Friday, August 31, 2007

Thursday, August 30, 2007

BORAT AND KAZAKHSTAN

Borat is a nice movie. From the standpoint of movie critic, I think that the content of the movie plays a minor role in ranking the movie compared to Borat's acting enthusiasm, interest in investagiting the cultural patterns in the U.S., and doing particular things which almost nobody dares to do today such as the immensly accurate 'on air' performance completely unexpectedly.

However, I think that after Borat, Kazkahstan widely affirmed its recognition and trademark promotion in the world as well as the Republic of Montenegro in this year's May when Rolling Stones had a concert in Budva, when Mick Jagger said: "Zdravo Budvo, dobro veće Crna Gora..." Inviting Rolling Stones to Montenegro, was probably a sufficient investment to boost the trademark of Montenegro in the international market regarding aspects such as tourist supply and investment location.

While I was watching Borat, I thought I'd be good to write a brief economic analysis of current macroeconomic trends of Kazakhstan and compare the results and numbers to the rest of the world. At Trzišno Rešenje, Slaviša Tasić posted Borat za predsednika (Borat for president) where he wrote:

"Kazakhstan is open to foreign investment, private companies are able to exploit oil and other natural resources while the most interesting of all is the fact that the privatization of the social security accounts has been accomplished in the middle of 1990s. The majority of Europe and the U.S. is still about to face this particular reform..." (link)

Macroeconomic trends, Monetary policy and Economic growth

Kazakhstan is a typical post-communist economy which is recovering from decades of socialistically mismanaged Soviet-styled economy resulted in a short-term contraction with the steepest decline which occured in 1994. During 1995 and 1997, the economic reforms and the privatization of state-owned assets, significantly boosted the GDP performance through high output growth rate where booming energy sector and thriving export market accelerate the pace of growth. In 2006, the output grew incredibly by 10,6 percent and 9,6 percent in 2007. Not surprisingly, the gross fixed investment equaled robust 27 percent of the GDP.

The estimates of the real GDP growth in the future seem optimistic to stimulate output increases. In spite of distorting pressures of high inflation, the price controls hiked through state-owned enterprises and holding prices below or above the market level, are significantly reducing the edge of monetary stability whereas the Kazakhstan's central bank suffers from the lack of responsibility and independence to curtail the money supply and circulated monetary emissions. Not surprisingly, the official inflation rate is 8,3 percent in Kazakhstan and is estimated to decline by 2011 with a distorting increase during the pass from 2010 to 2011 resulted from optimistic output growth estimates reversed into higher inflation. A transition report by EBRD (European Bank for Reconstruction and Development) comments the inflation tendencies surrounding Kazakhstan economy, its outlook and risk:

"Inflation remains on an upward trend – the consumer price index increased from 7.6 per cent year on year in December 2005 to 8.6 per cent in December 2006. To stem inflationary pressures and dampen credit growth (which remained buoyant in the first half of the year), the Central Bank raised the refinancing rate by a cumulative one percentage point during the first seven months of 2006 and broadened reserve requirements... A possible levelling off of oil prices in 2007 (albeit at the current high level) may mitigate inflationary pressures arising from excess domestic liquidity. Deceleration of real GDP growth to 9 per cent is expected in 2007, reflecting the decline in oil prices, constraints on hydrocarbon production and the tightening of monetary policy in the second half of 2006. However, given continued strong appetite for external borrowing by Kazakh banks, further monetary and regulatory tightening may be required. A key risk over the medium term is the rapid credit expansion, funded through the accumulation of external liabilities of banks, and the resulting construction and real estate boom."

Source: EBRD, Transition Report (link)

Low degree of economic freedom

Kazakhstan's economy is 60,4 percent free, slightly below the world average. Low score in economic freedom presents an especially weak rule of law, widespread corruption and extensive over-regulation of foreign direct investment. Despite the high contribution rate to annual periodic GDP growth rates, the oil sector still remains marred by extensive control over the entry into the sector by foreign investors. Since 1991, the foreign direct investment regime changed significantly and improved the entry and operative conditions for foreign investors. The U.S. Department of State reports:

"Kazakhstan has made significant progress toward creating a market economy since its independence in 1991. The European Union in 2000 and the U.S. Department of Commerce in March 2002 recognized the success of Kazakhstan's reforms by granting it market economy status. Kazakhstan also has attracted significant foreign investment since independence. By July 2005, foreign investors had invested a total of about $36.8 billion in Kazakhstan, primarily in the oil and gas sector, during the country's fourteen years of independence. Following independence, the government created a favorable regime for oil and gas investments at the same time that it undertook other liberalizing economic measures and began an ambitious privatization program." (link)

However, the oil sector is not the sole case of restricting the inflow of foreign direct investment. In the closer past, Kazahstan's economy has not yet experienced a devaluation of its currency which would lead to the reduction of domestic purchasing power parity. Further, with $22,6 billion net worth of export, Kazakhstan is a net exporter of its natural and oil resources. Solid export market is soundly performed by foreign direct investors, bringing technological feedback and required knowledge needed to face the challenge of the new economy with a high-growing energy sector. According to the Index of Economic Freedom, the government of Kazakhstan legislates to favor domestic investors over foreign ones by deterring the foreign investment investment itself. The unofficial barriers to new investment is particularly persisting 25% government cap ownership on banking sector investment and 20% ceiling on media ownership.

Conditional Business Climate (link)

An interesting observation is that poor investment conditions usually coexists with highly perceived signals of corruption, the lack of sufficient protection of private property rights and with the lack of rule of law.
According to Doing Business, Kazakhstan ranks 63rd in the world in the ease of doing business. While the most of indicators show the inefficiency of complex bureaucratic codes; the labor market is subject to a high degree of freedom and flexibility over firing and hiring practices which possibly do not hinder the growth of overall productivity. The labor code entails absolutely no rigidity in hiring labor supply while firing causes no significant negative cost ends. In spite of high non-salary wage costs (22%), the costs of firing (8,7 weeks of wages) are low compared to international standards. As the economy booms, the deregulation of credit is neccessary to unleash the potential of the supply of the banking system to respond to incentives and properly manage market behavior of participants. Surprisingly, Kazakhstan gained 69 places in the rank of doing business. While trading across borders is still very costly (high cost wedge of export and import activity), the commercial contract enforcement is not complicated and marred by long time period of waiting to enforce a typical commercial contract.

Pro-Growth Tax Reform

In 2007, Kazakhstan introduced several new features into its system of taxation. The flat-rate VAT on all goods was reduced from 15% to 14%, and a flat rate of income tax of 10% was introduced, replaced after previous three-bracket progressive tax system ranging from 5 to 20 percent. The impact of pro-growth low-rated tax ssystem is definitely the way to generate higher growth through revenue-neutral rates and reduced real aggregate tax burden. Prof. Allan Rabushka says:

"On February 1, 2006, President Kurmanbek Bakiyev of Kyrgyzstan (Kyrgyz Republic) signed into law modifications in the country’s tax code that established a 10% flat tax. Kyrgyzstan’s flat tax replaced its current corporate tax of 20% and individual income tax rates between 10-20%. Shortly thereafter, the president of neighboring Kazakhstan said that his country would consider a flat tax in 2007."

Source: Alvin Rabuhska: Flat and Flatter Taxes Continue to Spread Around the Globe , January 16, 2007 (link)

THE COST OF TAX HARMONIZATION

The Irish Independent reports about the Charlie McCreevy's resistance to tax harmonization revenue proposals enforced by the European Commission.

The real aggregate tax burden in the EU is very high, both in historical and contemporary perspective. Back in 1980s, German policymakers instituted a 60 percent corporate tax rate. In Sweden, the top individual income tax rate exceeded 90 percent in the early 1980s. After new member state joined the EU, the picture of European economic performance is rather lingering, marred by low output growth, high structural unemployment and high tax rates penalizing the productive behavior.

However, within the EU, there're few examples where competitive pro-growth economic and tax policy significantly helped to boost the economic performance resulted in sound parameters, such as income per capita and wealth created per head. For instance, Ireland set the corporate tax rate at 12,5 percent and has seen a significant inflow of foreign direct investment. Nevertheless, Ireland is now the second wealthiest country in Europe, after Luxembourg according to the GDP per capita. Ireland's tax-to-GDP ratio is 30,8 percent compared to EU27's 37,4 percent. Fiscal sovereignity, the basis that brought the clash of punitive tax rates on corporate and individual income, is the very fundamental source of international tax competition opposed to tax harmonization, where statutory tax rates are set on a cross-national basis.

The fact that the aggregate tax burden of the European economy would increase sharply if tax harmonization efforts were implemented is not the only threat in this respect. Sluggish growth, diminished economic performance of European economies and higher tax rates on productive behavior are certainly among the forefront implications of tax harmonization.

First, high tax burden and output increases are negatively correlated, which means that higher taxes penalize each additional unit of gross domestic product.

Second, the statement of EU's taxation commisioner Lazslo Kovacs that the aim of tax harmonization is to simplify tax collection and make it less costly, is false and does not hold the real arguments. In fact, the cross-national organization of revenue service would deepen the budgetary spending and make it temporary since hiring labor to match the demands of the European Commission regarding tax harmonization pressures would result in public-guaranteed wages outlayed without with almost no effects of gains of productivity.

And third, the proposal of the European Commission that tax collection is ought to be conducted on a Europe-wide basis is a flawed suggestion erasing the real impact of fiscal sovereignity regarding the enforcement of competitive tax rates on labor and capital income and further eliminating the fruits of tax competition associated with individual liberty and the question of privacy.

See also:
Martin Feldstein: Economic Problems of Ireland in Europe, NBER Working Paper No. 8264, May 2001 (link)

Sunday, August 26, 2007

SEASIDE VACATION IN SLOVENIA

This is the 300th post on my blog.

Currently, I' m not blogging from my office base. Right now, I'm at the seaside here in Slovenia, in a small, Adriatic and Italian-styled Mediterranean town named Izola. The weather here is extremely hot despite some chill-weeding wind blows. Most people here are friendly and warm towards incoming visitors. However, you can face a lot of difficulties in communication if you speak English or German so it is preferable to use Slovene, Italian or Serbo-Croatian. Yesterday, me and my friend went to San Simon, Izola's central bay where lots of yachts are anchored alongside the coast. However, I found it "weird'n'strange" when workers at a rent-a-boat coast service told us that it is not allowed to drive a jet ski on water unless you have a sailor's licence. How can a small town expect to see in increase in incoming tourist visit if the best and most exciting is prohibited by law and regulation?

Yesterday evening, we had a great time as we did some night swimming in the seaside and the pool. I expect to do some scuba-dive and water sliding in the days to come.

One of the disappointments I face yet, is a typical post-communist infrastructure, dusts of socialist industrial factory complex and heavily-loaded, thin-sliced streets where it is nearly impossible to drive-in. The nightlife could also be more exciting with better facilities and more choice to feel the excitement of the summer and not that just walking down the street is the only option you have.

However, this CyberCafe is excellent. It offers one of the tastiest and most delicious Mai Tai cocktails.

Friday, August 24, 2007

FRANCE'S EXCESSIVE REGULATION PROPOSAL WOULD DISTORT FINANCIAL MARKETS

"Capitalism without failure is like a religion without sin."

Allan Meltzer


France responded to recent turmoils and frictions in credit markets by calling for tougher and tighter regulation of global financial markets. Clearly, recent dynamics of credit markets and ECB's strongest intervention yet, reflect the turbulence and heating of risk over debt securities in avoiding speculation and credit default swamps which notably increase the probability of financial crisis (Mishkin, Herbertsson 2006).

The question is whether regulative pressures to disclose more of particular data and information about traded financial products could ease the credit flows and ensure more transparency. Since information is the most valuable tool in picking-up financial products to invest in particular assets with sufficient return predictions, adding trickier code laws would simply burden the ability of financial markets to catch growth momentum and enforce risk management rules to respond to the volatility of the level markets properly. Risk management is of course an important aspect of decision-making in globally competitive markets. In addition, pressures for more information disclosure would enforce control over credit and broadly financial markets.

Financial markets are faced by risks and shocks every day and failures which occur frequently could hardly be a reasons for imposing more regulation on decision-makers. One of the ways to confront risk-taking and risk-minimization measures is to ensure a broader access to particular funds, thus to provide sound sources of liquidity.

Recently, France's finance minister stressed (link):
"We have been proven right. We need more transparency and better governance in financial markets and we need it on a G-7 basis."

The evaluation of risk which investors and creditors face in the course of financial market, crucially depends on the ability to reduce the risk of biased information regarding decision-making in particular activity, say hedge fund industry or private equity investment. Transferring the liabilites of governance and transparency to a global body would fail already in the short-run because the amount of information needed to be absorbed and the lack of acceptance of risk in terms of responding to the outcome of the excessive regulation, are the prime reasons why globally enforced regulation would punish and penalize financial markets which could face significant distortions and risk aversion leading to lower returns and discounted ability to target particular markets with particular financial products respectively.

Recently published in Wall Street Journal, Allan Meltzer wrote a simple fact which politicians obviously can't understand:
"But whatever the perceived problem, more regulation is not the answer. It is far better to change some incentives for excessive risk-taking."

Because the regulation of credit and financial markets does not achieve stated objectives, information-sharing pressure reversingly forces equity investors, traders and market actors in particular financial industry to disclose the information required and this, in turn, leads to more complexity and government's control over the financial markets to go for an intervention which is perceived as a negative affection of stock market performance. For instance, could the regulation of carried risk in hedge fund industry really ensure more transparency if trading is conducted on the basis of contract deals where the treatment of information is regarded as contract stakers negotiate.

If the assessment of risk is perceived as low and underestimated, than the portfolio and price reassessment boosted by spontaneous market behavior would give bankers, traders and investors a far better incentive to re-evaluate the risk involving repackaged debt securities. A regulation such as proposed by France's policymakers rather induce external risk pressures to hit hedge fund industry, stock market and private equity firms, causing more harm than good.

The cinism of France's minister of finance is well seen:
"It's not a question of forbidding trading or barring market activity, it's making sure that the sophistication of financial products does not get so complicated that even investors dealing in those products are lost as to what they actually are."

So according to this statement, government officials know better how and where to allocate market resources to maximize the return from financial markets by purchasing traded products at agreeable conditions to traders and investors/purchasers. Market fluctuations are a daily reaction to innumerable decisions and contracts in the financial markets. The assessment of product sophistication could hardly be attached to government's responsibility. The proper degree and size of regulation is much better managed trhough contract deals at which both sides agree on terms and conditions involving particular products to take action in financial markets. In sum, transparency of particular financial products is the matter of the contractual enforcement and the reflection of dealing preferences and the overall efficiency of trading and financial markets always gets worse when government decides to intervene the market with excessive regulation whereas the cost adjustment is high; both for the cost of government and the private trading sector's ability to akin compliance burden.

Thursday, August 23, 2007

DENMARK TO REDUCE INCOME TAX

Tax-news.com reports that:

"The Danish government has announced its intention to cut taxes by DKK10 billion (EUR1.34 billion) per year in 2008 and 2009 in a bid to stimulate the labour market, and improve incentives to work. Under the proposed reforms, announced by the government on Tuesday, the income ceiling for the middle and top income tax brackets will be raised to DKK353,000 per year from DKK304,100, and to DKK381,300 per year from DKK365,000, respectively.
The government is also proposing to raise the employment tax deduction, which is subtracted by all working wage earners, to 4.7% from 2.5%. Some of these tax cuts would take effect on January 1, 2008, with the total tax cut package coming into force on January 1, 2009.
In the same announcement, the Danish government also promised that a broad economic plan for the next eight years would not raise any taxes between now and 2015. The economic package also promises DKK50 billion in extra spending to improve Denmark's welfare system between 2009 and 2018."


Source: Denmark to Cut Income Tax (link)

Despite high tax rates on individual income with the marginal rate of 59 percent, Denmark enjoys a deregulated and relatively flexible labor market compared to the rest of the world. However, the real aggregate tax burden dropped by 0,8 percentage point and is now 47,2 percent of the annual GDP. Tinkering tax brackets instead of real income tax cuts could, in turn, increase compliance instead of reducing the punitive rates on personal income to stimulate labor productivity and ease cost pressures arising from wage-increase claims.

INTERNATIONAL TAX COMPETITION

International tax competition occurs when individuals and firms can reduce tax burden by shifting the supply of labor and capital from high-tax destination to low-tax jurisdiction. Fiscal rivalry encourages individuals and companies to move to the destination that penalizes effort and entrepreneurship less than high-tax jursidictions, leading to greater efficiency in work, savings and investment. Low tax burden, perceived as a percentage of the GDP, enhances economic performance and competitive pressures significantly improve the allocation of productive resources and thus promote efficiency and generate higher standard of living.

Selected reading:
Bermuda 'A Top Five Financial Centre, Tax-news, London 02 May 2007 (link)
Daniel Mitchell: The Economics of Tax Competition: Harmonization vs. Liberalization, 2004 (link)
Richard Teather: The Benefits of Tax Competition, 2005 (link)

MULTINATIONALS, TAXES AND COMPETITIVENESS

Here is a report from Financial Times:

"Multinational companies with US subsidiaries could face huge new tax bills under a law passing through the US Congress. The new measure, known as the Doggett law after the Texas Democrat who proposed it, aims to prevent international companies avoiding US tax when they transfer funds from the US to parent groups via countries with favourable tax treaties, such as the UK and the Netherlands. At present, companies with headquarters in countries that have no US tax treaty, such as Taiwan and Singapore, can avoid a 30 per cent tax on funds transferred from US subsidiaries by setting up a unit in countries with favourable treaties. Congressional Democrats say the legislation is focused on “tax haven hideaways”."

Source: US tax bill set to hit multinationals, Financial Times, August 19 2007 (link)

A new tax hike on multinationals introduced by the U.S. Congressman could seriously hurt job creation and force multinationals to leave the U.S. despite some of the particular competitive advantages of the business environment in the U.S. such as sound access to venture capital. The performance of multinational companies in areas such as value-added and venture formation crucially depends on tax rates hiking capital gains, corporate income and savings. In fact, net direct investment and capital inflows into low-tax and offshore jurisdictions reflect the attractiveness of particular locations to invest and transfer investment funds into the most favorable place with regard to corporate strategies undertaken by multinational companies.

Penalities levied on setting up business units in jurisdictions with non-punitive tax regime, would certainly force capital and investment managers to avoid taxes through unfavorable results such as less job creation as a measure to fight resisting cost pressures caused by the introducing particular tax bills on companies seeking to maximize growth and output in jurisdictions with lower statutory rates on corporate income and private equity.

Nevertheless, taxation of private equity has distorting effects on decision-making where and how to allocate investment resources in particular to maximize the output and return on equity. In fact, there is a numerous evidence that outsourcing benefits outward company performance and provides opportunities to investors and offshore/onshore service supply. Obviously politicians do not know that multinational companies frequently run several business units and that particular domestic markets do not neccessarily offer suitable or attractive access to particular capital and investment funds and that restricting access to international markets could result in a lack-luster performance of multinationals and consequently, in the loss of gains from competitiveness and access to provide liqudity and additional funds to fuel growth and perform the business strategy.

HOW HISTORY IS REPEATING ITSELF

Yesterday, I came across the link, a collection of famous historical quotes. Interestingly, there is also an excerpt from Nazi political program (see: quote 336):

"We ask that the government undertake the obligation above all of providing citizens with adequate opportunity for employment and earning a living. The activities of the individual must not be allowed to clash with the interests of the community, but must take place within its confines and be for the good of all. Therefore, we demand: … an end to the power of the financial interests. We demand profit sharing in big business. We demand a broad extension of care for the aged. We demand … the greatest possible consideration of small business in the purchases of national, state, and municipal governments. In order to make possible to every capable and industrious [citizen] the attainment of higher education and thus the achievement of a post of leadership, the government must provide an all-around enlargement of our entire system of public education … We demand the education at government expense of gifted children of poor parents … The government must undertake the improvement of public health ... – by the greatest possible support for all clubs concerned with the physical education of youth. We combat the … materialistic spirit within and without us, and are convinced that a permanent recovery of our people can only proceed from within on the foundation of the common good before the individual good."
– From the political program of the Nazi Party, adopted in Munich, February 24, 1920

Nowdays, there is a memory on the victims of hollocaust and Nazi executions. Every year, one of the most tragic events in human history is remembered around the world. History has given many lessons of how to avoid future holocaust and prevent totalitarian regimes to rise again.

However, it seems that politicians quickly forget the historical lessons when it comes to the issue of economic policy. Keynesian economic theory failed when the aggregate demand ended in results contrary to its assertion. As we can see from abovecited program of the Nazi party, the economic policy of Nazi Germany heavily relied on rent-seeking pressure groups (trade unions, interest groups), extensive government intervention and high welfare expenditures which are important features of today's stagnating welfare states with low growth rate and particularly high unemployment rate.

Wednesday, August 22, 2007

MONTENEGRO: OPENNESS, COMPETITIVENESS AND GROWTH

Montenegro is a small and beautiful country with lots of hillside plains and a gorgious slice of coastline. One of particularly beautiful place to visit is Budva located at the heart of Montenegro's Adriatic coast. Five-star hotels such as Astoria, ancient architecture, energetic nightlife and sound sandline beaches surround this beautiful coastal Adriatic city.



Budva by night


Budva: Little Kuwait

Budva is also known as Montenegrin Kuwait and is perhaps the case of most notable explanation of real estate boom back at the very beginning of 2000s when prices soared after foreign investors rushed in for underestimated real estate prices. After the declaration of independence on June 3, 2006, Montenegro experienced a significant output increase fueled by the net direct investment and sound monetary conditions resulted in non-inflationary growth. According to official estimates, inflation has edged a moderate level of 3,5 percent. The output continues to grow at a brisk 8 percent and above rate according to officially recognized estimates. The real output growth is expected to anchor 6 percent over the business cycles in the years to come. Public debt is expected to decrease gradually to 32,6 percent by 2010 and IMF's statement fuels optimism and confidence and the commitment to transition from backlash socialist economy into open free-market economy.

Macroeconomic and fiscal outlook

Medium-term macroeconomic and fiscal outlook seems to be favorable to sound conditions for growth according to current trends and output forecast over the target range. Due to the reduction of volatility of fiscal consumption and public spending relative to growth and inflation pressures, the macroeconomic framework enjoys a high support from normalized inflation pressures despite the fact that the Central Bank of Montenegro has not yet undertaken officially announced inflation combat strategy. The Bulletin of the Ministry of Finance of the Republic of Montenegro succinctly exposes the ambitious medium-term goals of the macroeconomic policy:

"Estimation of public spending of the Republic of Montenegro in mid-term frame 2008-2010 is based on evaluated data on GDP trend, data on public spending trend in the period 2003-2006, and on realised public spending for the first six moths of 2007. Public spending policy in next three years is based on basic goals of economic programme of the Government of the Republic of Montenegro and macroeconomic trends for the next period. In accordance with the goals of economic policy the balancing of the Budget in 2008 will be provided, with relative reduction of share of public spending in GDP. Furthermore, basic parameters of the fiscal policy will be harmonised with frameworks and goals agreed with the International Monetary Fund and World Bank, and their harmonisation with the Directives of the European Union will be provided. According to data from Montstat, amount of GDP and annual rates show stabile trend of economic growth in the period from 2003. Estimations show that the GDP will amount in 2007 2.155,00 mil.€ and that annual real growth rate will be 6 %. For 2008, growth rate is projected to the amount of 9 % (real growth rate 6 %), and amount of GDP 2.349,00 mil.€. Projection of macroeconomic indicators estimates that GDP in 2009 will amount 2.549,00 mil. € (current prices) and that the real growth rate will amount 6 %. It is planned that consolidated public spending is to be reduced for 3% by 2010, while the capital expenditures will slightly grow in relation with the estimated GDP. Projected share of capital spending in GDP in 2010 amounts 7,9 %. Share of current public spending (consolidated public spending reduced for total capital expenditures- Capital budget of the Republic of Montenegro, capital expenditures in the current budget and capital expenditures of funds and municipalities) in the period 2008-2010 indicates tendency of fall – from 43,21 % in 2007, to 38,6% GDP in 2010. Surplus of public revenues over consolidated expenditures in period 2008-2010 will provide reductions of tax rates without endangering of fiscal balance, settlement of all legal liabilities, capital investments and repayment of debts and debt in arrears with simultaneous fall of public spending when compared to GDP. "

Source: Bulletin of the Ministry of Finance of the Republic of Montenegro (link)


Montenegro's real GDP in transition


Medium-term fiscal projections regarding Montenegro's state of public finance forecast stable output growth rates, a decline in net foreign direct investment inflows and the moderation of default credit boom. According to these observations and estimated forecast, the level of household spending and consumption should decline and sounder investment conditions may benefit the business cycle.


Privatization as a pre-condition for an entrepreneurial economy

One of very important aspects of graduating from economic progress into advanced free-market economy is the privatization. The reasons for privatization are simple and concisely supported by empirical evidence and fundamental reasons. The government ownership of means of production is a pillar on which a socialist economy is based. The choice of gradualism for the privatization style could seriously endanger the international competitiveness of small and open economy. In fact, all sorts and types of resources are better utilized and allocated under private management where risk is a key feature of deciding where and how to allocate a particular resource. Due to wealth creation and gains from productivity, private sector effectively enforces risk management compared to the government which eventually can't absorb neither information nor sufficient risk management to maximize wealth and boost the economic performance. The ultimate goal of the government ownership is to provide consumption resources instead of generating wealth and providing conditions for output growth. Even through conditions may be sound in this respect, the government functionally present a burden to the private sector since public sectors' investment and operations are financed through taxes, thus reducing the overall ability of the economy to compete in the international global economy and benefit from low aggregate tax burden respectively.

The Empirics of Privatization

Alongside with price liberalization, privatization has been regarded as a key component of transition from communism to capitalism. Regarding privatization and its effects on economic growth, Bennet, Estrin and Urga (2005) found out that the impact of mass privatization is positive and that "other-than-mass" types of privatization have no significant impact on growth. Through microeconomic empirical studies, Megginson and Netter (2001) found that privatization acts to enhance enterprise productivity in middle-income and advanced countries. According to Transition Report, Montenegro is quickly accomplishing major aims and areas of privatization and is especially successful at all-scale privatization, price liberalization and openness to international trade with far more prospects to pursue such as enterprise restructuring and the implementation of competitive law.



Public Spending Forecast 2007-2010

Low taxes: Thumbs up!

In December 2006, Montenegro's legislative body approved a 15 percent flat tax rate on personal income. Effectively, the new tax code started on July 1 2007. The new tax system replaced previous progressively treated taxation of individual income with three rates: 16% on monthly taxable income between €65-218, 20% on monthly taxable income between €218-381, and 24% on monthly taxable income exceeding €381. Current flat tax rate of 15 percent is set to reduce to 12 percent by 2009 and 9 percent by 2010. The Montenegro's parliament abolished the dual taxation of corporate profits. Previous tax code included a 15 percent tax rate on profit up to EUR 100,000 and 20 percent tax rate on corporate gain exceeding EUR 100 000 (Rabushka, 2004). Montenegro is a nice example how international tax competition yields investment and thus helps to reduce unemployment and generate job growth. Tax cuts and the reduction of real aggregate tax burden is not supposed to result in less tax revenue as static experiments presume. Yet, revenue growth is brisk and has already enabled Montenegro's budget to sustain surplus together with annually lowering public spending as a share of GDP.


Competitive Business Environment

Montenegro ranks 70th in the world in measuring the ease of doing business (link). While the level of protection of investors is high and on par with top 20 jurisdictions in the world, tax complexity and administrative burden persent a huge source of self-induced cost push shocks such as compliance burden, excess regulation and administrative inefficiency or/and failure to provide a sound framework for dealing with official matters. Despite the significant macroeconomic and fiscal progress in reducing the real aggregate tax burden, Montenegrin business environment still shows the signs of a rampant post-communist economy with inefficient institution which fail to deliver the rule of law and business-friendly environment in spite of significant competitive potentials of Montenegro's small and open economy.


Montenegro's Transition Progress and Advancement


From sick man of Balkans to the top reformer of the region?

The future of Montenegro will, I believe, crucially depend on the macroeconomic, fiscal and structural conditions to sustain high, stable and non-inflationary growth, low public spending, low tax burden in the share of GDP, competitive business environment and openness to international trade and foreign direct investment. To match-up global conditions for job growth and competitive output growth rates, enterprise restructuring is essential for a vital framework of international competitiveness. Nevertheless, the creation of human capital in long-term growth process will determine the income per capita, standard of living and prosperity rank of Montenegro.

INDIA'S ECONOMIC GROWTH

India emerged as one of the world's major economies estimated to grow by high output increases and competitive sectoral performance adding further contribution to GDP growth. Here is s a nice paper summarizing the evolution of GDP growth in India as well as India's path from "Hindu socialism" to sound market economy and competitive growth performance in the global economy.

Arvind Virmani: India's economic growth: From socialist rate of growth to Bharatiya rate of growth, ICRIER, January 2004 (link)

INDIA'S DRUG MARKET TO REACH $20 BN CAPITALIZATION BY 2015

Currently, the retail sales value of India's high-growing drug market is on the solid path to sustain sound growth of market capitalization. Financial times reports that Indian drug market is projected to reach a remarkable $20 billion USD net capitalized value by 2015. India, with an outstanding 8,4 percent growth rate driven by high-return investment infusions, outperforms the rest of the world as is estimated to grow by 7,8 percent in 2008 (link).

It is noteworthy that India's human capital sector is growing rapidly, with two universities among top 100 Asian universities (link). Significant gains in output growth reflect the India's composition of the GDP where services dominate 60,7 percent of the GDP.

The forecast is favorable for the drug market, implying a forecasted 12,3 percent growth rate annually. The mechanics behind the significant growth of drug market can be explained by both, supply and demand. On the side of demand; with regard to market preferences (utility functions), a growing income standard leads to a growing demand for specific drugs driven by high rates of chronical diseases in India.

On supply side, India's pharmaceutical industry is processing a sectoral and price convergence of productivity and product quality, leading to new varieties of product choice delivered on the market to improve the health-care conditions individually.

Private investment such as hospital chains can naturally generate greater revenue and profit as opposed to public hospitals, and consequently higher rate of overall market capitalization which is an important aspect of international sectoral competitiveness.

Even health insurance is expected to double by 2015. As a responding incentive, new insurance claims and joint-ventures (to reduce the risk of sufficent capital allocation) could further boost the volume of capitalization and the size of investment pouring into India's high-growing health-care sector. Openness to technological innovation is an important pre-condition for delivering external results to match-up the relationship of supply and demand in the market.

One of the questions is whether government should intervene the drug market and impose price controls? The imposition of price controls negativelly affects both, supply and demand, in the long run. In fact, if a national agency or some governmental body decides to fix the price of qualified drugs, it cannot reach supposed results due to the lack of supply information. If government officials decide to lower the price of genetic drugs where the elasticity of demand is prone to changes in price and quality, then lower price fixation would result in shortages of supply of generic drugs.

On the other side, the upward fixation of the price could result in an unsold surplus and the demand side would be denied the access to generic drug products due to higher price which obviously wouldn't match the demand precisely. The excess regulation of health insurance and subsidies attached to generic industry through hidden contract inversion, delivers negative results and side-effects nevertheless.

Tuesday, August 21, 2007

THE SETBACK OF GOVERNMENT OWNERSHIP

It is always a great pleasure to read the columns of Mićo Mrkaić. In yesterday's edition of Finance, Mićo practically highlighted why government ownership of property and assets fails compared to private ownership based on the ability of the owners to directly enforce private property rights to maximize the outcome and return from investment and management of the property itself. I strongly recommend everyone to read the abovecited article.

From the behavioral point of view, the efficiency of property management depends on the rate of responsibility which investors or households possess. The greater the responsibility, the greater the opportunity to maximize the value of the property or certain type of asset in the market. Household management is, of course, highly sensitive to risk and value fluctuations of property in the market, that's why households form rational expectations and adapt them when the fluctuation distort the expectations set at the margin.

It is not difficult to find out that government ownership fails in most cases. The lack of risk-taking and cost-control, the minimal responsibility for possibly negative returns from investment into particular projects, followed by the property devaluation resulted from inefficiency management and investment; are among the forefront reasons why government ownership frequently creates a loss from property value.

In the light of practical experience, it is ought for empirical facts and conclusion to be thoroughly supported by the observed evidence regarding the volatility and performance of government ownership of property relative to the maximization of return. Individuals in the market possess far more interest to protect the property and maximize the return from it than the government can. Also, government participation in the form of intervention or/and public enterprises, fails to share risk and absorb the potentials regard company performance. From this point of view, it is concisely wise and logical for post-communist countries to accomplish the privatization and avoid the loss of wealth and property through letting markets and private investors control and manage property. In fact, it's about the maximization of net value of wealth which supposedly determines the standard of living respectively.

CZECH REPUBLIC JOINS THE FLAT TAX CLUB

Earlier today, the lower house of parliament of Czech Republic adopted a 15 percent flat-rated tax on personal income, replacing previous graduated progressive tax code based on tax rate ranging from 12 percent to 32 percent, depending on the earned income. The new tax system will take effect on January 1, 2008, while the rate is scheduled to drop to 12,5 percent in 2009. The legislated proposal also reduces 24 percent corporate income tax to 19 percent by 2010.

The act of adopting the revenue-neutral tax rate on individual income, makes the Czech Republic the 20th country to adopt the flat tax, following Bulgaria's recent flat tax adoption.

Once the flat tax is adopted, the tax system is free of various tax exemptions, deductions and loopholes; the ulitmate sources of tax evasion and compliance burden. The aspect of cost-adjustment which firms and households have to pass-through to adjust time and behavior to tax complexity, is of course another important reason showing that lower tax burden leads to more succinct allocation of time and resources of households and firms; two entities highly sensitive to the taxation of productive behavior.

THE BEST QUOTE EVER

"In the name of the best within you, do not sacrifice this world to those who are its worst. In the name of the values that keep you alive, do not let your vision of man be distorted by the ugly, the cowardly, the mindless in those who have never achieved his title. Do not lose your knowledge that man's proper estate is an upright posture, an intransigent mind and a step that travels unlimited roads. Do not let your fire go out, spark by irreplaceable spark, in the hopeless swamps of the approximate, the not-quite, the not-yet, the not-at-all. Do not let the hero in your soul perish, in lonely frustration for the life you deserved, but have never been able to reach. Check your road and the nature of your battle. The world you desired can be won, it exists, it is real, it is possible, it's yours."

Ayn Rand

CAPITALISM & FREEDOM'S NEW IMAGE

I hope you like it ;)

Monday, August 20, 2007

RISK MANAGEMENT AND A HAND OF POKER GAME

It sounds strange but what could a hand of poker and risk management have in common?

True, poker could learn personal finance and risk managers how to make the best of their tight chip stack and if you lose, how to loose well.

Harvard Law School has recently developed a strategy to find solutions to many of our problems through playing poker, whether it is a typical deliquent teenage issue or a triggering diplomatic crisis between two countries.

Surprisingly, poker could learn how to pursue respect, business strategy, research course or even war strategy. Nevertheless, poker is a great tool to learn how to think strategically by forecasting and betting-on-the-card. Thus, according to Harvard Law School, poker teaches people how to think for themselves. It is also a key aspect of individuality and a guiding aspect of managing and allocating resources.

What could business dealers learn from poker? Probably how to avoid making the first offer. What about children? How to have patience, composure and understanding diversity and someone else's views on various issues.

Source: Financial Times

AFRAID OF FLAT TAX? AFRAID OF TREATING EVERYONE EQUALLY?

Sometimes, it is somehow embarrasing to see what Slovenian policymakers missed-out when they agreeably said no to radical tax reform to simplify the current compliance burden of complexity of the tax code and to replace Slovenia's previous five-rate taxation with a single flat-rated tax on individual income with standardized general allowance. Despite the countless benefits that accelerated tax reductions would bring to Slovenia's economy; trade unions, pension lobbies, interest groups, and influential media figures; all of them raised voices against the flat tax with no particular reasons as far as I understood them.

Bloomberg's critic of Slovenia's communist shadows is great and when you walk down the street in Ljubljana, it is not hard to find-out that you came in a country governed by Marxist thinking. Retired people, complaining about low pensions, job skippers complaining about low salaries and trade unions outbursting old fashioned Soviet-styled symbols and red flags, raising voices against wage inequality saying the old-fisted labor pariah that 'rich are getting richer...'

Not a lot people here in this country realize that even the majority of economy is uncompetitive to the rest of the Europe, except for the export sector accounting the greatest slice of contribution to GDP growth. OECD's Literacy in the Information Age showed that 3/4 of Slovenes are functionally illiterate, incapable of living the modern information age with skills which they possess.

Slovenian policymakers always endorsed a punitive tax regime. In the communist manifesto, Marx and Engels demanded a heavy progressive taxation plus the abolition of property in land. The nest of Marxist pillar is a common cornerstone of Western democracies. So far in the West, only Iceland abolished the progressive income taxation by applying the single tax rate on personal income. The results of Marxist thinking in the long run are devastating. Taking away tools of decision-making to create, innovate and improve, is like taking away the most valuable abilities we have.

Ultimately, the progressive taxation was the idea of Karl Marx, thoroughly written in communist manifesto. In essence, there is no doubt that progressive taxation is equal to racial discrimination where one standard is prefered as a superiority over another. So, if rent-seekers, interest groups and trade unions, are afraid of adopting a flat tax, are then they also afraid that everyone would be treated equally before the law?

MART LAAR'S BLOG

Reading the posts on the Mart Laar's blog is great.

FROM CRISIS TO BALTIC TIGER THROUGH THE PRINCIPLES OF ECONOMIC LIBERTY: THE CASE OF ESTONIA

Estonia is a beautiful country where a lot of adorable women come from. It is also the freest country in the world (link) according to State of World Liberty. Even one of my favorite bands (link) is Estonian. Tallinn, perhaps the most e-city in the world and Estonia's capital is frequently named the Silicon Valley of the East. The city indeed transformed itself from the a Soviet-styled fortress into the high-tech economic powerhouse of the Baltics surrounded by Skype, Microsoft and high tech culture in general. Mart Laar, Estonia's former prime minister, thoroughly characterized the lessons from freedom and growth in Estonia. As to trade policy, whereas nearly all trade barriers were abolished, Mart Laar said:

"Tariff policy will tend to evolve in a myopic, haphazard fashion, influenced more by rent-seeking than by sound analysis."

Recently, I came across the resourceful outline, first-hand notable account of how following the principles of economic liberty pays interest, and a fascinating detailed description of Estonian economic miracle by Mart Laar. It can be read here.

SHOULD JAPAN REALLY INCREASE TAXES?

The latest IMF's published conclusions regarding Japan's overall assessment directly noted the aim to broaden the taxation by tax hikes as means of combating the financial pressures of Japan's ageing population, with unfunded net financial liabilities growing incredibly faster than the GDP and tax revenues. The IMF concluded:


"Most Directors considered that given the size of the task at hand, additional revenue measures will be needed, including for base broadening. They indicated that revenue measures could be best identified in the context of a broad reform of the tax system that addresses the challenges posed by Japan's aging society and globalization. Among possible measures, increasing the consumption tax has the benefit of being less detrimental to growth and equitable across generations. Some Directors, however, viewed the authorities' focus on expenditure adjustments as broadly appropriate at this juncture..."

Source: IMF Executive Board Concludes 2007 Article IV Consultation with Japan Public Information Notice (PIN) No. 07/96 (link).


In 2006, Japan's GDP grew by 2,2 percent led mainly by Japan's growing export contribution to the annual GDP growth and investments, continuing to strenghten Japan's operating position in the global economy. Annual inflation passed quarterly fluctuations with falling GDP deflator but counter-cyclical price indices continuing to grow. The recent Economy Report by the Bank of Japan panels the scope of indicators showing the moderate conditions of the full capacity of Japan's economy; near-term outlook remains favorable with 2,6 percent growth rate in 2007 and 2,0 percent growth rate in 2008. Regarding, the medium-term outlook, Japanese economy is projected to grow by 1,7 percent.

Depending on combating inflation pressures and financial outlook (recently announced lending rates favored stock market increases). The Japanese experience, however, shows a continually-adjusted decline in central bank's discount rate, as an alternative to an aggravated risk from pushed money supply growth. Dropping the interest-rates to historic lows, resulted in a timid deflation trap with continually-prolonged falling prices. With low borrowing costs, the economy is heavily relied on investment, pushing the output increases closer to sustainable edge. However, the Bank of Japan, namely the governor, has recently aimed for interest-rate increases. However, it is important for monetary policy to stay accomodative to productivity and non-inflationary output shocks. After years of deflation, Japanese inflation peaked the positive rate in 2007. With no signs of tight inflation pressures, the financial stability and the investors' confidence continue to Japan's favorable external position.

For instance, capital flows picked up sharply, showing the outward-oriented attitude of Japanese investors. The stimulus from capital flows sustained growing receipts from foreign assets. Low market volatility and widening differentials between interest rates, motivated private holdings to focus on debt securities.


Net Receipts from Foreign Assets


Source: IMF; Japan, Selected Issues (link)

As an industrialized country, Japan faces a highly volatile risk emerging from ageing population. According to the estimates, Japan will face the highest share of population over 65, 29,6 percent by 2030. The population in the upper part of age pyramid is highly dependent on welfare-services. With frequently exposed future labor market turmoil and shortages of labor supply, the unfunded net financial liabilities are growing, exceeding the annual output respectively. Generous social security accounts based on the redistribution of accumulated contribution payments, have nevertheless created a high proportion of risk and liability burden. As it can be see from the chart below, Japan has one of the highest rates of net financial liabilities refered to intergenerational accounts, closely approaching 100 percent of the GDP. In the long-term perspective, Shimasawa (2004) has composed baseline scenarios of generational wedge on macroeconomic indicators and pension contribution rate, showing the latter could nearly double by 2050.


Due to the robustness of the agony of ageing population, the formation of human capital is essential to competitive growth rates in the international perspective, also to cope an ageing crisis. On the other hand, robust fiscal reforms and intergenerational measures could significantly ease the burden of the ageing wedge. The question, refering to the IMF's proposal of detrimental taxation to boost revenues, is whether higher taxes would really result in equitable social security accounts through the generations? Japan already has a punitive and internationally uncompetitive tax regime with statutory 41,9 percent corporate income tax rate and 32,2 effective tax rate on capital, which is one of the highest tax rates in the industrialized world (Mintz, 2006). Japan's top individual income tax rate is 37 percent for the income exceeding $18,000,000 YEN. The distribution of tax rates on individual income is marginally progressive starting with 10 percent income tax rate on earnings amounted up to $3,000,000 YEN and ending with a 37 percent rate on earning exceeding $18,000,000 YEN (link).


Government Net Financial Liabilities as % of the GDP in Selected Countries


Source: OECD, Economic Outlook


Tax hikes on consumption, price controls and imposed tax duties on certain consumption products, in addition to extensive taxation of individual income, usually result in the emergence of black market where prices are free of double-taxation, such as value-added tax and special unit duties, and determined by supply and demand. Seeking new revenue through extensive taxation would distort the market performance and, ceteris paribus, burden the real sector by limiting the capacity of the business cycle to absorb the benefits given by the current favorable position of Japanese economy, operating closer to full capacity. Throughout broadening measures to impose new taxes, tax evasion would spread and revenue would be more probable to decline, further pushing Japan's ageing agony to spread intensively when the revenue to match-up the net financial liabilities pertained by public sector wouldn't grow.

Baseline Scenarios following Population ageing in Japan

Source: Manabu Shimasawa, Population ageing, policy reform and endogenous growth in Japan: a computable overlapping generations approach, April 2004

(link)

Sunday, August 19, 2007

WHEN POLITICIANS COULD LEARN FROM TEENAGERS

Which has been most important in reducing poverty over time?

a) taxes
b) economic growth
c) international trade
d) government regulation


It's awesome to be in the last teenage year after four years of high school of economics and nearly a month before entering the university. Despite the government intervention, dishonest institutions and high government spending, living in a post-communist country is sometimes even amusing. The pariahs of rent-seeking, capturing government's ability to curb high spending and low taxes on productive behavior, seem to be dodging the real issue of economic (il)literacy when politicians make decisions over spending, mandatory legislation and budget consumption sometimes completely faulty.

Slovenia is no exception to "live" economic illiteracy. Slovenian parliament, unflushed by socialists of all parties, frequently updates the very symptoms of economically illiterate decision-making. One such issue is the attitude toward poverty reduction. It is sometimes very frustrating that politicians gamble compassion and thus higher government spending and consequently higher taxes, to be the basis of parliamentary decision-making. When parliamentarians discuss the macroeconomic performance of Slovenia, they notably expose the need to accelerate GDP growth. On the other hand, most of them avoid to discuss the REAL (!) obstacles to growth since they repeatedly quote out-chewed socialist slogans such as: growth is not everything, profit should no be aimed at any price, poor and disabled hardly benefit from profit...

So if Slovenian politicians attained the national economics test, and if their answer to abovementioned question was "government regulation" or notably "high taxes", they'd prove themselves as economically illiterate. For instance, 53 percent of twelfth graders in the U.S. answered "b" while 79% of twelfth graders passed this first-ever national economics test. It'd be interesting to test politicians about the knowledge of applying cost-benefit analysis to budgetary analysis, inefficient public consumption and spending on unneccesary areas such as agricultural subsidies, culture and interest groups.

It appears that high school seniors outperform politicians in the area of economic literacy. When Slovenian politicians discuss social transfers, they often get trapped by the contradictions of themselves. For example, the voice of transfer aid to the poor, is notably heared all over the parliamentary discussion with a growing spending on the social aid. The already unsustainable pillars of the pension fund, with unfunded net financial liabilities exceeding 190 percent of the GDP, is due to greater spending outlays by introducing new duties on various consumption, most notably electricity.

Instead of discussing the need the cut taxes and unpenalize the productive activities, the politicians in Slovenian parliament, squeeze themselves when it comes to see how economically literate they are in practice. Nevertheless, I think the broadband economic literacy test should be a part of Slovenia's constitution regarding public employees. In fact, it is a little bit irresponsible if collected revenue is allocated by the official figures who possibly disregard innumerable negative effects of inefficient government spending which is, in Slovenia, mostly allocated by law and the legal requirements of statutory spending which fulfills the demands of rent-seekers and interest groups.

Link:
The Kids Are All Right, Opinion Journal (link)

LEADERSHIP AND THE ART OF SUCCESS

Skill in the art of communication is crucial to a leader’s success. He can accomplish nothing unless he can communicate effectively.

Norman Allen

Friday, August 17, 2007

ICELAND'S SUPPLY-SIDE LESSONS FOR CANADA

In Globe and Mail, Neil Reynolds emphasizes Iceland's supply-side corporate and individual income tax reductions which helped to turn a small island in the north of the Atlantic ocean into the fifth richest country in the world.

Recently, Hannes Gissurarsson of the University of Iceland and Daniel Mitchell of CATO Institute co-wrote The Iceland Tax System - Key Features and Lessons for Policy Makers. The paper shows how dramatic tax reductions and yet low rates on productive behavior, a 10 percent rate on capital income, 18 percent rate on corporate income and the repeal of the wealth tax boosted growth, efficiency and job creation in the Icelandic economy, reversing the low output performance, stagnation and high unemployment into the course of high output growth rates and international competitiveness of a small and open economy aided by prosperity and an enviable standard of living.

CHURCH, GOVERNMENT AND COERCION

British Times reports that pope has condemned tax havens and declared tax evasion, referring to fund investment in low-tax jurisdictions, as socially unjust. In addition, Italian prime minister urged church leaders to speak out on tax evasion. Italy's prime minister also began a crackdown on tax evaders, saying that it would target individuals with second homes and other signs of “conspicuous wealth”.

It is a sort of disappointment that influential religious figure believe that social compassion geared by extensive taxation and high government expenditure should be the basic function of the government, thus punishing productive behavior through high tax rates on individual and corporate tax income, making it harder for poor people to create wealth and prosperity through individual responsibility. The empirical evidence says that high tax burden hinders and slows output growth and income mobility.

It is rather frustrating that relgious figures avoid the understanding of basic lessons of economics. Tax evasion, which pope has emphasized, is a consequence of high tax rates whereas complexity of the tax system accelerates the absence of earned income from tax basis through numerous deductions and tax exemptions. In the hard-hitting manner, the pope argues that the opening of bank account in an offshore jurisdiction reduces the revenue 'for the benefit of society'. Nevertheless, anyone has a right to choose the provider of financial services for her and his own pursuits. It is personally irresponsible to instinctly confuse empirical facts with aggresive ideology against territories with low taxes on work, saving and investment.

The pope also argued for a 'world trade and economic system regulated in such a way as to avoid further injustice and discrimination'. Obviously, the pope does not understand that the issue of injustice and discrimination is attached to the enforcement of the rule of law, in terms of treating everyone equally before the law. Trade and market transactions are nothing else but a free-exchange in the marketplace. There is no such thing as involuntary exchange in the market where supply (sellers) and demand (buyers) determine prices and quantity supplied and demanded.

Pope's encyclical continues: "those peoples who are striving to escape from hunger, misery, endemic diseases and ignorance and are looking for a wider share in the benefits of civilisation..." The key to the fighting against endemic diseases and hunger is definitely not regulation as the pope says, but empirically-confirmed openness to international trade as an important engine of growth.

For instance, the abolishment of quotas and tariffs on imports and the quitting of protectionist policies, would result in an open way to import very much need drugs, medical technology and net direct investment to fight poverty, hunger and misery instead of foreign aid.

Another example of flawed morality in Vatican is the hysteria of the pope calling for "...an equitable world economic system based on social justice rather than profit."
It seems that Vatican's figures dream of a centrally-planned economy in pursuit of economic justice. However, no one could possess enough sufficient knowledge to plan the economy, make production decisions and efficiently allocate resources.

The talk of social justice is absurd and the redistribution of income and wealth is utterly mistaken since social justice is commonly nothing else but a theft legalized by extensive taxation. There is nothing more spontaneous than economic inequality which is the result of innumerable decisions of individuals with different preferences, ends and pursuits in life.

The fact is that there's nobody to be blamed for economic inequality since the latter is the result of free competition in the market where equal conditions to compete, innovate and create are distributed to everyone, and to say it in a genuine manner: social justice is a trojan horse exercised by totalitarian governments.

In the state of religious coercion, the pilgrims usually need an authoritarian leader to brainwash their minds and the things left are lies, ideologies and propaganda. And Vatican is no exemption to that rule.

THE ECONOMICS OF LOVE AND MARRIAGE

In chapter 21 of Price Theory, professor David Friedman wrote a perfect analysis of economics regarding love relationship and marriage. The aspects exposed in the text are interesting especially because the notable difference between sociological and economic view of decisions about love and marriage is seen very succinctly.

From my point of view, youth love is an investment to gain the experience before you invest in marriage as a firm, with obvious reasons for household production. In the model, the marriage is defined as an ordinary price market, contrary to standard marriage contract. In the given model, the supply and demand behave as usually, if the quantity of future wives supplied in the market is lower, and the quantity demanded higher, then there is a higher price which a husband has to pay. If a model is entirely symmetrical, it can easily be spoken of husbands supplied and demanded.

As marriages are monogamous, the number of husbands supplied and demanded is the same, since a man seeking to become a husband is a man seeking to obtain a women, just as on the barter market, where someone who offers to trade whiskey for wine, is demanding wine and supplying whiskey. It should be noted that when an economist analyzes marriages and love in general, not everyone has the same tastes as hidden and revealed prefereces vary. On the other hand, divorce could be taken as a price for obtaining another women, since men are worse off in this particular regard because their price edge will be higher as his supply surplus is reduced.

Overall, the chapter can be a great summer reading and yet it is another proof that the application of economic analysis into every walk of life is possible and it delivers very interesting results, regarding the decisions about love and marriage, both as price-taking and investment.

WHAT AM I DOING DURING VACATION

In recent days, I did not post on the blog.

I just returned back home from a beautiful Alpine resort in Slovenia. The weather was fine and there were many adventures such as running and extreme Nordic walking up the hillsides. Despite not doing any particular conditional activity recently, I did some tough running to gear up the body agility during the summer with a lot of jogging, running, roller-skating and cycling. Next week, I'll go to the seaside and taste a bit of Mediterranean tourist spots such as sea adventures, swimming, some diving and having great time with my friends.

Meanwhile, I'm reading Hayek's Constitution of Liberty. A fascinating masterpiece by Nobel winning economist, easy to read and a great book to train the the sophistication of arguments. Several days ago, I started reading Economic Aspects of Yugoslavia's Creation and Collapse where the author, Mr. Neven Borak, serves the reader a great collection of data and detailed studies regarding the failure of Yugoslavia and its experience with hyperinflation in the late 1980s. As I remember the heavy times of transitional depression in Slovenia, the reading is even more curious and interesting. I'm also finishing the reading of Friedman's Price Theory, before I enter the university in October.

I started writing a working paper about Serbia's macroeconomic and competitive long-term perspective. As you can see, there's a lot to do during vacation and I'm looking forward to further adventures during the longest holidays I've ever had.

Sunday, August 05, 2007

HEALTH CARE UNMASKED

Via professor Mankiw's blog, I came across an interesting and highlighting article entitled Better red than dead by Harvard professor Kenneth Rogoff.

Among economists, there is a growing concern over the expenditure pressures in health care outlays as a share of the GDP. There are several reasons behind this long-term threat such as (1) ageing society, (2) increasingly growing dependency on PAYG health care schemes, (3) advanced technologies and rising cost pressures, (4) the lack of efficiency in corporate governance, (5) regulatory framework, (6) government involvement in the overall health care system through Medicare and Medicaid...

As we can see from the estimates, current health-care expenditures account for approximately 16 percent of the economy (the case of the U.S.). If current trends of heavy government intervention, causing price distortions, severe cost pressures and rent-seeking practices, continues, the health care outlays could grab 30 percent of the GDP by the 2030. A recent CBO testimony has shown that over the last four decades health care beneficiary expenditure increased by 2,5 percentage points faster than the per capita GDP growth accelerated.

As higher costs emerge in the health-care system, the major question is how can the rise of the costs be cured to prevent the negative scenario of demographic crisis of an ageing society. The first step would surely be the deregulation of health care systems, the enforcement of private initiative in health-care supply without the statutory burden and regulated insurance contracts.

There is also a question how much cost distorsions does the generic industry cause by building subsidy frictions in the pricing process of prescribed drugs. Also, labor costs should not be neglected from temporary observations on efficiency produced by the overall performance of the health care sector.

In the future, the question how to realize cost shocks and keep them as low as possible, will be crucial in how to avoid the scenario in which severe economic crisis could occur as a consequence of huge spending pressures on health care expenditure.

Friday, August 03, 2007

ZIMBABWEAN ECONOMICS: $200,000 BANK NOTE

International evidence shows that once when inflation, as a monetary phenomena, is high and fiscal and monetary policies do not change fundamentally, inflation rate tends to increase exponentially.

Zimbabwe is a case-study of hyperinflation. Imposed price controls and exceeding money supply, to cover the unfunded fiscal expenditures (through monetary emissions) are the major sources of hyperinflation, an uncontrolled amount of money in circulation, chasing a tight scope of goods and services in the Zimbabwe's economy.

Currently, inflation rate in Zimbabwe is estimated at 13,000 percent.

"The launch yesterday of a new large-denominationbank note of Z$200,000 - worth £6.50 (€9.70, US$13) at the official exchange rate and 65 pence at the more realistic parallel rate - underlines the disarray. The central bank had wanted to issue a Z$500,000 note, but a bank official said this was vetoed by the finance ministry because senior staff thought such a large denomination would have re-inforced an impression that inflation was out of control."

Read more in today's Financial Times.

START TEACHING ECONOMICS AND STATISTICS FROM ELEMENTARY SCHOOLS ONWARD

Nicholas D. Kristoff has suggested a great idea to cure the epidemics of global financial and economic illiteracy; to start teaching economics and statistics in high school.

I suggest that the course should take place in elementary school already. In fact, economics is about life with a great measure of practical extension to make your decisions effective and effective. But I disagree with Nicholas on the point where he suggests that economics could be taught in other courses of sciences.

I think it'd much better and useful for economics to be taught as a single course. It is true that there are many interactions between economics and other social sciences such as history but teaching children how to analyze investment decisions and resource allocation in particular assets, would be somehow silly to be included in the package of say, sociology or history. That's why it'd be noteworthy to teach children about cost-benefit analysis, investment projects, lifetime saving and financial analysis of projects considered.

In the light of positive approach to economic research, the methodology itself is important to find-out the real situation while, on the other hand, normative approach would tell children "how to ask their parents for more pocket money when they find out the real situation and circumstances regarding the possible decisions of their parents." And also, what is the cost of temporarily given additional pocket-money compared to the rate of willingness of their parents to yield them more/less in the future.

Economic analysis is somehow neccessary in elementary and high school curriculum to teach the children about the usefulness of applying the principles of economics (link) to real-life situations, when efficiency and utility (as well as freedom to choose) are properly placed in making decisions both, utilized, dynamic and efficient.

Nevertheless, macroeconomic situation plays equally relevant role in teaching children about inflation and its threats as well as about GDP, economic growth and international trade, and numerous other broad areas in economic science. Also, economic analysis has shown to be the best answer to the questions of democracy today.

I'm happy that I had economic and statistical courses in high school. It changed my way of life and thinking completely, after I read Friedman's Free to Choose and Capitalism and Freedom. I also had very good professors of economics and statistics who showed me how useful and effective applying statistics and economic analysis to everyday situations and decision choice can be.

Professor Greg Mankiw opened the discussion about putting economics and statistics in high schools. In the course of lively and highly interesting discussion, I added my opinion regarding the introduction of statistics and economics in elementary and high school:

Rocks said...

As a student of economics I think economics and statistics should be taught from elementary school level onward. Due to the fact that there is many externalities in this case, the cost-benefit analysis of inserting economics and statistics among general courses, strongly favors such proposals.


One reason why the majority of public schools perform so weakly compared to distinguished high schools is that social science courses, through which most of behavioral attitude towards social issues is endorsed, are designed in a way which portrays economic thinking as a historical failure added with negative propaganda.

It would be foolish to claim that there is actually no benefit from economic courses in high and elementary schools as children would learn how to analyze the effects of loans on their financial well-being when choosing a college or university. Also, statistics course could show how efficient and appropriate tools could help optimize our market behavior in every walk of life.

There is also the calculation of compound interest in individual financial matters and topics such as internal return rate, cost-benefit analysis of the projects, decisions and action which we undertake every day. The benefits of putting economics and statistics into elementary and high schools are enormous, also because economics shows how appropriate algebra can be when applied to decision-making and asset manangement, which is a hot and actual issue regarding the real estate markets around the world, also in the U.S.

I come from a socialistic country where elementary and high school level is marred by the utopian presentations of the world through the prism of marxism and socialism. Thus, many generations are lost when they face the real-life economics such as in labor market and financial analysis.Let me put forward a few examples how an education sector without economics and statistics in most of the schools has affected a socialist country (Slovenia) where I come from:

1. Long-term macroeconomic perspective is volatile and shows weak productivity performance due to high external pressures from state-run pension systems. Slovenia has one of the youngest retired population. In Slovenia, the size of the public sector and administration is the second biggest in the world according to Fraser's Economic Freedom of the World. Contribution rates to public pension schemes are very high and could increase significantly over the middle-run time magnitude... As Slovenian education system is one of the worst performers in the EU (http://www.ft.com/cms/s/a2109664-5dd6-11db-82d4-0000779e2340.html) and lots of young people of my age, don't know how to escape pension crisis through private retirement accounts and the acceleration of savings for the old-age. Everyone dreams about government-guaranteed pension, thinking that the budget is a bottomless bag of money.

2. The understanding of macroeconomic performance virtually does not exist in Slovenian elementary and high (secondary) schools. Nobody teaches children about inflation, GDP growth and international competitiveness which is accountably important in the age of new economy.

3. There's no course or at least general teaching about labor market situation despite the fact, that Slovenia has one of the most rigid and welfare-backed labor markets in the region. Heritage Foundation's Index of Economic Freedom has shown that Slovenia's labor market is one of the most inflexible and unfree in the region, further damaging the output-productivity impacts on Slovenia's global economic performance.These are things that children are not taught in high schools. Further, they do not receive a teaching to teach them how to apply algebra into everyday life through the prism of economics.Education performance and structural analysis of the education system in a socialistic country such as Slovenia (where rent-seekers compose teaching courses), can give numerous evidence on why free-market capitalism, responsibility, value and trust are despised overall.To conclude: of course, teaching economics and statistics courses in elementary and secondary schools should be enacted, otherwise economic illiteracy will become a global epidemics. Socialistic mentality which is entailed in Slovenian society has drown the country to 54th place in terms of financial and economic illiteracy (Source: IMD World Competitiveness Yearbook).

Regards,
Rocks
4:55 PM