Saturday, March 31, 2007
Tuesday, March 27, 2007
Mićo Mrkaić is a first-class economist. He graduated from Carneige Mellon University and obtained a Master Degree in Physics and Economics and a PhD in Economics. Hence, he was awarded by Alexander Henderson Award for Excellence in Economic Theory - a university award given for the best written PhD thesis in the field of economic theory. When the author came back to Slovenia, he started to write weekly columns in a daily business newspaper Finance where he emphasized an unavoidable need to liberalize the markets, deregulate the economy, privatize the rest of it (in Slovenia private sector composes only 65 percent of the GDP) and to let individual and civil liberties flourish. The author soon realized that newly elected government did not intend to implement very much needed economic and structural reforms. His scientific articles can be found here. The Growth of Total Factor Productivity in Slovenia is also an important contribution to the nature of economic growth where the author came to conclusion that, in Slovenia, TFP is growing too slowly.
In the book, the author sets a question why Slovenia, situated in the heart of Europe, never experienced a spontaneous order, a strong rule of law, individual liberty, entrepreneurial freedom and a limited government which Robert Nozick would call a minimal state. In that sense, the author continues a noble legacy of "Scottish Enlightenment" and a tradition of classical liberalism in Slovenia started by dr. Ljubo Sirc, a Slovenian immigrant and an economist who escaped communism and achieved a tremendous international success in Great Britain as a leader of the Center for Research into Post-Communist Economies. The author also analyzes the brutal continuation legacy of marxism and communism in Slovenia, the ideologies that ruined the productive grounds of Slovenian society and stuck to it for never-ending decades.
The book is also an economic masterpiece. The author explains the basic features of modern economic theory and policy and thereby unmasks the painful outcome of gradualist economic policy that has been intensively exercised by the economic policymakers in the early stage of Slovenian transition to market economy. The author highlights the question of central bank's inflation policy which in turn led to the depreciation of Slovenian tolar in order to stimulate the export sector through exchange rate depreciation and excess money supply which resulted in an unusually high inflation rate. The author reveals the true reason behind the depreciation policy of the central bank through several articles and analytical insights. He shows that the makers of such policy lied to the public as they were repeating that inflation is not (?!?!?!) a monetary phenomena. In normal countries, such insane statements would have a serious consequence. Can we imagine how it would be if FED, Ben Bernanke or Alan Greenspan lied to the public and exercised discretionary features in monetary policy through exchange rate depreciation? Or if they said that inflation is not a monetary phenomena - Well, everyone - I hope that now you see what kind of affairs have been happening in Slovenia.
The book also focuses on several other issues such as health-care, culture, classical liberalism, public finance, and economic policy. The author showed that cultural lobbies exercise a brutal policy of public subsidies for their activities in astronomic amounts. However, the policymakers never questioned the right to outlay such subsidies on the basis of cost-benefit analysis and neighborhood effects. The book also entails a closer analysis of the inefficiency of public health-care providers in Slovenia where the author emphasizes the problem of low efficiency and enormous differences in the rates of productivity in the health-care sector. The analysis is one of the most striking of all.
The next chapter of the book is dedicated to a closer look at economic policy and public finance. The author reveals how he swam into the sea in search of successfully implemented structural reforms and greater market liberalization, surrounded by socialists of all colors and parties, trade unions and corrupted journalists from socialist newspapers, which personally dishonored him. The author describes how journalists made fun of him and how explosively the mainstream media, many opinion leaders, trade unions and Keynesian economists did everything possible to persuade the public that economic and structural reforms were bad though, in reality, the nobility and high quality of the author's economic program Benchmark offered a long-term perspective through which Slovenia, if the program were fully implemented, achieved comparably high rate of economic growth, reformed its pension and social security systems and made them sustainable in the long run, stressed its booming potentials and increase the level of global competitiveness. It could become a global reform superstar and after Ireland, Estonia, Iceland and Slovakia, the next economic success story in a global arena and Europe but thanks to Slovenia's countless socialists of all parties and its exponents, the abovementioned success story has been made impossible.
I warmly recommend the book to everyone because it's a "must-be-read" book with lots of striking facts, thorough analysis, theoretical explanations and detailed views on Slovenian society by an author, a brilliant economist and a noble classical liberal who succeeded abroad and with no fear unmasked the image of the society in which we (in Slovenia) live.
Link to the book.
Asian development banks projects 8 percent economic growth for the fiscal year through March 2008. India's central bank has commited itself to curbing high inflation by reducing the supply of money. Government's share of responsible budget policy to reduce inflation pressures was pinned by the fiscal commitment to move from expansionary to restrictive budget policy coupled with the aim to cut public spending in the percentage share of the GDP. For this fiscal year, the growth is predicted to climb from 9 to 9,2 percent.
Growth optimism reflected the inflow of foreign direct investment and the appreciation of Indian rupee which could in turn led to denting India's competitiveness in the global arena. Rapid inflow of foreign capital flows slightly complicates the efforts by the central bank to rein in prices but inflation is always and everywhere a monetary phenomena. This year's inflation rate reached 6,7 percent and the central bank had to squeeze the excess money supply in circulation. The government also liberalized the agriculture market by reducing the imposed duties in order to increase the supply in the agricultural market. All those measure will push growth to the level of 8 percent in the next fiscal year. The Reserve Bank of India predicts the inflation rate to lower to 5 percent. In the beginning of 2008 the growth could spur up to 8,3 percent but that also largely depends on the pace of infrastructural boost needed.
Sunday, March 25, 2007
Figure: Total taxes as the percentage of the GDP between 1995 and 2005, comparision between countries
Public consumption and taxation size in Slovenia are very high. Not surprisingly, total taxes comprised 40,7 percent of the GDP in 2005. Though the government recently modified the marginal income tax from 50 percent to 41 percent, tax burden is still very high compared to the rest of Europe as the income earned on the margin has not been unburdened from heavily progressive taxation. There is also a unique payroll tax that could be immediately dismissed but the Ministry of Finance decided to erase it gradually. An important part of the tax burden in Slovenia is comprised of high social security and health care contribution rates. Unfortunately, Slovenian policymakers wasted another opportunity to implement a fundamental tax reform, to unburden the economy and productive behavior of the individuals.
Saturday, March 24, 2007
- Silent promises, shining performance; Why tiger economies roar louder;
- The Paradox of the most competitive economy until 2010;
- Cool sights from the north;
- On Swedish model;
- Personal liberty, voluntary exchange and self-ownership;
Tuesday, March 20, 2007
"And Ireland has steadily reduced its tax rates. The top individual income tax rate was cut from 65 percent in 1985 to 42 percent today. The capital-gains tax rate was cut from 40 to 20 percent in 1999. However, the key to Ireland’s success has been its excellent tax climate for business. In 1980, Ireland established a corporate tax rate for manufacturing of just ten percent. That low rate was subsequently extended to high-technology, financial services, and other industries. More recently, Ireland established a flat 12.5 percent tax rate on all corporations — one of the lowest rates in the world, and just one-third of the U.S. rate."
I posted a piece on Irish economic success story last year.
Sunset over Shannon river
The father of the German economic miracle once hit the essence of economic miracle and economic policy: "Es gibt aber kein Wirtschaftswunder, aber richtige Wirtschafstpolitik."
"Irish miracle" is on a good way to become a global hard-hitting trademark.
When dr. Paul Walsh visited Ljubljana where he gave a lecture on Irish path towards economic prosperity, it was quite clear that in Slovenia hardly anyone is actually even thinking about the macroeconomic and structural policy that could pursue global economic success of this small country in the heart of Europe. Approximately 10 individuals listened to dr. Paul Walsh of Dublin's Trinity college. It was quite clear why Slovenia will probably never imported the spirit of Irish success story.
Last time, I heared:
"Perhaps Ireland could be a global sightspot but the standard of living is much better in Slovenia than in many other countries, including Ireland."
Contrary to this popular belief, the Economist composed "A quality-of-live" index, measuring several factors that determine the quality of live such as material well-being and the level of freedom. On a scale of one to 10, Ireland achieved 8.33 points, with Switzerland coming in at 8.07. Despite being flattered by its inhabitants, Slovenia achieved 6,98 points resulted in 27th place.
The driving force behind the Irish economic miracle is a double layer that consists of right set of solutions and decisions in economic policy focused on attracting foreign direct investment, cutting marginal tax rates on productive behavior and creating a favorable atmosphere for business environment. On the other hand, multinational and domestic business and entrepreneurial sector played a crucial role in the transition of the economy. Consequently, Irish export sector is known for its competitiveness, diversified entrepreneurial market strategies, high tech, and knowledge-intensive industry.
Some comparative statistics can be seen here.Last Satuday, we celebrated Irish National holiday, St. Patrick's day, when we wear green, drink our faihful, loyal and always beloved Guinness and enjoy talking to our friends and loved ones. After taking a closer look at entrepreneurial dynamics, stock market performance, healthy macroeconomic policy and ambitious structural agenda, it is not difficult to find out that Ireland has a reason to celebrate.
Friday, March 16, 2007
Tuesday, March 13, 2007
From the economic point of view, in real terms, the GDP growth between 2002 and 2005 reached almost 15 percent. The economic growth has been supported by the infusion of foreign direct investment. Montenegro maintains an open policy towards foreign investment. The total cost of starting a business is estimated at $242,41 (USD).
In the field of investors' protection, Montenegro is among the top 20 countries in the world. In terms of general observation, Montenegro has set a modestly good grounding for further economic growth and structural convergence but a bulk of challenges still remain (privatization, price liberalization, contract enforcement and property rights protection, labor market reform, tax reform ...), including the reform of the judiciary and cutting the red-tape.
Credit risk should be minimized in order to diffuse the investment easier and less risky which, coupled with sound investment and tax environment, may galvanize the economy's transformation. In terms of the speed of convergence, the business sector is ought to stream towards the competitive business policy and innovative models because in a global world, competitiveness depends on the ability of the business sector (not government ownership and intervention) to accomplish ambitious objectives on an international as well as on domestic basis.
The policy of openness to foreign direct investment and rapid privatization is a direction that may accelerate the pace of convergence. The latter is a crucial challenge depending on the ability and innovation (human capital approach, R&D, value-added ...) of the business sector to sustain, innovate and grow domestically and internati0nally.
Frederic Sautet and Kyle McKenzie; A Mediterranean Tiger? - TCS Daily, 12 March 2007
Frederic Sautet, Kyle McKenzie, Maja Drakic; Montenegro: The Challenges of A Newborn State, Mercatus GMU, 2007
Doing Business in Montenegro, WB
Sunday, March 11, 2007
The Wall Street Journal reports how incredible the Laffer Curve works in Iceland.
The Iceland's story of galvanized economic success started when a group of enthusiastic, fiscally conservative and socially liberal reformers under the leadership of David Oddsson and Geir Haarde launched an ambitious set of features, including the trade liberalization, monetary stabilization, tax cuts and the privatization of state companies.
Marginal income tax rates were slashed to rock-bottom level. Individual income tax rate fell from 33 percent in 1995 to 22,75 percent in the recent tax cut implementation. Corporate tax rate, for example, was cut from 45 percent in 1991 to 18 percent in 2001. The benefits of tax competition are fully displayed and the results are flattering. Iceland is a perfect example of Laffer Curve demonstration. As the corporate tax rate gradually fell to one of the lowest levels in Europe, tax revenues trippled. When high tax rate on corporate income led companies to hide their revenue to avoid paying such a high tax, the amount of collected tax revenue was 3 billion kronas. When the rate fell far below the confiscatory level, the amount of tax revenue hit 9,1 billion kronas. Since 2001, when the competitive tax regime further led to higher tax revenue, the amount of revenue reached 33 billion kronas, estimated for the last year. The economy's transformation was characterized by a 10-year averaged 4 percent economic growth.
In the peripheral parts of Europe, the tax competiton is flourishing. Now there is a healthy tax competition between Eastern Europe (Estonia, Latvia, Slovakia), Iceland and Switzerland where cantons are allowed to set the corporate tax rates independently from the federal government. There's a huge opposition to tax competition in the EU. Policymakers in high tax jurisdictions such as France and Germany, have reverently attacked Switzerland, saying that cantonal tax cuts are a kind of illegal subsidy (???). But it seems that the wheel is turning since Germany announced a corporate tax cut from current 38 percent to 30 percent next year.
Iceland is an isolated example where economic policymakers are ambitious after having implemented pro-growth reforms. The committee of the Iceland's biggest bank (Kaupthing) leaded by the chairman Mr. Sigurdur Einarsson, recommended that corporate tax rate be reduced from current 18 percent to 10 percent, in order to make Iceland (Reykjavik) an international financial hub. If this particular tax cut is implemented, it will be the lowest one in Western Europe, overcoming Ireland's 12,5 percent rate.
If some political circles see the proposed rate as controversional, they should learn from the tax-cut history of Iceland that made the Arctic island, both rich and prosperous. If Reykjavik truly wants to become an international financial hub then it should immediately offer investors the foremost advantageous financial and investment environment that will led investors to choose Iceland as their operation destination.
Thursday, March 08, 2007
I still remember how student and trade union activists last year invited us to join them in protesting against economic reforms, from labor market to tax system and education. It shameful to see how student organization (SOS) receives a vast amount of budget money and is still kept on giving an explicit support to socialist structural policies which deny taxpayers from enjoying the output they create. In Slovenia, we have a very high employee social security contribution rate which equals 22,1 percent of the gross salary. Thus, one fifth of the average labor cost means a social security burden.
In the field of labor market, the role of trade unions is crucial. First, trade unions are nothing else but an interest group who protects its members at the expense of future employees. Thus, trade unions create a sort odevice which prevents the non-members of the unions from enjoying the potential benefits of the union memebership which they could gain if they were the members of the union. The reaction behavior of the unions is carefully designed and streams toward the implication of rigid rules of employment. The aim of the latter is to prevent new employees from getting a job fast, so that current employees would receive greater benefits and payments as the equilibria supply curve is shaped and the price of labor is thus higher than it would be in the competitive equilibrium conditions. Trade union also shape the horizon of the labor market with minimum wage claims. Higher minimum wage is nothing else but a paycheck insurance for existing employees, while higher minimum wage level creates a cost burden for employers who are thus prevented from faster hiring of low-cost workers. Minimum wage is a rigid experiment which cannot respond to the competitive labor market shifts which results in a rigid establishment of employment conditions. Due to these conditions, the employment probability for targeted worker groups is much lower. It's thus not surprising that strict minimum wage policy reflects higher unemployment among low-income population groups. That's why the aim of minimum wage is to protect current low-paid employees and detect potential future employees from competing and cooperating with existing employees. This kind of particular behavior is negative from several aspects. It implies a reduction of choice in the labor market because higher non-salary costs (tax report, payroll tax, social security contribution, meal subsidies, full fuel compensation, meal time subsidies...) and steeply progressive tax rates increase the price of productive labor force which often determines the growth of productivity and the use human capital in the productive process. As being faced with higher regular non-salary costs, employers shift towards looking for loopholes to reduce the cost burden. That's why many productive workplaces are moving toward the south-east where the labor cost burden is much smaller than in Slovenia. Therefore, hiring students is a practical example which explains why student employment is so spread in Slovenia. The worst of the worst is that those who lost the employment hardly find the job again due to rigid employment rules setup by the unions. The most frequent result of this spiral chase is applying for state unemployment subsidies and the creation of "moonlight" (underground) economy is very often the gateway for the unemployed.
Second, the implication of the rigid labor market rules negatively affects future university graduates. As employers would probably seek to minimize the labor costs, fresh graduates were then not able to find the employment regularily but through the framework of student hiring because they would too expensive to be employed in other case. Graduates are deprived from running a work age and consequently from investing in private pension funds. Third, student workers are a huge cost for the government because (a) they don't contribute to social security, and (b) don't fill in the tax return but the labor legislation allows them getting funded from unemployment and social subsidy funds. Fourth, student work and hiring students, by and large, forces students to postpone the graduation and this means a growing cost for the government who funds the education system. Hiring students stimulates them to prolong the status of the student and consequently, they graduate much later than the official length of the study is supposed to be.
Dr. Joze P. Damijan suggests the following solution for the labor market:
"...copy the Austrian system in which there is almost no non-salary costs [except for tax return and social security contribution] and then switch to the Danish system of flexibility within 3 to 4 years. For the beginning, we could lump-sum the non-salary costs in the hour figure regardless of the income level. Employer's labor cost would double formally, but not actually. All employees would be situated in an equal position and the costs of older employees were not grow exponentially anymore. In effect, contract transparency and the legal equality of employees would be increased. In addition, collective bargaining would become much more simplified. They would negotiate only about the extracting salary growth and not anymore about the formalities invented in socialism..."
In the situation in which trade unions determine the labor legislation and vis-a-vis the economic policy as well, the future opportunities in the labor market are harshly reduced. Will trade unions hold the responsibility for future brain-drain which seems to be inevitable as the trade unions are actually a "state within the state"?
Wednesday, March 07, 2007
Policymakers in Russia have announced the launch of gas market liberalization where prices are now fixed and held temporarily low by the government. According to the abovementioned source, the introduction of some new taxes has been addressed to balance the budget deficit. This view is of course very much static. Balancing the budget to ensure the vitality of public finances can be achieved through the curb of GDP spending.
Since 2002, Russia has sustained tremendous economic growth stimulated by the abolishment of many taxes and by the introduction of the 13 percent flat tax on the individual income. The lowering of the corporate tax rate resulted in business-friendlier investment environment. Years after the introduction of the flat tax, total individual tax receipts have more than doubled and the number is still growing. After adjusting for inflation, individual income tax revenues increased 25,2 percent in 2001, 24.6 percent in 2002, 15,2 percent in 2003 and more than 16 percent in 2004. The revenue expansion has resulted from less-discriminatory tax system, reduced tax evasion and sheltering, and increased incentives to work, save and invest.
The real GDP growth was constance since the flat tax reform in 2001; 5,1 percent in 2001, 4,7 percent in 2002 and 7,3 (!) percent in 2003. The average annual real growth rate in Russia over the last three years averaged 5,5 percent which more than the average real growth rate in many developing countries.
Revenue-neutral and supply-side tax policy cannot, of course, solve all the problems which Russia is now facing, but it's a progress in the productive direction.