LABOR MARKET, WELFARE STATE AND FRANCE: AGEING POPULATION AND UNSUSTAINABILITY OF PUBLIC FINANCE

OECD correctly recommended France to accelerate the reform of tight and rigid labor market structure to ensure competitive growth conditions and long-term sustainability of public finance as ageing population and PAYG pension system trigger the volatility and increase in public spending, particularly for healthcare and pensions. Consequently, net unfunded financial liabilities would grow into the spiral of unsustainability of public finance, putting public debt at risk and making structural crisis unavoidable.

Recent policy action concerning French labor market was replacing the plethora of job contracts with a unified contract where the protection of workers increase as the timeline goes ahead. The action, however, seems to generate generous conditions for existing labor force and increase entry barriers to future job seekers, further breaking-down the flexibility of labor market itself.

When in the course of labor market status, protectionism enters the structure, the power to negotiate about minimum wages gains while "faster-than-productivity" centralized wage growth creates a strong cost-push pressures, heating-up inflation pressure. Recently, extensive labor cost pressures forced Swedish central bank, Riksbank, to lift the interest (repo) rate above the expected level. It announced the increase in the repo rate continually in order to fight labor cost pressures.

The real problem in this particular case is the size of employment in public sector whereas wage expenditures (labor costs) are an important part of public spending as well as a tool for abuse emerging from discretionary increases in minimum wage which decreases the probability of higher employment growth since productivity is emptied by the increase in minimum wages.

Quite similar effect is resulted from health and dependency care where market agents react in accordance with satisfying the utility, comparing the overall alternative costs. In Sweden, for instance, welfare cheating is the most frequent when there are events such as World soccer championship. Leaving work when satisfying the utility is always a cost at the expense of productivity and creating value-added. As Sweden, France is no exception to generous welfare arrangements such as sick, work abuse, maternity leave and disability pay.

Structural crisis of the economy and society in French is far more probable than actually estimated. The size of public sector in France is huge, one of the biggest in OECD. France is also no exception to ageing population. In fact, public sector employees are permitted to retire before the age of 60 on a full pension under special pension regime.

”While young people suffer from especially difficult entry paths into employment, a striking characteristic of the French labour market is how quickly older people withdraw from it”
OECD, Economic Survey of France 2007 (link)

HONG KONG GDP UP 5,6 PERCENT IN Q1

Hong Kong's Gross Domestic Product rose 5.6% in real terms in the first quarter of 2007 over a year earlier, compared with the 7.3% growth in the previous quarter.

Here is a detailed analysis of quarterly GDP growth by economic activity

Source: Census and Statistics Department

MAURITIUS MOVES TOWARDS FLAT TAX

Here's an example of Mauritius where there are real aims to create conditions for robust, sustained and inclusive growth. The government of Mauritius eventually decided to impose the reduction of corporate tax rate to 15 percent. The flat rate will also apply to personal income tax by 2009. Pro-growth tax system is the one with a low proportion of tax burden, a system that is geared towards rewarding effort and entrepreneurship.

TAX HAVENS: THE WAY TO HIGHER GROWTH AND PROSPERITY

Published in Business & Finance, Dan Mitchell wrote an article on how international bureaucracies create anti-tax haven policies to penalize low-tax jurisdictions and why tax havens are the best conceptual tool to tackle the broader opportunities brought by globalisation.

TAX COMPETITION, ECONOMIC GROWTH AND ECONOMIC PERFORMANCE

Recent data on GDP growth in the EU show sluggish periodical growth rates, far below the average growth rate in globally high-growing economies, particularly in Asia and the U.S. After years of weak growth, the EU and eurozone now face a significant barrier in letting the GDP growth soar.

In the EU, tax burden on labor increased from 35,1 percent to 35,2 percent while in the eurozone the increase in tax burden levied by workers extended from 36,2 percent to 36,8 percent. Nevertheless in the EU, tax burden penalizing work as an ingredient of productive behavior is globally one of the highest, outperforming the competitors of the EU economy.

EU governments have been steadily persuading Europeans that work is essential in remaining on competitive level together with the U.S. and high-growing economies in Asia. But how can work be promoted if tax regimes in nearly every European jurisdiction heavily penalizes saving, investment, entrepreneurship and work. Labor tax burden levied on taxpayers remained pretty much higher in the EU than in other industralized economies, accelerating GDP growth rapidly faster than European jurisdictions. In fact, not every European tax jurisdiction is showing sluggish economic performance. Ireland, for instance, eased tax burden on productive behavior by slashing corporate tax rate to "rock-bottom" 12,5 percent, eventually the lowest rate on corporate income in the entire EU. In Ireland, top marginal tax rate on individual income was slashed from 65 percent to 42 percent. The taxation of individual income still remained somehow progressive but the rate was decreased dramatically. Further, the economies in Eastern Europe are booming. Recently, flat tax revolution quickly splashed over the entire horizon of Eastern Europe. Estonia, a Baltic beacon which pioneered flat tax revolution, enjoys a rapid GDP growth, outreaching 10 percent. Seven-year compunded annual average GDP growth between 1997 and 2004 equaled 7,2 percent. In 2004, Estonian economy boomed once again after annual GDP growth rate topped 7,8 percent.

Investment is a key to economic growth. In the EU, taxes on capital (personal savings and asset income) increased dramatically from 25,3 percent to 27,3 percent. In the eurozone, where the majority of high-tax jurisdictions is situated, real tax burden on capital rose to 30,4 percent from 28,4 percent. However, tax competition between tax jurisdictions is pushing tax rates on work, saving, entrepreneurship and investment down. If two jurisdictions compete on letting in foreign investment and if the first jurisdiction slashes the corporate tax rate, the result is an increase in direct investment as investors do not prefer to operate in an environment where doing business is hampered by the outburst of tax burden. This action, however, essentially forces another jurisdictions to challenge the competition and slash the corporate tax rate down as well. As taxes on capital fall, disposable income grows.

Policymakers in older EU members seem to feel relentless about the size of public spending as a source of increasing tax burden and the EU authorities want to penalize them by harmonising tax rates on corporate income across the entire EU. This would have tragic consequences, ending the stories of economic success of Slovakia, Lithuania, Latvia and Estonia - countries that suffered for 50 years under communist regimes and, after the collapse of communism, sustained precious economic performance and emerged as global stars, whom history shall never forget.

TRADE UNIONS THREATEN THE PROSPERITY AND COMPETITIVENESS IN CZECH REPUBLIC

International Herald Tribune reports that the members of labor unions in Czech Republic are protesting against proposed tax and expenditure reforms. Nevertheless, the GDP growth in Czech Republic accelerated rapidly in recent years. For instance, in 2006, GDP growth rate hit 6,1 percent annually. However, the size as well as the inefficiency of public spending in various sectors present a huge structural problem, putting the competitive position of Czech economy at risk. As in many other transition countries, Czecg trade unions possess a strong role in the course of economic policy and fiscal (un)sustainability, demanding high unemployment benefits, maternity leave payments and health care spending. Nevertheless, high unemployment benefits create a loophole which leads into a spiral of highly regulated labor markets by creating persisting barriers to productivity. By the matter of empirical content, a huge size of public spending is tightly correlated with an increasing inefficiency of the spending itself. Trade unions seem not to realize that the only way to fund all kinds of unemployment and health benefits is to raise tax rates, thus shaping tax basis and penalizing investment and saving which are essential to economic growth.

Economic policymakers in Czech Republic correctly decided to impose a tax reform that would reduce barriers to productive behavior. If approved, a 15-percent flat tax on personal income would be introduced in 2008. Currently, the personal tax rate ranges from 12 percent to 32 percent, depending on income. The corporate tax rate would be cut from 24 percent to 19 percent by 2010.

ROARING ECONOMIC TIGER FROM THE EAST

In a WSJ column, Dan Mitchell writes about how a simple, low burden and non-complex flat tax system boosted the competitiveness and performance of Estonian economy.

SWEDISH CENTRAL BANK RAISES KEY INTEREST RATE

"Inflation is the Riksbank’s particular responsibility. The Riksbank’s objective is to maintain inflation at around 2 per cent a year."

Mr. Stefan Ingves, the governor of Sveriges Riksbank

The Swedish Riksbank raised a key interest rate by 0.25% on Wednesday, to 3.5%, and promised even further hikes by the end of the year. Recent economic overview on Swedish economy showed a strong slowdown of productivity growth and strongly growing wage costs resulted in a tight cost pressure which inevitably urged the increase in repo rate to keep the economy on competitive edge to ease the possible inflation volatility. The repo rate is expected to be around 4 percent at the end of the year. Over the coming years it is probable that the interest rate will need to be raised further. This action is about to be taken soon and could suit Sweden's inflation targeting strategy performed by Riksbank, the oldest central bank in the world. Over time, the repo rate could be further increases, depending on wage, cost and productivity dynamics. To ease the inflation pressures as well as the volatility, the labor market bargaining pressures are ought to be eased and wage settlement should be completely separated from central agreements which are the heaviest threat to the economy in the course of long-term growth and reversing inflation pressures and the overheating of the economy.

FLAT TAX IN ONE LESSON

Madsen Pirie of Adam Smith Institute demonstrates the effects and implications of instituting a flat tax in the case of Iceland.

PUBLIC HEALTH: INEFFICIENCY, FISCAL TRAP AND THE LACK OF FREEDOM

The article in Washington Post states that Japan's new public health problem is obesity which has supposedly grown with the apetite for Western food.

There is a question, however, whether obesity and smoking are the problem referring to the issue of public health? The answer is no.

The term "public health" is similary coined as "national interest" and has grown in quite a similar way as government intervention did. Previously, governments from all around the world embraced falsified Keynesian economic concept of aggregate demand as the short-run determinator of economic growth. A dummie idea turned into the mainstream of economic policy which collapsed when the agony of high inflation and unemployment spiralled the course of stagnation starting back in 1970s.

Obesity and smoking are widespread problems. But they are not public health problems. For example, if someone eats a huge Big Mac, then he/she doesn poison or threaten your health since each and everyone is credible enough to make his/her own decisions about food consumption and eating habits. Nobody accidentially ingests Big Mac and it thus doesn't make your health worse-off.

If someone decides to eat donuts several times a day, he/she should do so while your health is not put at risk in this case. Years ago, the issue of public health focused on preventing epidemics and securing health benefits such as clean water and improved sanitation.

Mr. David Boaz of Cato Institute captured the essence of taking care of public health as the security package confirmed by the so called "neighborhood effects";

"Public health officials worked to drain swamps that might breed mosquitoes and thus spread malaria. They strove to ensure that water supplies were not contaminated with cholera, typhoid, or other diseases. The U.S. Public Health Service began as the Marine Hospital Service, and one of its primary functions was ensuring that sailors didn’t expose domestic populations to new and virulent illnesses from overseas."

A widespread propaganda infused that countries need public health bureaucracies to cure habits such as smoking. But despite all the fear intangled, government intervention again proved itself as inefficient and costly. Public health bureaucrats are a typical case of the monopolist who avoid the market behavior by setting-up discretionary supply, telling others what to do and how to adjust their lifestyle to the preferences of the minority government officials.

Economically, health care service is a tradeable good, which means that its price is determined by supply and demand. However, the monopolization of health care services once again demonstrated how costly to growth rent-seeking really is.

In public health care, prices are usually administered and controlled, and an important source of cost-push inflation. All kinds of anti-smoking campaigns, anti-obesity roundtables is funded by public spending and could easily be reached in everyday free-market. Neighborhood effects of increased spending on public health care programs have never been firmly proven and thus, over time, the outlays for public health care sector grew respectively and became a rigid fiscal obstacles in breaking-down the public spending.

If I want to quit smoking, I can do it on my own without the intervention of public health bureaucracy. If I want to anchor the eating habits, I can also do it on my own. I do not need the assistance of anyone unless I'm willing to ask and pay for it. Public health care "problems" are ridiculously expressed in a way that bureaucratic services can solve them immediately, demanding collective action and pushing for greater fiscal outlays while the quality of services ends-up in the spiral of dissatisfaction.

Economically, there could hardly be a health care crisis as well as public health schemes roughly overlook the aspect of its own supply on the basis of cost/benefit decision-making so it cannot be analyzed by tools from welfare economics. The outcome of mistakenly designed public health schemes is a high degree of expressed dissatisfaction with the services conducted in a public health care system.

There is also a huge cost shock wrecking the output efficiency of spending on health care. Not surprisingly, some health-care problems are widespread but that doesn't mean that they're public. To tackle these problems, government intervention can solve them but only an individual action as the latter rationally estimates its preferences as nobody else can.

GLOBALISATION IS THE PURSUIT OF LIBERTY

OECD correctly reports that fears and threats on globalization are fully overblown. Overestimated threats emerge from concerns over wage inequality and the loss of jobs as labor-cost incentives in emerging markets push many existing enterprises abroad. However, moving production facilities and low-skilled jobs abroad does not mean that wages neccessarily decline. Job flight is compensated by infusing high-skilled jobs such as IT, consulting and services broadly based on new economy.

Overblown rosy fears about the danger brought by the liberalization of international trade nearly turned into the commedy. Empirically, the liberalization of international trade flows encourages labor and capital mobility giving incentives to accelerate the investment in human capital. Another questions that raises woes against the pursuit of free trade is whether offshoring worsenes the unemployment agony or not? The answer is No.

Despite the increased amount of offshoring investment, the unemployment rate among OECD countries steadily declined from 33,6m in 2006 to 32m in 2007. The explanation can be based on the correct empirical assumption that offshoring investment is an incentive for domestic economy where new jobs are added particularly in high value-added areas where knowledge is transferred at an intensive pace. Regarding offshoring, both sides benefit since this is a pure behavior of market equilibrium and free exchange.

Domestic economy (where offshore investment takes place) is fueled by intensive job creation in sectors where high value-added plays a sharing role. The other side benefits from job creation. Since offshoring is primarily focused on locations where labor cost proportions are low relative to the rest of the world, say Chinese, Vietnamese or Indian workers benefit from higher job creation which lifted millions out of poverty into the middle-class wealth.

There is also concern about wages. Wage inequality is actually a good sign reflecting the difference in skills, education and productive behavior between labor market agents. The wage inequality over the last period is actually the result of technological change and increased productivity in several areas compared to another.

THE CRISIS OF WELFARE STATE IN EUROPE IS THE SEED OF ANTI-AMERICANISM

Writing for TCS Daily, Richard Rahn explains dangerous effects of European anti-americanism and its origins as well. Contrary to popular beliefs, I believe that the phenomena of European anti-americanism is not rooted in political reasons but in a broader economic highlight reflecting the crisis of welfare state in Europe, leading to low economic growth while supply-side (tax reductions) measures on the other side of Atlantic strenghened the U.S. competitiveness and contributed a substantial part to the record levels of GDP growth in the U.S. in the past year.

Anti-americanism is dangerous for both sides. The EU now accounts for 21 percent of U.S. merchandise exports and 19 percent of U.S. merchandise imports, and about 34 percent of U.S. services exports and 37 percent of U.S. services imports. In the past year, nearly 1,1 trillion (more than half of total U.S. foreign direct investment) was invested in Europe. U.S. and the EU are thus the largest trade and investment partners in the world. Even more. The total population of the EU and the U.S. presents nearly 57 percent of total world population.

The economic climate in the U.S. is far more prosperous than the one in the EU, except for the emerging markets in Eastern Europe, currently standing at skyrocketing economic atmopshere equipped with rapid GDP growth rates. Supply-side economic reforms in Estonia, Slovakia and Latvia are now paying big dividends.

In fact, growth projections of Estonia, Latvia and Slovakia rapidly exceed the European average, further stepping-up after the acceleration of GDP growth. The latest release has shown that Estonian and Latvian economies are growing at a rapid pace. In Slovenia, the GDP grew 7,2% quarterly. But in Slovenia, there is much misunderstanding concerning GDP growth.

In Slovenia, construction reached 28,9 percent rate of the value-added. But the offspring of investment emerged from the government debt grants to DARS (Highway builder and a monopolist) what enabled an intensive pace of borrowing which will once have to be repayed together with interest. You don't have to be an economic genious to find out that building highways stimulates construction investment, especially in a country in transition such as Slovenia.

Another relevant reason for a sharply widening gap between the U.S. and Europe is the crisis of welfare state in the EU back in early 1990s and still today. Many European countries suffered from a severe economic backlash in early 1990s.

After Germany was reunified, the economic performance started to flow sluggishly. The reunification could hardly be blamed for poor GDP growth track, but rather measures determining economic atmosphere such as benevolently high tax rates on labor and capital and rigid labor market. The agony of labor market deadlock has indeed forced many Germans to fly away from the welfare state onto nearby locations such as Switzerland, Denmark and Austria. Many Germans have indeed become "Neue Gastarbeiter" (new guest workers).

France equally suffers from rigid labor market and publicly declared protectionism and economic nationalism. In previous year, France clearly demonstrated what is the output of generous welfare expenditures coupled with unflexible labor market and lazy immigrants. Italy is the next sick man of Europe. After hitting the historically lowest GDP growth rates, the economy is hampered by significant tax burden and heavy regulation which slashes the potential absorbtion of output gains.

Another "pain-in-the-ass" is an ageing population which triggers the welfare expenditure rate in an unchanged pension scheme where net financial pension liabilities rise twice compared to GDP sum. Sweden, once the cradle of welfare filth, was hit by a recession and continually falling GDP for two years. Riksbank, the oldest central bank in the world, had to pass the devaluation of Swedish krona several times as the public debt and fiscal pressure on expenditure growth became uncontrollable. The economic recovery, of course, was slow, sluggish and hit by a growing taxation pressure as the retirement rent in "Bismarck-designed" pension schemes skyrocketed,

(A few days ago, I noted an interesting insight from Milton Friedman's trip to Stockholm (Sweden) where he received Nobel prize back in 1976)

On the other side, the U.S. economy flourished further after tax cuts were implemented back in 2003. Generally speaking, the U.S. has created an economic and business environment that is an envy to the world. Europe's best and brightest escape the welfare at a record pace, seeking to find better opportunities in the U.S where regulation and excessive fiscal pressure are far lower than in nearly every European welfare 'cradle-to-grave' welfare state.

True, the U.S. maintains one of the most onerous corporate tax rates in the world. Even in Germany and France, there is much less corporate taxation pressure on companies. The economic course diverging the measures (productivity) between the U.S. and Europe is eventually one of the main reasons why the majority of Europeans envies the U.S. so much. The cure for "European stagnation warming" is quite simple:

1. Privatize social security
2. Eliminate as much welfare state services as actually possible,
3. Maintain the rule of law,
4. Enforce tax competition,
5. Liberalize/deregulate product markets,
6. Abolish trade quotas,
7. Abolish the collective union bargaining, and
8. Cut tax burden by reducing tax rates on productive behavior.

IT'S ABOUT SPENDING, NOT DEFICITS

Investor's Business Daily has noted that the real problem in public finance is not budget deficit but the size of government spending. Whether it is financed by taxes and borrowing, high goverment spending causes the distorsions in dynamic economic behavior. If tax rates are high and widespread, market agents tend to absorb the money and hide it away from the taxation base. Inevitably, high tax rates, as Laffer Curve correctly explains, cause the loss of tax revenue which becomes the heaviest weapon in the hands of economic policymakers as well as the worsening of economic conditions in doing business and creating wealth emerging from productive behavior such as risk-taking, entrepreneurship, saving and work.

The most obvious agony of public spending is an empirical fact, that an obscure size of spending correlates with intensive inefficiency of public sector. Robert J. Barro, for instance, showed that growth and saving rates fall with an increase in utility-type expenditures; the two rates rise initially with productive government expenditures, but subsequently decline. With an income tax, the decentralized choices of growth and saving are too low, but if the production function is Cobb-Douglas, the optimizing government still satisfies a natural condition for productive efficiency (link). The explanation is simple: higher the spending rate, greater the inefficiency of government spending in a sample economy with endogenous growth.

In the long run, of course, high budget deficits are unsustainable as the size of the deficit is possibly fueled by raising public debt and tax rates as it is expected that individuals pursue adaptive expectations statically so that increasing tax rate on labor and capital will return higher tax revenue, but Nobel-winning economist Edward Prescott has shown that labor supply as a market agent is highly sensitive to taxes, as compliance costs per unit of output increase as a single taxation unit adds relative burden to agent's income earned in the market. As the tax rate rises, GDP per capita falls. For example, compliance costs is when you hire lawyers and accountants to help you overcome the burden of annual tax returns such as finding the right exemption for capital gains, income earned abroad etc... in a heavily complicated tax system marred by loopholes, exemptions and deductions pushing compliance costs ever upward.

Nowdays, it is silly to listen how deficits soared and how facts on high rate of public spending are left ignored.

GLOBAL MUTUAL FUNDS OVERVIEW

Here's some data sheet on top funds' average periodical yield rates which I came across today. As you can see from the sheet, the effect of solid economic conditions in emerging markets reflects the boom in the growth of returns from mutual funds. Despite speculative motives oftenly dribbling the dynamics of mutual fund performance, the growth outlook has remained shiny.

MUCH TALK, WRONG SOLUTIONS AND OPPOSITE RESULTS: THE CASE OF WAR ON GLOBAL WARMING

by Martin Rojko


When the EU officials, hardcore environmentalists and other global warming alarmists (similar to Nobel price nominee Al Gore) talk about „doing something“ about global warming, two ways are discussed. One is trading permits to emit carbon dioxide and other greenhouse gases. Second is taxing on carbon emissions from gasoline or electricity use. Both approaches are different in tools considered, but common in final result. If they cut something, it´s not for sure emissions but economic growth.

Some economists believe the best way to deter people from using carbon products is to tax them. Beside writting a treatment on detrimental effects of taxing for any „great and noble“purpose, one result is more than clear. High (Pigou) tax would burden the poor and hamper economic growth. Low tax would lead to probably zero emissions reductions.

The Kyoto protocol was signed in 1997. Participating countries (including EU) have made a serious commitment to cut emissions. Since this time they have in reality increased in every one of the EU-15. In fact, EU-15 emissions have been rising faster in percentage terms than in the USA (which is not bounded by Kyoto), where emissions have been going up about one point for every three points of economic growth. The U.S. Energy Information Agency estimates U.S. carbon-dioxide emissions dropped 1.3 percent in 2006. At the same time overall European emissions went up by more than 1 percent. This doesn´t bother politicians for just a minute as they continue in rhetoric exhibitionism of decreasing.

Emissions trading is not working. Evidence can be found not just in increasing emissions, but also in collapse of carbon price. Because of surplus of allocated permits the price fell from 30 eur in start of 2006 to 0,30 eur in these days. Post-communist countries has nowadays a large surplus of trading permits, which could be turn into cash by selling them to West European companies. This reality is well known in both West and East part of continent. And Belarus government know it also. Lukasenko´s regime had been refusing Kyoto for a long time untill the last year when emissions („hot air“) trading started.

The Newsweek magazine published the article on global earth cooling in 1975. It cited a few scientists warning against possible catastrophic results. It has taken more than 30 years till the Newsweek has admitted that it „has been considerably wrong in a short-time forecast.“ Stern´s sensational conclusions are condemned to the same act. But probably without his excuse.

Society functioning depends mostly on carbon nowadays. This substance can´t and won´t be substituted by swinging of magical stick in hands of politics which desire to handle a reality. If we need to do something about global warming, it is to shift from talking about forcibly reducing emissions and search for solutions compatible with market capitalism. A rich world will be better than one made poorer through overpriced carbon constraints. Only capitalism and freedom can help get us from carbon dependence.

JOINT-VENTURE IN A SMALL AND OPEN ECONOMY

After months of negotiations, gamling companies Harrah's Entertainment (USA) and Hit (Slovenia) have finally come closer to launch the biggest joint-venture Slovenian economy has ever had.

TRAVEL AND TOURISM COMPETITIVENESS INDEX

In many countries, travel and tourism is a critical sector impacting national prosperity and economic growth. In fact, tourism is gaining evenly greater share in the GDP and playing a vibrant role in promoting the attractiveness of global business and living environments. Here's the first WEF report on Travel and Tourism Competitiveness. The index of course, does not measure the competitiveness of travel and tourism in each country according to its natural fascinations and beauty of the landscape but it measures the factors that setup the conditions which help to build-up a competitive tourist and travel industry.

PUTTING GLOBAL WARMING OUTRAGE ON ICE

Early this morning, I came across the article in Financial Times written by Vaclav Klaus entitled Freedom, not climate, is at risk.

One of the major concerns in debating the future of global warming is that the supporters of heavy regulation seem to instinctly ignore the economic fundamentals. In the last decade, there have been numerous panel groups deciding how to orient to cure global warming. Nearly every proposal and recommended solution fetched the regulation of industries to cut the emissions as much as possible.

The suggestions of the environmentalists offered poor track in understanding how economic behavior really works. In recent years, world markets boomed from the emergence of new technology containing efficient, innovative and environmentally-friendly methods determining the course of production. Consumers always want new products and the only way to deliver them is to use the rock-bottom incentives to provide the best product at the best price. Old and rugged technologies were once the symbol in centrally-planned economies, causing high costs and truly poor quality. However, greater incentives to produce and supply over the course of time and supply-side economic measures such as deregulation, the liberalization of product markets and the enforcement of competitive law contributed to the diffussion of efficient technologies with an aim to control cost shocks and provide the betterment of product quality.

New economy and the "so-called" dot-com boom revolutionized the market by providing new technologies at far more efficient level. Consequently, the economy's transformation from manufacturing to services brought the greatest industrial restructuring we have ever seen. New economy is actually the reason the the share of industry in the GDP fell and consequently the amount of gas emissions as well. All kinds of "scientific consesus" are nothing else but a huge political infusion into scientific work.

Professor Richard S. Lindzen from the Massachusetts Institute of Technology brilliantly captured the essence of global warming histeria:
"Future generations will wonder in bemused amazement that the early 21st century’s developed world went into hysterical panic over a globally averaged temperature increase of a few tenths of a degree, and, on the basis of gross exaggerations of highly uncertain computer projections combined into implausible chains of inference, proceeded to contemplate a roll-back of the industrial age".

The supporters of "black"future environmental scenario suggest that we should dramatically change our lives by cutting the energy consumption expenditure and change it with new energy resources. Have they provided the positive impacts of alternative energy resources infecting the pollution?

The implications of environmental intervention stretch beyond the edge of our imagination. If such measures were introduced, our living standards would probably fell dramatically and so would GDP growth decline as well. Assume that you're an entrepreneur with a certain kind of technology. You know that this particular technology is the most efficient in the market giving you high yields of return. And then imagine that government said that "you must use another kind of technology" by which you cannot sufficiently generate the returns you get back from the technological combinations you carefully chose. Understanding consumer behavior is essential for the entreprise to boost the supply with the best quality and the lowest possible price yielding competitive margin. So in the long run, you'd forced to adapt a new kind of technology which completely distorts the stock of your products which consumer deny to buy. Your income, value added and profits would fall and how would then your enterprise be competitive and socially responsible if it didn't generate profit?

Following the pursuit of global competitiveness, we will enjoy far better technological conditions in the future, bringing new cutting-edge concepts into our lives and sharply improving our life conditions. Taken reasonably, it's quite pathetic to claim that gas emissions endlessly change weather and climate behavior. In fact, the empirical evidence and computer projections displaying the course of intensity of global warming over time is very poor, putting politicised scientific consesus on ice.

HOW ECONOMIC CHAUVINISM DEMOLISHED THE COMPETITIVENESS OF BANKING SECTOR IN SLOVENIA

Here is an article which I wrote in May on low competitive position of banking sector in Slovenia which was derived from the latest survey conducted by International Service Check, testing the accountability and sophistication of banking sector in several Central and Eastern European countries, including Slovenia, the place where I live.

The article was published on Sukromne Vlastnictvo.

THE ECONOMICS OF TAX COMPETITION

As a guest writer, I recently wrote an article entitled "The Economics of Tax Competition" published on Sukromne Vlastnictvo.

FREE TRADE TO BOOST CANADIAN COMPETITIVENESS

Financial Post reports that Canadian Trade Ministry announced a new strategy containing free trade agreements at an accelerated pace to help boost access to the market which Canadian businesses penetrate. The strategy is welcome since commerical access is about to boost the competitiveness of Canadian companies to compete internationally and bind closer commercial ties with international partners, enabling to look-up for new markets through easier access to key markets. It is also essential to note that protectionism does not serve its meaning as the trade benefits and competitive advantage boost growth and performance of the economy, further adding value to the economy competing on international markets. Previously, numerous empirical studies have shown a positive impact of free trade on performance and several other areas such as environmental questions. In Is Free Trade Good for the Environment (2001), Walter Antweiler, Brian R. Copeland and R. Scott Taylor questioned the effect of economic openness and international trade flows on global pollution, based on the observation of 43 countries from 1971-1996. They concluded that if trade liberalization increases the GDP per capita 1 percent, the concentration of pollution decreases 1 percent (link). Nevertheless, free trade agreements entail a positive impact on environmental sustainability.

RESTRICTING CAPITAL INFLOWS WON'T SOLVE THE LACK OF PROPERTY RIGHTS

Indian government is considering setting the restrictions on capital inflows.

The appreciation of the ruple has helpfully tamed the inflation in India, not further posing any inflationary pressures as long as the central bank responsibly follows the guideline monetary policy rules rather than discretion or impeding intervention. The rupee has strengthened over 9% against the greenback since the beginning of the year. Inflation, which peaked at 6.7% in January, is now at 5.06%. To bit the excess liquidity, Reserve Bank of India raised the lending rate from 6.75 to 7 percent following the increase cash reserves helping to tame the inflation. The objective to restrict the investment and separate it on "good" and "bad" is a little bit confusing if property rights are so weakly defined in India, then causing speculations in real estate sector for instance. Price pressures can be tamed by further practicing disinflationary measures and avoiding the protectionism which inevitably stimulates the demand side by disturbing the equlibria price behavior, causing huge excess demand pressures.

It's also good to hear that Indian government's policy remains favorable to attracting foreign direct investment. The Indian economy has risen at a compounded annual growth rate of over 8.5% in the last four years. The question is how to keep it up in the long-run to avoid robust bustling and overheating of the economy. To avoid this, inflationary measures are still needed to be in full preparation to be undertaken by the central bank in cooperation with fiscal authorities.

ROARING EMERGING MARKETS

Trimtabs Weekly Liquidity Review notions the redeemed global equity ETFs further warming the optimism carried-over to emerging markets such as China and Latin America.

INVESTMENT "HONEY MOONS" BOOST RUSSIAN ECONOMIC BOOM

In early 2007, investment growth boomed in Russia, driving one of the largest economies on record-breaking economic growth. High margins and rising ruble contributed to the growth of fixed capital investment which rised 19,9 percent, slashing the 17,4 percent record set back in 2000. WB's much favorable forecast predicted continually strong economic growth. It seems that investors relied on the estimates as internal and external investments focused on domestic consumption and mostly resource sector. This year's growth forecast is estimated to exceed previous 8 percent rate while the officials forecast 7 percent growth rate. Six year's annual economic growth has averaged 6.2 percent. However, Russian economic performance is significantly backlashed by tight inflationary pressure which will probably hit 9-10 percent annually, partly resulted from the unflexible exchange rate of the local currency and from the structural aspect including price controls, widespread government-owned enterprises and heavy regulation. Consequently, the degree of the independence gained by the central bank is not pretty high as it remain weak in controlling the inflationary pressures.

NEW ZEALAND'S INFLATION COMBAT

Coming across the Market Scan in Forbes, it notes that New Zealand is facing rough temporary inflation turbulence resulted from an accelerated domestic demand, roaring property market and rising government spending. Consequently, the Reserve Bank of New Zealand send a silent shock to investor by raising the official cash rate from 7,75 percent to 8,00 percent. The feature sizzled the New Zealand dollar onto the record level, but it depressed local stock prices as NZW-50 index fell 1,2 percent. Since it was floated in 1985, the New Zealand dollar (kiwi) rose to 76 U.S. cents compared to last year's "below-60" level. The Reserve Bank aims to keep the inflation within 1%-3% medium range. However, official statistics shows an uncomfortably high spending, based on fiscal expansions as well as on the acceleration of public consumption, further braking-down the effectiveness of fiscal behavior in a long-term perspective and warming an already-bubbled asset market whose property prices almost doubled from a total value of 282 billion Australian dollars ($234.8 billion) in the last quarter of 2002, to 559 Australian dollars ($465.5 billion) at the end of 2006.

LUXEMBOURG: HOW A TINY TAX HAVEN ATTRACTS INVESTMENT FUNDS

Luxembourg is a tax haven. Bank interests, dividends and capital gains owned by non-residents are not taxed neither by Luxembourg's government nor any other foreign government relating to the origin of the non-resident. Favorable and non-discriminatory tax regime lured an astonishing growth in the financial sector accounting for 28 percent of the GDP. In a tiny grand duchy, there are officially 12 000 holding companies along with 1 300 investment funds from all around the world.

Eurostat's survey recently accorded that Luxembourg enjoys 223 percent of the average EU GDP per capita. The closest trailer is Ireland at 139 percent of the EU average. Luxembourg recently caught the eye of International Herald Tribune. In fact, financial privacy is what investors praise very much on a distant offshore location such as Luxembourg. Given the favorable conditions of tax advantage, Luxembourg's diversification of the economy followed by steel crisis in 1970s strongly relied on banking and internet services by welcoming the arrival of baby boomers such as AOL and Amazon.com.

Also, Luxembourg's financial industry is booming. Luxembourg's decision in July 2004 to allow the listing of offshore hedge funds has made it possible for the jurisdiction to attract offshore funds and to compete on a level basis with Dublin, removing a barrier that has acted as a handicap to the growth of the hedge fund sector in the Duchy in the past. Economic performance indicated strong growth in the last couple of years, outperforming growth parameters in the rest of the EU economies. As one of the most attractive offshore locations, in 2000, the level of foreign investment per capita was 59 563 USD. Excluding banks, the number was still the highest in Europe. Luxembourg's favorable tax climate returned the arrival of rapidly growing mutual fund industry in the world with net assets getting close to $1,700 billion USD.

Also, Luxembourg is the second largest host of fund management industry in the world.

In a recent attack on Luxembourg's fiscal sovereignity, 26 EU countries have been forcing Luxembourg to slash tax advantages that soared a huge amount of FDI inflow. Here is some more evidence on Luxembourg's tax environment and here's a factsheet on doing business in Luxembourg.

High Growth boosts the performance of Luxembourg's mutual fund industry.

OBWALDEN: TAX COMPETITION IN ONE LESSON

Swiss Federal Court proclaimed Obwalden's degressive tax system on individual income as unconstitutional. Canton's degressive tax system is designed to reward the individual productive behavior by dropping the rate as the earnings of residents increase. Obwalden had adopted a degressive income tax system which meant that the more you earn, the less you pay. Those earning over SFr300,000 ($233,000) per year, for example, had a tax rate as low as one per cent. However, Obwalden's primary tax jursidiction was chosen by 86 percent of the votes in favor of degressive tax system. As one of the poorest cantons in Swiss mountianous center, Obwalden is ought to attract more direct investment which would inevitably boost job creation and income growth. In fact, fiscal decision-making based on the economics of tax competition is a basis for sound capital mobility. Previously, Obwalden's policymakers slashed its effective corporate income tax to 6,5 percent flat rate, one of the lowest and most competitive corporate tax rates in the world. In addition, property tax has dropped by at least 30 per cent. The figure below compares effective income tax rates between Swiss cantons.





Figure: The comparison of effective income tax rates between Swiss cantons in 2006

BRAIN-DRAIN AS GERMANY'S HOME-GROWING INDUSTRY

Here's a short article on how 'brain-drain' has hit the highest level since 1940s in Germany. The record level parallels with Germany's high fiscal burden causing disincentives to work, save and invest, pushing hundreds of highly-skilled workers into tax-friendlier destinations such as Switzerland, the United States and Austria. The most obvious consequence of intense brain-drain is the loss of the foundation which fuels long-term economic growth and global competitiveness. Previously, Germany faced a significant inflow of mostly unskilled foreign labor which transformed into structural crisis as generous welfare state hampered tax base by increasing marginal rates on individual income. Also, Germany has an onerous 39 percent corporate income tax.