Wednesday, January 31, 2007

EUROPE NEEDS LABOR MARKET FREEDOM

Johnny Munkhammar, The Urgent Need for Labor Freedom in Europe and the World, 2007 Index of Economic Freedom

TAX COMPETITION YIELDS PROSPERITY

"Zurich will be the biggest Google location outside the US"


Stefan Keuchel, Google Spokesman in Switzerland


Tax federalism is a marvelous system. It allows different preference to come into action but as the most important thing - it creates the structure of tax competition among governmental units so that when the competition among various units, firms, individuals or even political units is established, no statist welfare (anti-growth) programs could yield better results. It is very much an empirical recognition.

In Europe, the cradle of state welfarism, high tax rates on corporate and individual income are combined with rigid structure of the labor market through which extensively restrictve governmental regulation creates the environment of labor sheltering which is a gateway to structural unemployment. It usually becomes very tough to tackle it, when policymakers are unwilling to pursue structural reforms in various fields. High tax jurisdiction presents a striking punch to human capital creation.

According to a vast amount of empirical studies, human capital is the main driver of economic growth. When strongly progressive tax rates are put into action, human capital switches its behavior towards the evasion. This comes into effect when brain-drain explodes. In recent years, numerous educated and highly sophisticated graduates have escaped European countries because high taxation did not allow them to enjoy the fruits of economic growth. High tax rates in Germany, France, Sweden, Slovenia and Italy as well as in several other environments, punitively penalize the productive behavior.

Thus, policymakers in such countries are constantly concerned with tax revenue instead of being focused on how to implement incentives to produce and serious tax reform. High tax legislation inevitably reflects the cage in which the government has fallen. Interest groups and rent-seekers spent a harsh amount of time on putting pressure on policymakers not to implement structural and tax reforms because, as a consequence, an important part of their non-market income would decrease significantly.

As a matter of fact, if we take a closer look at the budget outlays, we see that the pressure of social groups on the government is endless. Those groups present an important source of financing political campaigns and political support as well. The government has to collect enough revenue to finance those groups through taxpayers' money. Thankfully, basically logical principles cannot fall off the cliff. Laffer Curve clearly explains the behavior of tax rate-tax revenue relationship.

When tax rates are low, government collects more revenue than when tax rates are climbing high. Empirical evidence shows that low tax rates energize productive behavior such as risk-taking, work and entrepreneurship. Low (flat-rated) taxes enable more disposable income. In the long run, the cumulative effect of low tax rates, reflects higher level of prosperity as well as a standard of living much higher than it would if the productive behavior were penalized through extensive strongly progressive taxation of corporate and individual income.

But there is an exception in Europe. Switzerland. Tax competition among cantons is spinning further as cantons are given a full degree of decision making about corporate tax rates. In recent years, tax rates on corporate income fell dramatically in the majority of cantons. Numerous international companies have set their holdings there in search of lower tax rates.

Kraft Foods has moved their headquarters into Zurich. By the middle of the year, the European headquarters will be moved from London and Vienna to Zurich. Kraft has rented office space that can house up to 600 people near Zurich airport. The relocation service has offered prime conditions for companies. As announced, Google will radically expand its business activities at the Hürlimann industrial complex in Zurich. The new premises provide a space for a total of 1,600 employees. After India, this will be second software development center abroad.

Prime business conditions for companies, coupled with solidly sophisticated infrastructure, are often the main channel for further influx of foreign firms. In Switzerland, good transport links, sound supply of financial services and a quality of life that attracts a high educated workforce and research facilities offered by Federal Institute of Technology (ETH) and Zurich University, are among the most stunning pillars of a growing capital inflow from abroad.

Google, for example, has recruited ETH spin-off technology firm Cybercity to help develop an interactive map Google Earth. Cybercity has utilised its skills to put detailed faceds on blank buildings on the internet program.

Swiss economic and business climate is boosted by low corporate tax rates offered by cantons in Switzerland. The Swiss strategy has been awfully criticized by its neighbouring countries. The EU, for example, has been roaring loudly against the tax competition model in Switzerland. Many foreign firms, including Kraft, have moved to Switzerland to reduce the aggregate tax burden caused in typical environments with punitive corporate tax rates.

The strategy of offering tax breaks to investors is largely a reason why Swiss business environment is the most wanted from international companies seeking to reduce the cost pressure resulted from unfair high taxation of corporate and individual income. Companies evaluate a business location in accordance with operational conditions.

ow tax rates on corporate and individual income are not a sole factor in attracting companies from abroad. Sophisticated and high-quality business framework for companies and investors vibrantly attract them as taxation and labor issues in high tax countries are becoming irresistable. Saving taxes and generating profits enable company to reinvest in its business and expand largely.

The competition among cantons to set corporatate tax rates independently from the federal government, was hot at the beginning of the last year, when Obwalden slashed its rates to 6,6 percent (!). Obwalden attracted 376 firms in the first 11 months of 2006, three times more than in 2005.



Tax competition is what has made Switzerland an economic tiger on an international basis. Very competitive domestic as well as international corporate tax rates are inviting international companies to set their facilities and holdings there. Tax competition is a vibrant mechanism through which physical and human capital engine the productive behavior.

Tax competition is a "big-mac" opportunity for small countries such as Slovenia, Estonia, Denmark and Iceland. Small countries carry a feature of faster adjustment to real competitive advantages in the global economy. Without the implementation of radical structural reforms, competitive tax reform, liberalization and deregulation, entrepreneurs from various countries will not go to Switzerland solely on vacation, they will probably go there forever.

Monday, January 29, 2007

MILTON FRIEDMAN DAY



Happy Milton Friedman Day everyone! The new documentary about professor Friedman, The Power of Choice: Life and Ideas of Milton Friedman, is being broadcasted by PBS stations. Professor Friedman was one of the greatest heros of the 20th century. His legacy of theoretical perfection and academic excellence continues to live vividly as his ideas of free enterpreneurship, personal liberty and open society echo the spirit of the man who revolutionized the economic and social life in the 20th and 21st century. We will always remember him.

Recommended further reading:
- The Power of Choice: Life and Ideas of Milton Friedman
- Paul Krugman: Who was Milton Friedman
- Milton Friedman Day
- Greg Mankiw; Milton Friedman Day
- Challenge the Status Quo

Friday, January 26, 2007

I'M A PROUD FRIEND OF ISRAEL

Since September 2000, Israel and its citizens have been going through dark times. Homicide bombers blowing themselves up (and by that taking lives of innocent civilians with them) have become an overwhelming, frightening, everyday sight in the streets of Israel. Israel is being compelled to fight a fierce war against the terror infrastructure of the Palestinians, and now has been forced to open a second front in Lebanon, against the terrorist group Hezbollah.



Israel and its citizens need to know their friends and supporters are standing by them at these harsh times!

Are you a friend or supporter of Israel?

Visit: Here

Wednesday, January 24, 2007

FLAT TAX POLICY FOR A PROSPEROUS FUTURE

Alvin Rabushka of Stanford University has publihed a brief paper discussing the spread of flat tax regimes around the world. The global behavior once again demonstrated that smaller and virtually unseen economies tend to absorb their comparative advantages much faster than their hammering counterparts. The tax code in Kyrgyzstan established a 10 percent flat tax on personal and corporate income. The immediate chain reaction move to neigbouring Kazahstan where the policymakers seriously consider the implementation of flat tax and a total re-establishment of the country's tax code. In August 2006, Uzbekistan's parliament adopted the budget which provides for several significant tax cuts. The corporate tax rate will be set at 10 percent in 2007 while individual income tax rates will also rapidly shift toward a lower proportional burden of individual income. Flatter taxes are also spreading across Europe. Czech Republic, Poland, Macedonia and Montenegro are considerable examples of a productive tax policy. Montenegro, for instance, set the corporate tax rate at 9 percent. Signs of improvement in the reduction of tax burden are also seen in Spain and Iceland where significant cuts have been made in terms of reducing gradual levels of taxation.

Further analysis of changes in tax policy will soon be posted on my blog.

THE ECHO OF BUSINESS MOBILITY

The ability access the information is coherent with the mobility of the business sector to adjust its capacity toward the reach of further trajectories of optimizing the flow of information. Recent Nokia's research paper on a holistic approach to business mobility has outlined new ways and linking channels through which the mobility of adjustment is exercised. Of course, business mobility varies from specialized firm functions and thus cannot be taken as unified, especially from the microeconomic point of view. In sum, business mobility could be separated into three main branches, (1) individually preferential mobility which aims to dynamize the information access regardless of location, time and day, (2) the mobility of processes streams to the point where cost-adjusted efficiency meets stated business objectives and (3) a technological mobility underpinned by a sound infrastructure within the firm. The opportunity costs of degressive mobility can skyrocket when firm's output size does not meet strategized business objectives. Among individuals, low flexible usage levels and the lack of adoption highlight the resistance to adopting new solutions. Opportunity costs of degressive mobility do not galvanize operation processing since the gap between cost efficiency and low levels of productivity goes up. According to recent experience, technological impact of degressive mobility implies slowly accelerated integration of sophistication. The inevitable result is that market distorsions occur unexpectedly. Negative effects of low mobility could increase unpredicted price pressures while this could stimulate falling of the edge of competitive position in the market. In microeconomic literature, recent suggestions and mobility behavior observations suggest that fewer steps are vastly needed to avoid the grasp of 'black hole'. Sound management implementation and decision policies could carry out a significant improvement in the environmental reform in the firm where mobility could become attractive to employees and thus, significant cost burden would disappear. The benefits of greater mobility are astute; increased levels of satisfaction and motivation, healthier balances, the optimization of corporate capacities, increased individual efficiency and team performance. Operational processes gain from increased mobility in terms of productivity's open space, improved agility and responsiveness, improved customer service and openly dynamic space for further service opportunities. The set of control of information flows is also required to prevent information from being disputed by inside trading. The control of external shocks is a little bit more difficult since this could seriously threaten the agility of the units within the firm. Risk could be minimized through support policy and system's response to immediate changes and shifts where the gap between assumed productivity and coupled efficiency is stimulated through paying not enough attention to internal efforts in order to dynamize the spectrum of mobility.

Firm's structural improvement in internal environment as well the control of absorbing risk predictions in decision making, is definitely one of the most slamping steps ahead of current market performance. As I have demonstrated above, dynamic mobility stems from individual drift, operational processing to technological readiness to predictable and unpredictable changes. Not paying enough attention to mobility within the firm could seriously impair abilities and potentials of the firm to enhance productivity growth and thus stimulate individual output and team performance.

Monday, January 22, 2007

PRODUCTIVE BEHAVIOR IN SWEDEN

"The Swedish model serves politicians as an inescapable excuse for raising tax rates on personal and corporate income as well as for a guiding tool in how to undermine the dynamics of the labor market through restrictive government regulation which sets heavy obstacles to productivity growth in the business sector. Sweden's image of a social country that creates "social tranquility" is largely a myth that has become so sticky and undroppable to many unsophisticated experts."

Rok SPRUK, the author of Capitalism & Freedom

Nima and Tino Sanandaji have written a thorough brief analysis on the state of productive behavior in Swedish economy. The authors highlighted unemployment, entrepreneurship and working ethics as a system in which there is only little room for entrepreneurship. The article can be read here.

Friday, January 19, 2007

THE BIOTECH MIRACLE IN DENMARK

Danish biotech companies are reaching a tremendous success after having invested nearly DKK 5 billion (EUR 675 million; USD 520 million) in biotech industry. Danish companies have been far more successful than their European competitors, especially when it comes to raising capital from venture companies. Although Germany has more biotech companies than any other European country it raised only USD 101 million from venture companies while the figure for Denmark from January to September was USD 196 million. In Sweden, for example, the total value of raised venture capital was USD 24 million. Danish biotech companies grew from small companies into established perspective ones. A significant contribution to this success belongs to well sounded venture capital markets as well as to dynamic and well-adjusted investment behavior. A closer look at OECD Figures reveals that Denmark has attracted more capital venture companies, in the percentage of the GDP, than any other European country. Very much of the success is attributed to 'Medicon Valley' biotech network based in Øresund region which includes Malmö and Copenhagen. Recent trends have shown that investment opportunities are sounder in Denmark as they lean towards. Thus, companies are running high on cyclical effects. Danish companies are known after their spiral financial ability and that creates the basis for further value empowerment. Statistics shows that the number of Danish biotech companies is steadily growing as there has been a strong 83 percent increase since 2000. Strong sustainable component of research and development supporting companies has contributed its share to the biotech miracle of Danish companies as those companies rely on the service and operational quality which suitably goes in line with growing challenges in the sector of biotechnology.

Source: The Copenhagen Post, Jyllands Posten

INCONVINIENT TRUTH FOR AL GORE

Mr. Flemming Rose and Mr. Bjorn Lomborg wrote an article on how Al Gore finds the other side of the global warming as fundamentally unacceptable. Al Gore's road to an environmental obsession will leave an average person 30 percent poorer and thus much less able to tackle the problems in a fast-changing world. Al Gore also highlights malaria problems in Nairobi, Kenya, though WHO has published different findings. Today, Nairobi is free in malaria but in the 1920s and 30s, when temperatures have been much lower, the malaria occured constantly. Al Gore mischiefly ignores the facts about Antarctica. His movie presents only pictures of 2% of dramatically warming part of Antarctica but he ignores the fact that 98% percent of Antarctica got cooler over the past 35 years. He adopted a similar approach in the case of shrinking sea ice levels in the Northern Hemisphere although the shrinking of ice mass into the sea in the Southern Hemisphere accelerates as well. It is estimated that 2000 more people in th U.K. will die from global warming but at the same time, Al Gore rambles the fact that 20 000 lives will be saved as colding temperatures will decrease.

In the light of government intervention, global warming could cost us $553 trillion over time. It's a crucial passage to make the right decisions to face the inevitability of global warming. At the same time, the global warming challenge is an opportunity for an entrepreneurial, research and technology sector to device reasonable and cost-benefit solutions to the problem instead of implementing threatening governmental regulation through the launch of poisenous intervention. Global warming is very much like an equilibrium. Some forget to take well-known facts into account and thus consider the problem from wrongly seminated assumptions.

Wednesday, January 17, 2007

SWEDEN: SUCCESS AND FAILURE

“We must understand that we are at the beginning of the creation of a new European economy in the context of a rapidly changing global economy. The stagnation in some of the central economies isn't the really interesting story at the moment -- the interesting story is the success of the radical reform policies initiated by Estonia a decade ago and recently reinvigorated by Slovakia. Over time, the success of these reforms, and the new growth opportunities they are creating, will influence all the other European economies. Few things have been as misdirected and counterproductive as all the talk about safeguarding some imaginary European social model. It has created the impression that change and
globalization is something that is threatening and dangerous, and that the
task of politics is to resist change. It has been truly damaging to Europe as a whole.”
--Carl Bildt

Swedish model is oftenly traced in mainstream media. It is also interpreted on a large basis especially in transitional developing countries. In the context of economic debate, critics, columnists, commentators and also professional experts point out that Sweden is the most successful society the world has ever known. In Slovenia, the economic debate about Swedish model of combining social welfare and sound economic performance has been reaching its peak as well. The question that comes to our mind is wheatear Swedish model, based on high income tax rates, extensive welfare and income redistribution, is really as efficient and productive as many academics and self-proclaimed experts say. In Slovenia, there is a hot debate when the country is on crossroad. Some claim that Swedish model is the most efficient and guaranteed option for Slovenia to be successful in the future while only a tiny minority (myself included) warns the public about potential dangers of copying the Nordic model. Misguided intellectuals are, indeed, very much in favor of copying Nordic problems instead of solutions. Proponents of exploding welfare state are forgetting that there is no such thing as a single Nordic model and that Nordic models frequently involve a good set of solutions. Is the Swedish model of high taxes, increased regulation and government intervention truly a wonder of the earth as
falsified unsophisticated and misguided experts say? They ignore the fact that due to Swedish model which they justify; Sweden has slammed into long-term economic recession after having achieved the highest economic growth rates during 1870 and 1950.

The story of Swedish success started back in 1860 when economic policymakers started to launch the implementation of liberal economic reforms based upon the principle of low rate of public expenditure. Accumulated set of solutions and industrial revolution stimulated Swedish economy at that time. Quick and immediate structural development outshined Sweden’s historically most reputed entrepreneurs and innovators like Alfred Nobel, Sven Wingquist, Gustav Dahle and Baltazar von Platten. In the period of rapid economic transformation toward free and unregulated market, entrepreneurial phenomena, such as Ericsson, SAAB and Volvo have been established and set on track. On the road to free economy, the birth of entrepreneurial generation of innovators had been the foremost basis of further economic and structural progress (Munkhammar, 2006). Another reason why Sweden safely enjoyed in period of prosperity, is that since Sweden has not been involved in any kind of war effort since 1809. The neutrality of Swedish foreign policy resulted in the avoidance of war conflicts and several disputes which plagued the world during the 20th century. The early
construction of the Swedish model had been based upon the expanding investment in human capital infrastructure (Norberg, 2006). Consequently, the Swedish GDP per capita between 1860 and 1950 had been the fourth highest in the world, right behind the United States, Switzerland and Denmark (Johnsson, 2003). After 1950, Sweden went socialist. The government started to run an expansionary policy of rapid growth of public consumption and welfare spending. It grew from 20 percent before 1950 to an enormous 50 percent of the GDP in 1976. Marginal tax rates on personal and corporate income were raised on a yearly basis. Socialistically streamlined economic policies of Olof Palme constantly included tight regulation of business sector and the process of collective bargaining through which trade unions enhanced its monopoly positions in the market. Peaking up at 83 percent, the rate of unionization had been the broadest in the world. Economic policies of several socialist governments pushed Swedish economy away from the advantages and benefits of global economic growth. Macroeconomic impacts of such policies have been disastrous. After trade unions collectively demanded wage increases, despite the fact that marginal productivity rates were negative, inflation expectations grew enormously after series of currency devaluations. In 1985, Swedish government was determined to deregulate the financial sector with a particular emphasis on banking reform. This was a necessary step forward. Terrible side effects of banking reform were on its way ahead. The interest rate was negative and thus consumer lending skyrocketed. Consequently, inflation accelerated much quicker than it was anticipated and assumed by the central bank as well as rapid growth
rate of consumer lending at negative interest rate, create stock and real estate bubbles. Exchange rate was fixed and the level of competitiveness of the Swedish economy had been at the lowest point ever recorded in modern history. Latter government of Mr. Ingvar Carlsson implemented a wide variety of moderately free-market economic and structural reforms. Currency control
was abolished and marginal tax rates on individual and corporate income were cut. At the
beginning of the 80s’ and 90s’ the economic growth rate was rachitic. Low levels of direct corporate taxation coupled with high nominal interest rates and unexpectedly decreasing level of prices caused high real interest rates what accurately stimulated the explosion of the real estate bubble on the market. Aftermath, the oil shock followed and Swedish export sector was stroke by a major hit. As a result, the volume of international trade between Sweden and its biggest trade partners at that time (U.K., U.S. and Finland), decreased significantly as those economy were severely hit by a global economic downturn. Consequently, Swedish economy faced a deeply rooted economic recession in the beginning of 90s’. After the abolishment of currency control, Swedish government pledged not to stimulate the devaluation of the Swedish crone. Swedish central bank, Riskbank, defended the currency by increasing the level of interest
rates. As currency speculators knew that surprisingly high level of interest rates will not be retained, they recharged the currency attack by knowing that devastated currency regime would not yield better conditions as those offered by the central bank, Riksbank. Consequently, real interest rates went double-digit and the recession prolonged. Fixed exchange rate regime collapsed in November 1992. After a dramatic increase in the real interest rates and a deep economic recession, the majority of banks, except for Handelsbank, consequently went
bankrupt due to generous lending practices. Macroeconomic profile of that time was terrible. In 1993, the gross domestic product was 5 percent lower than in 1990. Unemployment increased by 10 percent as well as the budget deficit increased by the same rate.

According to international economic surveys, Sweden fell on the 20th place in the world on the scale of income per capita. The economic turn is traced back in 1992 when the devaluation of Swedish currency boosted Swedish exports. The recovery of Sweden’s international competitiveness was begun by central bank’s dramatic decrease in interest rates and by a smooth cyclical recovery at the end of 1993. A wide variety of liberal economic reforms was introduced under the leadership of Mr. Ingvar Carlsson and Mr. Carl Bildt. Those structural reforms immediately ripped off currency control and deregulated the financial sector. The privatization was on its way as well. The liberalization of retail and telecommunication sector and of airplane industry, were effectively enforced. An efficient inflation-targeting policy framework in search of nominal anchor (Bernanke, Posen, Laubach, Mishkin, 1999)
contributed very much to the effectiveness of monetary policy in stabilizing the price level. One reason why Sweden fled into economic recession had been associated with highly progressive tax system. Today tax revenues present 50 percent of the GDP. Between 1950 and 1980, the aggregate tax burden increased by 150 percent respectively (Karlsson, 2005).

Today, the marginal tax rate on individual income equals 57 percent. In early and middle 70s, the rate of individual taxation peaked at 90 percent. After coherent structural measures were undertaken in the early 90s, the individual income tax rate was reduce despite still being triggered to 51 percent. Corporate tax rate of 28 percent is moderate compared to other high-tax jurisdictions. Before 1991, employers faced a 52 percent corporate tax rate. The rate dropped to 28 percent in the future period. Payroll tax extends to 40 percent of the total amount of collected revenue from income tax. 32,28 percent of the payroll tax is paid by employers. Expensive public welfare programs of early retirement, unemployment support
and social transfer payments have been financed through the revenue collected from the payroll
tax. The wealth is also taxed. Assets up to the value of SEK 1 500 000 is excluded from the wealth tax is currently rated at 1,5 percent. The overall picture of tax burden is awful. From 1950 to 2000, the aggregate tax burden moved from 21 percent to 53,9 percent of the total output. The sources of tax revenue are mostly individual and corporate income (37 percent), payroll (29 percent), goods and services (26 percent) and some other sources as well (8 percent).

Sweden is historically known after high tax rates on personal income. Reality highlights a marred damage of high taxation. The most successful and high-income taxpayers must pay are taxed at 60 percent on each further earned krona. High, burdensome and progressive taxation is making a heavily complicated and non-simultaneous tax system. Such tax system is marred by devices of tax fraud and avoidance. It hampers further investment, saving and dynamically innovative entrepreneurship. In several studies, OECD has warned Sweden about the need to cut marginal tax rates in the form of a comprehensive tax reform (OECD, Economic Outlook, 2004). All the way up from 1970, the rate of marginal taxation of individual income had never been dropped below 50 percent. A typical employee living in Sweden is forced to contribute a relative fraction of his income to state, regional and local levels of government. This means that an employee in the highest tax bracket receives less than 30 SEK on each 100 SEK earned (Karlsson, 2005).

An extremely high level of corporate and wealth taxation could have a devastating economic impact. Venture capital and fresh investment funds could leave highly constrained business environment and move to investment locations with significantly smaller tax burden such as in Slovakia, Estonia or Ireland where the labor costs (per unit) and aggregate tax burden are significantly lower. High rates of corporate taxation threat long-term performance of the economy through the hampering of economic growth. And since there is no betterment without economic growth, expansionary fiscal policy is a major threat to competitive economy with outperformed economic growth rates. Sunesson (2005) found out that total wealth asset in the worth of 9 billion SEK is avoiding to pay the wealth tax rate of 1,5 percent. Bager-Sjögren and Klevmarken (1996) demonstrated the wealth mobility in the Swedish economy after the area of periodic tax cuts and accelerated deregulation of real estate sector. Their main finding was that the mobility of wealth strongly increased after the wealth taxation burden was reduced.
The ability of entrepreneurial sector to sustain relatively high rates of market growth is
constrained by high compliance costs, high marginal tax rates, high social security contributions and payroll tax. The amount of high tax burden indirectly affects growth potentials of entrepreneurial sector in their mission to trigger high market growth rates and future
strategic market expansion. Standard 25 percent VAT volumes 1 025 pages. A large panel of goods and services is taxed at lower VAT rates of 12 percent and 6 percent. Swedish high-tax jurisdiction has not yet eliminated double taxation. Thus, a successful enterprise with
excellent annual business results is obligated to pay a unique tax of 30 percent on the payment of dividends. After all, wealth tax occupies the enterprise with a tax rate of 1,5 percent exposed on 80 percent of net market value of stocks and shares. In general, a gradual shift to high tax rates supported the preferences of part-time employment and thus did not encourage further education and human capital investment to grow (Engström, Holmlund, 2006).

One of the lingering worries of tax rates had been significantly decreased and hardly noticeable economic growth. High taxes inevitably decreased the amount of tax revenues as the tax base slightly stagnated. This is admirable evidence that shows how effectively the Laffer Curve Rule works in practice. Another, more oftenly exposed worry, that Sweden faces today is an incredible rate of unemployment which grew right after the labor market started to become inflexible and thus supervised by restrictive government regulation. Official statistical rate of unemployment is equal to 8 percent but this is very far from the actual rate of joblessness. Sweden has had a long tradition of government-funded labor participation programs which are very broadly attended by unemployed. The participants are not statistically examined as unemployed despite not having a job. A compound of labor program participants, unemployed youth and officially unemployed yields an astounding 15-20 percent rate of real unemployment (Sianesi, 2001; Ibison, 2006; Silberstein, 2005). Unflattering characteristics extend to a wide range of structural indicators. Gross capital formation is one of the foremost indicators of legal and economic friendliness to businesses. Since 1990, the rate of gross capital formation has always been below 20 percent of the GDP. In increasingly competitive business environments, in Ireland for instance, the rate of gross capital formation exceeded 25 percent of the GDP in 2005 already (Larson, 2005) and there are advantageous tendencies of the increase in the upcoming period of dynamic global investment growth. Socialistically designed economic policies yielded a dangerous stimulation formula for capital flight – high tax rates on corporate and individual income, tight regulation, rigid and inflexible labor markets, difficult hiring and firing procedures, restrictive government intervention and vastly expansive fiscal policy. Such features forced many Swedish companies to retreat from Sweden and fly to more liberal places for doing business. The entire pharmaceutical industry escaped abroad. Pharmacia was acquired by Michigan-based UpJohn. Astra, once the jewel of big Swedish companies, was acquired by Zeneca. Research facilities were moved abroad while a fraction of high-tech companies maintains its operations in Sweden. In the mid-90s, VolvoCars was excluded from Volvo Corporation after having been acquired by Ford. SAAB, which was taken over by General Motors, built its own production plants in Belgium and Netherlands. IKEA escaped to much less tax burdened Switzerland. Even TetraPak left Sweden and built technological facilities in England. As a result of highly encumbered business environment, capital flight was more than obvious. Between 1993 and 2000, the emigration of young graduates increased by 48 percent. A sampled panel analysis of statistical data shows that “brain-drain” emigration accelerated seven times faster than the birth rate. Due to strong absence of very much needed human capital, Swedish economic growth was rachitic. According to ECB, the inefficiency of public sector is a serious structural problem. Fraser Institute’s Economic Freedom in the World shows that Sweden has the biggest public sector in the world as well as the least efficient one in Northern and Western Europe. Recent reactions have shown that there is no willingness to accelerate the privatization of public sector services such as health-care and social security. A long tradition of public sector’s privileges and tax revenue’s protection at the expense of Sweden’s global competitiveness and economic growth rate, has resulted in a government’s restrictive attitude toward private sector. Not even a single job in the private sector has been created since 1950 (Norberg, 2006).

According to international charts of economic liberty and competitiveness, Sweden is falling off the cliff. In 2006, Sweden was ranked 19th on the rank of economic freedom. In 2007, Sweden dropped to 21st place, being 72,6 percent free economy. According to Fraser’s Economic Freedom in the World, Sweden is ranked 24th on the scale of economic liberty. Thanks to efficiently managed monetary policy of low inflation, solid protection of property rights, sound contract enforcement, strong protection of investors, moderate commercial regulation standards and to a low level of black market activity (WB Doing Business 2006), Sweden still maintains the status of mostly free economy though there is still a long road for Sweden to become a free economy. Recent trends in economic performance have been interesting. Recent, comparably high rate of economic growth, has not been surprising. Swedish central bank, Riksbank, has been forced to raise the interest rate above the level of 2 percent which helped to stimulate the economic growth mostly at the expense of estate bubbles and household debt. Relative deregulation of the economy released the economic potentials and, thus, fostered the economic growth close to 5 percent. Low-price retailers recently entered the Swedish market. Increased competition led to a huge price reduction so that established retailers could continually rely on their customer basis. Lower prices and increased supply side lifted the consumption and thus empowered the economic growth. Money supply increased by 11,5 percent respectively so that the acceleration of inflation for a little bit, brought a certain amount of optimism among companies and market stakeholders, after the inflation rate had been one of the lowest in the Europe for years.

The definition of the Swedish model as the most successful one the world has ever known could hardly be justified on the ground of fatal welfare experiments. Early periods of peace, stability and neutrality brought a bulk of opportunities to Sweden. Years of non-conflicts foster the implementation of free market reforms based upon one the world’s lowest public consumption rates. Free market reforms empowered Swedish bright economic performance between 1860 and 1950 when Sweden had the 4th highest income per capita in the world, after the United States, Switzerland and Denmark. After 1950, Sweden went socialist and its future path
towards the “paradise of social democracy” had been a shrink rather than success. The economic recession had been stopped by the implementation of very much needed reforms by Mr. Carl Bildt and Mr. Ingvar Carlsson. Their structural reforms included the privatization, deregulation, liberalization and tax cuts. It is almost hilarious to defend the Swedish model on the basis of
high welfare, big government and high taxes. Early Swedish economic boom was consequently led by liberal economic reforms and by substantial entrepreneurial development which was exercised through the miracle of free market. Government non-intervention approach to business and social life was combined with intense development of human capital
infrastructure, and early research and patent development. If Sweden were the U.S. state it would emerge as fifth the poorest state (Bergstörm, Gidehåg, 2004) beyond the income per capita levels of Alabama and Oklahoma. Early economic and structural reforms were the key to the invigoration sustainable long-term economic growth. A high degree of economic freedom pursued a dynamic entrepreneurial road onward. Future periods of exploding socialism based upon expansive welfare spending robbed Swedes. The entrepreneurial sector was turned into the source of revenue for continually prolonged welfare spending and for one of the world’s public consumption rate in the advanced economies of the 20th century. Labor market came under restrictive government regulation while giving the privileged position to monopoly trade unions hampered further productivity growth. Economic policies of socialism resulted in a huge economic crisis as deep economic recession was on its way to reach the top of the edge. Welfare state has always been an excuse for undermined economic performance. Citing Murray Rothbard, I finish this post by sending a message to many who still believe in the myth of the welfare state – Welfare state is a warfare state.

Literature, Sources and Further Reading:

Daniel J. Mitchell, GÖran Normann; Pension Reform in Sweden: Lessons for American Policymakers, Backgrounder, The Heritage Foundation, 2006
http://www.heritage.org/Research/Taxes/upload/wm_1219.pdf

Anders Björklund, Tor Eriksson, Markus Jäntti, Oddbjörn Raaum, Eva Österbacka; Brother Correlations in Earnings in Denmark, Finland, Norway and Sweden Compared to theUnited States, IZA Discussion Paper Series, Forsuchungsinstitut zur Zukunft der Arbeit, 2000
http://ideas.repec.org/a/spr/jopoec/v15y2002i4p757-772.html

James Gwartney, Robert Lawson, William Easterly; Economic Freedom of the World,
2006 Annual Report, Fraser Institute, 2006
http://www.freetheworld.com/2006/EFW2006complete.pdf

Mårten Palme, Ingemar Svensson: Financial Implications of Income Security Reforms in Sweden, National Bureau of Economic Research, 2005
http://www.nber.org/books/intlSS-p3/sweden6-29-05.pdf

Thomas Andrén, Björn Gustafsson; Income Effects from Labor Market Training Programs
in Sweden During the 80’s And 90’s, Institute for Labor Policy Innovations, 2002 http://ideas.repec.org/p/hhs/ifauwp/2002_015.html

Lars Bager-Sjögren, Nils Anders Klevmarken; Inequality and Mobility of Wealth in Sweden 1983/84 - 1992/93, Uppsala University Department of Economics Working Paper Series, 1995 http://ideas.repec.org/p/fth/uppaal/21.html

Richard C. B. Johnsson; Economic Freedom in Sweden 1950-2002, The Ratio Institutet, 2004
http://ideas.repec.org/p/hhs/ratioi/0055.html

André Sapir, Philippe Aghion, Giuseppe Bertola, Martin Hellwig, Jean Pisani-Ferry, Dariusz Rosati, José Viñals, Helen Wallace; An Agenda for a Growing Europe -
Making the EU Economic System Deliver,
Report of an Independent High-Level Study Group
established on the initiative of the President of the European Commission, European Commission, 2003
http://www.euractiv.com/ndbtext/innovation/sapirreport.pdf

Sven R. Larson; The Swedish Tax System - Key Features and Lessons for Policy makers, Prosperitas, Vol. VI, Issue 2, Center for Freedom and Prosperity, 2006
http://www.freedomandprosperity.org/Papers/sweden/sweden.shtml

Sweden's Economic Performance; Recent Development, Current Priorities,
McKinsey&Company Executive Summary, McKinsey Global Institute, 2006
http://www.mckinsey.com/mgi/publications/sweden/

Per T. Ohlsson; Sweden - Still the Middle Way, A Talk Presented
at Columbia University in New York City, September 28, 2006

Per EngstrÖm, Bertil Holmlund; Tax Evasion and Self-Employment in a High-Tax Country: Evidence from Sweden, CES-IFO Working Paper No.1736, 2006
http://ideas.repec.org/p/hhs/uunewp/2006_012.html

Daniel J. Mitchell; Fiscal Policy Lessons from Europe, Heritage Backgrounder, The Heritage Foundation, 2006
http://www.heritage.org/research/budget/upload/bg_1979.pdf

Johnny Munkhammar; Don't copy the Nordic Model, A Speech held at Stefanik Institute in Bratislava, Slovakia, 2006
http://www.heritage.org/research/budget/upload/bg_1979.pdf

Fredrik Bergström, Robert Gidehag; EU versus USA, Timbro Institute, 2004
http://www.timbro.com/euvsusa/pdf/EU_vs_USA_English.pdf

Johan Norberg; In Defence of Global Capitalism, CATO Institute, 2003
http://www.johannorberg.net/?page=indefense

Johan Norberg; Swedish Models, National Interest, 2006
http://www.nationalinterest.org/Article.aspx?id=11488

Barbara Sianesi; An evaluation of the active labour market programmes in Sweden,
Institute of Labor Market Policy Evaluation, 2001
http://ideas.repec.org/p/hhs/ifauwp/2001_005.html

Johnny Munkhammar; Hot Swedish Models, TCS Daily, March 1, 2006
http://www.tcsdaily.com/article.aspx?id=030106D

Polly Toynbee; The most successful society the world has ever known, The Guardian, 10/25/2005
http://www.guardian.co.uk/Columnists/Column/0,,1599939,00.html

Johnny Munkhammar; Beyond the European Social Model, Open Europe, 2006
http://www.openeurope.org.uk/media-centre/pressrelease.aspx?pressreleaseid=14

Johnny Munkhammar; The Urgent Need for Labor Freedom in Europe—and the World,
2007 Index of Economic Freedom, The Heritage Foundation

Stefan M. I. Karlsson; The Sweden Myth, Mises Blog, 8/7/2006
http://www.mises.org/story/2259

2007 Index of Economic Freedom, The Heritage Foundation
http://www.heritage.org/research/features/index

INDEX OF ECONOMIC FREEDOM 2007

The newest Index of Economic Freedom has been published. The 2007 methodology has been revised to provide an even clearer picture of economic freedom by using data-driven equations rather than performance brackets which allows countries to be graded using a percent score rather than a 1–5 rating. In addition, labor freedom has been added as a variable.

Xavier Sala-i-Martin and Johnny Munkhammar have enriched the renewed index with astonishing articles about the importance of economic growth in a sustainable perspective of the worlds’ tomorrow.

This year's Index of Economic Freedom is a clear and simple message to stubborn defenders of the so called European social model which heavily relies on government intervention instead of implementing very seriously demanded free market reforms. The reason why mostly and moderately free European economies have failed on their exam from economic freedom is basically that when burdensome regulation is coupled with high tax rates and increasing government intervention in various aspects, then the economic freedom is very limited. Especially government intervention causes the decline of the economic freedom's level. Government intervention is seen through high taxes and economic and social policy of protectionism. Such policies are frequently justified on the basis of creating a better and safer tomorrow. Neither is accomplished when the government expands its role.

High tax rates on personal and corporate income distort productive behavior as well as high rates of taxation impair the ability of business sector to create new jobs and opportunities. Government intervention is the worst form of taxing work, saving and investment. There are of course several wheels of prosperity and economic freedom. The economic policy of successful and prosperous nations is streaming toward further liberalization of international trade. The removal of barriers and tariffs which impede the international trade is the greatest challenge to be met in the future. Protectionism in international trade is hidden behind the rhetoric of making jobs and markets safer while, in reality, policies based on protectionism prolong the agony of unemployment.

Politicians and many unsophisticated experts claim, for example, that labor market is a touching issue in the need of government intervention. The labor market is not truly unique as its critics suggest. Free market is a superior institution for labor yielding greater opportunities to increase the productivity and well-being of workers. Labor markets are often the most exploding experiment of government intervention. Left leaning governments tend to strongly intervene the labor market in order to improve its efficiency thereof. But stricter regulations yield exactly the opposite results. Without collected information, any kind of improvement in efficiency is made impossible.

Certain instruments of labor market interventions are usually given to politically privileged groups, mostly trade unions under the protection of government. But does the process of collective bargaining really yield sufficient results superior to individual choice and voluntary exchange? My answer is clear and simple: No, it does not. The core principle, upon which the free market is floating, is a free voluntary exchange between businesses and individuals seen through free price mechanism, free choice and free competition.

A dynamic feature of free markets is also their ability to unleash productivity and change much faster than under the regulatory government framework. Every day, entrepreneurs, designers and developers compete to satisfy their consumers. The result of the transmission of information and of spontaneous competition is the growth of output. No government regulation of entrepreneurial activity has produced neither a fraction of gains and benefits which have been achieved through competitive markets and the ability of individuals to choose freely. Results of free market have been thoroughly impressive.

In countries where free market reforms have firmly taken place, structural indicators of prosperity and progress have grown significantly. Between 1970 and 2003, the employment in the U.S. increased by 75 percent while in France, Italy and Germany, it increased by only 26 percent (Gersemann, 2004). Youth unemployment rates yields even more striking results. In Ireland and Netherlands, the youth unemployment rate is below 8 percent while in Greece, Italy, France, Sweden and Finland, the rate of youth unemployment was far above 20 percent. In the last decade, the dynamics of employment varied significantly among European states. In Ireland, Netherlands and Spain, the growth rate of employment was the highest while in Austria and Germany, the growth of employment was almost zero. The results show that freer markets substantially transformed in freer opportunities and choice in the market. Regulation of labor and business tripled its effect when the creation of new dynamic enterprises almost stopped. Together with the liberalization of labor market, lower tax rates created freer business environment and impressively improved quality of entrepreneurial framework.


Left-leaning policymakers often stress their care for the poor. But right after taking a closer look at the income structural, we see that those intentions are nothing else but a myth. In Sweden, the average growth of income between 1995 and 2004 was 29 percent. In the United Kingdom where labor market is much freer than in Sweden, between the same period, personal income grew by 72 percent in average. The message from this experience is: freer the market, freer the people. Policymakers in advanced as well as in certain developing economies often face severe difficulties when they try to implement free market reforms. The main source of objection to free market reforms is hidden within particular interest groups. They are simply afraid of economic growth and cutting politically granted privileges. Youth is oftenly the main voice of opposition to free market reforms.

In Slovenia (the country where I live), anti-capitalist youth marched against economic and education reforms. High tax rates make hiring and firing more expensive. As fewer can afford to hire, the desire to work strongly decreases. Many unsophisticated experts and critics suggest that minimum wage is a solution to the problem. It is not. Minimum wage, wage subsidies and collective bargaining cause the unemployment of low productivity workers. As trade unions fanatically struggle to keep their jobs, they prevent them from having an opportunity to re-educate and thus easily avoid the threat of being unemployed. As a result of union monopolies, extensive welfare and social security programs have occurred but it seems that politicians don't want to recognize that the existence of such programs will become unsustainable in the future as positive demographic trends will quickly disappear. Instead of deregulating labor market and making work incentives far more profitable than unemployment benefits, policymakers in mostly and moderately free countries are keeping regulation as well as they talk about different kinds of duty and legal discipline. This is a threat to economic freedom as well as it is a threat to the survival in the future.

The findings of this year's Index of Economic Freedom surprise many experts, economists, individuals, businesses and policymakers around the globe. Anglo-Saxon economies once again emerged as "free". This is a sign of being mature enough to graduate from economic freedom. Despite being congratulated by many, there is no Nordic country among free economies. Denmark and Iceland are economically the freest, and also the smallest, competitors from the North. This year's Index of Economic Freedom is a warning signal to Slovenia, the country in which I live. Strong government intervention, rigid labor markets and disrespectful protection of private property are the main ingredients of Slovenia's disastrous position on the scale of economic freedom. Inflexible employment regulations retard productivity growth. In Slovenia, labor freedom is virtually non-existent. The pursuit of privatization is very slow as the government effectively dominates the two largest bank and life insurance provider.

It is somehow hard to understand why such a small as Slovenia rampantly ruins its future potentials and real comparative advantages consistently through the lack of economic freedom.

Friday, January 12, 2007

CHINA AND THE FLAT TAX OF 25%

The Business reports that China is moving rapidly forward towards the radical tax reform based on the adoption of the flat tax of 25% on personal and corporate income. Advantages of the flat tax have been extensively stressed by Mr. Alvin Rabushka in one of his recent research papers - The Flat Tax in Russia and the New Europe. Rapidly growing economies in Eastern Europe and Russia have adopted pro-growth flat tax rates. Individuals, companies and the whole economy have vastly benefited from the radical tax reform. China is now achieving high rates of economic growth. The vastness of the market, the price of the labor, good channels of global logistics and the opportunity to yield high returns have been the main components of foreign direct participation. Through the exercise of international openness, Chinese market has attracted numerous global investment projects. As the largest growing economy in the world, China is now facing a growing need to adopt the policy of tax competition in order release its economic potentials and thus evenly higher economic growth which is the main channel of the international competitiveness. Sound tax policy is a good sign of economic recovery and progress. Further steps toward liberalization of the economic system are vastly needed. Increased flows of labor and investment capital could bring positive effects to Chinese economy in the long-run as well as a decreasing role of government must come into action. Flat tax will have an important effect on the tax jurisdicition itself. Flat tax textbooks provide a decent and stimulataneous economic policy. Many of those textbooks have recently been translated into Chinese.

In order to improve the economic survey of Chinese economy, competitive domestic markets are needed to take its place and give the best of their ability to pursue an improved economic performance. I warmly welcome the aims of Chinese policymakers who seem to recognize the importance of competitive tax agenda for a long-run economic performance. The adoption of a tax policy with low tax rates will not result in a decline of total tax revenues. In the case of Russian radical tax reform, tax revenues increased dramatically since the flat tax was successfully implemented. In 2001, total revenues were 28 percent higher, in 2002, the share of increase collected revenues was 54,5% higher while in 2003 personal income tax revenues grew amazingly by 80,1%. Of course, many other policy features are still needed to improve the competitiveness of the Chinese economy in the global arena. The economic miracle of Eastern European economies is a nice example of how a simple, transparent and efficient tax framework results in the accelerated pace of economic growth. And the flat tax is an excellent step in that particular direction.

Thursday, January 11, 2007

ECONOMIC PERFORMANCE IN EUROPE

By introducing the flat tax, Macedonia stepped ahead of its regional and global competitors and thus increased its astonishing potentials of creating a value of economic boom exercised through low tax rates on personal and corporate income and greater trade and investment openness.

OECD has published an Economic Survey of the Euro Area 2007. Detailed findings of the survey clearly reflect the reality of economic policy in many high-tax countries in Western Europe. Politicians in this part of the world often blame Euro for the lack of economic performance though this is far beyond the real truth. The most obvious reason why the competitiveness of European economies is slightly falling is an enormous amount of tax wedge coupled with a growing regulation burden, poor investment conditions and rigid labor markets. Labor market reforms seem to be unpopular since governments in Western and Central Europe are tolerating the monopoly position of trade unions which is exercised through a devastating process of collective bargaining.

Switzerland continues to benefit from astute tax policy based upon tax competition among Swiss cantons. Low corporate tax rates and high value of business environment promote the creation of new jobs. Switzerland has both, advantageous tax regime and smooth infrastructure. Companies that draw away from business places with high-tax pressures, are finding it easier to pursue lower costs of labor, management and transportation as well. In Zurich, the normal range of corporation tax is between 15 per cent and 24 per cent but foreign holding companies using Zurich as an administrative base are exempt from tax on their non-Swiss earnings. Vigrously supported tax competition enables cantons to compete in a similar way in which global economies do. The cantons have the greatest spending burden and the biggest scope to compete for international dollars and tax rates vary. Some of the lowest rates found in mountain regions, such as Zug and Schwyz, which have attracted a number of large and tax-shy corporations, such as Xstrata, the mining group

There is still a bulk of economic lunacy in France. When Johnny Hallday left France, after being fed up with high taxes, the supporters of a socialist presidential candidate Segolene Royal accused Hallday of treachery. They also called for a European action against "banditry" of Swiss tax competition. But Jacques Chirac surprised everyone when he said that France must reduce its corporate tax rate from 33 to 20 percent within five years, if it wants to retain a decent level of competitiveness in global economy.

Tuesday, January 09, 2007

Sunday, January 07, 2007

RECOMMENDED READING LIST

If you don't know how to fill the gap of your free time then you just came across the place at a very suitable moment. Below you can find reading suggestions of some of the most attractive far the most interesting books according to my opinion.

Borut Prah, former IBM Executive, wrote a masterpiece entitled The Party is Over: A Compilation of the Complete Accomplishments of Communism. You can also get the book from Amazon. In this excellent writing you will see how miserable the accomplishment of communism have really been. For example, in Chapter 4, Mr. Prah points out;
"Many years before the transistor was invented, Karl Marx declared and Lenin confirmed that dialectic materialism does not allow uncertainty to exist. Soon after they both died, another Karl, a German physicist named Werner Karl Heisenberg, discovered the Principle of Uncertainty. But, in the Soviet Union, certainty and the Five Year Plan rule. For uncertainty you get vacations without pay in Siberia. The Party or Politbureau cannot do otherwise. (For how this came about, read the following chapter, Mendeleyev, Lenin, Kapitsa, and Heisenberg.) Thirty years later in the United States, the Principle of Uncertainty leads to the discovery of the transistor. Being completely outside of the Soviet Five Year Plan makes a transistor radio immediately politically undesirable and on par with Coca Cola and Wall Street. Moscow stuck to Marx and Lenin: to be politically desirable it must be certain and real, such as, for example, a potato. Thus, the politically correct Marxist approach to the radio is to stick a pair of earphones in a potato and listen. The device indeed works and it predates the Walkman by forty years. But potato chips are found useless. So far, so good for the Party."

Going further, Mark Steyn offers us a productive reading entitled America Alone; Why America will have to fight alone in the battle for Western civilization. The book is also availble to be purchased. In his Deliver us from Evil, Sean Hannity, reveals the cause of the world ills. The book is recommended to anyone who still doubts about the neccesity for fighting against global forms of extremism. His first book, a New York Times Bestseller, Let Freedom Ring, is equipped with straight-forward pursuit of excellence and dedicated principles of liberty as well. This book is a powerful tool for slashing socialist view and bringing them to justice. In fact, there are many issues for which socialists (neo-marxists) should be responsible for. Progressive taxation (a legislatively coded form of stealing) is one of the issues, disrespectful attitude towards private property is another issue.

Nice and reader-friendly reading for the weekend that perhaps suits your interest is a book written by an Austrian economist Ludwig von Mises entitled Marxism Unmasked: From Delusion to Destruction. This book does not include empirical studies but it rather focuses on discussing the lies hidden behind carefully designed rethorics of Marxist ideology. Emotionally triggering and extremely devastiting Marxist thought is truthfully noted in Mises's Free Market and Its Enemies.

Libertarian Reading List also brings up books on libertarian topics.

In the field of economics and business there is a bulk of innovations as well as a large quantity of older, but extremely thoughtful books. One of those books is Warren Buffet's Lessons for Corporate America. In order to try to find successful message for your future I recommend you to read Why We Want to Be Rich - Two Men, One Message written by Donald Trump and Robert T. Kiyosaki. Thoroughly noted guidelines for the future are written in another book by Donald Trump - The Way to Success.

David A. Lax and James K. Sebenius wrote 3-D Negotiation : Powerful Tools to Change the Game In Your Most Important Deals. This book can serve as a useful tool in determining your negotiating position in the game with an aim to use the strategy called 'win-the-deal'.

Rogelio Oliva and Noel H. Watson published a working paper entitled Managing Functional Biases in Organizational Forecasts: A Case Study of Consensus Forecasting in Supply Chain Planning, studying organizational dimensions of forecast generation and improvement.

My favorite field - economics - has also been lightly enriched with generous literature, working papers and case studies. Tarun Khanna briefly wrote about India's need to increase trade volumes with China, showing how both sides (could) benefit from free trade agreements and through liberalized investment conditions. The paper is simply entitled India Needs to Encourage Trade With China. Julia Hanna and Toby Stuart write about the so-called money connection through which we understand the nature of VC firms operations. Mark de Broek and Throsten Slok wrote a working paper Interpreting Exchange Rate Movements in Transition Countries. This paper appears to be old but it's very useful in taking transitional economic behavior seriously. Lars Feldt and Emmanuelle Reulier wrote an extensive study on Strategic Tax Competition: Evidence from a Panel of the Swiss Cantons. Michael Keen, Yitae Kim and Ricardo Varsano of the International Monetary Fund wrote evidentially principled study on the flat tax effects in Eastern Europe. I warmly recommend anyone who's interested in this topic, to read the paper (50 pages) to furtherly understand the need for the fundamental tax reform in a direction of flat-rated taxes (see: related paper written Nancy Stokey and Sergio Rebello) though personal views of the authors are different. In the field of international economic issues and economic development, a thorough analysis and suggestion has come up, putting up neccessary solutions to let Africa drive on the path of prosperity. It's a Heritage Lecture under the authorship of Brett Schaefer. The paper is entitled Economic Freedom: The Path to African Prosperity. Michael Keen, Anna Ivanova and Alexander Klemm extensively wrote on the topic of Russian tax reform's impact after Russia had dramatically reduced personal income tax rates.

The foremost thorough analysis about fiscal expansion in Europe has been written by Dan Mitchell of Heritage Foundation in his paper Fiscal Policy Lessons from Europe. This is a paper with high priority on the list so in accordance with free choice, I recommend you to go through this paper and once again view the economic misery of Europe.

WHY SLOVENIA WILL NEVER BE LIKE SWITZERLAND

We have written very much about this particular question. One of the main features of small and open economies is that they adjust to real competitive advantages much faster than big economies are capable to do. But if there is a strong presence of anti-growth mentality, the desire for progress towards innovative economy could be a big barrier to potential economic story of success. Many Slovenes instinctly observe their country proudly as "The Switzerland of Eastern Europe." This is an untruthful saying and in this chapter we shall see why this particular remark is not valid.

First, there is a perception of economic freedom. For decades, Switzerland has been ranked among the freest economies in the world. One of the most positive value leaps that made Switzerland an economic miracle has been the presence of tax competition among cantons. The lowest corporate tax rates in the world attracted numerous multinational companies which set their holdings there. Economic freedom in Switzerland has been championed through low rate of government intervention. According to the EIU, the government consumed 12 percent of the GDP in 2004. In Slovenia, it triggered its consumption to 19,8 percent (U.S. Embassy in Slovenia, 2004). Swiss business environment has always been accompanied by one of the highest levels of economic freedom in the region as well as in the world. According to the Index of Economic Freedom, since 1999, Switzerland's economic freedom never scored below 2.00. In Slovenia, the level of economic freedom has been awful. Mostly unfree business environment's been accompanied by trade protectionism which was constantly exercised through unsterilized exchange rate variations, a robust and discretionairy monetary policy which seemed more like an industrial policy since exporting companies were heavily favoured at the expense of importing companies. Monetary stabilization lagged behind the very much needed pace. Hyperinflation pressures and negative interest rates inherited from Yugoslavia vastly increased public debt because crediting was financed through new loans which will have to be repaid in the future. The absence of competition on the banking market made the whole situation even worse. We cannot imagine prosperous economic environment without friendly framework for foreign investors. Inexplicitly noted property rights and politically-driven process of privatization and denationalizen deprived Slovenia from the flow of foreign direct investment. De Broeck and Stock (2001) reported that the liberalization of capital flows in Slovenia was, after Hungary, the lowest rated among the most successful transition countries. This was signficantly led through high rate of insider's penetration on the capital market. Sailing far away from economic freedom, Slovenian policymakers deprived potential foreign investors from the process of privatization. Instant care for "nationally profiled ownership" has been pioneered through the lack of the rule of law. In contrast, according The Fraser Institute's Economic Freedom of the World, Switzerland was constantly placed among top 5 economies in which economic freedom has been advanced through the the confidence in the legal system, contract enforcement and efficiently solid protection of private property rights. Now let's take a closer look at how economic freedom and performance varies between Slovenia and Switzerland. Slovenia has, according to the reference cited above, the most extensive size of government. This inevitably drives back its economic potentials since Robert J. Barro estimated that the reduction of public sector by 10 percent accelerates economic growth by 2 to 2.8 percent. In the field of legal structure and property rights, Switzerland peaked 10th place while Slovenia miserably achieved 45th place. In Switzerland, banking and financial competition ensures sufficient access to sound money while in Slovenia, state-dominated banking sector suffers from the lack of competition and thus makes the access to sound money even heavier. In Slovenia, freedom to trade internationally is very limited. For example, businesses are required to obtain 9 documents for export the cost of which equal $1,070 USD per container while it takes 20 days to accomplish the export. In Switzerland, only 4 documents are needed for export. Deregulated credit, labor and business conditions enable individuals and investors to pursue their plans and productive agenda much easier than in Slovenia where the regulation of those conditions hurts economic growth and threatens the process of real convergence achieved through economic growth and structural advancement.

The creation of institutional power in the hands of those politically priviliged few, persents the biggest obstacles to businesses and individuals who want to pursue their own goals. Switzerland and Slovenia are contrasting the profile of success. If you're an inspired future high-tech enterpreneur you will, as first, have to tackle enormous institutional concentration of power. This chiefly gives support to rent-seeking instead of paying attention to market rules of the game. There is also a strong failure of the education system. Not teaching individuals how productive behavior is important to ensure future progress and structural advancement, means a road to relative stagnation in the long run. According to GEM, Slovenia has the lowest proportion of those adults who want to tackle the challenge and become inspiring entrepreneurs. Only 4,4 percent of fresh entrepreneurial participation presents the lowest rate among advanced countries. It's not just the problem of the government, it's also the problem of individuals as Ziga Metelko says.

In this brief survey I tried to explain through data why Slovenia is not Switzerland as many Slovenes wrongly think. If Slovenia really wants to revise the economic miracle through which Switzerland became the Alpine tiger, it should first finish the process of privatization. Too much power is concentrated in the hands of the government. Thus, the promotion of free-market thinking is the surest way to the reduction of political power. Second, structural reforms in education sector are vastly needed to promote innovations and the improvement of research and knowledge through which the cooperation between scientific sector and the economy will result in higher economic growth. Then there's of course a capital market which needs to be privatized immediately. The role of para-governmental funds needs to be diminished. It would be the worst option if those funds were chiefly chosen to be in the position of guiding an economic policy. To improve competitiveness, foreign direct investment must pour into the market after which job creation will be higher. At last but not least, the people in Slovenia should start to become aware of competitive free enterprise exchange system and its potentials to prosper in the future and become richer. Discretionairy power of public institutions should be strongly limited while free-market institutions and non-interventionist economic policy in accordance with rules, are the surest foundations of future prosperity. It's neither government neither polticial parties, eurocrats or bureaucrats who assures the progress, prosperous and ambitious individuals do.

I would like to end this post in the words of Benjamin Franklin: "Those who would sacrifice liberty for security deserve neither."

Reference:

Rok Spruk; Slovenia 2006: How the Country Wasted the Opportunities of the Century, Capitalism & Freedom, December 2006
http://rspruk.blogspot.com/2006/12/slovenia-2006-how-country-wasted.html

Rok Spruk; Tax Competition is What Made Switzerland an Economic Miracle, Capitalism & Freedom, 2006
http://rspruk.blogspot.com/2006/12/tax-competition-is-what-made.html

The Index of Economic Freedom, Heritage Foundation, 2006
http://index.heritage.org

Rado Pezdir; Strukturni dejavniki odlocanja ravnoteznega realnega deviznega tecaja tranzicijskih drzav na poti v ERM2, Ljubljana, 2004
http://www.cek.ef.uni-lj.si/magister/pezdir405.pdf

Mark De Broeck, Torsten Slok; Interpreting Real Exchange Movements in Transition Countries, IMF Washington, 2001
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=276074

Fraser Institute; The Economic Freedom of the World, Fraser Institute, 2006
http://www.freetheworld.com/2006/1EFW2006ch1.pdf

Ziga Metelko; Podjetnistvo na kvadrat (Squarred Enterpreneurship), Finance, 1/6/07
http://www.finance-on.net/?MOD=show&id=171978 (online subscription required)

Lars P. Feldt, Emmanuelle Reulier; Strategic Tax Competition in Switzerland: Evidence from a Panel of the Swiss Cantons, CESifo Working Paper Series No. 1516
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=796704

Wednesday, January 03, 2007

INCONVINIENT KYOTO ACCORD

Mario Lewis of the Competitive Enterprise Institute perfectly points out the common misunderstanding of Kyoto accord, the aim of which is to limit further gas emission in the future. Kyoto accord actually proposes only one way to cut carbon dioxide emissions in the future and that way is very similar to what happened in former Soviet Union and Eastern Europe - economic collapse. U.S. Energy Information Administration projects global energy consumption will rise by 71 percent between 2003 and 2030, with three-quarters of that growth in developing countries. Fossil fuels account for the lion's share of the increase in consumption. Kyoto accord is on track to push gasoline prices to record highs. Increasingly growing prices on various energy would inflict a bulk of hardship on all income earners. Many European consumers pay twice as much for gasoline, due to high motor fuel taxes. Yet, despite higher fuel prices, European Union transport sector CO2 emissions increased almost 26 percent during 1990-2004 and are projected under current policies to be 35 percent above 1990 levels in 2010. To say in a more radical manner, Kyoto accord is nothing else but a platform for giving energy diet to starving population. Until increasingly growing economies do not restrict CO2 emissions, the control of atmospheric carbon dioxide levels is impossible.

THE POLITICAL ECONOMY OF CAPITALISM

Bruce J. Scott of Harvard Business School has written an extensive paper which deals with the relative connection between political authority and economic markets on a larger basis. We often hear confused reactions to political engagement in economic markets, particulary in Central and Eastern Europe where economies are still facing the process of long-term convergence to market economy. Institutional misstepping is the core which disables the net economic progress in the region. There is also a lack of economic education because people who are less aware of the nature of economic problems and methods how to solve them, are mostly in favor of marching on the streets against globalization, economic change, structural reforms and future prosperity. It would be improper if we said that capitalism is definitely not a political system. It is a mixture of economic and political system. Markets cannot exist without institutional foundation whose mission is to protect property rights efficiently. In fact, it's the government who imposes laws that guide trade and production. In general, government has two modes of state intervention, direct and indirect. The direct mode is essential for the operation of capitalist system while indirect mode is mostly seen through the ownership of public utilities and other public enterprises. Good and bad governments are usually marked according to its roles, wheater if be administrative or innovative. Both options are inevitable though capitalism doesn't need too much administrative pressure from the government. Why? Because markets will suffer and economic potentials will be damaged. Therefore, the capitalism itself has two hands - one hand is an invisible hand of price mechanism which coordinates economic actors in a spaceful framework. And the second hand can thankfully be reduced. It's hand of the government, administrative and innovative. Market frameworks definitely need to be modernized to let the progress through the economy grow. But it would be highly inappropriate for the government to intervene markets, directly or indirectly. The surest way for progressive path in the future is to intervene the legislation and thus let individuals and free enterprise system to do its job.

I recommend this paper to anyone who wants to study economics as well as to those who want to understand line between economic markets and political authority. Of course, you cannot learn the capitalism but you have to understand how it works if you want to be fully aware of the importance of structural reforms and economic change. We have never before met greater need for being aware of how important structural change, economic reforms and higher economic growth are.

MEASURING THE EFFECTS OF WAL-MART

Recently announced global news and business analysis about the effects of Wal-Mart are quite mixed. For example, the company decided to shift its market activities from Europe to high growing and far more upward-yielding markets in East Asia. Wal Mart's retreat from Germany was reasonable. German business culture and ethics did not sustain Wal Mart's so far rapidly successful strategic approach. All of his retail centers have been aquired by the largest German retailer Metro AG's Real Division. Perhaps the most tragic story in this particular situation is that Marxists are now wordfully saying that Wal Mart is facing tackling a battle between "labor" and "capital". Well, we're not in the 19th century anymore to boost such misstepped non-sense and Marxist worshippers should take that into account seriously. So far the most realistic and rational analysis about Wal Mart's global ventures has been pinned by Ken A. Mark and Pankaj Ghemawat, a professor at Harvard Business School. He tells that "there is hard evidence that Wal-Mart has grown the economic pie available to be divided among its various stakeholders."

Marxist worshippers and social activists took a full-blown stance when they have started to stress how the world's largest retail company is primarily treating its workers. Overt criticism has been underpinned by Anthony Bianco's The Bully of Bentonville: How the High Cost of Wal-Mart's Everyday Low Prices is Hurting America. Even balanced and cooly tended books raise questions about the real economic impact of Wal Mart, saying that it destoryed more jobs in 2005 than it created. How is then "mixed economic impact" translated into action?

Anykind of questioning whether Wal-Mart's overall economic impact has been positive or negative reflects a failure to engage properly with the data. There is an evidence that Wal Mart has grown into economic pie which has been divided to its stakeholders. McKinsey Global Institute's study specifically examined the U.S. labor productivity growth between 1995 and 2000. Robert Solow, Nobel laureate in economics and the advisor to the study, told that "by far the most important factor in that growth is Wal-Mart." The company indeed has some issues to tackle in the future but it seems highly inappropriate to label Wal Mart as a kind of devastating impact for workers, because of those issues. If I managed a company and if there were no issues to challenge in the future, then I would be truly concerned. The value which has been created by Wal Mart benefited the pockets of consumers. It brought them low-prices and an opportunity to penetrate a large volume of free choice in the market. According to Global Insight, Wal Mart's prices are approximately 8 percent lower than the prices of its competitors. Applying the price gap to domestic sales volumes of Wal Mart, then U.S. consumers on the order save $14 billion per year. Low Wal Mart's prices force its competitor to charge lower price, so this is only a fraction of company's real economic impact. This particular kinds of savings outscored costs which Wal Mart allegedly imposed on the society. The savings to Wal Mart costumers appear large in the relation to the surplus that it passes on to its stakeholders. In recent years, the retailer netted just 1,5 to 2 percent of its revenues as an income to its shareholders compared with 8-plus percent for its customers.

Charles Fishman, in The Wal Mart Effect, sets up another issue when he says that a giant boa is squeezing the life of capitalism to sheer market dominance. This statement is a little bit ovre the edge. Wal Mart accounts less than 10 percent of total non-automotive retail sales in the U.S. and its rate of market growth has varied significantly. In recent years, Wal Mart's growth temporarily cooled due to a large imposition of cost elements such as healthcare insurance and pressures on stock prices. Historical features suggest that successful new retailing formats provoke rigiorous reactions, wheater it be in market or non-market sector.

The arguments stressed above suggest that Wal Mart is very far from a conflict between "capital" and "labor" as far-fetched Marxist worshippers try to propagate. In fact, Wal-Mart has brought an extensive panel of benefits which no welfare program has never had. U.S. legislation thankfully favors consumers. The to the question if Wal-Mart supply strategy is good heavily depends on the identity of the consumers who benefited from low prices. Without Wal-Mart, the rural poor in particular would pay several percentage points more for the food and nonfood merchandise that, after housing, is their second-largest household expense.

Tuesday, January 02, 2007

CAPITALISM & FREEDOM 11TH MOST POPULAR BLOG IN THE WORLD

Our success story is not over. I recently searched the web and found out that our blog is highly rated also in North America. The visitors of the website placed our blog in the 11th place in the world. Click here and see the rankings.

CAPITALISM & FREEDOM AMONG TOP 100 BLOGS IN FREE-MARKET ECONOMICS

Blogs in this category discuss concepts of free-market economics, an economic model where market participants are free from coercive influence or government interference. Our blog has won 16th place. We hope we deserve it. At this moment I would once again say gratefully 'thank you' to our visitors and viewers. By visiting our blog, you enrich our mission more than everything.