once forlornly tried to construct an artificial oil market in the U.S. -- so it inevitably turns to the old hands. Mr. Beffa's Saint-Gobain has been around for 340 years. But, as Nobel Prize-winning economist Friedrich Hayek noted, we'll never know what wasn't invented because government poured its immense resources into promoting this or that, even when it achieved some success.
So by supporting a limited number of projects, and possibly crowding out other, potentially more-successful ones, the French state vitiates one of the market's chief advantages -- the diversity of approaches that comes from multiple actors all autonomously pursuing their own projects and succeeding or failing on their merits. And by doing it with taxpayer funds rather than private capital, the state short-circuits the private sector's other virtue -- access to information about the price, and so the value, of the goals that it is attempting to pursue.
This leads to inefficient use of human and capital resources and deep structural problems in the economy, a la Japan 15 years ago. If Mr. Beffa wants France to adopt a Japanese model, he should consult a history book that doesn't end when the Nikkei average was at 50,000. Japan has had a long, painful hangover from the days when MITI picked the winners and a cozy corporatist arrangement greased the wheels of growth over there. The country is still trying to sort out the mess that resulted.
Of course, funding research at established companies has two big benefits from where Messrs. Beffa and Chirac are sitting. But neither has anything to do with the economy or innovation. From Mr. Chirac's perspective, big, established companies are far easier to exercise political influence over than tiny, disparate upstarts. Witness the arm-twisting that went into the Sanofi-Aventis merger last year. And for Mr. Beffa, a policy of subsidizing research at the established players discourages competition from upstarts that might upset the positions of those players in French industry. "Strengthen the strong," indeed.
Mr. Carney is editorial page editor of The Wall Street
Journal Europe.
Thursday, January 6, 2005 ~ 8:45 a.m., Dan Mitchell Wrote:
35. Irish and Slovak officials explain important role
of better tax policy. At the Tax Foundation's annual conference in
November, officials from Ireland and Slovakia discussed the role of lower
tax rates and tax reform. Not surprisingly, better tax policy leads to
better economic performance:
...what role did tax reform play in the rise of the Celtic tiger? It's difficult to disaggregate the effects of several contemporaneous and with the mutual support of policy changes, but there were some noticeable shifts and I've just mentioned three of them. Married female, labor force participation went up and very substantially, obviously releasing or realizing a new known resource. Longterm unemployment in particular fell dramatically with the tax wage between gross and take-home earnings falling, a larger gap emerged between welfare incomes and income from work. And such employed obviously would have benefited - relative on my last slide where you saw the tax burden falling on higher incomes. And that, in turn, may have induced stronger investment but stronger incentive . . . but rather the trend towards higher selfemployment could also be a national response simply to the fact that we were growing faster and there were more opportunities. The second question that was posed on the agenda we got was what has been the impact on tax revenues and tax compliance? Tax compliance - certainly lower tax rates should encourage compliance by reducing incentives to invasion...
...the major engine of
the tax reform was the request to increase the competitiveness in a very
high competition between the countries in Central and Eastern Europe to
attract investment. This was clearly the major, major reason for the tax
reform. ...Today in Slovakia we don't have a tax on dividends. We have
no inheritance tax. We have no gift tax. And from January next year, also,
the real estate transfer tax will be abolished. Also, we have a flat tax
rate for the personal income... When I was talking about major impetus
of the reform it was the attraction of the investment and this is how we
would like to support capital inflow to Slovakia. We have only one tax
on profit, which is 19% corporate income tax and there is no dividend tax.
So a combination means 19% taxation and you can see the comparison with
other countries. ...already today we can see two of the most important
results of the reform. The first one is there's no doubt that we have significantly
stronger interest from foreign investors to come to Slovakia, to visit,
to discuss and many of them are already deciding for investment to Slovakia.
http://www.taxfoundation.org/events/67/Panel1-Ireland-Poland-Slovakia.pdf
36. Globalization and 'Contract Culture'
By Christopher Lingle Published
01/05/2005
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TCS
It is obvious that the process of globalization inspires great disagreement concerning its nature and impact. Despite acts of terrorism and labor disputes that have marked this public discussion, one point of agreement is that this process is seemingly irresistible.
A sober assessment of the merits of the arguments in this
debate requires identifying some essential elements behind this momentum.
One place to start is to discard an important misinterpretation.
Globalization should not be confused with Westernization
or Americanization of economies and cultures. Perhaps this muddled thinking
arises from an observed sense of convergence towards certain norms or rules
that are associated with Western cultures, especially concerning commercial
considerations. Promoting this misconception adds to an unwelcome divisiveness.
It also implicitly assigns a sense of domination or superiority of American
or Western culture over others, itself a patently foolish assertion.
The view offered here is that this convergence is a natural
and evolutionary procedure. In this sense, global convergence arises from
voluntary choices by citizens and their governments to engage in worldwide
markets to achieve some individual and collective goals, including shared
prosperity. Indeed, the overpowering nature that some observers find so
troubling is actually the outcome of choices made by most other members
of their own communities. In the end, the movement is towards the establishment
of and guidance by the legal bounds that govern contracts. As will be argued,
exposure to contracts has important impacts on cultures since it imposes
greater accountability on businesses as well as governments.
As such, globalization should not be viewed as the outcome
of anonymous, outside and mysterious forces. Instead, an important source
of globalizing influences in a local economy arises from choices made by
most of ones' compatriots who prefer better or cheaper products that are
imports rather than shoddy or higher priced ones produced locally. In this
narrow interpretation, globalization can be seen as a universal application
of democracy. Opposition to these results is tantamount to an elitist loathing
of thy neighbor, or at least their choices.
In all events, the spreading of the benefits of globalization
depends upon how well markets function, because competitive markets are
a force that empowers consumers and humbles producers. And well-functioning
markets require and inspire a certain attitude towards agreements that
can be identified as a "contract culture".
A contract culture exists when all parties in an agreement
are predictably treated as equals whenever there is a legal dispute or
a need for interpretation of the conditions behind the pact. Markets both
depend upon and set the stage for the emergence of a contract culture as
well as providing an impetus for the emergence of a commercial morality
and a wider application of trust. In turn, institutional frameworks
evolve to reinforce and reward or punish actions in reference to the agreements
and the legal institutions that support them. This convergence is inspired
by globalization.
While most may think that the discussion only involves
private contracts concerning commercial transactions, it also covers social
contracts like constitutions that specify duties and obligations of citizens
and rulers. Markets inspire the development of a contract culture where
the spirit of compromise becomes part of human interaction. In such a setting,
equals are treated as equals just as unequals must also be treated as equals
before the law. Governments or large corporations should not receive special
treatment in the courts over individual citizens while domestic interests
should not override those of foreign claimants. At the same time, interactions
within a community where contracts are widely negotiated can bring about
a greater appreciation for compromise and humility that might undermine
future claims for authoritarian leadership.
Viewed from this vantage point, capitalism and free markets
are seen to provide a necessary underpinning for democracy's success rather
than merely a sufficient one. It is through individualist-based institutions
associated with and arising from markets that people exercise true self-ownership
to pursue their own chosen goals.
The importance of establishing a contract culture cuts
deep. It is an intangible element in the measurement of growth factors,
but it is certainly an essential element of the institutional framework
for an active player in the global economy. Apart from promoting political
stability due to greater fairness, the contract culture is also associated
with "middle-class values" like the importance of education, thrift and
moral values that promote hard work and honesty in contract fulfilment.
Globalization can reduce some of the economic vagaries
by eliminating some of the sources of recurrent crises. During periods
of rapid economic growth, massive cash flows can compensate for some of
the inconveniences arising from a weak adherence to contractual obligations.
Once an economy reaches a certain level of maturity or begins to lose its
comparative advantages, the importance of legal protections becomes clearer.
It is the absence of such safety measures that induce investors to undertake
reassessments that can lead to the sort of mass exoduses of capital like
the one associated with the Asian crises that began in 1997.
In many Asian countries, the dominance of autocratic rule
led to an entrenchment of hierarchical power relations that retard the
development of a local contract culture. Outside of some former British
colonies, few Asian countries have an independent and competent judiciary
that issue ruling based upon strict interpretations of a body of law concerning
fulfilment of contracts that includes predictable bankruptcy proceedings.
Yet the exposure to and pressures from the international marketplace will
eventually pressure governments to adhere to the rule of law.
Some opponents to globalization express legitimate concerns.
Perhaps the most compelling objection is the fear of the dilution of local
culture. Nonetheless, opening a community to global influences is most
likely to reveal the strengths of those elements that are worth keeping
and undercover weak points that might be given up. (It is worth noting
that the Dutch have been deeply engaged in the globalization process for
many centuries without losing their unique cultural identity.)
An assessment of globalization should begin with the fact
that it introduces a contract culture in association with the rule of law
as the basis of a modern market-based economy. Although there will always
be transition costs of such monumental changes, there are solid reasons
to believe these will be exceeded by the benefits. Above all other benefits
is the increased commercial and political accountability that offers greater
protections to citizens and consumers.
Christopher Lingle is Global Strategist for eConoLytics.
37. Flat-Tax Club
January 6, 2005; Page A16
On New Year's Day two more countries hopped on the flat-tax bandwagon -- Romania and Georgia. That brings to eight the number of nations in Old Europe that believe a flat tax is the way to a new economy.
Romania's new rate of 16% applies to both personal and corporate income. It replaces five personal tax brackets ranging between 18% and 40% and a corporate rate of 25%. Georgia's flat tax is even lower: 12% on corporate and personal income. It's no accident that it trumps Russia's 13% flat tax by a hair -- President Mikhail Saakashvili wanted to boast the lowest tax rate in Europe.
The Continent's flat-tax club also includes flat-tax pioneer Estonia (25% and heading down to 20% in 2007), Latvia (25%), Serbia (14%), Ukraine (13%) and Slovakia (19%). The largest opposition parties in the Czech Republic and Poland are also agitating for a flat tax and have promised to implement one if victorious at the polls.
It's no surprise that the flat-tax movement took hold in the former communist countries of Central and Eastern Europe. In some cases, they were starting from scratch, or nearly so, in choosing a tax code, so opting for the simplest, most efficient system available was the natural thing to do. The need to do something to attract investment and spur growth was particularly urgent. Economists have long recognized the fairness and efficiency of a flat tax with a broad base and few or no carve-outs for special interests.
In the rest of the world, countries that want to stay
competitive could do worse than to take a page from the Romanian and Georgian
playbooks. A clean sweep of all forms of tax favoritism would wipe out
a huge industry of consultants and lawyers. But eliminating all this tax-generated
make-work would be a boon to economic efficiency and give most taxpayers
a fairer and better deal.
38. Hail Estonia!
By MARY ANASTASIA O'GRADY
January 4, 2005; Page A12
For the first time in the 11 years that the Heritage Foundation and The Wall Street Journal have been publishing the Index of Economic Freedom, the U.S. has dropped out of the top 10 freest economies in the world.
In 1998, the U.S. was the fifth freest economy in the world, in 2001 it was sixth, and today it sits at 12th, tied with Switzerland. The U.S. drop in ranking is explained in part by a slightly lower score, but mostly by the good performance among its competitors. The lesson? Stand still on the highway to economic liberty and the world will soon start to pass you by.
The 2005 Index, released today, ranks Hong Kong once again as the world's freest economy, followed by Singapore and Luxembourg. But it is Estonia at No. 4 that makes the point. This former Soviet satellite is a model reformer, setting the standard for how fast countries can move ahead in the realm of economic liberalization. Ireland, New Zealand, the U.K., Denmark, Iceland, Australia and Chile, all relatively recent converts to free markets, also outpace the U.S. this year.
The Index scores economic freedom in 10 categories, ranging from fiscal burdens and government regulation to monetary and trade policy. The U.S., with its strong property rights, low inflation and competitive banking and finance laws, scores well in most. But worrying developments like Sarbanes-Oxley in the category of regulation and aggressive use of antidumping law in trade policy have kept it from keeping pace with the best performers in economic freedom.
Most alarming is the U.S.'s fiscal burden, which imposes high marginal tax rates for individuals and very high marginal corporate tax rates. In terms of corporate taxation as an element of economic freedom, the U.S. ranks a lowly 112th out of the 155 countries scored, and its top individual tax rate ranks only slightly better at 82nd. U.S. government expenditures as a share of GDP increased less in 2003 than in 2002, but the rise since 2001 is what explains the U.S.'s decline in score over the period.
In addition to the 155 economies scored, six, including Iraq, had to be sidelined for lack of reliable data. The 2005 Index finds that, on balance, freedom has again made strides around the globe: 86 countries are more free this year, 57 are worse off, and 12 remain unchanged. Europe and North America are by far the freest regions, with even their median scorers, Spain and the Czech Republic, in the top 33. Notable gains were made by China; it is still a "mostly unfree" economy but moved up 16 places and is continuing a trend toward liberalization.
Policy makers who pay lip service to fighting poverty would do well to grasp the link between economic freedom and prosperity. This year the Index finds that the freest economies have a per-capita income of $29,219, more than twice that of the "mostly free" at $12,839, and more than four times that of the "mostly unfree." Put simply, misery has a cure and its name is economic freedom.
Ms. O'Grady edits the Journal's "Americas" column. She
is co-editor, with Marc A. Miles and Edwin J. Feulner Jr., of the 2005
Index of Economic Freedom (414 p., $24.95), which can be ordered at 1-800-975-8625.
Destination U.S.A.
By ARTHUR B. LAFFER
January 3, 2005; Page A8
Just because the United States has its largest trade deficit ever doesn't mean that we're living beyond our means. Far from it. In fact, the characterization of the U.S. as a land of chronic overspenders, hellbent on selling themselves into global servitude doesn't make sense at all. And once the over-consumption model is put into question every policy remedy based on the presumption of squander looks pretty weak.
In an era of floating exchange rates the trade deficit (or more appropriately, the current account deficit) is one and the same as the capital surplus. The only way the U.S. can have a trade deficit amounting to 5.6% of GDP is if foreigners invest that amount of their capital in the U.S. It's a matter of simple accounting. But once you realize that the trade deficit is, in fact, the capital surplus you would clearly rather have capital lined up on our borders trying to get into our country than trying to get out. Growth countries, like growth companies, borrow money, and the U.S. is the only growth country of all the developed countries. As a result, we're a capital magnet.
Take a look around. Germany hasn't had a growth spurt since the 1960s when Ludwig Erhard was Bundeskanzler. France still has a mandated maximum workweek of 35 hours, a maximum income tax rate of 58%, a 1.8% annual wealth tax and government spending as a share of GDP greater than 50%. Finland, for goodness sakes, fines speeders a percentage of the speeder's income. Sweden, Denmark and Germany also fine speeders a percentage of their income, only with caps. Japan has had a stock market down by over 70% from its high in 1989 and both company and government unfunded liabilities in Japan are out of sight. Canada's economic policies are kooky and investments in Latin America, the Middle East, Russia, Southeast Asia and Africa are about as safe as running drunk blindfolded across the "I-5" freeway at rush hour.
So what's not to like about the U.S.? Whether you're an American or a foreigner the U.S. is the choice destination for capital. That's why we have such a large trade deficit.
The only way foreigners can guarantee a dollar cash flow to invest in the U.S. is if they sell more goods to the U.S. and buy less goods from the U.S. Our trade deficit is not a sign of a structural flaw in the fabric of the U.S. economy but is instead a stark reminder of our privileged status as the most pro-growth, free market, rule of law economy the world has ever known. Why on earth any American would want to change our policies to emulate foreign policies is beyond me.
China has realized the pre-eminence of the U.S. model and since 1979 has reduced the percentage of GDP flowing through its government from about 82% to today's level of about 30%. That is a supply-side tax cut par excellence. China also realizes that the U.S. has the best monetary policy ever. By fixing the value of its currency, the yuan, to the U.S. dollar, it has literally imported Alan Greenspan to China. Talk about outsourcing!
To guarantee the dollar value of the yuan requires that China hold over $500 billion of liquid dollar assets. China doesn't hold those dollars as a favor to us: it holds those dollars to benefit itself. One needs only glance at the financial disaster that ensued when former Argentine President Fernando De la Rúa broke the peso currency bond to the U.S. dollar to understand why China won't break its currency's link to the dollar. It's elementary, my dear Watson.
Now, within this framework of global capital mobility and U.S. pre-eminence there are significant variations in the relative capital attractiveness of the various nations of this world. When foreign economic policies improve, and the foreign attractiveness to capital increases as a result, the first impact is a weakening of the U.S. terms-of-trade (the real exchange rate) followed much later by a fall in the U.S. capital surplus, i.e., trade deficit.
As of late, foreign economic policies have improved. France is a lot better today than it was three years ago. And -- shock of shocks! -- Germany is even considering a real tax cut. Jean- Claude Trichet has shown himself to be a world-class governor of the European Central Bank, following on the heels of the incompetent Wim Duisenberg. Five new entrants to the EU -- Estonia, Latvia, Lithuania, Malta and Slovakia -- have low-rate flat taxes. Junichiro Koizumi of Japan is a lot better than the former prime minister, Yoshiro Mori. Investors on the margin should look more favorably to investments abroad.
But even changes in exchange rates have limits. The dollar under current circumstances can't go to zero or infinity. Without a corresponding rise in domestic dollar prices, U.S. goods and assets become relatively more attractive to foreigners and Americans alike when there is a fall in the foreign-exchange value of the dollar. Sooner or later the dollar would be such a bargain that there would be more buyers than sellers, therefore limiting the dollar's fall. Today, the dollar's value in the foreign exchanges fits nicely within its historical range.
On Jan. 1, 1999, the euro was born and was worth $1.17. In fact, if we look at the synthetic euro prior to 1999, the dollar's low was in 1992 when each euro could buy $1.47. The large dollar appreciation from 1992 to early 2002 saw the dollar peak at 83 cents per euro and our capital surplus (the trade deficit) go from less than 1% of GDP to almost 4% of GDP (and continue on to today's 5.6%). Well, the global economic environment is changing once again as are investors' perceptions of relative attractiveness.
There have been times in the past when the dollar depreciation
of the magnitude we've experienced over the last two-plus years would have
been a clear harbinger of much higher inflation and interest rates. But
such is not the case today. It is true that products which are freely traded
in global markets will experience dollar price increases relative to foreign
prices by the percentage depreciation of the dollar. But to have these
exchange-rate induced price increases lead to higher U.S. inflation would
require the Fed to accommodate the higher inflation with faster monetary-base
growth. The Fed has not accommodated any higher inflation and as a result
markets do not anticipate higher inflation. Nor should they.
* * *
Back in the late 1960s and '70s, currency depreciation was associated with domestic monetary creation and a horrendous bout of global inflation. Then, as opposed to now, currency depreciation was directly responsible for inflation, high interest rates, and low growth. We even coined a new word for low growth and high inflation -- stagflation. Aren't you glad we've had an epiphany of Fed policies under the leadership of both Paul Volcker and Alan Greenspan?
The most natural, proper, and economically correct response of the foreign exchange markets is for the U.S. terms of trade to have declined and that's exactly what has happened. As far as I can tell, the decline in the dollar is about over; soon we will see the U.S. capital surplus falling back to more normal levels. When a global economic system works as well as ours does, we should just leave it alone.
Mr. Laffer is founder and chairman of Laffer Associates.
Why Doesn't Latin America Takeoff?
By Carlos A. Ball Published
12/29/2004
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TCS
Latin American has never experienced individual freedom.
Alvaro Vargas Llosa, in his new book "Liberty for Latin America: How to
Undo 500 Years of State Oppression" (Farrar, Straus & Giroux), blames
the Latin tragedy on government coercion, mercantilism, special privileges,
redistribution of wealth and politicized laws. What is urgently required
south of the border is individual freedom, respect for private property,
rule of law, and limited governments.
No matter what yardstick is used -- per capita income,
poverty, the size of the informal economy, unemployment, capital flight
or emigration data -- Latin America continues to be backward, underdeveloped
and poor. Why? This Peruvian author, currently a research fellow at The
Independent Institute in Oakland, California, tells of the tremendous damage
caused by the economic nationalism that became fashionable in Latin America
after the Second World War, when the authorities sped-up development by
means of social engineering.
The economic nationalism promoted by the U.N. Economic
Commission for Latin America and the Caribbean (ECLAC) blamed poverty on
unfair terms of trade -- selling raw materials cheap and importing costly
finished products. The supposed remedy was to protect domestic industry
with high tariffs, import quotas, exchange controls, and periodic devaluation
of the currency.
Vargas Llosa asks: what possible incentive could there
then be for companies, operating in highly protected markets, to become
efficient and use new technology? Such policies only favored certain business
elites, which soon understood that what it took to be successful was not
necessarily to please the consumer, but rather to please cabinet ministers,
politicians, and government officials responsible for taking most economic
decisions. That explains why top Latin American "capitalists" still today
tend to support state intervention rather than a free market.
But it was not long before the politicians began to get
their hands on the so-called basic and strategic industries, such as oil,
electricity, telephones, minerals, banking, fisheries, airlines, etc. By
1982, there were more than a thousand state-owned corporations in Mexico,
the government of Argentina had 350 companies, and Venezuela had nationalized
its oil industry, which ended several decades of tremendous growth and
prosperity. The deterioration of public services was not long in coming,
and soon people had to pay bribes if they didn't want to wait two or three
years to get a phone.
The inefficiency of state-owned corporations, plus the
cost of the private monopolies and oligopolies created by rent-seekers,
devastated the middle class and made the poor more dependent than ever
on government handouts. But remember that the justification for such infamous
economic policies was their supposed benefits to the common people, when
in fact the opposite took place.
Unfortunately, the Inter-American Development Bank, the
World Bank, the IMF and Washington, by promoting and supporting bad policies,
have contributed for decades to Latin America's backwardness. While capital
flight in Latin America reached $68 billion in the 80s, between 1982 and
1989, the IMF lent $54 billion to the underdeveloped world on condition
that taxes were increased.
Economic nationalism collapsed and the remedy applied
was the so-called "neoliberalism" of the '90s, whose true objective is
described by Vargas Llosa in Lampedusa's famous words: "if we want everything
to continue as it is, it is necessary for everything to change." Evidently,
the elites did not want to lose their power and rents, which is why the
reforms undertaken were quite different from what they appeared to be.
Privatizations, for example, in many cases simply transferred public monopolies
to private hands, to the detriment of the consumer and the discredit of
capitalism. If in doubt, pay attention to the discourse of the region's
new left, like Venezuela's Chávez, Argentina's Kirchner, and Brazil's
Lula, who blame it all on globalization and cold-hearted capitalism.
The main thesis of this book is that investment, production
and growth are manifestations of development, not its causes. What really
promotes development -- as economists such as the late Peter Bauer clearly
demonstrated -- is individual freedom (which includes the freedom to buy
and sell, import and export whatever one wants), respect for private property,
limited governments, and the rule of law.
Individual freedom has never existed in Latin America.
During colonial times, almost a million laws and regulations were passed
and after independence, as "the State represents the interests of the people…
it is not necessary for all members of society… to assume responsibility
for their own lives." Vargas Llosa blames the Latin American tragedy on
the oppression of State corporatism and mercantilism, the redistribution
of wealth and politicized laws. In Latin America, there is no real system
of justice. What we have is a political system, and the courts support
whatever the politicians require.
After examining the cold facts behind the façade
of falsehoods constantly voiced by politicians and bureaucrats, both local
and multilateral, Latin America's backwardness turns out not to be such
a mystery after all.
Mr. Ball is editor is editor of AIPE, a Spanish-language news organization based in Florida, and adjunct scholar with the Cato Institute.
Editorial Reviews
Review
"Liberty for Latin America is an analysis of how differing
cultures and institutions enable or impede the emergence and flourishing
of free, representative governments and broadly productive economies. It
is an analysis of the causes and consequences of liberty and oppression
in the history of mankind, focusing on and thus constituting the most profound,
enlightening study available of Latin American history." --William Ratliff,
research fellow and curator of the Americas Collection at the Hoover Institution
"There is much to admire in Alvaro Vargas Llosa's Liberty for Latin America, not least of which its sweep, ranging across centuries of economic history from Mexico to the Southern Cone. He is especially incisive on the free market reforms that became the rage during the '80s and '90s, with Washington's encouragement, but that have left intact the stagnation and crony capitalism they aimed to end. This is an intriguing manifesto, passionately argued." --Samuel Dillon, co-author of Opening Mexico
"You may not agree with everything Alvaro Vargas Llosa says in his Liberty for Latin America, but you should take very seriously his central argument: that lack of political and economic freedom is at the root of our region's underdevelopment. With this volume, Alvaro makes an important contribution to the present debate on the causes of Latin America's poor economic and social performance." --Ernesto Zedillo, former President of Mexico; Director of the Center for the Study of Globalization, Yale University
"Liberty for Latin America presents Alvaro Vargas Llosa's thoughtful analysis of what has impeded Latin America's progress and what needs to be done. It is well worth reading." --Lawrence Harrison, The Fletcher School, Tufts University, author of The Pan-American Dream
"Liberty for Latin America is a gripping story of five hundred years of Latin American oppression. But it's not just another re-cycle of that well-worn story. Far from it. Vargas Llosa marshals an impressive array of evidence to successfully make his incisive case: no rule of law, no liberty, no progress. This book is essential reading" --Steve H. Hanke, Professor of Applied Economics, Johns Hopkins University
"Why does 'everything' in Latin America usually fail?
Vargas Llosa has a daring, but coherent, explanation: Neither the cultural
features of Latin America nor its prevailing institutions lead to stability
and a growing prosperity." --Carlos Alberto Montaner, The Miami Herald
Product Description:
Latin America's Foremost Political Journalist Makes a
Brilliant and Passionate Argument for Real Reform In the Economically Crippled
Continent
In Liberty for Latin America, Alvaro Vargas Llosa offers
an incisive diagnosis of Latin America's woes--and a prescription for finally
getting the region on the road to both genuine prosperity and the protection
of human rights.
When the economy in Argentina--at one time a model of
free-market reform--collapsed in 2002, experts of all persuasions asked:
What went wrong? Vargas Llosa shows that what went wrong in Argentina has
in fact gone wrong all over the continent for over five hundred years.
He explains how the republics of the nineteenth century and the revolutions
of the twentieth-populist uprisings, Marxist coops, state takeovers, and
First World-sponsored privatization-have all run up against the oligarchic
legacy of statism. Illiberal elites backed by the United States and Europe
have perpetuated what he calls the "five principles of oppression" in order
to maintain their hold on power. The region has become "a laboratory for
political and economic suicide," while comparable countries in Asia and
Eastern Europe have prospered.
The only way to change things in Latin America, Vargas
Llosa argues, is to remove the five principles of oppression, genuinely
reforming institutions and the underlying culture for the benefit of the
disempowered public. In Liberty for Latin America, he explains how, offering
hope as well as insight for all those who care for the future of this troubled
region.