THE PUNITIVE EFFECTS OF PUNITIVE CORPORATE TAX CODE

There is innumerable evidence showing that high corporate tax burden is eroding competitiveness and results in a poor track on investment, growth and job creation. As every economist agrees upon, there is hardly any upward change in output without a rigorous pro-growth economic policy and supply-side feedback.

Instead of the so called aggregate demand, the output growth has been shown to be driven by the long-run engines of growth such as saving, investment, entrepreneurship, innovation and labor supply known as human capital or productive behavior.

The stimulation of output growth through the infusion of expansionary public and fiscal spending has several negative effects such as inflationary pressures, unless the output gap is negative.

Despite thousands of pages of a negative impact of high corporate tax burden on growth and labor market, the politicians obviously haven't yet learned a simple "elementary-school" lesson called the Laffer curve, stating that high tax rate on corporate income has a double negative feedback.

First, the punitive tax rate enables a the outburst of complexity leading to costly evasion and comparably associated administrative cost, such as the education incentive for under-productive jobs that entail a minimum or zero-contribution rate to output growth and instead, hamper growth potentials of firms, forcing them to face higher proportion of additional labor cost that otherwise has enviable and nevertheless attractive alternative investment choice.

And second, the course of economic and tax policy has shown that high tax rates correlate with tax revenue loss (because of high taxes), leading to continually high and unrestrained public spending and external fiscal indebtedness.

As a recent example from Ontario straightly demonstrates, when the output performance is shifting the economy from manufacturing to a reliance on knowledge-intensive services, the labor demand is oriented towards highly productive human capital. One of such areas is the financial sector.

As the economy structurally transforms, the role of financial service sector plays continually nevertheless important role that is essential in boosting the sector's contribution to output growth.

Last year, the sector generated 7.8 per cent of Ontario's total gross domestic product or $36 billion. For Toronto, it contributed an estimated 14.3 per cent or $15 billion of the city's economy.

Table No.1: Real and Nominal GDP Growth in Canada by Province, 2003-2005

Source: Statistics Canada

On the other side, Ontario currently stands at a punitive corporate tax code that is eroding macro and micro-competitiveness. In spite of 14 percent capital tax rate, Federal rate of capital taxation is onerous and one of the highest in the world, undermining the output growth respectively.

The evidence of capital tax as a job-killing one is very to understand. Imagine that you're a corporate manager in Toronto facing a punitive corporate tax code and considering the switch to investment-friendlier territory:

""... if Alberta, for example, completely abolished its corporate taxes, you know it's going to be not too long before a lot of financial services and other kinds of companies may well say `Well look, for the sake of what could be hundreds of millions of dollars in tax, might we have to consider moving our head offices'?" (link)

Stronger investment environment that supports growth could hardly be recognized as that if high tax burden, red-tape, compliance regulation and administrative barriers reduce competitive potentials of the territorial economy to create jobs, increase productivity and output.

Read also:
Parties pressed for growth, Toronto Star, September 15 2007 (link)

DOING BUSINESS: REVIEW AND PERSPECTIVE

The 2008 Doing Business project solidly provided a valuable tool in ranking the economies with respect to the ease of doing business. The quality of the business environment is, by any means, one of the essential supporting components of growth and value creation. Put simply, the greater the flexibility of the business environment and the ease of doing business, the greater the opportunities for the firm to target markets and growth while the foremost advantage of a dynamic business environment is the minimization of external risk, notably macroeconomic risk and the risk emerged from external vulnerabilities such as the failure of the public administration to provide sound entrepreneurial framework and business conditions. In spite of vital importance of dynamic entrepreneurial framework, small-scale economies are, by empirical investigation, affected by the extent of quality of the business environment far more than the economies of large scale according to the share in global economy they possess. That’s why; the first-class quality of the business environment is essential to long-term creation of venture capital and jobs as well as to output growth.

First, let’s take a look at the microeconomic aspect of rating the quality of business environment. Suppose there is a consulting firm with a certain amount of investment from venture-capital fund with an idea to target and invest in emerging markets whether by direct market entry or by indirect market access, i.e. through intermediaries. Firm’s executive board mutually decides to hire local human capital; local labor to reduce the potential risk of firm’s perception of asymmetric information about the local business environment in conducting consulting services to local firms or branches of global firms. Assume that the decision processing is as in usual firm’s entry. The barriers to doing business, in turn, crucially impact firm’s decision for investment location accountably regarding the size and attractiveness of market niches. Suppose the firm is decided to target emerging markets in Central and Eastern Europe and in broader Asian market. Consequently, the firm obtains all available data and information about the particular business environment, varying which one to choose. If a firm jointly varied among Czech Republic, Hungary and Slovenia as a headquarter base, how would the quality of the particular business environment affect firm’s decision where to invest. Suppose each business environment carries-in some strengths and weaknesses. For example, Czech Republic offers sufficient transportation links to the rest of Eastern Europe while Hungary offers a sound and deregulated corporate conditions such as low corporate tax burden and dynamically competitive financial sector (access to attractive financial, capital and insurance services) while Slovenia offers sound access to potential booming markets in South-Eastern Europe. In Asia, the firm varies between sophisticated and growing markets, say between China, India and Vietnam and Singapore and Hong Kong on the other side. Depending on the preferences included in firm’s panel, where would the firm decide to invest in to setup a base for targeting specific markets?

Of course, it is impossible to predict all circumstances of the firm’s decision since information is distributed asymmetrically. But let’s predict the possible scenario with respect to the quality of business environment, assuming that firm’s main decisive objective is to decide for the location with the easiest and most business-friendly environment with least administrative and regulatory burden given the impact of external cost pressures affecting firm’s output and organic growth performance.

Depending on the impact of firm’s strategic decisions regarding the performance of output and supply, the firm would, by rational means, choose the environment with the least regulatory complexity and administrative burden such as the quickness of starting a business, time costs of getting required licenses, the flexibility of labor market, the security of property rights, access to credit information, transparency of transactions, self-dealing liability, shareholders’ suing ability for misconduct and hence, tax compliance and time cost of paying taxes, the costs associated with international trade, contract enforcement, and the legal protection of the deprived party in exchange in case of payment dispute or payment delay and the extent of procedural backlash in case of closing the business.

The quality of the above-listed factors crucially determines the overall attractiveness of a particular business environment as an investment location. Looking globally, Singapore, New Zealand and the United States were ranked among top 25 on most areas except for in the area of the difficulty of paying taxes in case of the U.S. Emerging market countries scored variably. Russia is ranked 106^th, India 120^th, China 83^rd and Brazil 122^nd. From investment decision aspect, high economic growth in BRIC despite the low quality of the business environment is driven by strong investment boosted by remaining influential factors such as low proportion of labor cost attached to manufacturing and the convergence potentials of the GDP in those countries nevertheless. What about countries in transition? As top performers, Baltic tigers par the quality of business environment of advanced countries. Estonia is ranked 17^th, Latvia 22^nd and Lithuania 26^th. In central Europe, the ranking is much less competitive; Slovakia is ranked 32^nd, Slovenia 55^th, Czech Republic 56^th and Poland 74^th. Each year, Nordic countries constantly perform highly competitively. Taking a closer look on Nordic countries, the figures show that a typical Nordic business environment is almost completely free without hampering regulatory burden. Further, sophisticated and competitive access availability of venture and investment capital adds to the ease of doing business together with strong security contract validation and enforcement. Denmark’s flexible labor market free trade ranked it 5^th respectively, Iceland is ranked 10^th, Norway 11^th, Finland 13^th and Sweden 14^th.

THIS IS HOW BELARUS WOULD BE BETTER OFF

Nearly a week ago, I came across an interesting website entitled Economy.by, presenting the project "The Community of Young Economists and Entrepreneurs" which was organized as a reaction to the lowest level of education in Belarus. The project aims to give opportunities to young students in Belarus to support their scientific work. This particular initiative is very ambitious indeed. In fact, Belarus is croaching in Soviet-styled political dictatorship together with poor track on the respect of human rights, civil and personal liberties. Doing business is difficult and the economic environment is embroiled by government involvement, protectionism and widespread corruption. Also, the education system is instilled by staunch ideological propaganda (here and here).

Regarding the practicing of human rights in Belarus, State Department reports:

"Prison conditions remained austere and were marked by occasional shortages of food and medicine and the spread of diseases such as tuberculosis and HIV/AIDS. Leila Zerrougui, chairperson of a UN working group on arbitrary detention who visited the country in 2004, reported that conditions in detention centers were worse than those in prisons because of poor sanitary and living conditions and restrictions on visitation, phone, and mail privileges. According to human rights monitors, conditions in prison hospitals also were poor...The government restricted access to the Internet. Credible reports indicated that the government monitored e-mail and Internet chatrooms. Many individuals and groups could not engage in peaceful expression of views via the Internet, including by electronic mail. During the March 19 presidential election, there were numerous credible reports that the government blocked several opposition campaign and independent media Web sites. Many opposition groups and independent newspapers have switched to Internet domains operated outside the country because of the government's campaign against Internet freedom. There also were credible reports that authorities attempted to block Radio Liberty's Web site in the country during the March presidential elections. On November 7, the NGO Reporters Without Borders again included the country on its annual list of "enemies of the internet," countries that censor independent news sites and opposition publications and monitor the Internet to stifle dissident voices."

Disclaimer: Capitalism & Freedom strongly supports "The Community of Young Economists and Entrepreneurs" in their efforts to pursue the ideas of individual and economic liberty, human rights, international awareness and knowledge development in Belarus.

DOING BUSINESS 2008

The newest World Bank's Doing Business is here.

The top five economies where doing business is the easiest are:
1. Singapore
2. New Zealand
3. United States
4. Hong Kong
5. Denmark
...

55. Slovenia

DEMOCRACY: THE ENEMY OF ITSELF

One of the most strinking thins which can be observed around the world is the misguided connecting of liberty with democracy. Empirically, the effect of full democracy on economic growth is weakly negative.

In political terms, democracy means voting. It means the ability of the voters to elect representatives. There are many dubious side-effects of what is referred to as the "real democracy". In the state of democracy, there are few things that are contradictory to civil, human, political and economic freedom.

Coercion and constraints

1. Coercion. If political leaders are elected democratically through voting, it means that they have a full ability to pursue a particular political philosophy. As Friedrich August von Hayek wrote in The Constitution of Liberty, each extensive political philosophy supposes that the lives of individuals mismanaged by themselves, and thus they should be controlled through any means of coercion and constraint whether it be the taxation of individual income, information-sharing or the government force to agree and respect the disagreeable. Hence, the main determinator in the state of democracy is not the market where wants and goods are compensated by value exchange, but is the majority that casts the demands imposed on political bodies. Depending on the extent of majority rule, the demands will be suited only if they suit the political support over the term. The sum effect of majority rule is thus guided by the sources of political power which is close to the oligarchic rule. Thus, in many particular items, democracy is a self-contradiction governed by the seed of collectivism and by the tyranny of the majority rule as Alexis de Tocqueville wrote brilliantly in his work Democracy in America.

2. Interest groups: to gain support, the political rivals compete on getting votes from particular interest groups such as trade unions and agricultural lobbies to receive private interests on behalf of public good. In the free market, demand and supply are matched and taken as given. The ability to meet the market needs of individuals is determined by the freedom of choice, given the total utility impact. In political market, the ability to meet the needs of voters is determined by the concentration of power in the hands of most influential groups and formations in public whom the priority is given. This is another proof that democracy is perhaps the most notable hidden evidence of discrimination since "everyone-is-treated-equally" is rambled by "you-are-treated-equally-if-you-belong-to-majority".

3. Extensive government: Great Britain was free way before it became democratic. A country can be free and prosperous even without being dichotomously democratic. Singapore has a high degree of economic freedom and is treated as politically hybrid regime. Estonia is among the freest economies in Europe and the world, but its grade in democratic performance is likely marked by the label of flawed democracy. On the other hand, Sweden is known as "full democracy" but its 81,3 percent economically free relative to Hong Kong which is known as the economically freest place in the world.

Democracy - a self-contradiction

Democracy is treated as an untouchable dogma which is supposed to be in the interest of all. Failed and falsified as it is, democracy is neither close to liberty nor minimal state. Classical liberalism is based on the grounds of negative liberty of non-interference as well as on the absence of government coercion. Fundamentally, democracy mischiefs the extent of government coercion. Classical liberal/libertarian pursuit always predicts the individual and political action to reduce (or possibly eliminate) the extent of government coercion while the dogma of democracy takes no notice on the extent of government coercion, but only on the action which is governed by the rule of majority.

Democracy - the slavery of positive liberty

That is why government based on the principle of the minimal state, providing only the fundamental general framework of interaction (the-rule-of-law), functions efficiently and contributes a significant share to the future creation wealth in going for growth and prosperity. Minimal government is the best friend of individual initiative accompanied by the degree of being free to choose, live and create.

Read also:
Denis Bider: Robert J. Barro's Democracy and Growth (link),
Libertarec: Socializem ustvarja vojne (Socialism creates wars) (link)
Libertarec: Zgodba o dveh vased (A tale of two villages) (link)
Greg Mankiw: A question for democrats (link)
Robert Nozick: A tale of the slave (link)

THE SURGE OF CANADIAN DOLLAR

Recent interest rate cuts by the FED and a periodic trade-balance deficit in the U.S. have pushed the strength of Canadian dollar ahead of the U.S. dollar. In February 2002, the CAD hit the all-time low of 62 U.S. cent. Two days ago, the Canadian dollar climbed up to 1,0004 USD.

The relative strength of CAD is fueled by weak U.S. currency and high prices of major Canadian commodities, including oil, gold and wheat, reflecting trade conditions in the world market. An additional push-up of CAD has been powered by continuously optimistic and record-high wholesales data and estimates. Unlike the U.S., Canadian economy maintains a strong budget and current-account surpluses which boosts the position of the Canadian currency in relative terms.

Not surprisingly, Bank of Canada has not yet estimated a possible interest rate cut over the short-run in its policy forecast, unlike the FED's recent benchmark rate cut. As a result, the investors have not predicted such forward-looking expectations an advantageous gain from a favorable yield of higher Canadian interest rates.

On the other hand, the data revealed that Canadian manufacturing sector struggles to maintain profit margin to sustain the competitive edge in the world market. Consequently, dividends have shrank.

Could the opportunity of the strong currency have an impact on labor market and manufacturing sector? Definitely. Strong position of the Canadian currency could reverse the trend of productivity dynamics. Through imported technology, the labor productivity per unit could spark-up and thus the side-effect of productivity growth would have had a greater strength to stimulate the performance of the labor supply. However, the medium-term scenario will depend on the ability of the manufacturing sector to increase sales partly depending on the dynamics of the Canadian currency relative to other currencies. The economic indicators also show strong effective investment activity of the Canadian economy due to recent spark in sold options which is why Canadian banking sector is temporarily soaring.

Of course, oil price benefits sustained at a stronger parity do not neccesarily reflect the permanent robustness of the economy due to periodic fluctuations and changing demand/supply conditions in the world market.

Read also:
Oil puts Canada's currency ahead of the U.S. dollar, Financial Times, September 21, 2007 (link)

KOSOVO: EUROPEAN HONG KONG?

At Blic Online, I came across the article which predicts the model of autonomous sovereignity of Kosovo based on the status which is similar to Hong Kong.

Under such proposal, Kosovo would be able to join the international organizations such as World Bank and International Monetary Fund. Politically, the status could induce the formation of institutions as well as an independent political decision-making among which there is an ability to form the rule-of-law and slash government intervention. As a partly independent region, Kosovo would probably be able to induce the foundations of economic, personal and political liberty to gain the competitive position in the world and pursue the policies in support of economic growth and capital formation.

Hong Kong, which is entitled as the freest economy in the world, generated significant economic growth and structural advancement among which there had been the enforcement of competitive law and the creation of growth-friendly business environment which attracted a significant inflows of foreign direct investment. As a result of pro-growth economic and structural policy, Hong Kong's income per capita skyrocketed over the past half of the century.

Regardless of the solutions, the creation of autonomous region or an independent state is an opportunity to gain territorialy tax sovereignity in the region with sound property rights, openness to trade and investment, and enviable structural environment which would, in turn, energize economic growth and the pursuit of prosperity through economic, individual and political liberty.

BATTLING WELFARE LEGACY IN SWEDEN

In Wall Street Journal there is a good article outlining the implementation of economic and structural reforms on the road to recovery from a typical generous experiment of the welfare state (link).

BELARUSSIAN STATE ECONOMICS

At Economy.by, a Belarussian student explains how Belarussian State University's professor lectures economics to third-year students. During the lectures on Economics of enterprise professor Bainev tells the third-year students of economics faculty that Russians are the superior race, saying that:

"...Russians are the superior race, and the rest of the world in whole, and americans and europeans particularly, are the absolute morons and animals. He insists in a tough way on the fact that the market economy - is an absolute evil with which we should promtly fight. He says that we shouldn’t think about ourselves and our relatives, and should act only in the interests of nation and her the very best child - President of Belarus. He adds that the USSR was the best time, when people were absolutely happy. He alleged that we should do everything to reunite three main countires in the world - Ukraine, Belarus and Russia with a strong leader who will control people’s life."

Source: Lectures in BSU, Economy.by (link)

JAMAICA - TAX HAVEN?

After nearly a decade of cyclical financial crisis and anaemic economic growth, Jamaica sustained a moderate growth. In 2007, the real economy grew by 3,0 percent. In 2008, the economy is expected to absorb its growth mommentum and increase the annual output by 3,1 percent.

Despite high investment in the mid-1990s, Jamaica experienced a low growth. One of the greatest contributions to fragile output performance is concerningly associated with public debt. A significant share of investment was composed by public investment crowded-out by debt service. The inefficiency and failure of public administration to target the efficiency of investment in effective terms, correlates with lagging productivity growth rate. As the study by the IMF shows, Jamaica's economic performance has been subject to macroeconomic uncertainty. Constantly untamed inflation rate revealed the dependence of the central bank in conducting the monetary policy. Macroeconomic policies asserted on the very principle of aggregate demand (resulted in a persistantly high inflation rate which reduced from double-digit rates to 6,2 percent in 2007, using the inflation targeting framework) do not exclude the possibility of financial crisis as Jamaican experience shows. Through the emulation of rules-based and credibility-asserted monetary policy, the reliance on interest rate outdated the direct money control which is an important source of cyclical inflation pressures.

Economist recently crticized Jamaica's past political frictions which led to irresponsible policy decisions and boosted the impolsion of financial crisis. The abovementioned reliance on aggregate demand consolidated the position of the fiscal policy which lacked the scope of consideration of inflation pressures.

But the news from Financial Times about Jamaica seeking to become an offshore financial center is positive and it poses a great measure of challenge in going for sustained growth and improved structural performance whose inadequte and fragile indicators Empirically, the real reason for low taxes is the advancement of general welfare and prosperity and the evidence does not seem to neglect this theorem. According to CIA World Factbook, 5 offshore tax havens and 3 onshore low tax jursidictions are among the world's wealthiest countries in effective terms of GDP per capita (PPP).

Currently, the public debt equals 133,3 percent of the GDP and the experience of lagging economic performance clearly reflects a dodgy profile of Jamaica's international competitiveness. However, with sound and competitive tax policies and first-class business environment, the sustained growth of output is estimated to reach the long-run scope as capital creation and the foreign direct investment inflows will crucially depend on the ability of economic policy and its inclination towards openness and the reduction of macroeconomic uncertainty.

ALAN GREENSPAN'S THE AGE OF TURBULENCE

Here's a new book written by former chairman of the FED, Alan Greenspan (link).

And here is a book review by J. Bradford DeLong published in LA Times (link).

HALL OF FAME

Here is how I voted for the favorite free-market economist, journalist, business leader and think tank leader on the Free-Market Hall of Fame:

Favorite academic economist (past): Milton Friedman
Favorite academic economist (present): Gregory Mankiw
Favorite writer and journalist (past): Ayn Rand
Favorite writer and journalist (present): John Stossel
Favorite business leader and entrepreneur (past): Andrew Carneige
Favorite business leader and entrepreneur (present): Charles Koch
Favorite freedom organization and think-thank (past): Leonard Read
Favorite freedom organization and think-thank (present): Edward Crane III.
Favorite government official (past): Thomas Jefferson
Favorite government official (present): Vaclav Klaus
Hall of Shame (past): Karl Marx
Hall of Shame (present): Hugo Chavez

MEXICO'S ANTI-GROWTH TAX POLICY

The USAToday has published an article describing the populist assertions of Mexican president Felipe Calderon who recently annoucned the launch of aggresive tax hike to raise tax revenue.

Enhanced through the rethorics of populism, Mexian president wants to increase Mexico's tax revenue by one third, roughly $35 billion a year. Among fresh tax policy proposals an extensive corporate income tax based on firm's income from corporate activity can be traced as well as giving tax breaks to state enterprises (Pemex), 5,5 percent gasoline tax and government requirement levied on banks, claiming to deduct 2 percent tax on desposits exceeding the amount of $1,800 USD monthly.

One could claim that despite a relatively low fiscal burden in the share of the GDP and particularly low government spending, Mexico's overall tax revenue equals 10 percent of the GDP, and thus concluding that reducing the aggregate tax burden does not make any sense. However, this particular assertion hardly entails any sufficient arguments and data analysis.

First, corruption in Mexico is perceived as significant. The cost attached to corruptive officials, institutions and politicians negatively affects economic performance and openly enables seeking ways and channels to adopt tax evasion. The negative-side effect of corrupted tax system is that a mantling establishment of the bureaucracy inclines towards seeking additional revenue via loopholes, deductions, exemptions and tax breaks.

Second, despite a moderate degree of economic liberty, Mexico weakly performs in the areas which are essential to sound framework of economic peformance such as the extensive corruption net and discriminatory investment framework. According to World Bank, paying taxes takes 552 hours in Mexico compared to the OECD average of 202,9 hours. This particular indicators purely reflects the complexity and failure of Mexican tax system. Under such conditions, numerous investors prefer to avoid taxes since getting rid of government regulation and directives is less costly than complying with inefficient and onerous tax system.

Here is a brief data on Mexican macroeconomic performance.

The assumption that additional tax revenue measures would induce government's ability to pursue fair redistribution to reduce poverty is false regarding the empirical aspects of income redistribution and research observations on the growth-correlated tax system. Fighting poverty through the prism of government intervention usually returns the opposite results. Instead, there has been much empirical outcome saying that trade liberalization and openness induce poverty reduction. In addition, deregulated labor market and growth-friendly entrepreneurial framework also boost productive behavior which is the ultimate way to avoid and reduce poverty instead of relying on rent-seeking government and tax bureaucracy.

SHOULD BELGIUM BE ABOLISHED?

Sometimes it is right for a country to recognise that its job is done. This is one of the previous headlines in the Economist (link)

The question set in the article "Time to call it a day" is whether Belgium should no longer exist mainly because of the fractions between French-speaking Wallons and Dutch-speaking Flemings. The latest elections thus reflected the revealed political preference of the voters, prefering to vote upon the lines of linguistic roots. In sum, the result was the inability to form the government. The tension heated up as Flemish parliament inevitably considered the declaration of independence. There is a popular quote saying that Belgians have nothing in common except for the king, the football team and some bears. A very delicious chocolate could be added onto that list.

Economically, Brussels could harldy be recognized as a high-tech, free-enterprise powerhouse of Europe. Instead, it gains its strength as a bureaucratic center of Europe, as a city known as a center of government intervention and infamous European-styled central planning and extensive government structure and income redistribution headlined by the European Commission and European Parliament. In spite of the fact that at the end of the World War 2, Belgium was economically far more developed than Ireland, in terms of standard of living as well as in terms of fundamental macroeconomic indicators such as GDP growth and the share of capital formation in the GDP. In 1980, Belgium had a GDP per capita of $9478,99 USD in current prices while Ireland had a GDP per capita of $5746,20 USD. In 2004, after Ireland's supply-side feedback, Ireland's GDP per capita increased five-fold compared to 1980, after inflation adjustment. In contrast, Belgium's GDP increased three-fold between the same period, also after adjusting the GDP per capita with inflation (link).

In the long run, the macroeconomic forecast regarding Belgium is subject to severe structural risk such as ageing population and therefore age-dependency on public retirement schemes and contribution-funded public health care services financed through budget outlays, grabbing a growing portion of the GDP. By 2012, the real GDP growth is estimated to slide down to 0,9 percent (link).

Generally speaking, the splitting-up of Belgium into two separate units could dramatically reduce compliance costs since political decision-making and the ability to fight with long-term demographic pressures originally emerged from labor supply squeeze, and also to fight the disease of onerous government spending and high tax burden. In fact, the benefits of Belgium's abolishment accomplish more openness to individual liberty and the ability to impose the decision-making with fewer painful cost proportions, not just re-assesing the cradle of welfare dependency which has indeed punished the Belgium's international competitiveness compared to high-growing tigers such as Ireland.

Read also:
Libertarec, Time to change Brussels' regime or time to leave (Cas za menjavo rezima v Bruslju ali cas za odhod)

SERBIA: SOUND GROWTH PROSPECTS, BUT STILL MUCH ROOM FOR IMPROVEMENT

Here is report on Serbia's economy written by Financial Times:

"Gross domestic product (GDP) grew about 6 per cent last year, a steady repeat of 2005. Inflation, which dogged Serbia two years ago, has been tamed with the help of a determined central bank, shrinking last month to an annual rate of 3.3 per cent."

U.S. HOUSEHOLD RETAIL SPENDING FALLS AS HOUSING SECTOR SLUMPS

The Financial Times reports about the decline in periodic retail sales in the U.S. presumably to the impacts of the housing market turmoil.

As prices weakened, the lending practice has become far more restrictive, reflecting the experience of sub-prime mortgages. In fact, this particular shock outbursted the sell-off in the capital markets which heated the situation close to panic, leading to price corrections respectively. Despite the recent news about the possible interest rate cuts by the FED, borrowing conditions have become tighter. In turn, immediate market sell-offs sprang out a highlighted price reductions and a downslide of stocks and bonds.

In effective terms, the indicators in the U.S. financial market envisage a high degree of uncertainty in the future, especially due to the aggresive assertions of the interest rate cutting and due to housing and sub-prime mortgage slid. I believe the confidence index will play the major role in regaining the positive outlook of financial markets which crucially determines the dynamics of household spending particularly on retail consumption.

WHY CORPORATE TAXES ARE BAD

PROSPERITY, COMPETITION AND EUROPE

Here is the answer to the question how European economy and society prospered from competition and free exchange:

Johnny Munkhammar, What Competition Has Done for Europe, European Enterprise Institute, 2007 (link)

THE COLLECTIVISM OF THE EUROPEAN TRADE UNIONS

The movement of the European trade unions recently denounced Bulgaria for having one of the least punitive and most growth-friendly tax systems in the EU.

MALAYSIA'S MODEST CORPORATE TAX CUT

Malaysian Prime Minister Abdullah Ahmad Badawi announced another 1% cut in the rate of corporate tax in the Malaysian government budget. In addition, several other measures have been introduced to boost the investment, revenue and capital formation.

By 2009, the corporate tax cut proposal is expected to be reduced by an additional percentage point down to 25 percent. Despite a tax cutting "slow-motion" of slashing the corporate tax rate by 1 percent annually in the last two years, the aggregate corporate tax burden is estimated to reduce. The rate fell by 1 percent to 27 percent this year, and will bring about a further 1 percent cut next year.

Tax news reports that: "...announced a generous package of tax breaks for the investment industry in an attempt to consolidate and build upon Malaysia's position as one of the leading centers for Islamic finance. As a result of the budget measures, fund management companies will be given income tax exemption on all fees received for Islamic fund management activities until the 2016 year of assessment. Furthermore, the government's pension scheme, the Employment Provident Fund (EPF), will channel about 7 billion ringgit (US$2 billion) to be managed by Islamic fund management companies. Also, these companies will be permitted to be 100% foreign-owned, and will be able to invest all their assets overseas."

In addition to a mere modification of the tax system, Malaysian government further deregulation stock-broking licensing procedures by allowing the entry to the companies that can source the investment funds.

However, the new tax proposal seems to be discriminatory to international investors as government decided to slash the entry barriers only to investors from Arab countries and the Middle East. Among other measures, a a 50% stamp duty exemption on the purchase of a house worth less than 250,000 ringgit (US$72,000) has been launched.

Malaysia's currently ranks 48th internationally and 8th regionally in economic freedom, scoring significantly better than Slovenia.

THE OPPOSITE EFFECTS OF PROTECTIONISM AND STATISM

"France should work for a much more offensive policy of protection, solidarity and regulation," says the French minister of foreign affairs.

The failure of protectionism

Contrary to popular asserted beliefs, the policy goals aimed at the enforcement of protective trade policy results the opposite effects. At the government level, extensive intervention in the form of company ownership reduces the competitive ability of the owned companies to compete in the open world markets.

Government officials have in fact different objectives than strategic investors. In terms of international trade, the restriction of imports from abroad, impairs the ability of gains from free trade and open exchange. In larger terms, even investment can be hampered as capital and technology may not be openly availible in the domestic market. If high tariffs and quotas are imposed on certain imports, the effect is three-fold. First, the enterprises and the economy are forced to pay an extra price for goods that are vitally needed to be purchased as estimated by the firm.

Practically, if a global economic environment of the firm is sourced by cutting-edge technology that could rapidly improve the productivity of the firm per unit of output, but the competitive and productivity potential is swiftly reduced as a possible 10% tariff on high-tech products from India causes an increase in firm's costs.

Second, assume that customers demand improved tech products which can be purchased in the firm which imports those products from India. Then tariff's mark-up on the price would inevitably result in the higher final customer retail or wholesale prices.

And third, high tariffs rate and protectionist trade policy with a bulk of formal and informal barriers, distort the general equilibrium and in this particular case, the only way to match supply and demand is the so called product smuggling resulted in the rise of informal economy which, ceteris paribus, reduces the overall output of the economy.

The anti-social effect of solidarity

Labor unions often expose how labor solidarity should remain an untouchable social value. In the rethorics and slogans of Karl Marx and contemporary socialist terminology, the leaders of the labor unions compose threats such as collective strikes in case if wage-increase demands are not fully accomplished. In macroeconomic terms, the spiral of unparalled wage growth boosts inflation pressures and diminishes the effect of benefits derived from the productivity growth. In effective terms, assume that trade unions achieve the periodic wage increase through collective demands.

After a sudden increase in the growth of real wages, the growth of productivity is negative while the union pressure on wage growth continues. Reasonably, the manager of the company will be forced to cut the exceeding labor quantity by firing to prevent the company's collapse.

Collectivism's Road to Serfdom

In the global economic environment where the regulatory burden and protectionism turn out into comparatively advantageous competitive environment of the firm, the outcome of strict enforcement of protectionism and collective union demands would, as demonstrated above, result in a lagging and stagnating economy facing low output growth rate, rachitic productivity growth and the spiral of upward inflationary pressures.

In fact, as the history has demonstrated many times, collectivism produces anti-social effects.

9/11

Veritas numquam perit.

GLOBAL COMPETITIVENESS

Here is a national competitiveness factsheet of selected countries:

France

United States
United Kingdom
Spain
Finland
Germany
China

FLAT TAX REVOLUTION IN POLAND?

In Central and Eastern Europe, the flat tax revolution took place in early and middle 1990s when simple flat-rated tax on individual and corporate income replaced previous progressive tax rates on productive behavior such as labor supply.

According to Eurostat, Eastern European economies generate high periodic growth rates and outstanding output performance despite some recent inflationary pressures which are, in turn, a natural consequence of high growth that normalizes when annual and period (quarterly) GDP growth rates resile the output gap (case study: Latvia):

Latvia - 11,9%
Estonia - 11,4%
Slovakia - 8,3%
Romania - 7,7%
Czech Republic - 6,5%
Bulgaria - 6,1%
Poland - 6,1%
Slovenia - 5,2%
Hungary - 3,9%

Source: Real GDP growth rate in 2006, Eurostat (link)
See also: Frederick Mishkin: Inflation Targeting in Transition Countries: Experience and Prospects, NBER Working Paper 9667 (link)

There is innumerable practical and empirical support for less aggregate tax burden. In effective terms, the reduction in marginal tax rates could significantly stimulate the propensity of productivity since each additional unit produced and hour spent in the market, would not be penalized by additional taxation. On supply-side, the fundamental rax reform applied to corporate entities, such as the elimination of double taxation of income that is saved and invested and the abolishment of capital gains and divdend taxes, could stimulate the economic performance as well as encourage the business competitiveness. The real evidence has shown that countries with lower aggregate tax burden and flat-rated taxes generate higher output growth rates respectively. In addition, high aggregate tax burden empirically leads to the tax evasion and the groundbreaking path towards hidden economy, since it is typically cost-beneficial to avoid paying the tax through complex set of deductions, exemptions and loopholes or to boost the economic performance away from government control.

The impact of progressive tax code is multi-layered. As first, punitive tax regime on labor income, produces a cost distortion as well as a negative impact on human capital creation which is essential to dynamic growth conditions. Hence, progressively-rated tax on labor supply results in a high wedge between gross cost of the employee beared by employer and the real wage. This particular variety of taxation negatively affects the productive ability of the employees to spend more hours on market since each additional earned income unit is deducted by a punitive tax rate. And second, labor supply is highly sensitive to tax rates. Higher tax rates on labor supply mean higher taxes on human capital. Thus, firms such as service sector are discouraged to hire employees that could generate high productivity and contribute its portion to firm's output. And third, in sum, high progressive tax rates on productive behavior alienate investors and contribute to the loss of net direct investment. Adding the aims for tax harmonization, the effect multiplies downward.

The latest indice of tax reform proposal has come from Poland. The effect of international tax competition between jurisdictions is that labor supply and capital easily shift from high-tax jurisdictions into locations with growth-friendly and less complex and costly tax system. Since investment and capital creation boost economic growth, Poland would suffer a loss in net direct investment in case of maintaining a progressive and complex tax code with rudimentary compliance burden, despite the advantages of Polish business environment such as low comparative cost of labor and outward/inward international flows. In fact, punitive tax regime with high effective tax rates on labor and capital and weak structural e-competitiveness, could backstage Poland's transformation to full-fledged free and competitive market economy.

POLITICAL ENTREPRENEURSHIP AND CORRUPTION

Writing for Wall Street Journal, Burt Folsom compares the entrepreneurship in two countries; the U.S. and Mexico.

The discussion in the article is focused on Carlos Slim who supossedly surpassed Bill Gates as the world's richest person. As the article demonstrates, the spread of political entrepreneurship coexists with weak contract security and insecure protection of private property rights. In comparison to market entrepreneurship, political entrepreneurship is costly to growth and does not embrace risk-taking, quality maximization and price minimization as strategic terms. Here is an interesting story:

"Enter Carlos Slim. His father, Julian Slim Haddad, a Lebanese immigrant, made his money as a merchant during the chaos leading up to the Constitution of 1917. Carlos Slim greatly expanded the family fortune by working closely and cleverly with government officials. (In fairness to Mr. Slim, there may not be another avenue to great wealth in a massively interventionist economy.) His major opportunity came when President Carlos Salinas de Gortari decided to privatize some inefficient industries. Mr. Slim bought Telmex, the nation’s phone company, in 1990 in a controversial auction which was decidedly less than transparent. With that purchase came a six-year monopoly guaranteed by the government. Although Mr. Slim was supposed to relinquish the monopoly in 1997, he used a variety of legal and political tools to maintain it, for example filing injunctions in court to block orders from the regulator to provide competitors fair access to his network. According to OECD figures, Mexican consumers and businesses still pay above market telephone rates. Fewer than one-fourth of Mexican homes have telephones. With a near monopoly of fixed-line telephones and data access (the Internet), Mr. Slim has reaped windfall profits which, wisely invested, have propelled him to immense wealth. Meanwhile, Mr. Slim’s newer ventures—his construction company and his oil services company—rely on government contracts for their major business. Recently President Felipe Calderon met with Mr. Slim and urged him to accept greater competition."

Source: Burt Folsom, Slim Pickings, Wall Street Journal, August 29, 2007 (link)

LIBERTY AND PROSPERITY MAKE DEMOCRACY WORK, NOT VICE VERSA

Here is Economist's Democracy Index 2007.

Source: Economist (link)

ZIMBABWE AND THE LAWS OF ECONOMICS

Here is how the principal laws of economics determine Zimbabwe's episode of hyperinflation.

Sources: New York Times (link), Greg Mankiw (link)

SLOVENIA, SOCIALIST REPUBLIC INC.

Janez Jansa, Slovenia's socialist prime minister, once again demonstrated that he's not keen on macroeconomics and the explanation of inflation. In today's radio speech he mistakenly explained the causes of currently higher inflation in Slovenia than in other countries in the EMU, in the fashion of an old Soviet rethorics which could be read from Lenin's textbooks. Perhaps Slovenia's prime minister should read today's column written by Mićo Mrkaić published in business daily Finance, to learn the fundamentals of inflation.

In addition, Slovenia's prime minister, stated that Slovenia is emulating an Irish model since Ireland faced a significant GDP growth throughout 1990s and periodically higher inflation, so according to the words of Slovenia's prime minister, Slovenia is now generating a strong and stable long-term GDP growth. If Slovenia's prime minister had some basic economics in his mind, then he'd know that the time difference between two countries crucially depends on basic macroeconomic parameters such as price-adjusted income per capita and the rate of GDP growth.

Let's take two countries; Ireland and Slovenia. The question what is the developmental distance between Ireland and Slovenia. The equation is written in the following form:

(1) Yslo(0)(1 + Rslo)^t = Yire(0)(1 + Rire)^t

where Y is the income per capita, and R is the rate of output growth. To obtain the result expressed in time period, the upper equation needs to be logged:

(2) t = ln(Yire/Yslo)/ln((1 + Rslo)/(1 + Rire))

which is approximately similar to

(3) t = ln(Yire/Yslo)/Rslo - Rire

According to World Bank, in 2006 Ireland's GDP per capita in terms of purchasing power parity was $35 540 USD and Slovenia had $23 960 USD of GDP per capita (PPP). Assume that Slovenia's estimated GDP growth rate is 4 percent annually while Ireland's long-term growth estimate is 3 percent. If so, then using (3), it would take 40 years for Slovenia to catch-up Ireland's GDP per capita in terms of purchasing power parity.

The issue can be launched differently. Assume that numbers of macroeconomic aggregates discussed above are the same and that we want to know what should be the growth rate if Slovenia is set to catch-up Ireland's GDP per capita in 20 years. The equation is then the following:

(4) Rslo = (Yire/Yslo)^(1/t) (1+Rire) - 1

where R is the required "catch-up" growth rate, t is the time (length) of the catch-up period and Y is the GDP per capita (PPP). Thus, if Slovenia wanted to catch-up Ireland's GDP per capita in terms of purchasing power parity in 20 years, the growth rate would have to equal 7,4 percent annually. If desired "catch-up" time period is reduced to 15 years, then Slovenia's output would have to grow by 8,4 percent annually. Given the negative side-effects of ageing population, labor supply reduction, and of the external pressure on tax-funded generational acccounts, growth estimates for Slovenia show that in the long-run, the growth rate is ought to reduce to the range between 2,5 percent and 3 percent accountably.

As shown above, Slovenia does not emulate an Irish model of economic miracle as Slovenia's prime minister is saying. Given the scope of current growth dynamics, Slovenia emulates a typical Keynesian debt-financed economic growth based on chain effects of stimulus to construction sector. In the short run, the growth rate is temporarily high but in the long-run, when the dynamics of generating output growth is exhausted and fiscal and debt indicators burdensome, the rate is comparatively low and hampered by an upward pressuring inflation rate and consumption-inflated indebtedness of household and fiscal sector.

In addition, in this year's Fraser Institute's Economic Freedom of the World, Slovenia is ranked 91st in the world regarding the scale of economic freedom. Slovenia was surpassed by nearly all post-communist countries in most areas. Ranked on the same place as Mozambique, Ghana and Papua New Guinea, realistically explains the state of economic freedom in Slovenia. High tax burden, weak protection of property rights, extensively sized government sector and highly restrictive labor market definitely explain the low score of economic freedom in Slovenia, the most socialist EU republic.

PENSION CRISIS AND AGEING POPULATION... AND THE MAFIA OF OLD POLITICIANS

Here is a story from Economist:

"On the contrary, Italian men stop work and begin living off the state at the average age of 60.7, among the youngest in Europe. In Sweden, by contrast, male workers keep going until 64.3. Italy can ill afford such easy-going retirement. It has one of the European Union's fastest-ageing populations, and its highest levels of both pension spending (about 15% of GDP) and public debt (107% of GDP in 2006)... The government's capitulation on pensions highlights the growing power of the trade unions and their allies in the two communist parties of the ruling coalition. At first, their impact (which also showed up in a tax-and-spend 2007 budget), was offset by the liberalising moves of ministers nearer the political centre. But the reformist drive is weakening visibly."

Source: Economist, La dolce pensione (link)

ECONOMIST'S VIEW ON SLOVENIA'S PRESIDENTIAL ELECTION

I'm not used to write posts associated with politics and parliamentary or presidential election. Despite the notion of politics as an untouchable prism, it is noteworthy that political market is a contemporary chapter of modern economic analysis. James Buchanan, the Nobel-winning economist, pioneered the public choice and constitutional economics and demonstrated how effective the application of economic analysis to the state of political market can be. In fact, the political strategies seen and observed everyday behave as normally as a typical market governed by the rule of public choice. When the aspects of game theory are added and variable multiple choice attached, the observation of the political market becomes highly interactive.

When functionally illiterate vote the chairmanship

When a classical liberal economist observes the public choice in Slovenia, he or she does not actually know where the magnitude of political compass is situated. Mischiefed by the ideology of national interest, staunch Keynesian economic perspective and the mixture of conservative and statist views regarding the issues of personal and economic liberty, Slovenian politics is a valuable tool when it comes to populist assertions delivered to the population which is 85 percent functionally illiterate (see: OECD, Literacy in the Information Age). The dictionary of pro-growth policy proposals is replaced by the revealed political preferences against the completion of privatization, the enforcement of competitive law and the reform of the old Gaulist-styled government intervention and populism added-up with the preaching of communist revolution and slogans of Karl Marx notably assessed by trade unions and the derivates of old-socialist ideology.

Slovenia's economic record - losing growth momentums

Slovenia emerged as an independent sovereign country in 1991 when it nominally diverged from a unique system of socialist self-management and stepped on the path of a presumable transformation to market economy, political democracy and the rule of law. Before the shift towards the policies of state intervention and socialist mismanagement, Slovenia had a higher income per capita than neighboring Austria adjusted for inflation and international price comparison. Before the communist revolution swept the country, compared to Greece, Slovenia had been a powerhouse of wealth with a far greater income per capita and advanced output performance. In 1945, the tool of central planning mainstreamed the economic policy. The industrial assets had been confiscated and the institute of private property abolished. The confiscation of property negatively affected all the wealth which markets had created. The redistribution of wealth and income accelerated at the full gas. The sum of created wealth in the next period had been low and the absence of market entrepreneurship, replaced by the political decisions about investment and allocation of resources in the real sector, resulted in the weakly conducted investment of the real economy. The overall coefficient of investment had been high in average, depending on the separate sectors of the economy. Meanwhile, Spain and Greece had merely the same GDP per capita with much less investment inputs and capital formation as a share of the GDP. If the coefficient of investment efficiency had been as high as in Spain or Greece, than Slovenia's GDP would increase 2,5 times over the period of 25 years. Low score on overall efficiency of investment prolonged the economic crisis and brought the upward inflationary pressures after serial currency devaluation. The stocks of capital formation were empty and the industrial competitiveness was low as much as the export performance of Slovenian enterprises. In 1990, 4 years after the start of continued output decline subject to a spiral of hyperinflationary pressures, Slovenia enjoyed the highest standard of living and the highest GDP per capita in the socialist world. However, from 1986 to 1992, Slovenia accounted a significant negative GDP growth converted into overall output loss. The macroeconomic framework in a newborn state had been far away from growth-friendly. The agony of high public spending, high tax burden and structural backlash worsened Slovenia's relative competitive regional and global position.

When Estonia matures and Slovenia fails

What about Estonia, Slovenia's hot rival and the Eastern European Baltic tiger? Despite the severe economic crisis, Estonia's visionary leader Mart Laar pursued what he learned from Milton and Rose Friedman's Free to Choose. The elimination of tariffs, the reduction of public spending, the monetary reform, structural liberalization and a radical tax reform returned a rapid GDP growth and structural advancement, an incredible metamorphosis from Soviet-styled economy into free-market economic powerhouse. Today, macroeconomic estimates for Slovenia respectively express concerns over the long-term stability of the public finance. The risk, involving the sustainability of the generational accounts, seriously threatens output performance and structural advancement. Today, Slovenia is still recovering from decades of socialist mismanagement. The basic infrastructure such as highway system, is incomplete and the public spending on infrastructure is expanded at the expense of higher public debt in the future.

Risk management and taxes - who cares?

At the same time, Slovenia is one of those countries which are ought to face a significant demographic crisis regarding the sustainability of the public-funded health-care system, pension system and welfare services. The macroeconomic policymakers, however, never considered the course of macroeconomic policy aimed to avoid the structural risk through the establishment of pension funds covering the current expenses of the demographic crossover which could be easily funded through the sale of state-owned assets. Thus, Slovenia generational accounts are funded through punitive taxation of productive behavior such as enormously high employee contribution rates to health-care schemes. It is thus hardly surprising that Slovenia is the most taxed country in the world according to the "take-home" income residual after taxes.

How can a communist president claim to be a democrat?

The intellectual fathers of government failure in during transition to cut taxes and promote foreign direct investment to accelerate enterprise restructuring of the lagging backlashed socialist economy, are the old guards firmly consolidated in the prism of staunch socialist ideology and Orto-Keynesian perspective when it comes to the issues of economic policy. Slovenia's first president, Milan Kucan, had been the president of central committee of the Communist Party. When dr. Ljubo Sirc, classical liberal, economist, the president of CRCE and the Slovenian immigrant living in Edinburgh, ran for a president, Slovenes prefered to vote for an old communist guard Milan Kucan. The attitude of his political presidential chairmanship roared the government intervention in the economy through the political establishment of elitistic corporate oligarchies (Forum 21). An open calls against the privatization of state-owned enterprises, lobbying against the entry of foreign direct investors in Slovenia, the leadership designed through the style of old communist populism, are just a few item describing the agony of communist presidents in post-communist Slovenia.

Let the candidates show their knowledge of economics, maths and statistics

The public choice between the candidates for the president of Slovenia is poor. The promotion of the ideology of the chauvinistic nationalism and socialism is a deadly drift which had been undertaken by the cruelest dictators in the world. Calling for bigger government and thus even more corrupted government through statist ideology is what the headline of presidential candidates proposes. I suggest that presidential candidates pass the mathematical, statistical, logic and economic literacy test and than we'll see who's the most competent presidential candidate in the round.

Sadly, this year's election again demonstrate how deeply rooted is the nationalist and socialist mentality in Slovenian society regarding the attitudes toward open society, free economy and personal liberty. As a voter I'd expect from a president to openly promote the fight against monopolies and cartelized structures, to call for school choice, tax reform, deregulation, the enforcement of competitive law, competitiveness efforts, and especially to act and behave like a statesmen, not a politician.

Slovenia: WASP - Wrecked Archaic Socialist Pond

Unfortunately, Slovenia is still a socialist society and all it can realistically be expected from the future president is populism an further protection of big government. It'd be completely out-of-date to expect a free-market enthusiasm, visionary attitude and ambitiously geared desire for change. In a dysfunctional sub-Alpine cesspoll of lies and deception, where anti-Americanism and the nationalistic sequels governed nearly all walks of society, the president is like a leader of the tribe suffering from shocking historical truths about its genocide leaders who lived through corruption, manipulation and lies over the pond of local self-sighted, envy-inflated, brainwashed community called Slovenia.

FRANCE: GROWTH OR STAGNATION?

Despite the historic highs in economic growth, some European countries are economic laggards. Marred by tight labor market conditions, protectionist policy, high unemployment benefits and generous welfare expenditures, France's global position currently emulates low output growth rates. Meanwhile, the aggregate tax burden as a share of the GDP is among the highest in the world. Recently, France's president intiatiated several panel proposals to boost France's global competitiveness and economic performance.

In international comparison, French economy has a relatively high productivity rate. But behind this measure, there is a cautious explanation. Since France has one of the largest population of retirees in the world, the aggregate productivity depends on the ability of the existing labor force to sustain competitive productivity growth rate. In addition, a large amount of per unit productivity is penalized by high taxes and welfare contributions rates. Recent surveys (OECD, 2007) have shown that France has a high rate of hourly productivity and that there is a significant sectoral variability of the growth rates of productivity respectively.

The reason for a rachitic aggregate productivity level is the length of the workweek. Previously, French policymakers imposed a 35-hour working week. The overall loss of productivity gains has been immensive while the relative gap of productivity outfall further diminished the competitiveness of the French economy in the international perspective. One of the most hindering characteristics of a rigid labor market is the negotiating power that labor unions possess over wage claims and strikes against pro-growth measures aimed at an improvement of the company performance and aggregate productivity as well. There is much empirical evidence on negative correlation between growth behavior and extensive collective bargaining, meaning that deregulated labor market does not impede the growth of productivity since the allocation of resources absorbs the gains from output behavior easier than under extensively regulated conditions set by the misallocated collective instruments exercised in the labor market. The fact is that collective trade unionism lacks the use of information and knowledge to reach optimal decisions regarding choice aspects. In the state of collective bargaining over working time and labor utilization, there is always an expense at which the most productive labor units are penalized while the under-productive labor force, which generates a majority of extensive trade union power, gains. Consequently, the most productive labor force which usually does not engage in wage claims, face an overall loss since the output of productivity is generated into consumption and wage claims by the external income redistribution.

France's climate and environment for doing business is ranked way below the most competitive and business-friendly destinations for entrepreneurship (link). For instance, the cost of property registration is 6,8 percent of the property compared to the average of 4,3 percent in the average of OECD countries. The operating conditions of the economic climate and confidence is further depressed by the low score of economic liberty where France ranks 45th in the world and 21st in Europe. One of particular concerns is a restrictive and regulatory code regarding the investment conditions. Despite a relatively high level of the sophistication of financial products and market incentives, the regulation of product and financial markets is high and companies face significantly high payroll and income taxes. The fact that the investment climate is not dynamic and open is the notion that foreign direct investment is restricted in a number of sectors such as airplane transport, telecommunications, tourism...

France, known for its tradition of old-style Gaulist state intervention, currently prolongs a very rigid labor market with all of its damaging symptoms such as rigid restrictions regarding the increase in working hours, high non-salary costs of employing workers from the labor market, high tax wedge levied on the most productive workers and staunch rules regarding hiring and firing. Sarkozy's agenda on the state of labor market seems favorable to the prospects of productivity growth as well as to the reduction of external costs:

"On tax and labour-market policy, Mr Sarkozy is pursuing a deregulating agenda, hoping to free up business, and stimulate growth and job creation. On industrial policy, however, it is far from clear that Mr Sarkozy believes in letting the market decide."

Source: The Economist (link)

It will surely be interesting to see what the outcome of Sarkozy's market agenda will be since the size of government spending in France is among the highest in the industrialized world. Total government expenditures in France, including consumption and transfer payments, are very high. In the most recent year, government spending equaled 53,7 percent of GDP. The revenue from state-owned firms equals 3,9 percent of the GDP. There is a numerous evidence on the negative comparative effects of state (political) ownership of firms since the government ownership of enterprises is subject to political agenda instead of setting market objectives. Another negative side-effect produced by government ownership of industrial companies and firms is that the aim is not to pursue value and quality to its customers but rather to protect domestic firms against external competition such as sectoral strategic, direct or portfolio investment of foreign-owned firms.

If French policymakers really want to pursue the liberalization of the market, then it would be silly to push for larger state intervention such as protecting the industrial companies against the competitive pressures without which the economy would stagnate in the medium-run and sustain rachitic, minimal output growth.

RISK AND RECESSION

Is there a significant risk of recession in the U.S?

Credit market turmoil and housing slump have hurt wealth while recent frictions have made enough face for FED to respond with lower costs of borrowing. It is expected that FED will reduced the key interest rate. At the same, the credit expansion could endanger favorable growth prospects respectively. Due to abovementioned housing slump, consumer spending faces a significant risk because of the recent wealth depreciation. Predictably, consumption which accounts for two-thirds of the U.S. economy is expected to decline and tranquil temporarily. Also, consumer confidence shrank recently. According to the figures, the U.S. economy waved a feel of strength before credit markets were defaulted with morgage borrowers.

See: here and here

WEALTH MANAGEMENT OF SOVEREIGN FUNDS

Here is an advice to the managers of wealth funds of how transparency and diversified global investment portfolio generate returns without distortions and uncontrolled risk (link)