1. East Meets West by Marian L. Tupy September 23,
2005
2. Sweet and Lowdown WSJ September 26, 2005; Page
A18
3. Taxing times Sep 22nd 2005 From The Economist print
edition
*4. FINANCIAL DEVELOPMENT BENEFITS POOR
5. Poland's Voters Back Off On Economic Reform
6. TAXING TIMES Economist Sep 22nd 2005
7. French destroy jobs by trying to protect job
*8. Northern Europe, U.S., East Asia Remain Tops in
Competitiveness Largest European Economies Lose Ground, According to Closely
Watched Survey
*9. India 50th, Finland most competitive nation
*10. The Follies of Regulation By HENRY G. MANNE WSJSeptember
27, 2005; Page A18
11. EU Begins Boiling Down Business Regulations
*12. Voting Against Reality .The German and Japanese
elections illustrate the uneasy relationship between capitalism and democracy.
13. Jakarta Readies Fuel-Price Rise
14.ARE AMERICANS STINGY?
*15. THE PROTECTION RACKET ------------------------------------------------------------------------
16. SCOTLAND TOPS LIST OF WORLD'S MOST VIOLENT COUNTRIES
17. In Germany, Good Deeds Go Unrewarded
*18. Go, Neelie WSJ September 27, 2005
19. Another flat tax success story.
20. The OECD commends Slovakia for free-market
reform
21. Uncompetitive Elections and the American Political
System
22. Dubai's financial exchange
23. Bad loans made good Sep 29th 2005 From The Economist
print edition
*24. A Mexican Tycoon Fights Reform of Securities
Law By MARY ANASTASIA O'GRADY September 30, 2005; Page A11
25. Defying the Doom Mongers WSJSeptember 30, 2005
26. Germany's Bad Example for Iraq By MICHAEL GREVE
WSJOctober 3, 2005; Page A17
27. TABOR targeted Colorado taxing and spending limits
being threatened Oct 2, 2005 by George Will (bio | archive)
*28. Naive View of Democracy in Latin America?
by Mary A Ogrady
29. NGOs on Drugs By ALEC VAN GELDER WSJOctober 5,
2005 Without patents, there is no innovation.
30. Who Will Win the 2005 Economics Nobel?
31. Albania Starts OptimisticallyDown Hard Road to
the EU By NICK CAREY DOW JONES NEWSWIRES October 6, 2005; Page A13
32. RESHAPING EUROPE: A SPECIAL SUPPLEMENT TO THE
ONLINE WALL ST JOURNAL
*33. The Wealth of Nations By LESZEK BALCEROWICZ WSJ
October 6, 2005; Page A14
34. Be my guest Oct 6th 2005 From The Economist
print edition The economic case for temporary migration is compelling;
the historical record less so
*35. The World Is Flat WSJ October 7, 2005 The
mainstream press is finally discovering the flat-tax movement that has
been sweeping Europe
36. America's Bad Trade Example WSJ October 7, 2005;
Page A16
*37. In Struggling European Countries,Momentum Is
Building For (Gasp!) the Flat Tax By G. THOMAS SIMS Staff Reporter of THE
WALL STREET JOURNALOctober 3, 2005;
Marian L. Tupy is assistant director of the Project on Global Economic Liberty , at the Cato Institute.
Economic liberalization in post-communist Central and Eastern Europe is paying off. Per capita incomes in that region are growing faster than those in Western Europe. The fact that the new poorer EU members are catching up with the old is a tribute to the power of the market. The reforms in the new EU countries are not over, but their success should serve as an example to the moribund economies of France, Germany and Italy.
The Economic Freedom of the World: 2005 Annual Report, which is copublished by the Fraser Institute in Canada and the Cato Institute, measures economic freedom in 127 countries around the world. Countries are rated on a scale from 0 to 10, with a higher number signifying a greater degree of economic freedom. According to the just-released report, the old 15 members of the EU saw a slight increase in their economic freedom, from 7.2 in 1995 to 7.4 in 2003. Compounded average annual economic growth in the EU-15 was 2.55 percent over that period.
Economic freedom in the eight Central and Eastern European (CEE) members of the EU increased notably from 5.4 in 1995 to 6.8 in 2003. Their economic growth rate averaged 4.62 percent per year between 1995 and 2003. The star pupil continues to be Estonia, which rose from the 75th place in 1995 to ninth place in 2003 and retained its position as the freest country of the former Soviet bloc. Between 1995 and 2003, the new eight EU members saw their purchasing power adjusted per capita incomes rise by 44 percent. Incomes in the old 15 EU members rose by 26 percent. The "old" and the "new" EU members are converging.
Though economic freedom in Western Europe remains slightly higher than in CEE, rapid transition from a completely state-controlled economy to the market spurred higher economic growth in CEE, as theory would predict. The more constrained an economy, the faster it grows once constraints are removed.
Estonia provides an excellent example of economic liberalization followed by fast economic growth and rising incomes. Estonia began to liberalize at the end of 1992. The government eliminated import tariffs and instituted a flat income tax. Corporate taxes on reinvested profits fell to zero. To arrest inflation, the government established a currency board. State enterprises were privatized. As was the case with all former communist countries, initially the Estonian economy went into a recession as many inefficient firms folded. By 1995, however, the economy was growing again. Between 1995 and 2003, Estonian GDP per capita grew at a rate of 6.6 percent. During that period, Estonian purchasing power adjusted per capita income rose by 78 percent.
What is true of post-communist countries also applies to Western Europe. In 1987, the Irish government began the process of economic liberalization. Taxes and spending were reduced. The standard tax rate on income fell from 35 percent in 1989 to 22 percent in 2001. The top marginal tax rate fell from 65 percent in 1985 to 44 percent in 2001. The corporate tax rate fell from 40 percent in 1996 to 12.5 percent in 2003. In 1999, Ireland's tax revenue was 31 percent of GDP. A comparable figure in the pre-enlargement EU was 46 percent. Ireland's economic freedom ranking rose from the 22nd place in 1985 to eighth place in 2003. Its economy grew at a compounded average annual rate of 6 percent between 1987 and 2003. During that period, Irish purchasing power adjusted per capita income rose by 88 percent. In 1987, Ireland was, after Portugal, the poorest country in Western Europe. In 2003, Ireland was, after Luxembourg, the richest country in the EU.
In contrast, economic freedom in France, Germany and Italy has declined in recent years. Between 1995 and 2003, French, German and Italian growth rates were 1.7 percent, 1.2 percent and 1.6 percent respectively. Their respective per capita incomes increased only by 14 percent, 9 percent and 11 percent over that period. The French and Italians will hold their elections next year, while the people of Germany will choose their new leaders this week. As they head to the polls, Germans should recognize that growth is preconditioned by economic freedom. After all, it was Germany that under Ludwig Erhardt's leadership blazed the way to post-war economic liberalization -- an event that brought about a period of unprecedented prosperity throughout Western Europe.
This article appeared on Techcentralstation.com on Sept. 15, 2005
2. Sweet and Lowdown WSJ September 26, 2005; Page A18
During the Cafta trade debate we wrote that the U.S. sugar program, pound for pound, might be the most destructive policy in Washington. Turns out it may also be the dumbest.
By the time of passage, Cafta allowed a modest increase in imports from the Caribbean, which set off wails of impending catastrophe from the sugar-growing interests here. Guess what? The U.S. this year is facing a shortage of sugar. And next year, too -- and that's before we know the damage that Katrina has done to the 2005 crop.
It turns out Cafta's new import levels are too small. So we're going to have to import more sugar this year and more than Cafta allows next year to avoid an unpleasant price spike for consumers and damage to the $225 billion U.S. sugar-using industries. There's only one place where we'd have thought you could produce anything so ludicrous as a sugar shortage, and that's the old Soviet Union. Well, that's pretty close to what we've got.
The foundation of the U.S. sugar program is a government crop loan and a guarantee that farmers can offload their sugar on Uncle Sam if market prices fall below loan levels, which work out to 18 cents a pound for cane and 23 cents for beet sugar. Needless to say, this means the commissars in charge of the program at the U.S. Department of Agriculture strive to keep prices high so the government doesn't get buried beneath a landslide of forfeited sugar. Thus, the department puts quotas on both domestic production and imports.
The obvious problem with targeting supply to guarantee price is that you really can't know at the beginning of the year exactly how much sugar Americans will consume. So the department derives an arcane guesstimate, and based on that sends "marketing allotments" to domestic producers who are then supposed to deliver the "correct" amount of supply. But this year the producers' deliveries fell below the benchmark.
Because of unforeseen demand, allowable quantities were already tight in July -- most likely a combination of a robust economy and the twilight of the Atkins diet. Hurricanes and frost last fall also interfered with supply. Then in August a major supplier announced that it will have less sugar than anticipated in the coming weeks. Ergo, a shortage scare, hoarding and fear of sharp price increases.
Hmmm, how do we solve this puzzle? To "mitigate the shortage," the Ag Department says it is increasing the amount that domestic producers can sell. But, wait, there's more: U.S. law also dictates that 54% of the new marketing allotments must go to the beet producers and 46% to cane producers, sooooo the shortage of supply from cane producers means that, to fill the balance, the USDA has to turn to government stocks and imports.
We'll spare you the detail of proposed short-ton import quotas, but suffice to say there's also a circumstance in the law that would let the sugar producers forfeit all production to the government, and possibly bankrupt the program. But of course steps -- many steps -- have been taken to avoid that meltdown.
An analyst for the sweetener industry puts it this way: "USDA estimates show that supply will be several hundred thousand tons below what will be needed to maintain normal price levels." Without more imports, he adds, prices are heading through the roof. All of this forecasting grows even more complex as tariffs on Mexican sugar go down each year, heading toward zero in 2008. Mexico has already loosened its restrictions on importing U.S. high fructose corn syrup, so our southern Nafta partner is again a net exporter of sugar.
The U.S. 2002 farm bill, the protector of this big rock-candy
mountain of central planning, comes up for a rewrite in 2007. The sugar
producers' lobby will demand yet more bells and kazoos to keep the contraption
going. This year's fiasco suggests why it's time for someone in authority
to announce: "Enough."
3. Taxing times Sep 22nd 2005 From The Economist print
edition
A study of corporate taxes yields some unexpected results
SWEDEN, a bastion of egalitarianism where the state claims around 60% of GDP, is surprisingly friendly to capitalists. On the other hand, communist China, the darling of foreign investors the world over, demands a great deal from its suitors. Both findings emerge from a new report on capital taxation by Duanjie Chen, Jack Mintz and Finn Poschmann of the C.D. Howe Institute, a Canadian think-tank.
The simplest way of comparing countries' capital taxation would be to look at statutory tax rates on corporate income. But that, says the authors, misses a lot of factors that affect the taxes which firms actually pay. Governments use different rules for the treatment of depreciation, inventories and other things. All of these cause actual tax rates to diverge from the statutory figures.
The authors have calculated a ranking according to the
“effective” tax rate—the proportion of the pre-tax return on capital swallowed
by the state (see chart). China comes out on top, largely because of a
17% value-added tax on purchases of machinery and equipment. However, lucky
firms can sometimes negotiate a full refund, which cuts the effective tax
rate from 46% to only 18%.
China, Sweden
Financial regulation
The C.D. Howe Institute publishes a study about investment taxes by Duanjie Chen, Jack Mintz and Finn Poschmann.
Economics A-Z
Canada, America and Germany are also among the top corporate taxers. Although Canada has a lowish statutory tax on corporate income, high capital and sales levies on inputs by its provincial governments lift its effective rate.
Sweden allows fast write-offs for capital investment, which pull its effective tax rate down. Singapore and Hong Kong also offer liberal deductions and concessions that yield more favourable tax regimes.
How important are tax policies in encouraging foreign direct investment? All other things equal, a higher tax rate reduces the return on investment. However, all other things are seldom equal: differences in market size, labour costs, the quality of infrastructure and political stability, among other things, are also important for attracting investment. Foreign investors falling over each other to set up factories in China are plainly not put off by tax.
Still, the authors believe that taxes do matter, and increasingly
so for industrialised countries that face stiff competition for investment,
especially from the Chinese. In Germany, corporate-income taxes may be
on the way down whatever the colours of the next government. Similar pressures
may lead America and Canada to cutting their rates as well.
4. FINANCIAL DEVELOPMENT BENEFITS POOR
------------------------------------------------------------------------
Most economic literature finds that financial development
produces
faster economic growth, but it has been unclear whether
it also shrinks
poverty. A new paper from the National Bureau of Economic
Research
finds that financial development helps the poor as well
as the rich.
The authors used data on the economies of 52 nations over
the
period 1960-1999 to test the relationship between financial
development
and the distribution of income. Additionally, they used
data on 58
developing countries for the period 1980-2000 to assess
the
relationship between financial development and poverty
alleviation.
The authors find that in countries with increased financial
development, income inequality falls more rapidly and
poverty rates
decrease at a faster rate than would otherwise be the
case. For
example:
o In Chile -- with a high
private credit ratio of 54 percent
-- the percentage
of the population living on less
than $1 a
day shrank at an annual rate of 14 percent
between 1987
and 2000.
o In contrast, Peru --
with a low private credit ratio of 13
percent --
saw the number of people living on $1 a
day increase
at annual rate of 19 percent.
o The average income of
Brazil would have grown at more than
1.5 percent
per year instead of not at all from
1960-1999
if Brazil had the same level of financial
intermediary
development as South Korea.
Thus, the authors note, the impact of financial development
on
poverty is quite large. It lowers income inequality and
boosts growth
without the potential disincentives to entrepreneurs
and others
resulting from policies that directly redistribute income
and other
resources.
Source: David R. Francis, "Financial Development Helps
the Poor in
Poor Countries," National Bureau of Economic Research,
NBER Digest,
July 2005. Based on Thorsten Beck, Asli Demirguc-Kunt,
and Ross
Levine, "Finance, Inequality, and Poverty: Cross Country
Evidence,"
National Bureau of Economic Research, Working Paper,
No. 10979,
December 2004.
For text:
http://www.nber.org/digest/jul05/w10979.html
For abstract:
http://papers.nber.org/papers/w10979
5. Poland's Voters Back Off On Economic Reform
By G. THOMAS SIMS
Staff Reporter of THE WALL STREET JOURNAL
September 26, 2005; Page A17
WARSAW -- Over the weekend, U.S. Treasury Secretary John Snow again called on Europe to enact unpopular overhauls to boost its economic expansion and employment. But elections yesterday in Poland, and last week in Germany, show just how tricky that is to pull off.
For weeks, a Polish pro-business political party was poised to win yesterday's election, campaigning on a platform of tearing down barriers to job creation, cutting red tape and installing a flat 15% tax on personal and corporate income. Exit polls late in the evening indicated that voters in the end got cold feet, resulting in the Civic Platform party losing its edge to the more welfare-minded Law and Justice party.
"Not enough Poles trusted us when we said that we could really change this country," Jan Rokita, the Civic Platform party leader, told reporters. "That means we still have a little work to do."
A center-right coalition will take over Poland's government. Civic Platform's electoral dive is reminiscent of what happened a week earlier in bordering Germany, which, as with Poland, is a laggard in growth, and plagued by high unemployment, large budget deficits and lost competitiveness. Conservative Angela Merkel was slated to upset incumbent Chancellor Gerhard Schröder.
Support waned amid concerns about her economic medicine and worries that her finance minister would promote a flat income tax that would hurt the poor. Ms. Merkel's party still won over Mr. Schröder's by a small margin, but not enough for a clear victory.
Both parties are in continuing talks about forming a coalition government, but the discussion is complicated with both leaders insisting on being chancellor.
With 90% of votes counted Monday, the conservative Law and Justice Party -- which campaigned against the flat tax and is eager to keep some costly social programs -- had 26.8% of Sunday's vote, while the free-market Civic Platform had 24.2% of Sunday's vote, the Associated Press reported.
Law and Justice and Civic Platform have said they will form a government together, and government television projections showed them together with 305 seats in the 460-seat lower house.
Voters ousted the current ruling Democratic Left Alliance, mainly because of Poland's high unemployment -- the highest in Europe at nearly 18% -- and a wave of corruption scandals. It garnered 11% of the vote, exit polls showed.
"The pace and scale of reform will now be limited," said Ryszard Petru, chief economist at Bank BPH in Warsaw.
Economic overhauls will either be slowed down or outright dropped, he said, adding that the flat-tax idea was dead and that he was fearful of watered-down plans to privatize large state-owned companies -- a hangover from Communism.
The shift in Poland in recent days was due to voters such as Rafal Kochowski, a 30-year-old statistician. On his way to the polls yesterday, Mr. Kochowski said he had long supported Civic Platform but was becoming fearful of its radical reforms and now backed Law and Justice. "We need more of a balance," he said.
-- David McQuaid contributed to this article.
Write to G. Thomas Sims at tom.sims@wsj.com
World Bank, IMF Agree to $57.5 Billion in Debt Relief
http://www.cato.org/research/glob-st.html
“The World Bank and International Monetary Fund concluded
their annual meetings [Sunday] with an agreement to write off as much as
$57.5 billion in debt to ease the burden on impoverished countries. They
then immediately turned attention to the next priority for those nations
-- global trade,” Bloomberg News reports. In “Poor Country Debt Relief,
Rich Country Shenanigans,” Ian Vasquez, Cato’s director of the Project
on Global Economic Liberty, writes: “It is difficult to hold citizens of
highly indebted poor countries responsible for the gross abuses and policy
mistakes of their rulers who received generous support from western aid
agencies. Many of those countries, after all, contracted those debts under
authoritarian governments ... Debt relief will only be a long-term fix
as long as further flows of much-misnamed foreign aid are halted.”
6. TAXING TIMES Economist Sep 22nd 2005
A study of corporate taxes yields some unexpected results
SWEDEN, a bastion of egalitarianism where the state claims
around 60%
of GDP, is surprisingly friendly to capitalists. On the
other hand,
communist China, the darling of foreign investors the
world over,
demands a great deal from its suitors. Both findings
emerge from a new
report on capital taxation by Duanjie Chen, Jack Mintz
and Finn
Poschmann of the C.D. Howe Institute, a Canadian think-tank.
The simplest way of comparing countries' capital taxation
would be to
look at statutory tax rates on corporate income. But
that, says the
authors, misses a lot of factors that affect the taxes
which firms
actually pay. Governments use different rules for the
treatment of
depreciation, inventories and other things. All of these
cause actual
tax rates to diverge from the statutory figures.
The authors have calculated a ranking according to the
"effective" tax
rate--the proportion of the pre-tax return on capital
swallowed by the
state (see chart). China comes out on top, largely because
of a 17%
value-added tax on purchases of machinery and equipment.
However, lucky
firms can sometimes negotiate a full refund, which cuts
the effective
tax rate from 46% to only 18%.
Canada, America and Germany are also among the top corporate
taxers.
Although Canada has a lowish statutory tax on corporate
income, high
capital and sales levies on inputs by its provincial
governments lift
its effective rate.
Sweden allows fast write-offs for capital investment,
which pull its
effective tax rate down. Singapore and Hong Kong also
offer liberal
deductions and concessions that yield more favourable
tax regimes.
How important are tax policies in encouraging foreign
direct
investment? All other things equal, a higher tax rate
reduces the
return on investment. However, all other things are seldom
equal:
differences in market size, labour costs, the quality
of infrastructure
and political stability, among other things, are also
important for
attracting investment. Foreign investors falling over
each other to set
up factories in China are plainly not put off by tax.
Still, the authors believe that taxes do matter, and increasingly
so
for industrialised countries that face stiff competition
for
investment, especially from the Chinese. In Germany,
corporate-income
taxes may be on the way down whatever the colours of
the next
government. Similar pressures may lead America and Canada
to cutting
their rates as well.
See this article with graphics and related items at http://www.economist.com/finance/displayStory.cfm?story_id=4430961
Go to http://www.economist.com for more global news, views
and analysis from the Economist Group.
7. French destroy jobs by trying to protect jobs. Politicians in France are trying to stop a U.S. company from reducing its workforce. But this is a self-destructive policy. When politicians make it harder to fire workers, that sends a signal to employers that they should avoid hiring workers in the first place to avoid future problems if business conditions require layoffs. This is why the so-called compassionate policies of France and other welfare states actually cause unemployment and misery. It is therefore to be expected that France's unemployment rate is twice as high as the jobless rate in America:
French president Jacques
Chirac has suggested a US company should be referred to Brussels for a
probe into its plan to cut 5,900 jobs in Europe by 2008. Mr Chirac has
instructed his ministers to prepare an appropriate response to Hewlett-Packard's
plan and make sure the company shows "full respect" for labour laws in
France, where over 1,000 jobs are to be cut. ...The plan has come across
strong opposition from local politicians, pressing Paris to prevent a further
increase in unemployment, which currently stands at 9.9 percent.
http://euobserver.com/?aid=19903&rk=1
8. Northern Europe, U.S., East Asia Remain Tops in Competitiveness Largest European Economies Lose Ground, According to Closely Watched Survey
By G. THOMAS SIMS
Staff Reporter of THE WALL STREET JOURNAL
September 28, 2005 10:39 a.m.
FRANKFURT – Europe's largest economies – Germany, the U.K., France, Italy, and Spain – are all losing ground in an annual survey on global competitiveness, dragged down by concerns of sluggish economic growth and high budget deficits.
The rankings, published Wednesday by the Geneva-based
World Economic Forum, pit Italy and Poland as the least competitive members
of the European Union. Italy has slipped steadily to 47th of the 117 nations
measured this year from 26th in 2001, and it now lags countries such as
Tunisia and is just ahead of Botswana. Italy is burdened by perceptions
that its government is interfering in the private sector, as recently alleged
in the Bank of Italy's intervention in banking mergers.
AHEAD OF THE PACK
• Read the executive summary of the annual Global Competitiveness
Report.
• See the full rankings for 2005 and comparisons with 2004.
• View the competitiveness rankings by technology, macroeconomic environment and public institutions.
(Adobe Acrobat Required.)
Finland for the third consecutive year and the U.S. for a second straight year, respectively, once again top the international organization's list of most competitive economies in the annual survey, though the U.S.'s image is tarnished by the health of an economy posting large budget deficits and near-record trade deficits.
Along with Finland, the Nordic European countries of Sweden, Denmark, Iceland and Norway hold five of the top 10 spots, as they did last year.
Other stars include Taiwan and Singapore, ranking fifth and sixth, respectively, ahead of 12-seated Japan, which is still suffering from years of deflation.
China and India, often cited as the greatest competitive threats to western economies as they flood markets with cheap products and labor, ranked 49th and 50th. Despite their high growth rates in recent years, the survey found that both countries need to cut red tape, educate their people and improve infrastructure in order to continue to compete in the years ahead.
The World Economic Forum defines competitiveness not just on the basis of productivity and exchange rates. It also looks at policies and institutions that can affect productivity and prosperity.
Western Europe's slip in competitiveness from the beginning of the decade – though from fairly high levels -- reflects the region's economic development of late. Gross domestic product in the 12-nation euro zone that forms the bulk of the region's economy is projected to have expanded on average at just 1.3% during the first five years of this decade, compared with more than 2% during the previous decade. The euro zone is forecast to grow just 1.2% this year, behind 3.5% growth in the U.S. and 4.3% growth globally, according to recent forecasts by the International Monetary Fund. The region's budget deficit has risen to 2.7% of GDP in 2004 from 1.9% of GDP in 2001.
"What you have is several years of low growth, which has damped the mood of the business community," said Augusto Lopez-Claros, chief economist of the World Economic Forum. "There is an impact on investment, on hiring. It is a slight vicious circle. … This means the business community is in a mood of retrenchment."
The United Kingdom slipped to 13th place from 11th last year; Germany to 15 from 13; and France to 30 from 27.
The dimmer outlook for nations such as Germany and France, which the IMF expects to grow this year 0.8% and 1.5%, respectively, is even beginning to harm the outlook for relatively robust Spain, which has been one of the euro zone's fastest growing economies in recent years. Spain's overall ranking dropped to 29 from 23, and the indicator ranking Spain's economic outlook has dropped to 65 this year from 29 in 2001. "You look at the growth figures and Spain is doing well, but with respect to a bad neighborhood," Mr. Lopez-Claros said.
Italy, however, is the real outlier in Western Europe with its economy expected to remain stagnant this year. The survey's measure of the short-term outlook ranks Italy 110 of the 117 countries surveyed.
But Italy's problems go beyond the short-term outlook. Italy's government debt is more than 106% of GDP, above the 63% average of the 25-nation EU and just a touch below Greece, according to the EU's statistics office. This is putting pressure on its credit ratings, making it more expensive to borrow for investment and new jobs, and raising questions about how it will finance an increasingly aging population in the decades ahead.
And as the Forum points out, Italy economy relies heavily on low-growth mature industries, such as textiles, clothing, and shoes, which need cheap labor to prosper and are as a result coming under increasing pressure from China. After ceding its lira for the euro in 1999, the nation can no longer devalue its currency to regain competitiveness.
Also weighing on Italy is the perception that the government favors well connected firms and individuals in deciding upon contracts and policies. Here, Italy ranked 72nd of 117. Antonio Fazio, governor of the Bank of Italy, has made headlines recently over his role in allegedly attempting to block a Dutch bank from taking control of an Italian lender. Though he insists he acted correctly, prosecutors have collected large amounts of evidence that indicates Mr. Fazio went out of his way to prevent the foreign bank from winning the takeover battle.
"The perception that the Bank of Italy was meddling and
not playing the role of equidistant regulator and rather the role of blocker…has
played a role in shifting the position of the business community," Mr.
Lopez-Claros said.
9. India 50th, Finland most competitive nation
September 28, 2005 18:30 IST
Last Updated: September 28, 2005 19:30 IST
http://inhome.rediff.com/money/2005/sep/28wef.htm
According to the The Global Competitiveness Report 2005-2006,
released on Wednesday by the World Economic Forum, Finland remains the
most competitive economy in the world and tops the rankings for the third
consecutive year. The United States is in second position, followed by
Sweden, Denmark, Taiwan and Singapore, respectively.
The rankings are drawn from a combination of hard data, publicly available for each of the economies studied, and the results of the executive opinion survey, a comprehensive evaluation conducted by the WEF, together with its network of partner institutes.
"The Nordic countries share a number of characteristics that make them extremely competitive, such as very healthy macroeconomic environments and public institutions that are highly transparent and efficient," said Augusto Lopez-Claros, chief economist and director of the World Economic Forum's Global Competitiveness Programme.
Highlights
*
Finland is number one
in the Growth Competitiveness Index rankings and holds this position for
the fourth time in the last five years. The country is very well managed
at the macroeconomic level, but it also scores very high in those measures
that assess the quality of its public institutions.
* The United States, as last year,
is ranked second: the country demonstrates overall technological supremacy,
with a very powerful culture of innovation. However, technological prowess
is partly offset by a weaker performance in other areas measured by the
index.
The US has a relatively
low rank of 20 for the contracts and law indicator, with particular concerns
on the part of the business community about the government's ability to
maintain arm's-length relationships with the private sector, and in the
formulation of policies more generally.
But the country's greatest
weakness concerns the health of its macroeconomic environment, where it
ranks a low 47th overall. This echoes the increasingly vocal international
concerns about the macroeconomic imbalances in the US economy, especially
as regards the public finances.
*
The Nordic countries continue
to hold prominent positions in the rankings among the top 10 most competitive
economies this year, with Finland (1), Sweden (3), Denmark (4), Iceland
(7) and Norway (9) all in privileged places.
*
China and India, 49th
and 50th, respectively, now rank much more closely to one another than
in previous years. While China dropped 3 ranks, India moved up 5 places.
China had a slightly deteriorating
score with regard to the country's macroeconomic environment, while India's
improved position is due to a somewhat higher rank in the area of technology.
Both China and India have
had an excellent growth performance in recent years. However, both countries
continue to suffer from institutional weaknesses, which, unless addressed,
are likely to slow down their ascension to the top tier of the most competitive
economies in the world.
*
Leading within Asia are
Taiwan and Singapore, ranked 5th and 6th respectively, some places ahead
of the next Asian country covered by the GCI, Japan, ranked 12th. The distance
between these top-ranked economies and Japan has increased since last year,
reflecting Japan's relatively poor macroeconomic performance, particularly
as regards management of the public finances.
*
Compared with the other
tigers, Hong Kong is ranked much lower at 28th place, having dropped 7
places since last year. This is attributable to a tangible deterioration
in the quality of the institutional environment. Hong Kong saw a weakening
in perceived judicial independence, the protection of property rights,
and in government favouritism in policy-making.
*
In Europe the most notable
developments are the improvement in the relative position of Ireland, which
has moved up 4 places to 26 in the overall rankings and the improvement
of Poland, which has moved up 9 places to 51st place in the rankings.
*
Australia, in 10th place,
has moved up 4 places since last year, with improvements across many of
the institutional and technology indicators measured by the index.
*
Mexico has fallen 7 places
since last year to 55th, ceding its second spot in the regional ranking
to Uruguay, while Brazil fell 8 places to 65th position.
"Policy-makers are presently struggling with ways of intelligently managing global risks, while preparing their economies to perform well in an economic landscape characterized by growing complexity," noted Klaus Schwab, founder and executive chairman of the World Economic Forum.
*
The rankings
The World Economic Forum has been producing The Global Competitiveness Report for 26 years.
This year nearly 11,000 business leaders were polled in a record 117 economies worldwide. The survey questionnaire is designed to capture a broad range of factors affecting an economy's business environment that are key determinants of sustained economic growth.
.
Particular attention is placed on elements of the macroeconomic
environment, the quality of public institutions, which underpin the development
process, and the level of technological readiness and innovation
DON'T MISS! India and the World Economic Forum: Complete
Covera
10. The Follies of Regulation By HENRY G. MANNE WSJSeptember 27, 2005; Page A18
Christopher Cox, the newly minted chairman of the Securities and Exchange Commission, has offered the first hints of his direction on substantive policy issues. Addressing the question of exorbitant executive compensation -- which has become the focal point of the American public's concern about corporate governance -- Mr. Cox last week raised the venerable battle standard of the SEC: full disclosure. That is too bad; the regulatory philosophy of full disclosure has been tried for over 70 years and been found sadly wanting as a way to protect shareholders from corporate and financial abuses.
Of course, Mr. Cox has a large and probably ideologically hostile bureaucracy to contend with, was accused of being too "pro-business" by Democrats before he took office, and faces a public that has rarely been as angry about corporate derelictions as it is right now. But such is the stuff that leadership is made of, and one can hope that Chairman Cox's initial sally into the regulatory wars is merely a feint to test the enemy's position.
The problem begins with thinking (as reflected in his statement) that shareholders will use the information they receive as a result of full disclosure laws to make their hired agents toe the (bottom) line. But while information that would not otherwise be available is valuable to those who trade in it or make their livings dealing with it, that is not the position of most shareholders. That includes most institutional investors, to whom some savants look for shareholder protection.
Shareholders who do not also control a corporation and designate the management cannot supervise and monitor managers and their salaries. Despite the apparatus of the derivative suit, courts are rightly reluctant to overturn compensation decisions by independent boards. Even those who do have control but not all the shares, may, for familiar free-rider reasons, spend less on monitoring than they would if they owned all the shares. And, not just incidentally, institutional investors are barred from owning control of portfolio companies by the Investment Company Act of 1940.
The result in many large, publicly held companies is precisely the situation that Berle and Means, in their 1932 classic, "The Modern Corporation and Private Property," envisioned and condemned as the "separation of ownership and control." Today the more commonly used term is "agency costs." Call it what you will, the implications are clear. With no effective means for shareholders to monitor the self-interested or even merely stupid behavior of a corporation's managers, a lot of peculiar things begin to happen.
For example, even independent boards will tend to pay managers higher salaries or other compensation than would be true in non-publicly held companies, since the competitive and oversight pressures for restraint are relaxed. Managers may hoard cash to guarantee their own emoluments or to expand an "empire," even though a payout would be more in the shareholders' interest. They may use corporate funds to overpay other employees and avoid the headaches of labor strife. Or they may use corporate funds for nonprofitable ventures or "social" purposes, justified as part of the corporation's "social responsibility," but not in the shareholders' interest. We can, and do, see all of these things happening today and in greater amounts than ever.
Most shareholders do not care whether their investment is tanking because the executives are overpaid or because the same people live like monks and give all the company's wealth to good causes. Disclosure of the facts, of the sort the SEC has so long and disingenuously promoted -- and which Chairman Cox sounds like he is still pushing -- will not make a significant difference in what actually occurs. This is especially so on a matter like executive compensation, where real competitive market forces do, in fact, substantiate obscene-sounding compensation figures and the business judgment rule will generally prevent courts from second-guessing the market.
By and large, the media, the government, and many academics have been looking for the explanation for "obscene" executive compensation in the wrong places. Greed, immorality, lack of full disclosure and cronyism have precious little to do with corporate economics. For at least 45 years, legal and finance scholars have had available the explanation of what is going on and, at least in theory, the proper fix for apparent problems. Alas, that fix is now so politically out of the mainstream that other, far less desirable solutions are regularly proposed.
A brief review of the economics may be useful for regulators and businesspeople alike. We start the scenario with managers of a publicly traded company who are providing less than the maximum feasible rate of return on the corporation's assets. Consequently, share prices, sensitively following the facts, decline relative to those of similar companies that are well managed. When the decline is sufficient that the difference between the purchase price of control shares and a higher share price expected from new management would cover the costs of a displacement action, the incumbents will be ousted and replaced by more competent managers.
This process occurs easily when enough shares are held by one or a few collaborating shareholders (and this includes hedge funds, which, for this reason alone, should not be further regulated) to allow them to vote the board and the overpaid executives out of office and preferably out of town. But when shares are widely owned and no one has a controlling block, incumbents cannot be so easily "fired." Some other mechanism is required. Since the coordination costs of organizing diffused shareholders into a block are usually insurmountable, direct shareholder democracy in the form of a proxy fight has little chance of solving the problem. Only in the make-believe world of SEC regulation could anything like the proxy fight be seen as a significant solution to the agency-cost problem of exorbitant salaries.
But free markets do not tolerate economic inanities for long, even in the case of large, publicly held companies. Contrary to the popular liberal shibboleth, markets do not often fail on their own. It usually requires help from the government. In the late '50s and '60s, we witnessed the early development of the hostile tender offer -- the most powerful market tool ever devised for dealing with non-profit-maximizing managers in publicly held companies. It did not appear before this time for the simple reason that there were very few companies that had the wide diffusion of stock ownership prerequisite to hostile tender offers. Tax laws and a growing understanding of the virtues of share diversification changed all that, and hostile takeovers were not slow then in making their appearance.
But their appearance was, for incumbent managers, a terrifying thing: surprise offers for almost all outstanding shares at a huge premium over current market price -- and with little time for shareholders or the corporation to shop the offer, or for the incumbents to mount a counterattack or defense. The opportunity for affording such a premium, of course, was created by the low stock market value generated by the policies of the incumbent managers. There were no inefficiencies in the stock market that generated incorrectly low prices for these companies' shares.
Even today, mention of the surprise hostile tender offer is enough to throw most executives into paroxysms of hysteria. And the politics of the situation were such that Congress, at enormous cost to shareholders, passed the Williams Act in 1968 to put a stop to surprise tender offers. Public disclosure of takeover intentions and plans for management, plus a lot more, were required to be made public when 5% of the target shares were acquired. This, of course, elevated the price of the other 95% of shares immediately and very significantly reduced the profitability of a takeover. State legislatures also got into the act with various anti-takeover rules, and state courts made it a lot easier for companies to adopt defenses or otherwise prevent a hostile takeover.
The number of hostile takeovers plummeted, and negotiated mergers and friendly takeovers increased to fill the gap. In these methods of changing control, however, incumbent managers became integral participants in the process of displacing themselves. Profits from control transactions, which previously were shared only between the shareholders and the raiders, now have to be shared as well by the incumbent managers, perhaps in the form of continuing employment without real responsibility.
Further, as the cost of waging a successful displacement of incumbents escalated, managerial compensation was bound to go up. Any addition to the costs of displacement made just that amount of money available, which incumbents could claim for themselves. They did not have to perform better to get the higher figure; it was just there for the taking. Thus, the Williams Act and state takeover laws laid the groundwork for the controversy over executive compensation that we see today.
This is not just airy theory. Markets do work, and to
the extent that these costs must enter the calculations of raiders and
lower the number of hostile takeovers, the ensuing rents have to go somewhere.
The most likely recipient of truly free and unconstrained money is the
one who designates the recipient. And as some companies take advantage
of this situation, competition forces everyone else to meet the new and
higher market price for executives. That is the most obvious explanation
of why we are seeing more and more obscene salaries.
Of course, the executives might choose to use some of
the money for social purposes or good labor relations. This might make
them feel better or keep pesky activists at bay. An increase in such behavior
was predictable as management-displacement costs increased. Since the money
is available, demands for such expenditures by anyone with an even slightly
plausible-sounding claim on corporate funds became louder and shriller.
The current frenzy for corporate social responsibility and stakeholder
benefits has the same economic genesis as the obscene CEO salaries that
Chairman Cox has vowed to curtail.
Until we return to something like the pre-Williams-Act
market for corporate control, we shall continue to see egregious salaries,
crazy option grants, and golden handshakes and parachutes. Disclosure as
a solution to that problem is a bit like a New Orleans levee faced with
Katrina. A return to the takeover law of the '60s would substantially solve
the compensation problem without ungainly regulation, and it would also
deliver us from vacuous and harmful notions of corporate social responsibility.
All that is required is a little guts from Mr. Cox, confidence in free
markets from the managers of large corporations, and some humility about
economic regulation from the U.S. Congress.
Mr. Manne, a resident of Naples, Fla., is Dean Emeritus of the George Mason University School of Law.
11. EU Begins Boiling Down Business Regulations
By WILLIAM ECHIKSON and ANGELIKA STEINFORT
DOW JONES NEWSWIRES
September 27, 2005; Page A17
BRUSSELS -- The European Union, facing declining support and fighting an image of a faceless bureaucratic meddler, today will launch what it bills as a war against red tape.
But 70 proposed business regulations to be scrapped by the European Commission, the EU's executive arm, already have been scaled back from an originally proposed list of 180 rules because of conflicting interests.
Among proposals to be dumped are a long-debated plan for a pan-European tax on industrial diesel fuel and a regulation banning Sunday shifts for truck drivers. Plans to regulate labor conditions for airline cabin crews and temporary workers will also be dropped, as will a proposed directive that would have set minimum standards on information given workers on the dangers of over-exposure to the sun -- standards that subjected the EU to ridicule after exaggerated media coverage suggested they could lead to orders that bare-chested construction workers and waitresses with low-cut tops cover up.
"We believe that existing legislation must be simplified in a determined and ambitious fashion," EU Commission President José Manuel Barroso said last week, acknowledging the over-exposure proposal had become a "joke."
Much legislation was better left to local rather than European authorities, he added. "We should be honest; we should analyze where we can avoid legislation."
The timing is crucial. French and Dutch rejections of a proposed European constitution this spring sent a message that many Europeans want less continent-wide rules.
Yet even some of the proposals being withdrawn will reappear elsewhere. While the commission's draft document on "better regulation" says the proposal to regulate labor conditions for temporary workers will be abandoned, it also says a new plan will emerge after European states agree how to open the bloc's services industry. Other axed proposals weren't going anywhere anyway. The plan for a pan-European tax on diesel fuel, drafted in 2002, has been blocked at the European Parliament by German parliamentarians who warned it would require lowering Germany's levy on diesel, straining the country's already-strapped finances.
In addition, the commission isn't touching much of what business hates most about the EU -- strict environmental legislation. A proposal calling for the testing of thousands of chemicals has been spared, along with plans for clean-air regulations announced last week.
The one-step-forward, one-step-back approach is dictated by conflicting pressures. The deadlocked German elections earlier this month underlined just how divided Europeans are over how much free market they want. In a policy paper released yesterday, the American Chamber of Commerce to the European Union said "the simplification initiative must go beyond the simple codification and consolidation of legislative texts and tackle aspects of conflicting, cumulative, inconsistent, superfluous and obsolete legislation."
Commission spokesman Gregor Kreuzhuber says today's action is intended to send "a message that we are serious about cutting red tape" while acknowledging the initiative "won't resolve the continent's economic problems."
The commission's next step is to start simplifying existing EU law, cutting it to 50,000 pages of statues from the current 80,000 pages. The trimming will focus on three industries that Mr. Kreuzhuber says are most often considered the most overregulated -- cars, waste management and construction. The commission can withdraw the proposals by itself. But for simplifying or withdrawing existing legislation, it needs parliament's support.
Mr. Barroso, the commission president, said, "I am sure that some will say we are doing too much, some will say you are not doing enough. That's the usual thing."
Write to William Echikson at william.echikson@dowjones.com
12. Voting Against Reality The German and Japanese elections illustrate the uneasy relationship between capitalism and democracy.
By ROBERT J. SAMUELSON
The Washington Post
September 28, 2005
T
WASHINGTON -- The recent German and Japanese elections
deserve more attention because they illustrate the uneasy relationship
between capitalism and democracy. Capitalism thrives on change -- inspiring
new technologies, products and profit opportunities. Democracy resists
change -- creating powerful constituencies who like the status quo.
Capitalism (an economic system that relies heavily on markets and private ownership) and democracy need each other. The first generates rising living standards; the second cushions capitalism's injustices and, thereby, anchors public support. But this mutual dependence is tricky because if democratic prerogatives are overused, they may strangle capitalism.
Just how to regulate this relationship was the core election issue in both Japan and Germany. As is well known, their economies have faltered badly. Since 1997, their annual economic growth has averaged about 1%, and joblessness is rampant. The campaigns centered on these setbacks.
Voters seemed to reach opposite conclusions. The Japanese gave a resounding triumph to Prime Minister Junichiro Koizumi, who made the election a test of his economic-reform agenda. By contrast, German voters seemed more timid. The pre-election wisdom was that Chancellor Gerhard Schröder of the Social Democratic Party (SPD) would lose decisively to Angela Merkel of the Christian Democratic Union (CDU), who preached aggressive economic reform. But the two parties ran almost even and it's unclear who will head the next government.
Despite the divergent outcomes, the prospects for economic renewal in both countries remain uncertain. Proclaiming economic "reform" and doing it aren't the same. In Japan, Mr. Koizumi has championed overhauling Japan Post -- the world's largest bank, absorbing as deposits about 30% of Japanese household savings. The trouble is that much of this money is wasted. It's funneled into government bonds that often finance dubious public-works projects -- bridges to nowhere and paved riverbeds, says Richard Katz, editor of The Oriental Economist Report.
Mr. Koizumi wants to privatize Postal Savings -- turn it into a profit-making company. That should favor more productive investments and thereby stimulate the economy. Although this sounds sensible, it's no economic panacea. Mr. Katz warns: first, Mr. Koizumi's conversion would take a decade; second, a privatized Postal Savings could still make big blunders; and third, Japan has lots of other problems -- too little domestic competition, an aging society, scant foreign investment.
Similarly, Germany's sluggishness has many causes. Political scientist Stephen Silvia of American University writes: "The (government's) share of the German economy has become too large, crowding out more productive economic activity." … "non-wage costs -- [have] become too high. Government regulations … dampen competition." Ms. Merkel proposed easing restrictions against firing workers (which, deter companies from hiring new workers) and also wanted to relax nationwide collective bargaining (which makes wages rigid).
All this offers a useful political lesson. A successful democracy gives people a chance to protect their interests and lifestyles. But when these protections try to deny unalterable economic realities, they become self-defeating. Still, it's hard to adjust to shifting realities because changes offend voting blocs that benefit from the status quo.
And so it is that -- despite a gradual aging of the population that will require huge and probably damaging tax increases -- no one has seriously attempted to contain these costs. It is easier to pretend that there will be no ill effects. The Japanese and Germans took the same attitude toward their problems. They hoped there would be no day of reckoning. They were wrong.
13. Jakarta Readies Fuel-Price Rise
By PHELIM KYNE
DOW JONES NEWSWIRES
September 27, 2005; Page A15
JAKARTA -- The looming increases in fuel prices that Indonesia plans to implement Saturday will power protests that could bruise, but not cripple, the government of President Susilo Bambang Yudhoyono, analysts say.
A government compensation plan and timing of the price increases for the eve of the Muslim fasting month of Ramadan will help defuse public anger over the cut in price subsidies that have given Indonesians some of the cheapest fuel in the world for decades.
Mr. Yudhoyono's "government won't be very popular [after the fuel price increases], but I don't think it's in any danger," said Dewi Fortuna Anwar, Indonesian Institute of Sciences deputy chair for social sciences and humanities. He "is no Gloria Arroyo," Ms. Anwar added, referring to recent mass demonstrations in Manila against the Philippine president.
Last Friday, Mr. Yudhoyono said the fuel-subsidy cut will take effect Oct. 1, but didn't elaborate on the size of the pending price rise.
But the government decided recently to cap budget-crippling fuel subsidy costs at 89.2 trillion rupiah, or about $8.72 billion, in 2005, a reduction from an earlier projection of 138.6 trillion rupiah. This indicates fuel prices must rise an average of 50%, said Irene Cheung, ABN Amro's head of Asia sovereign and foreign-exchange strategy, in a research report. At present, subsidized gasoline costs Indonesian motorists 2,400 rupiah, or less than 25 cents, a liter.
Ken Conboy, a Jakarta-based security-risk analyst, said the start of Ramadan in the week following the price increases should reduce the type of potentially explosive street protests that plagued Mr. Yudhoyono's predecessor, Megawati Sukarnoputri, in 2002 when she announced deep cuts in fuel, telephone and electricity subsidies. Those protests forced Ms. Megawati to abort the planned cuts.
The bulk of Indonesia's largely Muslim population abstains from eating and drinking during daylight hours throughout the annual Ramadan period. "Yudhoyono will benefit from the [Ramadan] fatigue factor," Mr. Conboy said. If people aren't drinking all day, "they are less prone to go into the hot sun" to protest.
Fuel-price subsidy cuts are the latest in a series of volatile political challenges Mr. Yudhoyono has grappled with since taking office in October 2004. He raised fuel prices March 1 by an average 29%, following the Dec. 26 earthquake and tsunami that devastated Aceh province.
The urgency of this latest planned fuel-subsidy cut was highlighted by last month's mini-currency crisis, when the rupiah plummeted to a more-than-four-year low of 11,800 rupiah against the dollar. Analysts and government officials said massive dollar purchases to fund oil imports -- which go directly into highly subsidized fuel at the pump -- contributed to the rupiah's slide.
To be sure, the pending subsidy cut brought thousands of demonstrators onto the streets of Jakarta on Sunday. Two former Indonesian presidents, Ms. Megawati and Abdurrahman Wahid, publicly urged Mr. Yudhoyono to ditch the plan to increase fuel prices.
But government officials and analysts agree that the current fuel subsidies are unsustainable. They bled government coffers of $7.4 billion, or 3% of gross domestic product, in 2004.
Key to averting large-scale protests will be smooth management of an income-support payment program, which aims to cushion the effect of the fuel-subsidy cut on 62 million people, or 15.5 million families, said Salim Said, a professor at the University of Indonesia's Graduate School of Political Science.
The government has allocated 4.8 trillion rupiah for income-support payments from October to December. That figure will rise to 25 trillion rupiah in 2006.
Targeted families in 15 unspecified areas will receive three-month lump-sum compensation payments of 300,000 rupiah starting Saturday, the official Central Statistics agency said. Lower-income families in an additional 24 areas will get such payments starting Oct. 5.
While Mr. Yudhoyono will survive the unpopular subsidy cuts, the move will create other headaches, including an increase in inflation that could outweigh the impact of the government's price-rise compensation plan, some analysts warn.
ABN Amro's Ms. Cheung estimates that the subsidy cuts will accelerate inflation to 11% by the end of 2005. Indonesia's year-to-year inflation rose to 8.33% in August from 7.84% in July, and Bank Indonesia Gov. Burhanuddin Abdullah said earlier this month that inflation could hit 9% for full-year 2005.
Fuel-price increases also will damp consumption, limiting economic growth in 2005 and 2006 to 5% and 4%, respectively, Ms. Cheung said. The official GDP targets are 6% this year and 6.2% in 2006.
Write to Phelim Kyne at phelim.kyne@dowjones.com
14.ARE AMERICANS STINGY?
------------------------------------------------------------------------
Recently, the amount of financial support the United States
provides to
poor nations has been questioned, but most discussions
are distorted by
the fact that arguments take into account only the simplest
measure of
assistance: official government aid, says American Enterprise.
For European and other "rich" nations, government aid
is the
largest measure of financial support, but for the United
States, it is
the least important way we help, says AE:
o American private charities
attacking hunger, disease,
illiteracy
and other humanitarian problems spend three
times as much
across the globe every year as our
government
does.
o We send billions of
dollars to poor countries in the form of
private investments;
these funds create jobs,
power plants
and farms totaling more than two and a half
times our
government aid.
o Additionally, Americans
offer up their money and their lives
every year
to patrol sea lanes and airways, to
improve the
professionalism of Third World armies and to
protect human
life directly with our military.
Assuming that one quarter of all U.S. defense spending
goes to
preserving global peace and stability, then America's
cumulative
contributions to assist poorer nations looks like this,
says AE:
o Out of $246 billion
spent to assist poor people abroad, $114
billion is
spent on global security.
o Private investment in
poor countries equals $51 billion.
o Donations by private
charities equal $62 billion, while only
$20 billion
is supplied by official government
aid.
Source: Karl Zinsmeister and Joseph Light, "Indicators:
Are
Americans Stingy?" American Enterprise, September 2005.
For more on Federal Spending:
http://www.ncpa.org/iss/bud/
------------------------------------------------------------------------
15. THE PROTECTION RACKET ------------------------------------------------------------------------
Trade liberalization can increase exports, strengthen
economies and
bring in new technologies that will allow entrepreneurs
to compete with
the world's most efficient suppliers, says Foreign Policy's
Arvind
Panagariya.
The development paths chosen by South Korea and India
are good
examples of the effects of trade liberalization, he says.
South Korea decided to switch to an export-oriented strategy
and
proceeded to dismantle trade restrictions across the
board; the results
were quick:
o Between 1961 and 1980,
Seoul produced impressive annual
growth rates
of 23.7 percent in exports, 18 percent in
imports and
6.3 percent in per capita income.
o The country's exports
as a proportion of gross domestic
product (GDP)
jumped from 5.3 to 33.1 percent during
the same period.
However, India toyed with liberalization in the 1960s
but never
got serious about encouraging its exporters or eliminating
restrictions
on imports:
o The government kept
an array of domestic industries on life
support, without
regard to their inefficiency or
comparative
advantage and the repressive trade regime
caused the
GDP to fall from 7 percent (1958) to 3 percent
(1976).
o Despite stable politics
and a highly capable bureaucracy,
per capita
GDP grew slowly between 1961 and 1980, at
only 1.1 percent.
Protectionists still contend that certain industries
should be
protected, specifically agriculture. But even though
rich countries
subsidize their agriculture, poor countries will still
suffer from
trade barriers, says Panagariya.
Poor countries face a choice: either wait in vain for
rich
countries to unilaterally drop their trade barriers,
take the time to
negotiate mutual concessions or liberalize their own
markets, says
Panagariya.
Source: Arvind Panagariya, "The Protection Racket," Foreign
Policy,
September/October 2005.
For more on Trade:
http://www.ncpa.org/pd/trade/trade.html
]
16. SCOTLAND TOPS LIST OF WORLD'S MOST VIOLENT COUNTRIES
------------------------------------------------------------------------
The United Nations reports that Scotland is the most violent
country in
the developed world. Furthermore, England and Wales recorded
the
second highest number of violent assaults, while Northern
Ireland had
the fewest.
The study was based on a telephone survey of crime victims,
which
revealed:
o More than 2,000 Scots
were attacked every week, almost 10
times what
police figures show.
o Violent crime has doubled
over the past 20 years, and per
capita levels
now rival cities like Rio de Janeiro,
Johannesburg
and Tbilisi.
o Crimes involving knives
have killed over 160 people in the
past five
years; since January alone, knives have
been involved
in 13 murders, 145 attempted murders and
1,100 serious
assaults.
o In general, 3 percent
of Scots reported being victims of
violent crime,
compared to 2.8 percent in England and
Whales, 1.2
percent in America and .1 percent in Japan.
Detective Chief Superintendent John Carnochan of the
Strathclyde
Police recommends restricting access to knives and alcohol
to reduce
the problem.
Source: Katrina Tweedie, "Scotland Tops List of World's
Most
Violent Countries," TimesOnline, September 19, 2005.
For text:
http://www.timesonline.co.uk/article/0,,2-1786945,00.html
For more on International:
http://www.ncpa.org/pi/internat/intdex1.html
17. In Germany, Good Deeds Go Unrewarded
September 27, 2005; Page A19
By GEORGE MELLOAN
ABOUT GEORGE MELLOAN
George Melloan is the Journal's Deputy Editor, International.
He began writing "Global View" in 1990, when he took over responsibilities
for the overseas pages after 17 years as deputy editor in New York. During
the first five years of his present assignment he was based in Brussels,
traveling extensively from there to write about such events as the fall
of the Berlin Wall, the break-up of the Soviet empire and the collapse
of the Japan's stock market and real estate bubble. He returned to New
York in 1994.
Mr. Melloan invites comments to george.melloan@wsj.com.
Poor Germans -- they don't have a government. If the current situation is prolonged, it might prove to be an interesting libertarian experiment. But no such luck. They'll probably come up with something, perhaps a "grand" coalition of the two major parties.
Whatever happens, there is a lesson in the party gridlock Germany's Sept. 18 election produced: To wit, money won't buy you love. Since reunification 15 years ago, Bonn and Berlin have poured over $1.5 trillion into the former East Germany to try to bring communism-stunted living standards up to western levels.
The result? Eastern voters have swung heavily to the left, tying the Bundestag up in knots. Seven of the lawmakers the east elected are being accused of having collaborated before 1990 with the Stasi, those nasty East German secret policemen who had a bad habit of torturing "enemies of the state" in their Gestapo-style interrogation dungeons.
These throwbacks fly the banner of the Left Party, PDS, a combine formed last July of former Communists and Social Democratic Party (SPD) defectors. LPDS candidates won 8.7% of the latest vote, mostly in the east, giving them 54 seats versus the mere two held by the PDS in the old parliament. If Social Democrat Chancellor Gerhard Schröder were able to include the LPDS in his coalition, he could continue to govern despite winning a smaller plurality than the Christian Democrats (CDU-CSU) led by Angela Merkel. But Mr. Schröder and Oskar Lafontaine, the rebellious LPDS co-leader he had fired from his cabinet in his first term, share a mutual hatred. The other LPDS co-leader is former East German Communist Gregor Gysi.
In essence, voters in the former East German states summoned up the ghosts of communism to spoil things for the rest of Germany. They voted against reforms in Germany's lavish social-welfare system and its mind-boggling tax code. Why? Because despite all the money the west has spent on them, they're still poor.
With German unemployment at around 11%, over 19% of the work force in the east is idle, compared with 8.7% in the west. German policies have made a large proportion of the eastern population wards of the state and fearful that reformists will dispossess them. Herren Lafontaine and Gysi exploited these fears shamelessly, preaching the same old egalitarian nonsense that the Communists used for decades to keep captive peoples in the Soviet empire in thrall.
Instead of letting the East Germans climb naturally out of poverty by exploiting their lower labor costs, CDU Chancellor Helmut Kohl and the SPD's Mr. Schröder plied them with massive subsidies. This was prompted partly by the powerful German labor unions which have for years used their muscle to win generous government social benefits and industry-wide labor contracts. East Germany's Communists, through incompetent management of the "means of production," had allowed East German factories to fall into obsolescence and disrepair. But the West German unions insisted after reunification that labor costs and benefits in the East should be brought up to par with the West. That priced the less-productive East German workers out of the market.
The lesson is that you can't build a viable economy with subsidies and handouts. Factories and their workers must be allowed to employ whatever natural advantages they have to gain market share. Industry-wide contracts removed that advantage for the east and the government dole financed this exercise in trade-union protectionism.
Joseph Joffe, a German journalist who has written for these pages, philosophized at a Journal luncheon in New York last Thursday about a "Darwinian" effect in the east. The people who wanted to get ahead in the world simply left, at risk of being shot during the Stasi era but easily after reunification. Some 4 million departed, leaving behind the elderly, the indigent and the indolent, who have an engrained idea, long preached by the Communists, that the state will provide.
If this paints too drab a picture of Germany, let me hasten to mention other features of the German election. The Free Democrats, the nearest thing in Germany to a free market-free enterprise party, also did well in the election. Even Mr. Schröder had been pursuing some limited reforms, with tax cuts for business and liberalization of labor laws. In the western Länder, industry-wide bargaining is breaking down as individual unions are forced to cut their own deals with corporations or see their jobs go to Poland or other places more hospitable to business. That pressure will probably intensify, judging from the voting in Poland over the weekend for a more pro-market government.
If the CDU and SPD form a grand coalition, there will be continued political difficulties. But despite the reactionary turn in the east, most Germans know that they have to reform. They are quite capable of competing, as they have always demonstrated, so long as excessive government doesn't encumber their normal managerial and industrial skills. Even now, German exports are brisk. Had Ms. Merkel offered the Germans a clear alternative to the stale old policies of the past she might well have gained enough seats to form a governing coalition with the Free Democrats.
Some observers read a dark message in the German vote. It goes back at least to Alexis de Tocqueville. He wrote in the mid-19th century that when the poor have the largest vote in a democracy, they will vote themselves larger and larger shares of the wealth of the well-to-do and ultimately destroy democracy itself. That message, although only a part of Tocqueville's argument that a large middle class is necessary for political stability, has been used in warnings against democracy for ages.
But Germany is in no danger of being overwhelmed by a party that could only get 8.7% of the vote, despite the mischief it can cause. The American democracy that Tocqueville was writing about has thrived on an ever-expanding middle class, proving his point.
Nonetheless, the German example is worth pondering as the American president and Congress discuss spending $200 billion in federal money to turn Louisiana into a Cajun East Germany.
18. Go, Neelie WSJ September 27, 2005
European antitrust policy has for years been a riddle for multinational companies, a costly riddle in some prominent cases. Here's a novel idea: How about judging whether a dominant producer deserves legal restraint by asking if its market power harms consumers, rather than asking competitors how they feel about it?
In principle, that's been the practice of American regulators for some time now. In Europe, however, it amounts to sweeping change. Enter EU Competition Commissioner Neelie Kroes, who, during a speech Friday in New York, signaled plans to bring the EU more in line with the U.S. attitude toward market-dominance cases.
In the past, Brussels has hammered Microsoft, Coca-Cola and others for reasons that boil down to their being bigger and stronger than their competitors. This was due in part to the European Commission's "fairness" doctrine for dealing with powerful companies. Regulators obsessed over statistics such as market share -- which may or may not accurately reflect competitiveness within an industry. The result, Ms. Kroes, pointed out, is that EU law was "not focused primarily on consumer welfare," which is of course the only real justification for the state to interfere in private business deals and market practices.
Correcting that flaw would be a significant step forward, and we're told Brussels already has sent member states a proposal to do just that. As with many nice-sounding EU reforms, however, the devil will be in the details. Changing the Commission's focus in these cases will be for naught if companies face too heavy a burden in demonstrating that their market dominance doesn't harm consumers. The burden should rest on the Commission to prove damage, just as in a court of law.
Any new guidelines must be clear enough that companies can ensure their compliance with some degree of certainty, but flexible enough to allow different ways of handling different circumstances. The Microsoft case involved, among other things, the alleged "bundling" of different products together, presumably to freeze out other suppliers of peripheral products. Coca-Cola stood accused of using illegal rebates and discounts, which, in theory at least sounds more like giving consumers a better price than using market power to jack up prices. These practices made both companies unloved by competitors, but did they damage consumers?
Companies likely will take a wait-and-see approach to talk of policy change. Still, David Hull, a Brussels-based competition lawyer who attended Ms. Kroes's speech, said her message was well received: "Sometimes in these conferences, the Commissioner will give a very neutral speech that says nothing new. I think people were pleasantly surprised when she focused her entire speech on this one, very important area and signaled a clear willingness to consider real reform and to open up a dialogue."
Importantly, while Ms. Kroes was speaking solely about market-dominance cases, we'd hope that she'll take a similar tack in dealing with mergers. Her predecessor, Mario Monti, introduced the American-style "consumer harm" standard for reviewing mergers two years ago, but follow-through is key. Judging from the reversals by EU courts of several Commission merger vetoes in recent years, giving Commission trust-busters clearer guidance in this area would be well advised. Mergers are a natural feature of a dynamic economy and would seldom make sense if the objective were not a more efficient use of resources -- again an economic benefit to the broad public.
An antitrust policy reform, if it succeeds, could be one bright spot in what's otherwise been a disappointing start for the more free-market European Commission that President José Manuel Barroso promised when taking office last year. So far, the Barroso team has bowed to narrow national interests on its hallmark reform measures. Mr. Barroso will try to regain momentum with his plans to cut red tape in Europe, which is due out today. But the word is that the deregulatory package has also been watered down in anticipation of resistance from the Commission bureaucracy and special interests.
It would be nice to see Ms. Kroes show her fellow commissioners
how to stop talking about the need for change and start bringing it about.
Shareholders and managers of multinational companies, perplexed over what
principle, if any, guides the European antitrust rulings that have scuttled
multi-billion-dollar deals, would welcome an overhaul.
19. Another flat tax success story. An Italian newspaper comments on the quick success of Romania's new flat tax. Already, the job market is booming and the government is collecting more money with lower tax rates:
Romania's newly introduced
flat tax has brought in more revenues and helped to reduce registered unemployment
by teasing business out of the shadow economy, Finance Minister Ionut Popescu
said recently. Popescu told Reuters in an interview that fast growth and
good revenues would allow the government to bring down the budget deficit
to 0.7 percent of gross domestic product from 1.5 percent foreseen last
year for 2005. ..."This reflects higher budget revenues from introducing
a flat tax in January and strengthening the law against tax evasion." Romania's
centrist government introduced in January a 16 percent flat corporate and
income tax, replacing an 18-40 income scale and a 25 percent tax on business
in a bid to limit the gray economy and spur foreign investment. ...Popescu
said this strategy had worked so far, additionally producing a spike in
officially registered employment. "The flat tax triggered a steep rise
in employment. In the first quarter, the number of employees rose by 153,000,
which is almost double from the same period a year ago," he said. Government
figures show the jobless rate hit a 13-year low of 5.5 percent in May.
http://www.portalino.it/nuke/modules.php?name=News&file=article&sid=12
836
20. The OECD commends Slovakia for free-market reforms. The Paris-based bureaucrats at the Organization for Economic Cooperation and Development usually are on the wrong side. It is the OECD, after all, that pushes the awful "harmful tax competition" scheme. So it is nice to discover that there are some sensible people at the organization - as can be seen in the OECD's country survey on the Slovakian economy. Tax reform is lauded:
Major reforms have enhanced
the flexibility of the labour market and have improved incentives for the
unemployed to seek work. ...In order to stimulate the creation of jobs
that require low skill levels, costs of low paid labour should be significantly
reduced, either by cutting employers' social security contributions for
low-wage workers, or by reducing the minimum wage. ...Slovakia's combination
of sound macroeconomic policies, comprehensive tax and social welfare reform,
and new regulations for the product, capital and labour markets, has resulted
in an acceleration of growth over the past five years and has increased
the pace with which Slovakia is catching up to the living standards of
wealthier nations. ...net employment creation in the private sector has
accelerated in the past two years... The fiscal cost of this should be
funded through expenditure restraint in less urgent areas such as industrial
and agricultural subsidies. ...the comprehensive 2004 tax reform has significantly
improved investment incentives.
http://www.oecd.org/dataoecd/40/4/35390288.pdf
June 30, 2005
Policy Analysis no. 547
21. Uncompetitive Elections and the American Political System
by Dennis Polhill and Patrick Basham
http://www.cato.org/pub_display.php?pub_id=3941
Patrick Basham is a senior fellow at the Cato Institute’s Center for Representative Government. Dennis Polhill is a senior fellow at the Independence Institute.
American representative government suffers from the handicap of a largely uncompetitive political system. American politics has fewer and fewer competitive elections. In arguing that political competition matters a great deal, this paper traces the increasing trend toward uncompetitiveness and details the role and nature of incumbency advantage in fostering an uncompetitive political system.
Current redistricting practices and campaign finance regulations, in tandem with publicly financed careerism, have significantly negative consequences for the health of the political system. This study analyzes several of the major instruments of campaign finance regulation, such as contribution limits, public financing, and the ban on soft money, in terms of their relationship to political competition. Simply put, campaign finance regulation and public financing have not improved political competition.
In the past, campaign finance restrictions and taxpayer-subsidized
elections have generated unintended consequences. The most recent regulatory
round is no exception to that rule. This study also looks at other reforms,
namely, term limits and improvements to the redistricting process, in light
of their comparatively successful record regarding political competition.
Changes in the manner in which districts are designed,
campaigns are funded, and politicians are tenured require immediate implementation.
In short, elected officials should be disconnected from campaign and election
rule making and regulation. There will not be an improvement in political
competition until the incumbent fox ends his tenure as guardian of the
democratic henhouse.
22. Dubai's financial exchange
Do buy, do sell
Sep 29th 2005
From The Economist print edition
A new stock exchange for the Middle East opens for business
WITH the world's tallest building, a man-made archipelago in the shape of the world and, coming soon, an indoor ski resort in the desert, Dubai is famous for its follies. On September 26th the Gulf emirate launched the Dubai International Financial Exchange (DIFX), which is meant to be a more serious venture.
The DIFX has started slowly. Its first securities are certificates linked to the world's main stockmarket indices and issued by Deutsche Bank, one of its founding members. In true Dubai fashion, though, it has grand aims: 15 initial public offerings, and as many secondary listings, in the next 18 months. There are plans to trade derivatives and Islamic bonds.
Dubai
Stockmarkets worldwide
DIFC, DIFX
Economics A-Z
This is not the Gulf's first financial exchange. Indeed, Dubai itself already has one. Regional bourses have done well in recent years, fuelled by rising oil prices. Arab investors who once flocked to America have kept their money closer to home since September 11th 2001. But foreign investors find some of these exchanges hard to enter, owing to low liquidity and restrictions on ownership.
The DIFX aims to be different. It will trade in dollars, with no limits on foreign ownership and a low minimum listing requirement. It aims to allow companies to tap into deeper pools of capital than exist on the regional markets. Arab companies are its main target, but Indian and Chinese firms have also shown interest.
All this is part of a plan to make Dubai the financial capital of the Middle East. Three years ago the emirate began work on the Dubai International Financial Centre (DIFC), a 110-acre “state-within-a-state” with its own commercial laws based on international standards. More than 70 firms have permission to do business, in banking, trade finance, insurance, asset management and Islamic finance.
The success of the DIFC and its new exchange will depend in large part on how they are regulated. An independent regulator, the Dubai Financial Services Authority (DFSA), has been set up to draft and enforce regulations, with regulators from Britain and Australia. “We like to think we are user-friendly,” says one expatriate regulator. “The rule books are slimmer.”
But all has not run smoothly. Before the DIFC became operational last year, it sacked Ian Hay Davison and Phillip Thorpe, two experienced Britons, as chairman and chief executive of the DFSA. Mr Hay Davison claims that they were pushed out for objecting to interference from their bosses and to the same bosses' failure to disclose land deals at the centre. “Like so much in Dubai the appearance is often the point, and the appearance of having a regulatory environment exhibiting the highest international standards was seductive,” writes Mr Hay Davison in the current issue of Euromoney. “The reality behind creating such an environment was perhaps too much to absorb.”
The top people at the DIFC and the DFSA have since changed. Omar bin Sulaiman, current director-general of the DIFC, says that there was a “misunderstanding”, adding: “It would have been disastrous if it happened during the operational phase.”
Alas, only last week new questions about corporate governance
emerged. William Miller, the American ex-head of the exchange's audit committee,
accused Lynton Jones, the chairman, and Steffen Schubert, the chief executive,
of poor disclosure of a commercial conflict of interest. The management
denies wrongdoing. But it is a spat Dubai could have done without.
23. Bad loans made good Sep 29th 2005 From The Economist
print edition
Donors not debtors will repay the World Bank's bad loans
ALL the routes to the headquarters of the World Bank and the International Monetary Fund in Washington, DC, were blocked on September 24th and 25th by dozens of identical dumper trucks, the kind normally used to spread salted gravel on unpassable winter roads. Inside this heavy security cordon, the ministers and officials gathered for the Bank's and the Fund's annual meetings were busy clearing a path of their own.
Agreement was needed on a proposal to cancel the debts owed by the world's poorest countries to the Bretton Woods twins and the African Development Bank (AfDB). The proposal already had the backing of the G8 group of rich nations. Last weekend, according to Trevor Manuel, South Africa's finance minister and chairman of one of the key committees at the meetings, the G8 agreement “emerged as the G184 agreement”, supported by the entire membership of the Fund and the Bank.
Debt and development
The World Bank and the IMF
Economics A-Z
There are now 38 countries that the twins deem poor and indebted enough to warrant forgiveness. Between them, these countries owe $42.5 billion to the World Bank's soft-loan arm, $10 billion to the AfDB and $5 billion to the IMF. Eighteen of these countries have already jumped through the hoops designed to test their commitment to sound policies. Their slates may be clean by the end of the year.
Their debts, said Gordon Brown, Britain's chancellor of the exchequer and chairman of the IMF's ministerial committee, are unpayable. In fact, these countries are servicing their obligations, but only because the multilaterals offer them new grants and loans to help them repay their old ones. This recycling of funds keeps up appearances on the balance sheets of the Bank and the Fund, making bad loans look better than they really are. But it is also complicated and inefficient, consuming the time and energy of creditors and debtors alike.
The G8 proposal will end this elaborate charade. The Bank, Fund and AfDB will stop collecting debts and cut the flow of new money to these countries by the same amount. This much is an exercise in bookkeeping, not altruism. As Adam Lerrick, an economist at Carnegie Mellon University wrote recently, “All that debt forgiveness really needs is an eraser.”
But there is more. Backed by the British, the Dutch and the Nordic countries, the World Bank has successfully convinced its donors to compensate it for writing off loans it could not have collected in full. This compensation is supposed to come on top of the regular contributions donor countries make to the Bank, such as the $18 billion already pledged for the years 2006 to 2008. Beyond 2008, however, it is impossible to know how much donors would have coughed up in the absence of debt relief. Therefore it is hard to gauge whether the money they offer will be in addition to, or instead of, money they would otherwise have given. In effect, the Bank has swapped the risk that poor countries will not repay their loans for the risk that rich countries will not redeem their promises.
To allay these fears, the G8 finance ministers all signed a letter to Paul Wolfowitz, the World Bank's new president, promising to compensate the Bank “dollar for dollar”. A “baseline” will be agreed, which is meant to define the counterfactual, showing what donor countries would have given had debt relief never happened.
It is not yet clear how this line will be drawn. Nonetheless,
Mr Wolfowitz was happy to declare that “the path to complete debt relief
now has been cleared.” Almost ten years after the multilaterals first consented
to the partial forgiveness of their loans, the snow has finally melted.
24. A Mexican Tycoon Fights Reform of Securities Law By MARY ANASTASIA O'GRADY September 30, 2005; Page A11
"Badges? We ain't got no badges. We don't need no badges. I don't have to show you any stinking badges!"
Apologies for bringing up what is perhaps the world's most worn movie clip -- from the 1948 Humphrey Bogart classic "The Treasure of the Sierra Madre." But Mexican politics provokes me.
Specifically, what provokes me is the battle between reformers in President Vicente Fox's government who want to push Mexico's corporate governance standards to international levels and the Mexican Congress's ghosts of a corporatist past who respond with, "Transparency? We don't need any stinking transparency!"
The Fox government's new securities law has already passed the Senate. But in the lower house it's in trouble. Opponents of the law's minority shareholder protections, insider trading regulations and government investigative powers are demanding a rewrite to strip out these critical provisions. If they prevail, Mexico will signal international investors that it isn't interested in better corporate governance. That will doom the country's capital markets to continued enfeeblement, limiting economic growth.
Development economists believe that building robust capital markets is vital to countries at Mexico's stage of advancement. Very poor countries can rely on concessional loans. At the next rung up the ladder companies can turn to foreign direct investment. But at some point, a middle income country that wants to graduate to higher living standards needs equity markets reliable enough to encourage investment and spread risk.
Mexico in the last few years has attracted 30%-40% of the foreign direct investment going into Latin America. But now it seems stuck. It only gets about 10% of private equity flows into the region, which itself only obtains about 1% of those flows world-wide.
Financing is not a problem for the country's few world-class companies, which can easily access international markets. But since many Mexican businesses are not big enough or sophisticated enough to tap into those markets, they are relegated to either listing on Mexico City's "Bolsa" or trying to raise money privately.
The Fox government notes that the Bolsa has only 151 listed companies while South Korea has some 1,500 listed companies. It believes that at least part of this can be explained by the fact that minority shareholders lack adequate protection of their interests. The enhancements to minority shareholder rights and disclosure that Mexico's executive branch wants are a recognition that Mexico is competing for international flows and investors will go where they are well treated.
The bill has support in writing from Mexico's stock exchange, from a committee representing listed companies and from Mexico's investment banks. But one very powerful opponent of the improvements to corporate governance is Grupo Salinas, run by Ricardo Salinas Pliego, who also controls Mexico's TV Azteca. The company is aggressively, and with some apparent success, pressuring the Congress to kill some of the law's most crucial elements.
A spokesman for Grupo Salinas told me that the company "welcomes any legislation that will promote transparency and modernization of the Mexican securities market." But the company is objecting to articles in the law that have to do precisely with sound corporate governance. One prime example is the law's requirement that companies disclose stock-price-sensitive information immediately. Grupo Salinas rejects this standard securities law proviso and instead wants there to be a clear list of what defines price-sensitive information.
The company also opposes the mandate that audit committees for all public companies be fully independent. Mexican law already allows for one non-independent member on corporate-governance committees. Adding "one or more" on the audit committee, as Grupo Salinas wants, would sow suspicion. All the more so if the company gets its way and the law is stripped of the rule that board of directors' decisions on related-party transactions must follow corporate-governance committee recommendations or be otherwise disclosed.
Grupo Salinas is also against the existing subpoena power for Mexico's securities and exchange commission, which allows it to question all related parties in an investigation. Supporters of the law say that without that power investigators would have to communicate in writing with witnesses and investigations would go nowhere.
Grupo Salinas holds that it is merely trying to contain the power of the state to overregulate. But backers of the bill say that Mr. Salinas is fighting against a change that would challenge the way he runs his company.
In June, the Journal's John Lyons reported from Mexico City that lawmakers were complaining that Salinas lobbyists "have been the most outspoken opponents to provisions protecting minority shareholders' rights." Fauzi Hamdan, who heads the Senate's finance and public-debt committee and supported the bill, told Mr. Lyons that "They were applying pressure and pushing changes that were totally against the spirit of the bill."
According to Mr. Lyons, TV Azteca (of which Mr. Salinas owns 59%) also took public its dispute with the top regulator, Treasury Secretary Francisco Gil Diaz, by broadcasting "a television series that revived questions about Mr. Gil Diaz's role in a mid-1990s bank bailout."
This year the U.S. SEC filed fraud charges against TV Azteca and some company executives. According to the Austin, Texas-based publication Hoover's Company Profiles, "the lawsuit alleges that Salinas personally profited from questionable stock deals involving Unefon [a mobile phone company 50% owned by Azteca] to the tune of $109 million, and that two other company executives later helped him cover it up." The allegation, not yet proven, goes right to the heart of what the Mexico's new securities law seeks to police. Mr. Salinas has denied the charges and has since pulled his listing off U.S. stock exchanges complaining of "excessive regulation."
The government says it worked hard to avoid the errors
of overregulation in Sarbanes-Oxley. But it also recognizes that it has
to confront the age-old Mexican saw that says you should never invest in
anything unless you have control. As the rest of the globe forges ahead
with competitive institutions, failure to rid Mexico of fuzzy or weak law
will leave the country lagging behind.
25. Defying the Doom Mongers WSJSeptember 30, 2005
Remember all those apocalyptic predictions about how the advent of free trade in the garment industry would spell devastation for many developing nations, whose rag trades would inevitably be crushed by the China juggernaut? A year ago, countries such as Bangladesh -- which depends on textiles for 80% of its exports -- were poster children for international labor activists. They rushed to exploit such fears with predictions that millions of jobs would be lost after global textile quotas finally came to an end on Jan. 1.
How strange then that knitwear manufacturers in Bangladesh should announce this week that, far from losing any jobs, they've set up 92 new factories and hired 100,000 new workers since the end of quotas. Yes, quotas on Chinese goods were effectively reintroduced in the summer, but Bangladesh manufacturers say knitwear exports to the U.S. doubled in the first six months of this year, leaving manufacturers struggling to keep up with a flood of orders.
Their case may be an extreme one, indeed exports of other types of textiles from Bangladesh have increased by much less so far this year. But they're still up on the like period in 2004, reflecting a trend seen in developing nations across Asia -- as well as elsewhere in the world. From Cambodia to Sri Lanka, Indonesia, Pakistan, Philippines and Thailand, as well as Bangladesh, textile industries have defied the doom mongers. All these countries increased their garment exports to the U.S., European Union and Japan in the first half of this year, according to figures compiled by Clothesource, a U.K.-based consultancy. India has done particularly well with a 34% increase during this period.
Of course, China still leads the pack and is an immensely powerful force in the global textile market. Clothesource puts the overall growth in Beijing's garment exports at 48% for the first six months of 2005, and other estimates range even higher. It's possible that diversification by clothing suppliers ahead of the protectionist measures the U.S. and the EU have put in place to curb the growth in Chinese exports may have played some part in the growth in other countries' exports.
But a far more significant factor is one which would have been easy to forecast if it weren't for the scare stories being spread by labor unions and the likes of the U.N. Development Fund, who confidently predicted one million job losses in Bangladesh alone. Put simply, ending artificial barriers to trade in garments had the same impact as in any other industry, forcing manufacturers to become more competitive and so stimulating greater demand for their products. In effect, it created a larger pie in which there's more to share all round.
That's the untold story since the end of textile quotas.
As prices fall, U.S. consumers have been snapping up more cheap clothes.
And they're not just getting better value for money, but spending more
overall -- total apparel imports were up 12% in dollar terms year-on-year
in the first half of 2005. That increase in the size of the market means
there's room for not only more imports from China but also other countries,
such as Bangladesh, if their industries are efficient and skilful enough
to carve out their own market niche.
Two exceptions are Nepal and Burma, where Maoist rebels
and repressive rulers respectively have proved significant disincentives
to trade. But now that buyers are much freer to pick and choose where to
source their products, it's tough to find many Third World nations that
have significantly lost out. "Almost every developing country has seen
growth in apparel exports this year," said Mike Flanagan of Clothesource.
While some job losses are inevitable in the Third World,
as manufacturers cut costs to compete, most of the economies where garment
exports have collapsed since the end of textile quotas are more prosperous
ones. We're talking about economies which had long since moved up the value
chain and had no economic rationale for remaining in such labor-intensive
industries, were it not for the market distortions of the quota system.
In Asia, for instance, apparel exports from Hong Kong, South Korea and
Taiwan have dropped by 30%-40%.
The irony is that political leaders in the U.S., and
especially Europe, have resorted to using supposed job losses in the Third
World as an excuse to protect their own textile industries from the same
kind of inevitable shakeout. Apparently oblivious to how well Bangladesh
seems to be doing, EU Trade Commissioner Peter Mandelson cited the need
to protect it from Chinese competition as one rationale for forcing Beijing
to agree in June to curb its textile exports to the EU. In Washington this
week, talks have been underway with Chinese negotiators on imposing wider
restrictions on Beijing's exports to the U.S., following the unilateral
curbs on some products announced by the Bush administration in May.
But despite Western politicians' efforts to prevent the
global economy from reaping the full rewards of textile-trade liberalization,
the benefits are filtering through. The Chinese juggernaut remains a huge
competitive threat that any other producer ignores at its peril. However,
from Bangladesh to Cambodia, which has also succeeded in carving out its
own market niche, the experience of the past nine months shows China is
not the only game in town.
A more open market means a larger market -- and one in
which there is room for everyone from the U.S. consumer to the Asian garment
worker to share in the prosperity that flows from freer trade.
26. Germany's Bad Example for Iraq By MICHAEL GREVE
WSJOctober 3, 2005; Page A17
Why proportional representation leads to gridlock.
Berlin is far from Baghdad, and the Germans at least want to keep it that way. But for all the obvious differences, Germany's inconclusive election results and the impending constitutional referendum in Iraq point to some identical obstacles to effective and constitutional government.
These obstacles are proportional representation and "cooperative federalism." As it happens, well-meaning U.N. officials, NGOs and U.S. advisers have been urging these constitutional arrangements upon numerous fledgling democracies, including Iraq. That may not be good advice.
Proportional representation -- PR -- is said to be more democratic, inclusive and respectful of minorities than British-American winner-take-all, first-past-the-post elections. Unfortunately, it does nothing to foster clear majorities capable of effective government.
Germany's system of almost pure PR has consistently produced coalition governments and now, for the first time, a situation in which no party constellation can produce a government with a coherent program for much-needed reforms. Prime Minister Margaret Thatcher's reform of Britain's sclerotic economy wouldn't have been possible with PR and cooperative federalism; nor could one imagine Prime Minister Junichiro Koizumi accomplishing anything similar in Japan.
The more subtle but ultimately more insidious problem is that PR -- unless balanced by plebiscitary institutions such as a directly elected, powerful executive -- tends to be constitutionally unstable. Instead of institutional checks and balances, PR constitutions resemble temporary peace pacts among contending interests, classes or warlords.
The structure is only as stable as the underlying constellation of forces; or it is stabilized by nonpolitical means.
That's the function of Germany's cherished social welfare state: reducing political competition to promises of transfer payments, and compressing the range and intensity of social and political conflict. That sort of stability translates into economic malaise, political indecision and fears of much worse down the road.
Germany's "cooperative" federalism reflects the same disposition and tendencies. To ensure fairness and "solidarity" between levels of government and among the Länder (states), Germany mandates comprehensive revenue-sharing and complex fiscal transfers, from the federal to state and local governments and from rich to poor states.
This fiscal constitution creates holdouts and gridlock. Germany cannot be effectively governed without the active support of the Länderfürsten, as state prime ministers are fittingly known -- whose fortunes, in turn, depend on federal funding formulas. Worse, economically competitive states are punished for success, as a good chunk of their revenues will be transferred to less prosperous brothers.
Like PR, moreover, cooperative federalism entrenches the political instabilities it is meant to contain. Germany's fiscal constitution has been subject to incessant litigation and repeated amendments. The principal means of ensuring a modicum of stability is to raise taxes, to make all participants in the intergovernmental revenue wrangling better off. But stability turns into sclerosis when the economy sags under the accumulated burdens.
Fast forward, or rather backward, to Iraq, whose National Assembly was elected, under U.N. and American pressure, on a PR basis. A just-proposed election law envisions a slightly modified system of party lists and PR. (At least every third delegate must be a woman.) The proposed constitution puts a hydra-headed executive at the mercy of the parliament.
While the federalism arrangements are still in flux, the proposed document promises a thoroughly cooperative regime, with the "fair distribution" of federal offices (including foreign missions); of international aid, grants, and loans; of oil and gas revenues; and of a "fair share" of other federal revenues. In conflicts between regional and federal law, regional law shall prevail -- thus providing potent incentives to extort fiscal transfers. This construct is at best a state of (hopefully) suspended civil war. A constitution, it is not.
To appreciate the difference, consider the U. S. Constitution. Without proportional representation, we have a stable two-party system. We have an independently elected executive, no "fiscal constitution" and (aside from the Nixon administration's ill-fated experiment) no general revenue sharing. Instead, we have independent taxing authority and competition, subject to only minor constitutional provisos. The states do not owe each other much beyond keeping each other's borders inviolate and their own borders open. Within those ground rules, they may and must compete.
In short, the U.S. Constitution is not a peace pact among interests or an attempt to entrench a social balance. It establishes rival institutions with the means and the motives to resist one another, in the hope that counteracting ambitions will keep the outcomes within bounds. The system, to be sure, produces lots of friction and wheel-spinning -- but it is also capable of energy and decision when needed. We do not owe the stability of our political institutions to economic forces or temporary social alignments. American politics is constitutionally stable.
Cooperative federalism and transfer payments may sometimes be the only way to buy (literally) a temporary respite from regional or ethnic separatism. Even so, the U.N.-U.S. push for proportional representation and cooperative federalism in Iraq looks more like a reflex than a carefully considered option. And it only postpones the hard work of building a stable constitutional order -- one not subject to political drift, indecision, gridlock and sclerosis.
Energetic government and constitutional stability may seem in tension, if not conflict. In truth, they go together. For many still-young republics in Eastern Europe and elsewhere, they make a far more attractive package than the German model of consensus, cooperation and paralysis.
Mr. Greve is director of the Federalism Project at the
American Enterprise Institute.
27. TABOR targeted Colorado taxing and spending limits being threatened Oct 2, 2005 by George Will (bio | archive)
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DENVER -- This autumn's angriest political controversy is reaching a roiling boil in this state. Conservatives, especially, are arguing, with their characteristic internecine fury, about whether a change in fiscal facts should cause Colorado to change its mind about a rule restricting government spending. Come November, there will be a referendum on a temporary relaxation of the state's ``taxpayer bill of rights'' -- Tabor.
Adopted by referendum in 1992, it is the nation's most stringent limit on a state legislature's freedom to tax and spend. It says that spending in a given year cannot increase faster than population growth plus inflation -- if both are 2 percent, spending can increase only 4 percent. Furthermore, revenue exceeding permissible spending must be rebated to taxpayers, who also must approve any tax increase.
Tabor has been spectacularly successful. Per capita spending has increased slower than in almost all other states, and Colorado ranks 50th in state taxes collected per $1,000 of personal income. Even though -- actually, because -- Gov. Bill Owens has cut taxes 41 times, revenues have surged, and in six of the last nine years taxpayers have received refunds, a total of $3.2 billion, about $3,000 per household.
But two events have given Tabor an unexpectedly ferocious bite. These events have revealed an unanticipated wrinkle in Tabor's mechanism.
The first came in 2000, when Colorado voters, in an episode of cognitive dissonance encouraged by the teachers unions and the rest of the public education lobby, passed an initiative discordant with Tabor. It requires spending on education in grades K through 12 to grow significantly faster than overall spending. This, combined with the growth of federally mandated Medicaid spending, means not only that the portion of the budget devoted to elementary and secondary education must steadily grow relative to the rest of the budget, but also that all spending cuts must come from less than one-third of the state's budget -- basically, from higher education, corrections and human services. Those who favor leaving Tabor as it is and cutting $300 million to $400 million from the $2 billion of controllable spending are notably reticent about what they would cut.
The second event was the intersection of the recession of 2001 after the bursting of the high-tech bubble (Colorado ranks first among the states in high-tech workers per 1,000 private-sector workers) with a drought and 13,000 forest fires that hurt Colorado's tourism. This caused a collapse of revenues -- a 16 percent decline over two years -- unprecedented in recent history and unanticipated by Tabor's authors.
This confronted Colorado with Tabor's ``downward ratchet'': the budget's baseline of permissible spending was reduced to the recession-year level. This lowered spending for all subsequent years because it restricted the spending of revenues produced by economic recovery.
Owens, who has traveled to 15 states advocating enactment of Tabors, believes Colorado's Tabor will be repealed in two years unless the November referendum prevents politically unpopular budget cuts. The referendum, of a sort that Tabor explicitly allows, would not raise any tax rate, but would suspend the rebates of surpluses -- $3.7 billion -- for five years. This would enable spending to return to the pre-recession trend line.
For conservatives and other sensible people, it is doubt-inducing, not to mention excruciatingly unpleasant, to be on the same side of an argument with public employees unions, whose ravenous appetite for government growth is constant and self-aggrandizing. Explaining his temporary alliance with those unions, Owens points to a clock on his office wall. He says it comes from a Soviet submarine and that it is broken, but even it is right twice a day.
Owens resisted the Legislature's demand to gut Tabor by indexing the growth of government spending to the growth of personal income rather than to population growth and inflation. Still, by advocating passage of the Tabor referendum, he has infuriated some conservatives. This in spite of his record of promoting school choice, cutting taxes, opposing other governors' attempt to grab revenues by imposing Internet taxation, and using the line-item veto to cut 50 times more spending in his first five years than other Colorado governors cut in the preceding 24 years. He vetoed 47 bills this year, half of which, he says, promoted organized labor's agenda.
Those now calling Owens an apostate
from the church of conservatism need to answer two questions. Is one deviation
from doctrinal purity sufficient grounds for excommunication? Is a political
creed that is so monomaniacal about taxation that it allows no latitude
for tacking with shifting fiscal winds a philosophy of governance or an
ideological fetish?
28. Naive View of Democracy in Latin America? by Mary A Ogrady
Daily Policy Digest
International Issues
http://www.ncpa.org/iss/int/pd111601d.html
Friday, November 16, 2001
Some observers of the Latin American political scene
are warning that democracies there are operating under constitutions that
grant government nearly unlimited power in the economic sphere. They say
this creates destructive incentives and has made reform and development
in the region nearly impossible.
Here is a look at their reasoning:
* As Latin America has converted
from rule by military dictatorships to democracies, the new governments
were assumed to be benign and were granted enormous control over economic
resources -- and to act as slayers of all inequalities in life.
* This means, first, that whenever
the government deems it good, it can rescind individual liberties for the
"public good" -- thereby trampling on private property rights.
* This unchecked power leads to
corruption and crony capitalism -- creating more inequality.
* Healthy institutions, which might
allow government by checks and balances, cannot develop under such conditions
because elected leaders have no interest in limiting their own power.
Thus, each "reform" of the constitution expands the
power of politicians who have their own incentives to retain their power
to transfer wealth. What develops is a "now-it's-our-turn" attitude --
and a cynical and disillusioned populace.
Political experts advise Latin American countries to
limit their constitutions and their governments.
Source: Mary Anastasia O'Grady, "In Latin America, Too
Many Constitutional Promises Thwart Democracy," Wall Street Journal, November
16, 2001.
For text (interactive subscription required)
http://interactive.wsj.com/
archive/SB100587591720110360.htm
29. NGOs on Drugs By ALEC VAN GELDER WSJOctober 5, 2005 Without patents, there is no innovation.
It is in the nature of governments to overreach themselves without considering the consequences of their actions. And, as philosopher Edmund Burke observed back in the 18th century, "the greater the power, the more dangerous the abuse." True to form, some governments and NGOs are using supranational bureaucracies to undermine private property rights, one of the pillars of the free society, global growth and prosperity.
One such campaign goes as follows: Millions of people throughout poor countries suffer and die from preventable or easily treated diseases; some of the medicines needed to treat those diseases are expensive; because medicines are essential, they should be sold at cost; if patentees will not lower their prices, governments should use "compulsory licenses" to break patents and authorize local production as "generics." Such a chain of reasoning would surely have Burke spinning in his grave.
The latest battle concerns an antiretroviral (ARV) drug called Kaletra, produced by U.S.-based Abbott Laboratories, used to inhibit the spread of HIV. Although the highest price in the U.S. of around $4 per pill is more than three times the price in Brazil, the Brazilian government claims it is still too expensive. Egged on by activists and supported by the Pan American Health Organization and other U.N. agencies, Brasília has threatened to produce the drug locally while circumventing the patent, claiming it can do so for $0.41 (with the rights-holder receiving a nominal royalty at most). Like many firms, Abbott uses price differentiation to sell its products more cheaply in poor countries than in rich ones. And while Brazil is a lot richer than the poorest countries in Africa, it pays only slightly more for this important ARV component.
Circumventing the patent would indeed provide even cheaper Kaletra in Brazil now -- though it would have a very limited impact on the overall cost of treating HIV/AIDS, since drugs account for only a quarter of those costs. But HIV quickly develops resistance to existing therapies, so where will the next line of ARVs come from? If companies are unable to reap some profits on new ARVs in countries outside Africa, where they are sold at cost or below, they will have no incentive to undertake risky research to develop new AIDS drugs, especially if those are likely to be appropriated. Pharmaceutical companies spend an average of $800 million to develop a new drug, take it through trials and gain regulatory approval for it. For every success, however, 12 candidates fall by the wayside.
Moreover, if patents should be breached when medicines are deemed essential to human life, why stop there? Food and shelter are essential too -- why should anyone turn a profit on these basics? And given the current high prices of oil, the same logic would suggest that governments should slap a compulsory license on, say, Venezuelan or Norwegian oil -- paying only the extraction costs, not additional royalties or the amortized investments that are also factored in.
While this may seem absurd, it is the model proposed by Venezuela, Brazil, Argentina and 11 other nations with regard to intellectual property. These governments are attempting to use the World Intellectual Property Organization to weaken the rights of IP holders globally. The Kaletra saga is just the tip of the iceberg.
Ironically, the countries seeking to destroy this fundamental institution of the free society style themselves "Friends of Development." Yet their actions would directly harm development by weakening the ability of entrepreneurs to profit from their investments in innovative and creative products. In a world where lifesaving medicines are expensive to develop and launch, but cheap to copy, these entrepreneurs need the protection of intellectual property rights to cover their large and risky investments.
India has learned from past mistakes and just this year implemented product patents for, among other things, pharmaceuticals. After 30 years in which practically no new drugs were developed in India, local drug companies are now receiving unprecedented levels of foreign direct investments and transfer of technology.
The tide will turn in the battle against the global AIDS pandemic and other diseases of poverty only when the poor enjoy the fruits of sustainable economic development. But for that development to take place, the poor must be empowered through private property rights, free trade and equality before the law -- institutions that are anathema to the "Friends of Development."
In 1949, Venezuela was among the richest countries in the world. The wealth was in part the result of vast oil reserves. But from the 1950s onward, the government went on a spree of intervention, imposing arbitrary taxes on business and then, in many cases, nationalizing them. As a direct result, the average Venezuelan is now 30% poorer in real terms than 50 years ago.
By contrast South Korea, which was poorer than Venezuela or Ghana after World War II, now stands as one of the world's wealthiest countries. There, a strong commitment to market institutions -- including intellectual property rights -- has fostered a climate where innovative and creative industries can flourish.
The "Friends of Development" do seem to realize that removing intellectual property rights will reduce the incentive to develop medicines. Their solution is a "new business model," a vague proposal in which governments and NGOs somehow whip up useful innovations. Perhaps their model is the Soviet Union, which had no intellectual property rights but also very few new drugs -- or any other innovations for that matter.
The profit motive, combined with a competitive market underpinned by the institutions of the free society -- property rights, contracts and the rule of law -- is the best driver of innovation. It has emancipated billions from poverty and servitude. The true friends of development acknowledge this and support the spread of these free institutions, not their abrogation.
Mr. van Gelder is a research fellow at the London-based
International Policy Network.
30. Who Will Win the 2005 Economics Nobel?
http://voluntaryxchange.typepad.com/voluntaryxchange/2005/10/who_will_win_th.html
Time to stick my foot in my mouth again. The 2005 Nobel Prize in Economic Science will be awarded this Saturday; last year I just about guaranteed that Prescott would not win.
Caveat: I have no morbid fascination - if any of these people passed away this year I apologize (you have to be living to get a prize).
My money is still on Jagdish Bhagwati. Last year, Brad DeLong agreed, and I just don't think these rankings change that quickly (Matthew Kahn of Environmental and Urban Economics has got him ranked highly this year too).
There is also the question of Bhagwati and who else? These prizes just aren't awarded solo very often. There's a big list of other possibilities: Dixit, Helpman, Grossman, and even Krugman. Having said that, I tend to think that Bhagwati might get one solo, with one or more to follow for these other fellows.
The big weakness of Bhagwati is that the Nobel Committee is leaning increasingly towards people who did seminal work in sub-sub-fields rather than broader work in sub-fields. Bhagwati has done a ton of stuff in the trade sub-field, but I'm hard pressed to name a sub-sub-field which he started (this is Krugman's great strength in this sort of voting). For example. Kydland and Prescott won last year for work in rules vs. discretion and real business cycle theory - but there are very good macroeconomists who cover up the fact that they can't master everything and have only a passing understanding of either of those tracks within the sub-field of macroeconomics.
Last year there was a betting market to help us out. It isn't up and running this year, but you can see who ranked highly and who got votes at all.
Here's my speculation on other picks.
* People in that area think Thomas
Schelling is due. Maybe so, I'm not sure.
* Baumol comes up on a lot of lists.
He doesn't do it for me, but he's certainly influential. And he has a brand
name.
* Phelps is also probably due, but
they won't do macro 2 years in a row (for the same reason, I would say
Barro and/or Sargent are out for this year).
* If I had to pick one sub-sub-field
it would probably be contracts - someone like Oliver Williamson.
* Lately, they've been leaning towards
people who developed econometric techniques for the toolkit. I think the
big fish here is Dale Jorgenson for his work on cost functions. Another
possibilty is Chris Sims for VARs.
* Maybe it's just me, but I have a
soft spot for Arnold Harberger - Arnold Kling and Michael Stastny, can
you say "Harberger Triangle"?
* It's mostly used in macro, but the
overlapping generations theory developed in the 60s is all micro, so Diamond,
Cass, and Shell might be up this year. This might be a good dark horse
bet given Assar Lindbeck's influence on moving the Nobel Committee towards
people from different fields who layed the foundation of contemporary macroeconomics.
* Finance is probably due again, and
Fama is at the top of the list here (although I tend to think that given
enough time just about anyone could've done his work - he's Henry Aaron
not Willy Mays).
* John Quiggin has said Robert Shiller
in the past, but I don't see this happening for a long time, if at all.
He's done a lot of good work, but if you claim that the sky is falling
it seems to me that you go off the short list until it actually does fall.
* Certainly Paul Romer looks likely
to be the youngest prize winner ever. I think it's too early, but you never
know.
* Lastly, I had to review last year's
posts to find this one from Division of Labor who suggest that Anne Krueger
and Gordon Tullock for rent seeking might be a possibility too.
Posted on October 04, 2005 at 12:01 AM in Current Affairs,
Economics, Nobel Prizes | Permalink
31. Albania Starts OptimisticallyDown Hard Road to the EU By NICK CAREY DOW JONES NEWSWIRES October 6, 2005; Page A13
NEW YORK -- Albania's new prime minister rattles off goals that sound like the combined wish lists of the World Bank, European Union and international investment community.
"I will introduce the rule of law to Albania, fight corruption and organized crime and guarantee property rights," Sali Berisha says, counting them off on his fingers between meetings with aid agencies and Western officials in mid-September.
These issues all have been highlighted as problems blocking increased foreign investment and eventual membership in the EU for a country that was Europe's poorest when communism collapsed in 1990. On Nov. 9, the EU's executive arm will give an early indication of the hurdles Albania must clear to achieve Mr. Berisha's overriding goal of membership by 2014. "We will move fast, and I aim to get us there by 2011," he says.
That is brave talk for a man who was president of Albania in 1997, when the country descended into violent anarchy following the collapse of pyramid investment plans that attracted $1.2 billion from Albanians, touching off rioting that left about 2,000 dead. At the time Mr. Berisha failed to heed warnings from the international community that the investment schemes were doomed, and analysts said his micromanagement style exacerbated the crisis.
But now even some of Mr. Berisha's former critics say he has learned from his mistakes, bringing in a team of young ministers untainted by past regimes who are committed to tackling Albania's most intractable problems. In addition, after spending eight years in the opposition party, his second chance comes as the country is enjoying a rare period of economic and even political stability.
Albania, a small mountainous nation about the size of
Maryland that is sandwiched between Greece and countries of the former
Yugoslavia, has 3.5 million people, with an average salary of less than
$200 a month. But Albania's economy is expected to grow about 6% this year
for the third year in a row, while inflation is projected to drop to 2.4%
from 2.9% in 2004.
RESHAPING EUROPE
See complete coverage of EU issues, from Turkey membership
talks to the stability and growth pact.
Mr. Berisha was in New York less than a week after the Albanian Parliament approved his government, following a two-month battle over July 3 general-election results. Analysts said the fact that his opponent, former Prime Minister Fatos Nano, accepted defeat after a recount was a sign of progress in a country where election results traditionally have been bitterly contested.
"Berisha is the least corrupted and corruptible politician in Albania, and his election leaves many people optimistic for the country's future," says Robert Austin, a southeastern European analyst at the University of Toronto.
The 60-year-old Mr. Berisha radiated confidence in the lobby of the Waldorf Astoria as he pledged to complete privatization of the banking sector, then focus on selling off utilities and industry. He also aims to cut the size of government, overhaul the tax and customs systems and double health-care and education spending.
The chief concern of outside observers isn't with Mr. Berisha's goals, but whether he has promised too much too soon to an impatient electorate, and whether he will be able to set priorities.
For example, Nadir Mohammed, World Bank country manager in Albania, says Mr. Berisha should push his plans to slash income tax for small businesses to 20% from 40% and improve tax collection before increasing spending. Still, Mr. Mohammed believes Albania should be ready in 2006 to start drawing infrastructure loans from the International Bank for Reconstruction and Development, as opposed to being a mere recipient of aid. The World Bank has provided $800 million of interest-free loans to the country during the past decade, and he says more will be forthcoming "if progress is made on reforms."
But while more money and more jobs would be welcome in a country where the unemployment rate tops 14%, Albanian voters will judge Mr. Berisha most critically on his campaign promise to eradicate corruption and organized crime.
Write to Nick Carey at nick.carey@dowjones.com
32. RESHAPING EUROPE: A SPECIAL SUPPLEMENT TO THE ONLINE WALL ST JOURNAL
Foreign Investors Cheer EU Talks
EU leaders warned approval of Turkey's membership talks
doesn't mean automatic accession, but investors still are cheered.
EU to Launch Talks Over Turkey's Membership
The EU agreed to begin membership talks with Turkey in
a gauge of the West's relations with Islam. Also, Croatia got the go-ahead.
EU Debate on Turkey's Bid Grinds On
EU ministers sought to persuade Austria to drop last-minute
objections to Turkey's membership bid, so talks can proceed Monday.
Key Turkey-EU Vote Is Delayed
The European Parliament postponed a vote to ratify Turkey's
customs union with the European Union, citing frustration over Ankara's
continued refusal to recognize Cyprus.
Czech Caution on Euro Highlights Trend
The Czech government's decision to delay its attempt
to adopt the euro until 2010 underscores growing reluctance across Central
Europe to rein in spending ahead of elections.
EU Sees Slowing Growth in R&D Spending
R&D spending in the EU is growing so slowly it is
projected to be matched by China by 2010, despite a push to promote a high-tech
economy.
Luxembourg Voters Approve EU Constitution
Luxembourg voters approved the EU proposed constitution
in a referendum, a move the country's prime minister had hoped would revive
the charter.
EU Constitution Rewind
Past stories on the European charter
• News Analysis: A Democratic Revolt in Europe
• Profiting Off EU Charter Votes
European Union 101
• Profiles of the countries that joined the European
Union in 2004
• Key milestones in the history of the euro
EU Constitution
• Where the 25 countries stand
• Why does a constitution matter?
• Full text of the charter
33. The Wealth of Nations By LESZEK BALCEROWICZ WSJ
October 6, 2005; Page A14
WARSAW -- The failure of various forms of statism in the
Third World, the bankruptcy of communism in the former Soviet bloc and
China, and the high long-term unemployment and relative stagnation in Western
European countries with overregulated economies has forced a revision of
the development paradigm in favor of the market and private property --
in short, a more limited state. But the battle over ideas and policies
is far from over. As a matter of fact, it will never end, as the forces
of statism regroup rather than capitulate. This is why it is so important
to analyze which policies work and which ones fail, to generate lasting
convergence -- and to bring poor countries out of poverty.
* * *
Communism, an extreme form of statism, went farthest to
suppress markets and criminalize entrepreneurship. The opportunity costs
of this organized folly were enormous: relative per-capita income in Poland,
for example, declined from about 100% of that in Spain in 1950 to only
40% in 1990. And with the collapse of the communist system, a great natural
experiment began. Looking at its results, one is struck by the huge differences
among countries of the former Soviet bloc:
• In 2004, GDP had increased, relative to 1989, by 42%
in Poland, 26% in Slovenia, and 20% in Slovakia and Hungary. In contrast,
it declined by 57% in Moldova and 45% in Ukraine. If the shadow economy
were included in the calculations, the differences in output would be smaller,
but they would still be large.
• All transition economies have made considerable progress
in lowering inflation, yet better long-run growth performance went hand
in hand with lower inflation. This confirms that in countries that inherit
high inflation, successful disinflation is conducive to long-term economic
growth.
• Foreign direct investment usually follows past economic
success and strengthens future economic success. Between 1989-2003, the
Czech Republic attracted $3,700 per capita in FDI, Hungary $3,400, the
three Baltic countries $1,000-$2,400 and Poland $1,300. FDI inflows per
capita to Ukraine and Moldova were only $128 and $210, respectively.
Countries with better economic outcomes tend to achieve better non-economic results as well. For example, between 1989-2001, energy efficiency (GDP per kilogram of oil equivalent) -- an important indicator of environmental impact -- had increased from 2.5 to 3.9 in Poland. In Russia, it rose from 1.5 (1992) to only 1.6 and, in Ukraine, it decreased from 1.6 in 1992 to 1.4 in 2001. Life expectancy has increased in Central and Eastern European countries, while it has declined in most ex-U.S.S.R. countries. For example, life expectancy rose from 71 to 74 years in Poland between 1990-2002, while it declined from 70 to 68 years in Ukraine.
There are similar trends in the infant mortality rate. Between 1990-2002, infant mortality per 1000 live births dropped from 16 to 8 in Poland, but only from 18 to 16 in Ukraine and from 21 to 18 in Russia.
What explains these enormous differences? In terms of GDP growth, it is tempting to look at differences in the initial conditions. For example, the Baltic countries -- Estonia, Latvia and Lithuania -- were much more dependent on exports to the old Soviet trading club, Comecon, (30%-40% of GDP) than were the Central and Eastern European communist countries (4%-15% of GDP). Following the collapse of the Soviet bloc, it might be argued, the Baltics were exposed to a much deeper decline in GDP.
Such differences in initial conditions, however, can explain only a part of the difference, and only in the early years. Despite huge initial shocks, the Baltics performed in the longer run much better than, say, Romania, which was relatively less dependent on trade with Comecon.
The differences in longer-run growth are largely due to more extensive market-oriented reforms and more successful macroeconomic stabilization. This conclusion is supported by a considerable, serious empirical literature.
Countries that catch up with reforms tend to catch up with growth as well. Take Armenia, which has radically enlarged the scope of economic freedom and brought its tax/GDP ratio to low levels, while strengthening fiscal discipline. Its GDP has grown 70% since 1996. This may be another indication that the low-tax model is more conducive to rapid economic growth than are systems with the extensive budgetary redistribution typical of larger Eastern European countries.
Better economic outcomes tend to be associated with better non-economic ones because some reforms are crucial to both. For example, market-oriented reforms sharply increased the overall efficiency of the economy and that both boosted economic growth and reduced environmental pollution. The introduction of the rule of law was important both for long-term development and for the enforcement of environmental legislation. Economic liberalization not only stimulated growth, but also made healthier food more available and relatively cheaper.
Postcommunist countries that moved more toward a market
economy achieved better economic (and non-economic) results than those
that implemented fewer market-oriented reforms or none at all. How does
this basic conclusion compare with the experience in countries with a large
state-owned enterprise sector, competition-stifling regulations and barriers
to entry, import restrictions and rigid labor markets, poor protection
of private property rights, fiscal irresponsibility, etc.? These features,
in various combinations, are characteristic of statist systems, i.e., those
where politics and state bureaucracy strangle the free market. They're
also characteristic of failed states, whereby ostensibly state agencies
are in fact instruments of a private plunder.
* * *
My reading of the empirical literature suggests three broad lessons:
First, no poor country has achieved lasting convergence under any of the statist or failed-state systems. By implication, institutional change which results in such a system precludes lasting convergence. Systems that suppress, heavily limit and distort legal market competition produce economic losers.
Second, successful cases of sustained convergence have happened under more or less free-market systems (e.g. the U.S. catching up with Britain in the 19th century) or during and after the transition to such systems (e.g. the Asian Tigers since 1960 or some of the post-communist economies after 1990). This suggests that the acceleration of growth does not have to wait until "good" institutions emerge. Rather, growth may accelerate during the reform process, provided the reforms improve institutions for productive activities. That's because the reforms increase output and productivity in previously repressed sectors (agriculture in China or the service sector in the Soviet system), or because the previous incentive structure encouraged massive waste (command socialism).
Such transition effects tend to expire after a certain
time, and the pace of future growth will then mostly depend on the strength
of permanent incentives to work and to innovate -- which in turn depends
on how far the country has moved toward becoming a limited state. Therefore,
the extent of market-oriented reforms, started under either a statist or
a failed-state system, matters for short-term and long-term growth.
Some economies, especially the Asian Tigers -- called
"growth miracles" -- have produced a lot of debate. There is no shortage
of explanations ascribing their exceptionally rapid growth to some special
state interventions (such as directed credits, or close links between the
government and business). A closer look at their experience suggests another
explanation.
For a while, the "miracle economies" differed in the
extent of state intervention (from practically none in Hong Kong to some
in most other countries), but they had one thing in common: A large dose
of market reforms, which, combined with their initial conditions, ensured
a greater degree of economic freedom than in other developing counties.
State intervention tended to obstruct rather than to promote long-term
growth. Witness the state-led heavy industrialization drive in South Korea
in the 1970s, which contributed to the growth of South Korean foreign debt
and diverted investment from more export-oriented industries. As a result,
South Korea's GDP growth sharply declined in the early 1980s, inducing
a change in economic policy towards less state intervention.
The common features of the "miracle countries" include
low tax-to-GDP ratios due to a lack of extensive welfare states. This tends
to increase labor supply and promote private savings. Growth leaders in
the post-communist world which have achieved low tax-to-GDP ratios, in
other words, should be encouraged to keep those ratios. An extensive welfare
state crowds out the voluntary forms of human solidarity, and -- especially
in poorer economies -- can obstruct economic growth. This is a warning
to those poorer economies which have now much higher public-spending-to-GDP
ratios than Sweden, Germany or France did when they had similar income
per capita.
Third, while all cases of lasting convergence have occurred
under more or less free-market systems, or during and after the transition
to such systems, not all market-oriented reforms have led to sustained
convergence. Reforms are frequently announced, but not implemented, or
they may be implemented initially but then reversed or seriously amended.
In such cases, criticizing the failure of market reforms is misplaced.
Market-oriented reforms may well fail -- if they are
incomplete in critical ways. One example would be introducing a fixed exchange
rate regime without fiscal discipline. Argentina's recent collapse reminds
us that fiscally irresponsible politics may undermine the results of genuine
market reforms. Market-oriented reforms may also fail to generate lasting
convergence if some of their crucial elements are badly structured, e.g.
a serious miscalculation of the initial level of a fixed exchange peg or
a bad incentive structure in the bankruptcy law.
None of these problems validate the search for a "Third
Way" solution as the best way to ensure sustained convergence. They are
merely hurdles to be overcome on the path to a full-fledged market economy.
Mr. Balcerowicz is president of the National Bank
of Poland, the country's central bank.
34. Be my guest Oct 6th 2005 From The Economist print edition The economic case for temporary migration is compelling; the historical record less so
LABOUR is globalisation's missing link. The flow of workers across borders is heavily impeded, leaving the global market for labour far more distorted than those for capital and commodities. The world price of capital may be set in America, and that of oil set in Saudi Arabia. But there is no such thing as a world price of labour. Wages can differ by a factor of ten or more depending only on the passport of the wage-earner, according to Dani Rodrik, an economist at Harvard.
Relaxing the movement of labour even a little would thus generate large efficiency gains. Mr Rodrik calculates that letting poor workers into rich countries, in modest numbers (equivalent to 3% of the hosts' labour force) for a limited period, could reap benefits to the developing world worth $200 billion a year. With numbers like that, he and other economists wonder why so much energy is spent freeing trade and capital, and so little expended freeing labour.
Illegal immigration
Oct 6th 2005
Economics
Globalisation
Immigration and asylum
Economics A-Z
As if in answer to that rebuke, Kofi Annan, the secretary-general of the United Nations, set up the Global Commission on International Migration almost two years ago. The commission, 19 members of the great and good from around the world plus a secretariat in Geneva, was charged with inspiring debate and reflection on all aspects of international migration and policy. On October 5th, it published its report.
Of its 33 recommendations, the most consequential is indeed a call for more temporary migration from poor countries to rich ones. Guest-worker programmes would realise some of the efficiency gains identified by Mr Rodrik. Opening up new avenues of legal migration might also help reduce the flow of illegal migrants, the report hopes.
As the commission acknowledges, history lends little support to their optimism. The Gastarbeiter programme in Germany—which invited Turks, Yugoslavs and others needed at the time to fill the factory jobs created by the country's post-war economic miracle—failed, at least on its own terms. Many of Germany's “guests” never left, and their families soon arrived. The bracero programme in America—which, from 1942 to 1964, recruited Mexican field hands to pick cotton and sugar beets in Texas and California—fared no better. The entry of hundreds of thousands of farm workers provided camouflage for a substantial flow of undocumented labour.
Nonetheless, the logic of temporary migration appears irresistible. Rich countries want migrants' labour, but do not want to look after these newcomers when they grow old. Ideally, rich countries would like a constant rotation of workers, arriving while they are young and active, leaving before they grow old and dependent. For its part, the commission argues that “temporary and circular migration” is also better for poor countries. One reason is remittances: the longer an immigrant stays away from home, the smaller the share of his wages he sends back.
If temporary worker programmes make a comeback, how should they be designed? In a paper written for the commission, Martin Ruhs, of Oxford University, explores the options. Some countries set a simple quota, filled on a first-come, first-served basis. The British government is more calculating, allocating visas to specific sectors, such as food processing, that express a need for cheap labour. Singapore is the most ambitious. Its ministry of manpower sets “foreign worker levies” that employers must pay to hire an immigrant. The levies differ by industry and by skill. To hire a skilled foreigner in construction, for example, an employer must pay S$80 ($47) a month. To hire an unskilled migrant, the employer must pay S$470. With these levies, the ministry can fine-tune the demand for immigrant labour.
Governments often claim they want to tailor rules on immigration to the needs of the economy. But the economy's needs also adapt to those rules. Philip Martin, of the University of California, Davis, and Michael Teitelbaum, of the Alfred Sloan Foundation, provide two striking examples. California's ketchup industry relied heavily on Mexican braceros to pick its tomatoes in the 1960s. The industry insisted it could not survive without these cheap hands. But when the bracero scheme was ended in 1964, farmers replaced the migrants with machines. Engineers invented a harvester that could shake tomatoes from plants and distinguish red fruit from green. Crop scientists developed new, ovoid tomatoes that the machines found easier to handle.
In Germany, Mr Martin and Mr Teitelbaum argue, the same phenomenon happened in reverse. The availability of cheap guest-workers in German factories slowed the adoption of new labour-saving technology. As the saying went at the time: Japan is getting robots while Germany gets Turks.
Some economists argue that governments should simply set a quota of visas and auction them. Alternatively, they could set a price for the permits designed to achieve more or less the same number of sales. The principal virtue of both schemes is that they allocate visas according to private perceptions of their worth, not government guesses about need.
Auf Wiedersehen, pet
How can governments ensure that guest workers do not overstay their welcome? In South Korea, temporary workers contribute to a special account that is refunded to them if they leave on time and forfeited if they linger. The British government is thinking of asking some migrants to post a bond, like a defendant on bail, which they will lose if they choose not to return.
If the economic gains to migration were not so great,
the huddled masses would not be so reluctant to leave the rich world when
they get there. “There is nothing more permanent than temporary migration,”
cynics always say. But equally persistent are the market forces and demographic
pressures that make temporary migration worth considering anew.
35. The World Is Flat WSJ October 7, 2005 The mainstream press is finally discovering the flat-tax movement that has been sweeping Europe
Sooner or later it had to happen: The mainstream press is finally discovering the flat-tax movement that has been sweeping Europe. It must be painful to credit an idea associated with the likes of Milton Friedman and Steve Forbes, but reality can't be ignored forever.
The latest news is that the government of Greece is contemplating a 25% flat-rate income tax to take effect in 2006, replacing a multiple-tier tax structure with rates of 40% or more. The Finance Minister insists that such a flat-tax reform is necessary to reduce a spiraling budget deficit, and that any lost revenue will be recouped "via an overall increase in income."
By our count, this brings to 11 the number of nations with a single-rate, postcard tax system. More dominoes are expected to fall in the next few years: Bulgaria, Croatia and Hungary are also preparing to feed their thousands of pages of tax code into the shredder in favor of lower, flatter rates. A flat-tax proposal was debated as part of Poland's recent election campaign. And one of the countries that started it all, Estonia, plans to lower its rate one more time, to 20% from 24%, which was down from the initial flat rate of 26%. Lithuania hopes to go to 24% from 33%.
As shown in the nearby table, most of the world's flat-tax nations today are the former Iron Curtain nations, which for 50 years attempted to create a workers' paradise through command-and-control economic systems. Many of these nations have swung full circle in the opposite, free-enterprise direction. Daniel Mitchell, chief economist at the Heritage Foundation, notes that Greece's decision would make it the first non-former communist European nation to adopt the flat tax. East Europe is exporting its economic system westward after all, but not in the way Nikita Khrushchev ever could have imagined.
In response, even Old Europe has had to consider tax reform, lest its economies become increasingly uncompetitive. Rather than catching the flat-tax wave, France, Germany and Italy have been attempting to stop it by outlawing tax competition through international entities, such as the OECD, the European Union and United Nations.
But in the meantime, Germany has decided it can't wait and has announced plans to cut its corporate tax rate to 19% from 25%. During last month's election campaign, the opposition party's candidate for finance minister, Paul Kirchhof, championed a 25% flat tax "so that workers don't need 12 Saturdays but 10 minutes to complete their taxes." Some analysts blame the proposal for the opposition's late collapse in the polls, as incumbent Gerhard Schröder's party fanned fears about the flat tax. But the fact that it was debated at all shows that even Germans realize they are under competitive tax pressure.
And what of the United States? The postcard flat-tax concept was virtually invented on these shores, originally by Mr. Friedman. Americans devised the economically optimal tax system and much of the world seems ready to embrace it -- just not us.
Back in the 1980s, a few Democrats (Bill Bradley, Dick Gephardt) entertained a tax reform of flatter rates and fewer deductions. But nowadays the political left derides the concept as some sinister plot to let Rolls Royce and yacht owners slash their tax bills. Their ideological blinders prevent them from learning the lesson that the new political class in Russia, Estonia and now Greece accept as a 21st-century economic reality: The best way to get more taxes out of rich people is to generate more rich people, and then give them more incentive to report their income by keeping tax rates low.
Russia, for example, has reported that it now gets more tax revenues from the rich from its 13% flat tax than from its pre-existing Swiss cheese tax code with massive evasion and 50%-plus tax rates. Russia's revenues with the flat tax grew in real terms by 28% in 2001, 21% in 2002, and 31% in 2003, according to a recent analysis by the Hoover Institution. If the U.S. had that kind of revenue growth, our politicians would be wringing their hands over what to do with budget surpluses.
Last year the Internal Revenue code achieved a new Olympic
record for complexity, with nine million words -- 12 times the length of
the King James Bible. High tax rates and mindless tax complexity are an
economic ball and chain. We hope President Bush's tax reform commission
will cut through the class-warfare blather later this month and endorse
a simple, broad-based, single-rate tax system.
36. America's Bad Trade Example WSJ October 7, 2005; Page A16
"If Canada and the U.S., as close as they are, can't have an agreement that is respected, what does that say about the future of the rules-based international trading system?" That's the question posed to us by Canadian Prime Minister Paul Martin yesterday at the Journal's New York office almost as soon as he sat down.
Mr. Martin was in town to speak to the Economic Club of New York. At the top of his list of priorities to put on the record, he told us, is Canada's deep dissatisfaction with the U.S. refusal to comply with multiple rulings that U.S. tariffs on Canadian softwood lumber violate the North American Free Trade Agreement (Nafta).
Mr. Martin's case was bolstered on Wednesday when a fourth Nafta panel ruled the tariffs illegal. Americans have a stake here too, since the duties add about $1,000 to the cost of a new home and affect thousands of jobs in industries that depend on lower-cost Canadian lumber.
"We keep getting panel decisions and they keep being ignored," the Prime Minister said. "The decision has been made and it should be honored." President Bush's vision of a strong North America depends upon the integrated market being allowed to work. That's as much in the interest of Americans as Canadians.
37. In Struggling European Countries,Momentum Is Building For (Gasp!) the Flat Tax By G. THOMAS SIMS Staff Reporter of THE WALL STREET JOURNALOctober 3, 2005; Page A2
FRANKFURT -- It is, for many Western Europeans and Americans, a public-policy heresy: the flat tax, a single rate all taxpayers, rich or poor, pay on income. But across the struggling economies of Europe, momentum is building for flat taxes, or at the very least, lower and simpler taxes.
Last week, advisers to the Dutch Parliament recommended a flat tax on personal income to boost growth and get more people working. In Italy, weathering a public-debt crisis and a flailing economy, Prime Minister Silvio Berlusconi's chief economic adviser advocates a flat tax to increase revenue and fight tax evasion by abolishing tricky exemptions and loopholes and reducing off-the-book employment that can result when taxes are too high. Opposition parties in the Czech Republic and the United Kingdom are pushing similar ideas, while Spain and Greece have already offered plans to simplify and cut.
"Tax competition is clearly at play here," says Erik Nielsen, economist with Goldman Sachs in London, referring to the game of trying to lure businesses by setting tax rates lower than neighboring countries. "But I also think the drive reflects a general shift in Europe towards less acceptance of high tax rates."
The flat-tax movement is led by Eastern European nations that are making the transition from communism and from the progressive tax system championed by Karl Marx, who in his 1848 Communist Manifesto called for a person to pay taxes "according to his means." The rationale behind progressive taxation is that the wealthiest people have a larger share of a nation's income and therefore should pay more in taxes than people with less income. Before Marx's views took hold, taxes had been flat in the industrializing world. Despite its Marxist origins, many Americans and Western Europeans to this day consider a progressive tax fair and just.
But to countries trying to build their economies after years of crippling communism, progressive taxation is increasingly viewed as the problem. A low flat tax, in contrast, is considered the solution. Lower taxes free up money for spending on consumer goods, investment and new jobs; and flatter taxes help draw foreign investment by making the system easy to understand by foreign companies. In at least one place where flat taxes have been the norm for decades, Hong Kong, growth over the years has been strong.
Estonia was the first European nation to adopt a flat tax, in 1994, quickly followed by Latvia and Lithuania. Last year Slovakia and this year Romania have adopted low flat-tax rates that are helping them grow quickly and undercut so-called Old Europe economies. Estonia's gross domestic product, for example, grew 6.3% on average in the three years after it made the move, compared with shrinking 8.4% in the three years before. With many of these countries now in the European Union, it is putting pressure on the more-established, more-sluggish western European economies to rethink their tax systems: even if it doesn't result in a full-fledged pure flat tax, these countries are at least headed in this direction.
Under a flat tax, all income is taxed at the same rate. Proponents argue that flat taxes eliminate complexities, such as brackets and exemptions, and the administrative burden of managing taxes disappears, freeing up resources for more productive parts of the economy. Opponents say it hits the low and middle-income earners and would initially drive up deficits.
The challenge is to come up with a rate that is low enough to be politically palatable but high enough to keep the government running. In the U.S., the idea doesn't have the backing in Congress that it did in the mid 1990s, when presidential candidate Steve Forbes gave it a high profile, because of how high the rate would have to be. But Europe has more room to simplify its tax system and reduce the overall tax burden. Most nations have multiple brackets and numerous obscure exemptions. And in the EU, tax revenues are about 40% of gross domestic product, compared with 25% in the U.S.
The debate played out in Poland's elections last week The EU's most populous new member suffers from 18% unemployment and is losing new jobs to its neighbors. The probusiness Civic Platform party promised a flat 15% tax -- not only for incomes but also for businesses -- to stimulate the economy. For individuals the tax rate currently varies, and for companies it is 19%.
The Civic Platform rival, Law and Justice, launched a last-minute campaign playing on fears it would hurt the poor. In one television spot, a woman opens a full refrigerator, but the onions, lettuce, and other foods begin to vanish one by one. That cost Civic Platform its lead, but the party will still govern with the victorious Law and Justice, which agrees that taxes need to be cut and simplified. "We're absolutely sure that we need to lower taxes for the Polish economy to move forward," said party head Jaroslaw Kaczynski, who may be the next prime minister.
Slovakia managed to overcome objections by creating an exemption for low-income people, making their tax a bit less flat but seen as fairer. It had immediate effects: South Korea's Kia Motors quickly moved to invest nearly €1 billion in a plant, which is also attracting other suppliers. Slovakia's stock index is up 170% over the last two years. Slovakia received kudos from President Bush, as well as Japanese Prime Minister Junichiro Koizumi, who is struggling to enact his own reforms.
The latest country to move to a flat tax was Romania. Last month[September], Standard & Poor's raised the nation's credit rating from junk to investment grade, expressing confidence in the health of finances after the tax reform. That will help Romania borrow at a lower cost and attract investment. Just days later, Romanian President Traian Basescu was in Detroit to make a sales pitch to Ford Motor Co.
But the flat tax still carries a taint in some countries, including Karl Marx's homeland. In Germany, Angela Merkel, a Christian Democrat, saw her lead in the polls diminish ahead of Sept. 18 elections when she named a flat-tax advocate, the nonpartisan professor Paul Kirchhof, as her designated finance minister. Her party didn't directly advocate a flat tax, and Mr. Kirchhof even said he wouldn't push for it anytime soon.
Chancellor Gerhard Schröder seized on the issue,
saying at one rally the German Volk couldn't become a guinea pig for an
unjust tax experiment. Ms. Merkel lost support and Mr. Kirchhof quit the
day after the election. And Germany still hasn't picked a new government.