WORLD ECONOMIC FORUM: GLOBAL COMPETITIVENESS INDEX 2006

This year's Global Competitiveness Index surprised many economists, managers, researchers, scholars and other people as well. Two years ago nobody could think of Swiss economic tiger on top of the Global Competitiveness Index issued by World Economic Forum.

Switzerland is truly the embodiment of the success story. The country has preserved its political neutrality for a long time. Aided by peace and neutrality Switzerland had almost no problems in facing challenges in the global economy. The country's institutional order is very sufficient in terms of protecting everyone's wealth and income when he enters the market. Milton Friedman, Gary Becker and Douglass North have defined solid protection of private property rights as a key element of the economic freedom. Heritage Foundation's Index of Economic Freedom firmly placed Switzerland among the freest economies in the world. Long years of stable politics and stable currency, relatively low taxes, secure financial system and many incentives for incoming investors have made Switzerland an attractive investment destination especially for small manufacturing firms. Larger businesses are internationally highly competitive while agricultural businesses are small and economic policy has insisted on largely protecting them from foriegn competition.




Despite of brilliant innovation performance, Swiss consensus-driven business and political system retard further economic growth. Similar distorsions could be seen in Germany, Italy, Austria and Slovenia. Several years ago, Switzerland has announced its intention to pursue free trade agreement with the United States. We hope that this comes true. Switzerland favors a moderate trade policy, far from being a protectionalist economy. Only restrictive agricultural trade policy is varying aside from this. Nearly all agricultural products are subject to strict import duties and variable quotas. Protectionist agricultural trade policy lowers the level of Swiss economic globalization. Relatively low taxes are an important aspect of producing incentives to acelerate more productive behavior and efforts in order to work, save and invest. Current top cantonal income tax rates is 35% while top cantonal corporate tax rate is equal to 23%.



A little bit worrying is unusually high public expediture rate (36% of the GDP) setup by the government. Bernanke, Mishkin, Laubach and Posen (1999) report that Switzerland adopted inflation targeting in December 1974. The desire of the monetary policy was to coordinate the inflation expectations of the public with policy objectives of the central banks. Monetary targeting has been quite flexible in practice. Switzerland announced a point target which arguably doesn't give the public the false impression that money is controllable over a narrow range. At the beginning og 1975 Switzerland was about to enter the worst recession in postwar history. The oil shock had triggered a downturn that must already have been under way. Although the Swiss franc helped to absorb the inflationary impact of the shock, that impact posed a serious threat to the Swiss export sector, which constituted about a third of GNP at the time. During 1975 exports of merchandise fell by 8% in real terms. Moreover, though subdued growth in real wages supported the Bank's fight against acelerated inflation, it also contributed to a sharp decline in real consumption which was worsened by a significant outflow of foreign workers. The money-targeting initiative did nothing to ease the high costs of Switzerland's disinflatio, nor did the Bank suggest that the targeting would provide a coordinating function for wage- and price-setters that would lower that cost. The adoption of a target was intended to cap inflation expectations by indicating a policy commitment and nothing else. Today Switzerland's annual rate of inflation from 1995-2004 is 0,77 percent.


Institutionally, Switzerland may be one of the best protectors of private property rights due to secure contratual agreements and high quality judiciary. According to World Bank, it takes 22 procedures, 215 days to enforce contracts on the whole. The cost of enforcing contracts is 11 percent of the debt which ranks Switzerland on the 9th place according to the flexibility of enforcing contracts. Switzerland is very open to foreign investment with some restrictions on ownership participation in certain sectors as well. Banking system is secure and offers a wide variety of financial products. Approving credits and loans is allocated on market terms. Aside from extensive regulation practices, informal business sector participation rate is among the lowest in the world according to Transparency International.

Components that led Switzerland to the top of Global Competitiveness Index were performed successfully. Infrastructure is one of the most sophisticated in the world. It presents one of the foremost requirements for good conditions in order to pursue economic growth and long-term economic development. Macroeconomic picture is a little bit off the anchor but macroeconomic forecasts for the future predict improvement in that way. Higher Education and training institutions offer excellent education opportunities while the cooperation between universities and economy returns profitably and produces excellent output in terms of knowledgeable achivements. Market efficiency and efficiency enhancers successfully derive the problem of business sophistication, as well as of technological readiness.



Other countries showed randomly mixed performance. Traditionally competitive Nordic economies scored very well. Sweden and Finland topped right behind Switzerland. The main drivers of Nordic formula for success are a very sound financial system, strong protection of private property rights, quickly enforced contracts, high R&D expeditures, excellent education system, technological readiness and above-averaged rate of market efficiency and other efficiency enhancers.

Read more:

WEF, Global Competitiveness Index 2006,
Forbes, Global Competitiveness Rankings,
Forbes, The World's Most Competitive Countries 2006,
International Investing Guide

IT'S TRUE

Read Trump's recent post discussing the issue of cheating on college. Here.

SWEDEN: MAKING ROOM FOR IMPROVEMENT IN ECONOMIC PERFORMANCE

The victory by Sweden's Conservative coalition in the September 17 general election was its first since 1991, and as the outcome became clear on a crisp fall night, it triggered ecstatic celebrations. Young people even stripped off their clothes and cavorted in the fountain at Sergels Torg, the gritty center of Stockholm.

Radical economic reforms are inevitable for Sweden. Free-market policies based on the continually-adjusted improvement for pro-business incentives will likely be the main platform for chargining up already strong economic growth (4,2% of GDP). Business sector needs to be free of rigid regulation in order to be more flexible in terms of faster hiring and firing of productive workers. If new promises are kept then small and medium-sized enterprises will be in for a better and freer ride in the future. Long-term prospects of economic growth should also get boost but it's quite impossible to say how much.

One of the most paramount concerns of current Swedish economic picture is very high unemployment. Officially its rate is equal to 5% but other resources are saything that actual Swedish unemployment is about 7,5% of the capable working force. Other sources are counting Swedish unemployment above 10%. By cutting taxes, employers pay wages to employees and trimming high incomes employers face difficulties in hiring the most productive participants in the labor market since employers are facing heavy burden with gradually imposed income tax rates on those labor force whose contribution to progress and change in dynamic environment is essential to dynamic business and growing economy as well.

Sweden should immediately cut some of very irrelevant elements of welfare state. Taxes on luxury should be immediately dismissed in order to encourge dynamic and productive entrepreneurship that will evaluate agendas for strong global growth. Swedish tax system is definitely one of the foremost disincentives to save, work and invest. Current Swedish system is geared toward stopping wealth instead of stopping poverty. In the 20th century Sweden succeeded in terms of strong economic growth and remarkable level of economic freedom. This enabled strong growth upon creating wealth. After Sweden was getting richer, it was more capable for spreading strong welfare-spending habits. On the opposite, marignal tax rates grew as well. Punitive taxes are now a serious threat to country's overall competitiveness. Sweden enjoys many benefits from sections such as excellent education system. If Mr.Reinfeldt's promises are kept country should progress faster towards massive privatization of state hospitals to private companies. It's essential to improve the efficiency of health-care system. Large public spending habits in health care invariably result in less efficiency compared to invested resources. Welfare state means a warfare state. Private welfare is what creates prosperity and wealth. In order to have welfare policy-makers need to adopt pro-growth and pro-business reforms outputting in people who are able to save, work, invest and take part actively in entrepreneurship and business.

Mr. Reinfeldt should avoid gradualist approach to economic policies and immediately remove government intervention completely. Costs of adopting free-market reforms are not lower than costs of gradual advancement in careful and slow-moving imposition of economic policies aiming to increase stimulative incentives to let free entrepreneurship grow.

In fact, the Scandinavian or Nordic countries are admired across Europe for their ability to combine respectable economic growth with generous welfare programs. A fine-tuning of the model will likely make their approach even more appealing.

The best way to fund tax cuts is to launch hefty, fast and efficient privatization program, floating government stakes in a portfolio of companies including Nordea, a major bank; TeliaSonera, the largest phone company; OMX, the stock exchange operator; and SAS, the airline. The value of these shares is about $30 billion. All of these issues rose briskly on Sept. 18, with the broad Stockholm market up nearly 1%.

It is true that Social Democrats left Swedish budget in surplus but economic performance and overall competitiveness declined. But their policies toward low employment growth and massive outlays for public sector produced disincentives in gearing productive pariticipation. According to Fraser Institute's "Economic Freedom of the World" Sweden, beside Slovenia, has the most extensive public sector spending compared to the portion of GDP contributed to financing public sector. The Swedish krona has already strengthened to $7.24 to the dollar on the morning after the election as investors anticipate higher growth and spending.

Sweden can gain many benefits from flat-rated tax system. Swedish decision-makers should accelerate stopping and cutting public consumption, the growth of which must not exceed the growth of GDP. Lower taxes will encourage people to work on more productive things than seeking loopholes. Investments and entrpreneurial project are not the matter of taxation. They are the object of growth and productivity.

Low taxes, minimal regulation and more flexible labor market are a key to creating wealth and long-term prosperity. Sweden has a great chance to show others how this simple formula works in practice.

INDIA: MORE MARKET, LESS GOVERNMENT

Today's India is one of the most rapidly growing economies in the world, right after China. FDI rules for investors are becoming more and more liberal while real estate investment is booming as well. A stronger financial system would ensure India faster economic growth and higher revenues without high tax rates. Tight government control over almost every part of the financial system is undermining Indian economic growth. To sustain rapid growth of GDP and spread its benefits India needs a financial system that is comprehensively market-oriented. The shortcomings of Indian financial system fall largely on three major areas:



1. Formal institutions attract only half of Indian household savings.

2. These institutions allocate more than half of the capital they do attract to economy's least productive sectors such as state-owned enterprises, agriculture and unorganized sectors. The most productive corporations in India receive only 43 percent of all commercial credit.

3. Since the financial system is weak in both aspects - mobilizing savings and allocating capital - borrowers in India pay more and depositors receive less than in comparable economies.

This huge failures place heavy burden on India's economy; just fixing them would give it an immense boost. Research by McKinsey Global Institute predicted that a coherent program of reforms for the financial system and its institutional framework would add 47 billion to India's GDP growth. This would increase current economic growth from 7 percent to 9,4 percent. This would place India upon current Chinese economic boom. The resulted growth of GDP would be slightly below shy be 30 percent above current projections by 2014. This would lift unexpected number of people out of poverty. Financial reforms are one of the key transformation areas in the process of Indian convergence. Without dynamic and purely market-driven financial institutions India will hardly rely on competitive and innovative entrepreneurship since investors and entrepreneurs would not be able to find proper financial support to their projects. Governmental control and regulation over financial system remains unusually high. Many forecasted reforms suddenly ran out of steam. Change and progress will require strong rethinking of goverment's role in financial markets.

However, without serious reforms of the financial system India will never be able to complete the transition from a poor economy, dominated by agriculture, to a prosperous economic oasis dominated by services and manufacturing. Financial reforms offer a lot of opportunities. In a larger sense, financial reforms are greatly-fueled challenge to put contemporary academic research results and professional recommendations soundly into practice.

PUBLIC SCHOOLS? MAKE THEM PRIVATE, COMPETITION NOW!

It is amazing what competition does for consumers. Those entire businesses scramble to offer us good products at low prices. The power to say "no" to one business and "yes" to another one is awesome.

Unfortunately we can't apply the idea competition to current public schools.

Teacher Unions and bureaucrats are against it. They want to dictate where our kids go to school. The idea of public school as a system of social justice where everyone is harmonized in utopia and where equal opportunities are transferred to every child is actually a big lie that leaves heavy emotional consequences on people's feelings. We're all consumers. We all demand after certain products. If we flow into two stores where retailers offer us Nokia and Ericsson cell phones we analyze the information and let retailers compete and struggle for our attention. The one who offers sound products after low prices the one will win. We're the one who decide which cell-phone we will buy. So do we also demand after good and efficient education for our children? But according to current fiasco of public education we're not so free to choose. If we're not satisfied with courses, lectures and topics our children receive we don't have a choice to send out children into alternative school where we could get better education and better improvement of knowledge our children gain.

However teacher unions and bureaucrats dislike competition in education. Then they are having a monopoly. Subsequently they offer shoddy products at very high prices and the costs are booming as well. It's disgraceful to talk about cost-free education because there's no such thing as free lunch as well as there's no such thing as cost-free education. Taxpayers are paying a big fraction of their incomes to finance government-supported schools. They finance governmental service. They don't finance their children. After each € that is cash-out of their income and transferred to education budget, parents must divide paid euros into thousands of fractions and then they're able to see how little their child gets from their fractional income transfer to the government. There's no such thing as universally cost-free education. You have to pay it either through taxes or directly to educational institution. In fact we all want our money contributed to education to be spent efficiently. And what do we get for this? Public schools with dismal and relatively poor performance is what makes our children uncompetitive with the most productive individuals in countries such as South Korea where the rate of educational enrollment on all levels is the highest in the world and where 65% of all schools are placed in private sector.

Public schools are government monopolies. They are virtual monopolies of the state. They are run pretty much like Cuban or North Korean schools. Public system education operates like planned economy in which everyone's role is spelled out in advance and there are few incentives for innovation and productivity. It is surprise to see how our school system doesn't improve despite an enormous amount of taxpayers' money that is spent in public education. When a government monopoly limits competition, we can't know what ideas would bloom if competition were allowed.

Friedrich August von Hayek, Nobel-Prize winning economist wrote: "Competition is valuable only because and so far as its results are unpredictable and on the whole different from those which everyone has, or could have, deliberately aimed at."

This means that no human being can imagine what improvements a competitive market will bring.

I'll try anyway. I bet we'd see cheap and efficient virtual schools where you learn at home on your computer, music schools and sports schools and who knows what?

Every economics textbook tells you that monopolies are bad because they charge high prices and offer shoddy products. It is government who gives monopolies so why do we entrust something as valuable as children to government monopolies. If parents were not taxed to pay for lousy government schools, more might teach their kids at home.

A vast majority of teachers teaching in public schools have never worked in private sector so many of them don't know how to learn kids the hottest productive and global issues and topics in order to equip children for business, growth, challenge and progress. The outcomes of public schools are functionally illiterate children. That's because bureaucrats delegate how schools must teach children. And they teach them unproductively. They teach them by force and nearly everybody finds schools disgusting. Instead of pouring more money into the failed government monopoly let us free parents to control their own education money. Competition is that small but mighty seed of progress. It is a powerful wheel which bureaucrats can't resist on the long-run. Competition is the solution to save our school from governmentally and bureaucratically wasteful tyranny.

There's no need to prolong public schools. The simplest and most efficient plan is to privatize them completely and let them grow in order to impose some heavily needed innovations and productive reforms. Public education is a failure that needs to be removed by being radically privatized. Planned economy and monopolies have caused a lot of harm, burden and waste. Let's not allow the same to be done with children.

SAVING IRAQ

Steve Forbes writes about monetary reconstruction of Iraq. Read his comment here.

ESTONIA - THE MIRACLE OF FREE MARKET

Click here and see how Estonian economy is skyrocketing.

Estonian GDP growth has risen increasingly fueled with strong domestic consumption and strong growth in export sector. Growth was increasingly reliant on strong expansion in the construction and service sector. Analysits predict continually rising economic growth extending from 9,4 percent to around 10 percent for this year.

FROM COMMUNISM TO KEYNESIANISM

How effective is deficit spending in reviving economic growth? A recent test case of applying Keynesian-style cyclical cures to resolve structural problems can be seen in Japan. Since the end of its "bubble economy", most of Japan's additional public-sector expenditures were financed by deficits. With government spending exceeding 800 trillion yen it was fives times greater than U.S. public spending in the eighties. Despite massive expeditures combined with expansionary credit policies and zero interest rate Japanese economic growth in the nineties was reached at 1,1,%. Tokyo's outstanding public debt arose from 56% of GDP to an amazing 130%. Many credit rating agencies announced much higher figure. Some similarities between China and Japan inevitably exist. Both countires small and medium enterprises are starved out of capital while industrial behemonts are kept alive. Rising incomes and redcing unemployment in both coutries could induce policy changes so a new class of entrepreneurs can be a new sustainable basis of future growth. Even despite high level of saving in both countries, the allocation of these funds is largely inefficient. Japan and China suffer from a lack of a well-functioning domestic capital markets. An obvious problem with bank-lending is the vulnerability to political pressures. Indeed, the politicization of decisions on capital formation is at the core of the serious financial sector problems in China and Japan. Both countries need domestic stock and bond markets that are wider and deeper. Since capital markets require greater transparency and accountability, massive failures are less likely. Restructuring needs to be aimed in Japan and China as well. Proper and dynamic restructuring certainly requires very deep reform of management practices and government involvement in the economy.

Read Christopher Lingel's column here.

FREE MARKETS ARE THE MAIN DRIVERS OF GROWTH, NOT TECHNOLOGY

Many unsophisticated economists believe that technology is the main engine of economic growth but in larger terms this confuses cause and effect of economic growth itself. Technology is a reflection of growth and growth is a function of free markets.

Donald Boudreaux explains this coherently. Read his column here.

ON THE NATURE OF THE CORPORATE TAX

Rado wrote an excellent column on the truest nature of corporate tax and its irrelevance which makes an oasis of rent-seeking for interest groups and political parties. Rado has done excellent work and I therefore recommend you to read the column:

"Let's stop at corporate tax and ask ourselves why we have it. The answer is very simple - to full the budget so that political parties can later finance their support with subsidies and exhaust the budget as well. If this wouldn't happen then we had an efficient health care, pension system would not be similar to the "pyramid game" while education system would not be as bad as it is today when there is no Slovenian university among top 500 in the world. Let us ask ourselves why businesses make profits? To pay their workers for the participation of productive behavior and to finance their development or do businesses make profits in order to finance the voters output and what interest groups count as an advantage..." (http://www.finance-on.net/?MOD=show&id=162395 - only membership subscription required)

POWERFUL

"I enjoy competition. Competition is the essence of business and the essence of life, to a certain extent. In life, you have winners and losers, and often it's a small group of people that seem to be the winners. Some people don't think they're going to win—and they usually don't.

People who win have a certain level of intelligence, but more important, they never, ever give up. I went to the Wharton School and I know a lot of really smart guys. I also know people who weren't as smart but did better. Some of the smart guys just weren't able to handle pressure and sustain the competitive spirit. They gave up.

Failure is a great benchmark. It's something that keeps people successful, because they don't want to fail. I've never failed. I never went bankrupt or out of business. I had bad moments. I hit bad markets. I hit bad times. I also blame myself for certain things. I wasn't as focused as I could be. But the word "failure" is a great thing to think of, because you fight hard not to be there.

I think very positively. The Apprentice became the No.1 show on television. We just finished shooting season six. I said to myself, "It's going to be successful." I do that with deals, too. It doesn't always work out that way, but that's the thought process. You want to stay positive. You've got to back that up with preparation and work. But you have to have the ability to never, ever give up.

I've competed against a lot of very tough people. If I talk about them, they'll come at me to give it a second shot. And I've done very well. There are some very smart, very devious, very sick, very evil people out there in business. And there are some very smart, very competitive and very nice people. I think of myself as being in the good camp.

If you're competitive, you're not competitive in one thing and then you turn into a marshmallow everywhere else. You're competitive in everything. I compete with myself, and in fact I think of myself as my biggest competitor. When will I relax? Maybe when I kick the bucket."

Donald TRUMP on Competition

ECONOMIC GROWTH AND INVESTMENT IN THE ARAB WORLD

Xavier Sala-i-Martin, Elsa V. Artadi: Economic Growth and Investment in the Arab World

FRANCE'S POOR ECONOMY

TCS Daily Column, Au Revoir, Les Entrepreneurs, explores some of the data and experience on weak and collectivist France's economy:

"In 2002 the French lost more than twice as many weeks per worker due to sick leave compared to the US and a recent study by US and European researchers found that the wage and benefits returns to long-term employees in France has since 1976 been consistently lower than in the US. According to the "Global Entrepreneurship Report 2000" the percentage of those who were starting new businesses was five times higher in the US compared to France.
The problem is not only that the French economy punishes the very rich, discouraging them from working and creating businesses - but that it does the same for those with low incomes. The French welfare state creates a high "unemployment trap" for low-wage earners.
An unemployment trap is a measure of the percentage of gross earnings which is "taxed away", through social security contributions, higher tax and withdrawal of government benefits, when a person returns to employment. The calculations are based on a single person without child who earns 67 percent of the average earning of a full-time productions worker in the manufacturing industry. In France the unemployment trap corresponds to around 82 percent - creating a very small economic incentive for low income workers to actually go to work."

HUNGARY IS CAPTURED INTO THE EU PRESSURE, REFRAINING FROM TAX COMPETITION

Hungary's quite successful transformation form Soviet-styled command and controlled economy into largely free market economy has been a great leap forward. One of the key components of advocating liberal economic agenda has also been quite reasonable tax policy with low personal and corporate taxation as well. In fact, Hungary is having second lowest corporate tax rate (16%) in EU, after Ireland (12%). However, the situation is rapidly changing and the country is heading in the wrong way to meet the criteria to enter the EMU. Hungarian Government has decided to get in touch with EU-styled tax harmonization. The proposed plan excludes the possibility of cutting corporate and personal tax rate in the next five years. This clearly misguided economic policy will not improve conditions to attract more foreign direct investment and the flow of skilled workers as well. There is little hope for Hungary to attract more offshore companies. In order to cut the deficit, Hungarian lawmakers imposed higher VAT and higher taxes on business profits. Such a backward economics will have unimaginable consequences. The middle tier of VAT has therefore been increased from 15% to 20% while the plan has also introduced 4% solidarity tax on business profits and personal incomes exceeding HUF 6 million (US$ 27,500). Hungarian officials say that government is considering a shift to more consumption-based taxes instead of taxing incomes. But the thing is not over yet. The agenda included the introduction of 20% tax rate on earned interest and foreign exchange gains as well. The main objective of the Hungarian government is to ensure macroeconomic stability which is now below the Maastricht criteria. Budget deficit equals 8% of GDP and public debt (58,9%) is one of the highest in the EU. But increasing taxes on dividends, business profits, corporate and personal income will not efficiently result in the fulfillment of Maastricht targets. The effective step forward would be to ignore the EU and continually reduce tax rates on both personal and corporate income as well. As companies would be willing to engage in market behavior, wages would go up and as the result of lower tax rates, tax revenues would go up. The government should continually reduce public consumption and budget deficit by paying off the public debt. The currency has lost 9% this year, the third-worst performance by a European currency behind the Icelandic krona and the Turkish lira. As the result of a little bit higher inflation, the interest rate went up for a little bit as well. Next, Hungarian Central Bank should announce the policy of inflation targeting and stop increasing the quantity of money more than the annual output growth (GDP growth) lifts-up. If enacted, the best way for Hungary to meet Maastricht criteria is to cut its spending habits a little bit and to start paying-off the public debt very quickly. The continuation of lowering tax rates would result in more tax revenue, not less. High labor taxes caused Hungary to lose investment opportunities. The state’s role in controlling prices is still very strong demonstrated by the government’s price limitation on privately owned firms. Red-tape regulation is still one of the most paramount concerns. Business licenses are hardly obtainable. Retail businesses still counter a web of burdensome government regulation that makes it difficult to open-up the store. However, there is still a lot to in Hungary to finally reach the macroeconomic stability. But raising various taxes is certainly not the soundest way to pursue fine and reliable macroeconomic situation of the country.

Suggested Reading:

Hungary to refrain from tax cuts through 2011, Budapest Business Journal
Hungary’s businesses and consumers braced for tax hikes, Tax News
Hungary caves in to EU pressure, The Market Center Blog
Hungary's foolish tax increase, The Market Center Blog