Tuesday, October 30, 2007
Two years after gaining a formal independence from Serbia, Montenegro's economy operated at a full capacity, having seen robust output growth rates estimated to exceed 7 percent by the end of 2007. The growth, mainly driven by a significant amount of foreign direct investment, seems to remain robust in the medium-run despite particular tensions referring to the signs of overheating. Nearly 85 percent of capital value of companies was privatized. Banking sector, telecommunications, oil distribution and import services are 100 percent privately owned. Foreign direct investment is reaching record highs. In 2006, according to Montenegro's central bank, foreign direct investment reached $680 million USD, six times higher than in 2004. In the first half of 2007, foreign direct investment increased by 78 percent, while from January to July 2007, the amount of FDI was $650 million. Thus, Montenegro has one of the highest FDI per capita, $ 1,100 USD, one of the highest shares in Europe.
Montenegro's business environment is weak by international ranking, despite of significant improvement in since the independence year. Montenegro ranks 81st in the world according to the ease of doing business. The failure of public administration to provide the operating business environment at sound quality, long licensing procedures, severe difficulties faced when registering a property, bureaucratized trading environment, and a high level of difficulty in enforcing commercial contracts, reflect the disadvantages of Montenegro's business environment (link).
Affected by international financial turbulence, Montenegro's asset prices soared in the last two years, leading to a remarkably rapid growth of credit which further fueled the investment into real estate industry. However, rapid credit growth posed signs of an overheating economy which has been a particular backlash of Montenegro's domestic economic environment.
On the other side, Montenegro's growth is not drifted by inflationary pressures. Subject to concentrated market structure, retail inflation peaked slightly ahead of central bank's expectations, particularly in the electricity sector which has not yet been demonopolized by the infusion of competitive mechanisms and price liberalization. Electricity shortages occured despite tariff increases.
The economic reforms, such as the privatization of state-owned assets and the openness to foreign trade and investment, contributed to stable macroeconomic position. The budget remained anchored in surplus. Public debt does not currently evince any sign of quick consumption-inflated indebtedness. Total public debt peaked at 38 percent of the GDP while loans denominated into foreign currency presented 27 percent of the GDP by the end of 2006. As a matter of fact, overall public debt was reduced from 88,3 percent of the GDP where it stood in 2002 (link). Foreign indebtedness is expected to decrease in the years to come due to large amount of inflows from the investors' buy-outs of state-owned assets and enterprises.
As a transition economy, Montenegro has experienced typical short-term and medium-term problems due to the rapid convergence of GDP and robust economic growth as well. Transition process, by itself, poses a lot of risk and challenges, ensuring economy's vitality and growth sustainability. First, in Montenegro, real estate and equity prices skyrocketed due to signficant demand-induced pressures and country's valuable tourism potential, which folded residential and coastal property prices upward.
Second, according to IMF, credit growth accelerated at 170 percent by August 2007, pushing the the household indebtedness to record highs. Credit growth has surpasses the amount of inflows from foreign direct investment which Montenegro has received in this year. However, deteriorating current account deficit is not alarming, neither a sign of recession or downturn, whether it applied to established economy or an economy in transition. In case of Montenegro, widening current account is a result of accountable investment imports and capital inflows whose contribution to overall output growth is significant. In relation to credit growth, it is the question whether banking industry is strained by the lack of ability to assess loans in real estate.
Third, external demand-supported pressure on wages poses a significant threat to overall competitiveness of Montenegro's booming economy. If productivity expectations are high, the spiral of wage-increases claims could have been eased by the fact of productivity outcome. But if the productivity expectations are low, the wage-increasing claims could have bursted the triggering of inflation-pressing spiral. In case of Montenegro, public sector has claimed wage increases several times. It is the question whether the sector whose contribution to growth is relatively low relative to the components of the private sector, could claim wage increases on a legitimate basis subject to distortionary effects of wage-increasing claims under conditions of low and possibly rachitic productivity performance. The rigidity of wage claims is mainly derived by the lack of labor market reforms, whereas outdated labor legislation returns uncompetitive effect respectively.
Montenegro's abundant potential of a flourishing tourist industry propelled by market optimism and Stabilization and Association Agreement with the EU, provides sound opportunities to address the abovementioned concerns. Years ago, Montenegro adopted euro as a common currency, thus eliminating the possibility of currency and exchange risk. Monetary policy's ability to tackle demand pressures is thus partly limited and that's why a prudent fiscal stance is needed in lines with transparency and restrictive expenditure agenda.
In a booming economy, such as Montenegro, fiscal policy is a powerful tool in managing the fluctuations and brisk economic progress. In the state of robust output growth rates and soaring private sector productivity, fiscal policy is ought to be countercyclical to prevent the possiblity of overheating where the expansionary fiscal policy could turn a non-inflationary economic performance into inflationary economic growth generated by fiscal expenditures on infrastructure and public or/and foreign indebtedness, while seeing the overheating of economy's overall capacity. Fiscal balance or possible surplus is favorable to the business cycle for two particular reasons: (1) it faces adverse shock with low risk and (2) it gives support when revenue growth cools the impact on public finance. Also, significant import growth, reflecting the current account deficit, presented 4-5 percent share of imports in the GDP.
The role of fiscal policy is ought not to be undermined. As a powerful tool in responding to cyclical fluctuations during a "catch-up effect" period, fiscal stability and low government spending are usually based on surplus mechanisms. By avoiding budget deficit, policy responses may prevent the demand shocks and low level of public spending is a sign of maturity that helps to detach the anticipation of inflationary pressures and its impact on macroeconomic stability.
Tax cuts implemented in previous years may be seen as a policy failure in generating greater revenue. As the Laffer curve succinctly explains, it is able to reach higher tax revenue from a broader tax base, by reducing the rates on corporate and individual income. Since the implementation of low flat taxation on major sources of productive behavior, revenues have increased rapidly. Currently, public spending stands at 45 percent of the GDP (link), and the share of capital investment is 3 percent in this respect.
As a negative aspect of fiscal and structural policy, Montenegro's policymakers approved a significant 30 percent wage increase in the public sector, which is far ahead of current productivity and output growth measures. Such expansionary effects should be wisely avoided to prevent the loss of incentives to boost the economic performance when the growth performance slows. Robert Barro, a professor of economics at Harvard University, has shown empirically that reducing the size of public sector by 10 percent, stimulates growth by 1,3-1,8 percent. As a sign of innovative policy, public sector employment and expansion might be frozen and possibly reduced to prevent further unanticipated shocks such as wage-increasing claims.
In recent years, Montenegro's economic policymakers implemented a rigorous tax reform. Flat tax was implemented on personal and corporate income and it is expected to be dropped slightly in the years to come. Tax cuts were imposed procyclically. However, complex taxation structure such as numerous exemptions, loopholes, breaks and deductions have counter-effects as they raise the cost of paying taxes, notified as a difficult tax compliance and administrative burden which costs firms and taxpayers millions. The aim of tax reform and system is to pursue the efficiency and minimal tax burden levied on firms and individual taxpayers. High tax burden, empirically and practically, constrains growth and does not meed the indicated measure of efficiency. Fiscal reform, such as braking-up the size of government spending, is expected to pursue the objectives of fiscal consolidation which contains easing pressures to anticipated as well as unanticipated external or domestic shocks. The goal of prudent fiscal sustainability in the medium-term is to meet the demands of macroeconomic and structural stability. In the medium run, demands to invest rapidly in infrastructure may be tackled. However, it would be wise to avoid infrastructure investment through the expansion of state-owned enterprises. By the means of risk-taking and efficiency of capital and technology investment, infrastructural investment is easily attainable through private sector. In case if externalities and signs of market failure appear, then public infrastructural investment may be justified, also to prevent the emergence of public or natural monopolies where one firm, in public or private ownership, could substantially abuse its market power, such as in case of railway and highway infrastructure.
In monetary area, Montenegro has stabilized low inflation rate and the monetary policy remains anti-inflationary (link). In 2006, inflation rate peaked at 2,5 percent. In the first half of 2007, inflation rate was 1,1 percent (link). S&P has given Montenegro BB+ credit rating. The abovementioned rapid growth of credit has tightened banks to raise capital adequacy ratios. This could hamper the ability of banks as well as equity funds in responding to the demand claims of investors in real estate and stock market industry (link)
At last, structural reforms demand both; challenge and perspectives. One of the greatest potential of structural reforms is to boost economy's potentials. According to the data, the government and state, still own shares in 65 companies. In 53,8 percent of those companies, government has more than 50 percent ownership share. The argument for an accelerated privatization is the fact that the allocation of labor, capital and technology resources is better utilized as well as distributed in the channel of productive use. In fact, as an owner, government has severely different interest than private investors. In addition, the data shows, that privatized companies sustain higher level of productivity than state-owned companies.
The area in which radical reforms should not be postponed, is the labor market. The aim of the labor law is to pursue flexible and dynamic environment, allowing firms to dismiss non-performing employees without high severance costs. As every economist can confirm, collective contracts and bargaining such as oligarhic bundling between monopoly structures such as federation of employers and trade unions, does not match the needs of modern market economy. Instead, flexibility and deregulated labor market are essential to maximize productivity growth and eliminate discretionary wage-increasing pressures and also fight unemployment. In this respect, Montenegro's business environment is free of unnecessary regulation which boosts the potential of private sector growth. In the long run, fiscal risks are inevitable and Montenegro's abundant potentials may be implemented not by government intervention but by low public spending and first-class investment environment that underpins the role of private sector, free of corruption, in the economic performance respectively.
Rok SPRUK is an economist.
Copyright 2007 by Rok SPRUK
Monday, October 29, 2007
In the fall filled with two national referendas regarding whether
Let's have a look on presidential elections. I think that everyone who wants to explain why we need this junk will face big troubles. Why?
What this means in practical terms, is clearly demonstrated by the latest selection of future governor of the Bank of Slovenia; a situation in which prime minister and the president had an electoral mandate to appoint the governor. At the end, the technical dilemma turned out into an insensible political battle.
Third, some claim that the presidential function is necessary due to its role in representing
And at last, a large majority of Slovenians is evinced that the presidential function is necessary because of the need to have a discretionary moral authority such as Plato, Indian gurus,
The second redundancy is the elections in the State Council this fall. State Council is the remaining creature of fascistic corporate system. Let's summarize how these elections go through. At the end of the mandate, interest groups get together and select a dedicated person who is then authorized to delegate our lives from
INTEREST GROUPS CONTROL THE ENTIRE COUNTRY
The fact that interest groups have their own debate luncheons at the expense of taxpayers' money and do whatever they want at any time, is simply a blockade of decisions approved by democratically elected institutions. And even more: it is a blockade that disables the functioning of a democratic system. An ability that interest groups without the approval of taxpayers, are dealing about the way of living that citizens will simply have to embrace and live with it, is coming from the constitutionally approved status of the State Council and collective bargaining. A procedure, in which workers' monthly salary is not determined by his output and productivity, but by the bargaining decisions approved by trade unions; the latter call social justice. As a side-effect, entrepreneurs must give up a fraction of profit due to decisions passed by non-elected institutions, namely trade unions. You're not wrong if you think that such process is a restitution of the situation once common in the
A DEMOCRACY OF WAR MASSACRES
In addition, there are two non-elected representatives in Slovenian parliament approved on the basis of their nationality. What a democracy - a democracy on the basis of Slovenian shame, such as the genocide of Italian, German and Jewish community. Thus, Slovenians have collectively admitted not to aggravate if they have bloody conscience about their own past. Instead, for them it is admirable to have a handicapped democracy which places two non-elected representatives of minorities in the national parliament. If you perceive that as a hang of overdoing, think about suspicious role of those two representatives several times respectively. And if everyone is treated equally, where are the Roma, Serbian and German representatives? Shall we rather dissolve the entire parliament and put in suitable representatives? In case if anyone doesn't know - parliament is a democratic institution whose members are elected on the basis of individual preferences and not on the basis of individual ethical origin. To protect the human rights, there is a judicial system that defends individuals against violations of human rights of all the citizens, including ethnic minorities. It is simply not a seat in the parliament which protects the rights of the minorities.
So if you attend the elections, the impact of your vote will be the same as in the period of socialism - none. That is because of institutional chaos based on
Rado PEZDIR is an economist.© Copyright 2007 by Rado Pezdir
*An article was translated in English by Rok SPRUK, an economist and the owner of the web log Capitalism & Freedom
By 2010, the output growth rate is not expected to surpass 2 percent. Public finances are weak, reflecting the postponed pension reform. Enormously high pension outlays partly reflect the pressures holding France's public spending on record highs.
High public spending combined with punitive tax rates on income and productive behavior further discourage France's growth prospects. The fiscal consolidation is likely to remain slow. Budgetary spending remains anchored in deficit and the policymakers do not show any sign of turning budget deficit into surpluses as growth might accelerate at a faster pace.
The exchange rate is strong and the domestic prices are not expected to pose a threat to a stable and low inflation which peaked at 1,6 percent by 2007 subject to EU-harmonised measure.
On the growth side, household consumption is high and remains a mandatory GDP component. As a worrying sign, government consumption is currently higher than gross fixed capital formation in the share of the GDP despite the efforts to reduce direct taxes on corporate income and labor supply.
Jurgen Reinhoudt: Showtime for Sarkozy, American.com (link)
The Economist: Country Briefings: France, Economic Structure (link)
The Economist: Country Briefings: France, Economic Data (link)
Sunday, October 28, 2007
Using PPP measure of the GDP, Norway is the 6th wealthiest country in the world, having a per capita GDP at $46,300 USD, surpassing Ireland and the United States (link). High GDP per capita in terms of purchasing power parity is the result of gigantic increases in the GDP in recent decades due to high oil prices and oil exports which benefited the Norwegian economy. It would be a mistake to think that Norway's economic policy reflects its gross domestic product. Public ownership remains high (link). Welfare policies tend to contain a degree of inefficiency and fiscal sustainability (link) is risky in a long term perspective as the petroleum and pension fund are set to decline in its size subject to strong dependency and ageing population pressures (link).
Tuesday, October 23, 2007
The current economic and structural picture in Poland is mixed. Despite the great impact of the stabilization and market liberalization on economic performance in the past 17 years, Poland, as well as other Central European countries, maintained a high level of public spending in the share of the GDP. Poland scores low on Corruption Perception Index with a rampant track on the overall corruption. The index is measured on the scale between 0 (highest) and 10 (lowest). Poland slumped from 4,6 in 1998 to 3,4 in 2005.
The reason for such persistent corruption is the fact that Poland's government spending has not fallen below 40 precent of the GDP yet. In turn, higher level of spending and more extensive government and public administration negatively affect the overall capacity of the economy to operate and sustain robust growth subject to convergence process.
As a positive thing, under previous government, the burden of government size and spending was reduced, which was an additional influence on Poland's 6-7 percent economic growth rate, which is still low on Eastern European average. One of numerous disadvantages of the government chaired by Law and Justice was a an assertive foreign policy and a brisk growth of populism, curtailing individual liberties through the coercive dogmas of Catholic values, in addition to the enforcement of protectionism and criticism of free-market views based on the doctrine primarily adopted by socialist movements.
Civic platform's leader Donald Tusk pledged to accelerate the privatization of state-owned assets more rapidly and energetically as previous government did. He also pledged to adopt replace the current progressive income tax with 19 percent flat income tax. Polish economy is doing well at the moment driven by strong foreign direct investment and solid export performance. Mr. Tusk's also promised to reform Poland's wasteful public finance, inefficient and oversized bureaucracy and a lagging infrastructure.
A victory of Poland's now-leading party inspired by liberal political views might play a crucial role in building and implementing a reform agenda as a sign of relief with positive impacts on overall growth foundations such as reduced tax burden and an active fight against corruption through reducing the size of government and improve the inadequte public administration.
Monday, October 22, 2007
The abovementioned blog rigorously attempted to depict my own web log as a branch of political party.
Just to let everyone know: I am not a member of any political party, nor am I associated with any particular religious group, but I respect the freedom of religion. I am devoted to the profession of economic research and analysis, microeconomic as well as macroeconomic, and its application through empirical investigation on public policy and the internal and external environment of the firm by the positive and normative analytical tool.
And ss a classical liberal, I firmly believe in the principles of self-ownership, minimal state and individual liberty. Full self-ownership of an entity consists of a full set of ownership rights. Among them, there is also a control right over the use of the entity, a liberty to use it by the owner and a claim not to be used by the other.
Sunday, October 21, 2007
"A lower corporate tax rate is a powerful weapon in the federal government's arsenal to generate more investment, higher living standards and better jobs. If you lower the corporate tax rate, you lower the cost of capital for Canadian companies. Therefore, these companies are induced to spend more on capital equipment. As for foreign investment, we need a big hook to snare investment, including Canadian investment, that might otherwise go south of the border."
Delivering the speech on Tuesday, Canada0s Governor general, Michaelle Jean outline government's future intention to implement tax reform and re-enforce the intellectual property rights (link)
The negative comments on international and intranational tax competition include distorting views hardly matched by contemporary findings and conclusions from research on these particular issues. Lower public expenditure are not inefficient. In fact, numerous empirical and evident studies have confirmed the positive correlation between lower spending and higher growth of output.
On the revenue side, lower tax rates on corporate income significantly affect the amount of collected tax revenue. The evidence has shown, that lower tax rate on corporate income as a source of productive behavior, leads to higher tax revenue in the share of the GDP. In addition, many members of the OECD have significantly lowered tax rates on corporate and also individual income and none of the negatively asserted consequences occured. Ireland lower the corporate tax to 12,5 percent, and tax revenue jumped to record highs. It also had a positive implication on the inflow of foreign direct investment.
A research by US economists Mihit Desai, Fritz Foley, and James Hines (here, here and here) has shown that the relocation of investment capital into low-tax jursidictions actively stimulates the investment level in nearby high-tax jurisdictions. As firms located into tax havens retain higher relative after-tax return, they can maintain a significantly higher level of direct investment than otherwise.
In a new system, those aged under 35, must opt one of 14 competing pension funds, redirecting 2 percent of individual income from state budget to selected pension fund. The rate of contribution will gradually increase to 6 percent by 2015 and social security contribution rate is about to diminish effectively.
Romania is now officially joined member of the EU, facing a significant transformation towards a modern competitive economy. As a matter of fact, Romania faces a significant anti-correlation between labor supply and the number of retired individuals.
In case of state budget funding of retirement remained in effect, this could seriously affect and hamper the long-term stability of public finance and would boost tax rates on labor supply, saving and investment upward.
According to the data, Romania also faces a significant outflow of skilled labor into advanced economies within the EU, increasing the need to restructure the system of social security and pension funding.
Particular disadvantages of state-run budget pension fund is that, in the long run, it creates a significant degree of dependency, thus increasing the risk of macroeconomic crisis such as the outburst of public debt, growing budget deficits and the brisk of financial crisis which could, in turn, reverse into rachitic output rates and increased inflation pressures.
In addition, budget-funded pension system plagues inadequte methods and poor management track, unable to respond to intense demographic pressure, i.e. the shrinking labor supply and a growing number of retired individuals.
The report notes that by 2050, Romania will have 145 pensioners on 100 employees. In fact, it is admirable that a country such as Romania chose to opt a private pension system based on income percentage contribution to private pension funds, since accumulated savings are, by empirical means, the soundest guarantee of pursuing a lifetime living standard once when person is retired.
Saturday, October 20, 2007
Tuesday, October 16, 2007
Monday, October 15, 2007
Adam Smith's invisible hand refers to how market mechanism ensure an efficient allocation of resources under ample conditions. In pratice, those conditions are distanced from the ideal. Competition is not completely free as there exist oligopolistic, imperfect and monopolistic type of competition.
Among four basic definitive principles of perfect competition, there is an assumption that consumers initialize perfect information about the anticipation of the market. Consumption and production may generate externalities, a positive influence on by-standers. However, many transaction do not actually occur in the open market but in the depth of the microeconomic transactions between firms or in particular exchange agreements between individuals, interest groups (link).
In addition, transactions also occur as an institutional phenomena. The question is not if such transactions are equitable but whether such allocation mechanisms function optimally. The subsequent question is also what is actually the optimal mechanism in going for a certain goal whether it be a goal related to welfare or/and profit maximization. In fact, contemporary economic theory is based on extremal theory of utility and profit maximization.
As in the upgrading of the circular-flow of the economic cycle, there is also the role of government regulation and the question, under which conditions, government regulation is supportive to achieving concrete goals and objectives. From the basic point of view, governments can sometimes improve the economic well-being and welfare nevertheless. For example, government anti-trust and anti-monopoly policies can benefit the overall economic well-being through the enforcement of competitive law as a way towards making welfare deliverable.
However, it is an absurd idea that government should own enterprises due to the fact that the scale of externalities is rare and hardly attainable on the locus of benefits and advantages of the private sector as markets are usually a good way of organizing the economic activity. The issues regarding the efficiency of allocation mechanisms are difficult to tackle mostly due to asymmetric information among market actors.
The fact, that information about individual preferences of particular choice and availible inputs (such as technology) may be dispersed and the fact that information about the individual interest is delivered asymmetrically and through random variables, is probably the core of the theory of allocation mechanism.
This year's Nobel winning economists succinctly initiated and further developed a theory of mechanism design. Enhanced by the laws of complexitiy, optimal allocation mechanism cannot be stated on the typical view from government's perspective, assuming that market failures occur frequently and, further, thus government distortion of market and exchange is non-peculiar.
Contrary to popular assertions, mechanism design theory distinguishes situations in which markets work well and in which they don't, judging the validity of allocation resource mechanism regarding the private information and individual incentives to fluctuations in the market accountably.
In practice, mechanism design theory is a great tool of assistance in experimenting various different mechanisms of trade and multiple exchange, schemes of sound regulation and deregulation. The theory is also applicable in the field of political science as it may upgrade voting procedures to perform efficiently with the supportive role of the economic theory in the process respectively.
Financial Times, Sovereign funds warning, October 14 2007 (link)
Sunday, October 14, 2007
In January 2003, unemployment insurance benefits in Finland were increased for workers with long employment track. On average, the benefit increased by 15 percent for the first 150 days of the spell. The outcome was a significant rise of duration period for those receiving high unemployment benefits. The authors find that the expected re-employment time increased by 31 days or about 11 percent.
Roope uusitalo, Jouko Verho: The effects of unemployment benefits on re-employment rates: Evidence from Finnish UI reform, Institute for Labor Market Policy Evaluation, Working Paper 2007:21 (link)
The index shows that Wyoming's tax system is best for business (link). California, New York and New Jersey occupy 47th, 48th and 49th place on the index respectively. The lesson is that states with higher income taxes stagnate in terms of the quality of the business environment. Nevertheless, taxes are an important part of state's competitive position, seeking to attract investment and labor supply. On the other hand, states with lower or zero-income tax benefit from low tax burden and business climate favorable to job creation and capital creation, thus receiving high rewards from competitiveness efforts.
Saturday, October 13, 2007
In case if market cooling continues to advance faster, it is quite likely that Ireland may experience a sharp decline in property prices due to the fact that borrowers continue to see a widening gap between housing rents and repayed mortgages. On the side of the investment, continually adjusted holding of property may be assumed on the expected values of the capital gains in the future. If this happens, the cooling could trigger declining expectations and rush the property offerings at a lower price; of course, to avoid the anticipated shocks in the market.
Just recently, Economist published an articled analysis about the ailing frictions in property market in Ireland. The data on Irish economy can be viewed here and here.
"Affluent parents can afford to send their children to a private school, or move into the catchment area of a good state school. The disadvantaged, however, often have no choice but to have their children assigned to a state school, often of low quality, by their Local Education Authority. The widespread application of the surplus places policy, furthermore, prevents good state schools from expanding and rules out the establishment of a new school, if there are spare places in an existing state school nearby. That's like the state banning a busy restaurant from laying extra tables because there are spare places in an unpopular one next-door – absurd."
Source: Marek Hlavac, A Lesson from Sweden (link)
In 1992, Swedish government, under the chairmanship of Carl Bildt, introduced voucher in the education system by allowing parents to send their children to any school they choose, whether it be municipal, independent or religious.
15 years after the implementation of education reform, the sector of the independent schools has grown rapidly (link). And the outcomes improved as well. For example, in 1992 Sweden spent $7,000 USD per pupil, while the outcome resulted in falling middling scores on international tests despite the fact that Sweden's spending per pupil was more than in any other country in the world.
Distorting inefficiencies of government-owned education system are perhaps the most powerful practical evidence of the inefficiency of monopoly structures in the market. Higher price at a fixed supply of education products combined with comparatively lower quality trippled by the lack of choice in satisfying consumer's utility of education surely evinces a measure-based indicatior of the inferiority of government-run education system.
The essence of education reform based on voucher-type financing is that a certain amount of money for covering the costs of education is not transfered to schools, but instead contributed to individuals while having a competition among schools, competing to attract new students through the channels of innovation, choice, perspective and a rock-bottom incentive to deliver the best quality under the lowest possible price - the way the competitive forces of supply and demand work in product markets.
In fact, education is a product purchased by the consumer (student) at a certain price compensated by the quality which a student receives after he pays the product price of education.
Imagine the world in which Ericsson would be the only supplier of cell phones and government the only supplier of networks. In the absence of competiton in this particular product market, Ericsson's quality of cell phone supply would starting falling while prices would grow constantly and customer satisfaction with Ericsson's cell phones would quickly start to shrink and the inefficiencies would occur tremendously.
The mechanics of the government-run education system is similar. The fact is that progressive education system embrace the generalized curriculum, disregarding the education based on outcome such as the competitiveness of the future graduates in the labor market. It often happens that the guidelines of knowledge supply in the state schools is not matched by the real world.
The answerable question of how to solve the inefficiency of government-run education is to let the enforcement of competitive forces in the education sector while giving students and parents the ability to choose where and how they want to invest in education which, as Benjamin Franklin once said, always pays the best interest.
Ron Sunseri: The Swedish Model; The Failure of Progressive Education, Wall Street Journal, Tuesday, April 7, 1992 (link)
Friedrich August von Hayek: Intellectuals and Socialism, The University of Chicago Law Review, pp. 417-420, 421-423, 425-433, Spring 1949 (link)
Staffan Waldo: School Vouchers and Public School Productivity - The Case of the Swedish Large Scale Voucher Program, SIFAE, 23 March 2006 (link)
FCPP Publications: School Vouchers in Sweden (link)
Friderik Bergstrom, Mikael Sandstrom: School Choice Works! The Case of Sweden, Vol. 1, Issue 1, Milton and Rose Friedman Foundation, December 2002 (link)
Friday, October 12, 2007
In 2007, the prize was awarded to Albert Al Gore and Intergovernmental Panel on Climate Change. The committee explained the awarding decision to those two entitities in the following way:
"for their efforts to build up and disseminate greater knowledge about man-made climate change, and to lay the foundations for the measures that are needed to counteract such change"
IPCC has put together scientific knowledge in quite a comprehensive form while Al Gore has pushed policymakers to take action concerning global warming. Establishing scientific consensus on global warming is a difficulty. Regarding the definition of the consensus is that the latter is the agreement on particular issue or type of issue where everyone agrees with it, but in broader terms, nobody believes in. In 1992, professor Richard S. Lindzen wrote a fascinating article, a compelling truth about global warming where he wrote:
"The simple picture of the greenhouse mechanism is seriously oversimplified. Many of us were taught in elementary school that heat is transported by radiation, convection, and conduction. The above representation only refers to radiative transfer. As it turns out, if there were only radiative heat transfer, the greenhouse effect would warm the Earth to about seventy-seven degrees centigrade rather than to fifteen degrees centigrade. In fact, the greenhouse effect is only about 25 percent of what it would be in a pure radiative situation. The reason for this is the presence of convection (heat transport by air motions), which bypasses much of the radiative absorption."
Source: Richard S. Lindzen: Global Warming, The Origin and Nature of the Alledged Scientific Consensus (link)
In the course of global warming debate, there are several sceptics. On the issue of global warming, the understanding of science is crucial to the analytical predictions and estimates in the future about this particular issue. In addition, it is essential to separate science from non-science. Remember what Mr. Gore said in the interview on ABC when Mr. Stephanopoulos confronted him with the fact that the best estimates of rising sea levels are far less dire than he suggests in his movie:
"Scientists don't have any models that give them a high level of confidence."
Economist published a well-argued and notable article, judging whether Al Gore truly deserved to get a Nobel prize. In fact, the question is since when a movie which could hardly be identified as a documentary can serve as a tool for decision-making over such a distinguished award as a Nobel prize for peace. Clearly, the term "peace" includes effort that support the institution of peace in relation to preventing conflicts and suggesting solutions to solve particular complex problems. For instance, if there is a vast empirical evidence on the positive correlation between the decline of regional conflicts and free trade, then free international exchange is, in fact, the contributor to peace.
In Guardian, Bjorn Lomborg wrote a sizzling article on the Nobel prize for peace in this year. Have you read Mr. Lindzen's article Don't believe the hype? Here is a link to the article where professor Lindzen summarizes the fact that there is actually no consensus on global warming:
"So what, then, is one to make of this alleged debate? I would suggest at least three points.
First, nonscientists generally do not want to bother with understanding the science. Claims of consensus relieve policy types, environmental advocates and politicians of any need to do so. Such claims also serve to intimidate the public and even scientists--especially those outside the area of climate dynamics. Secondly, given that the question of human attribution largely cannot be resolved, its use in promoting visions of disaster constitutes nothing so much as a bait-and-switch scam. That is an inauspicious beginning to what Mr. Gore claims is not a political issue but a "moral" crusade.
Lastly, there is a clear attempt to establish truth not by scientific methods but by perpetual repetition. An earlier attempt at this was accompanied by tragedy. Perhaps Marx was right. This time around we may have farce--if we're lucky."
Thursday, October 11, 2007
"In Sweden in the early 1980s, for instance, the typical worker faced a marginal tax rate of about 80 percent. Such a high tax rate provides a substantial disincentive to work. Studies have suggested that Sweden would indeed have raised more tax revenue if it had lowered its tax rates."
Source: Greg Mankiw, Principles of Economics, ch.8: Laffer Curve and Supply-Side Economics, South-Western College Pub; 4th edition (February 15, 2006) (here and here)
The American published a brief article about Sweden's slow-motioning progress in the implementation of structural and economic reforms. Among the signs of genuine reform vitality, there has been a large amount of measures aim to boost the competitiveness and labor supply incentives. Unemployment and welfare benefits were cut, property taxes were abolished, wealth tax - an uninterrupted symbol of the Sweden's socialist past - was also slashed. What about market reaction? It may take a longer period for the market to respond to such incentives. But the fact that the response dynamics is slow, should not be the basis of denying any kind of policy reform. Perhaps I'm going a little bit more normative in this respect, but in economics, experience is a huge lesson. In fact, the fact that markets respond to incentives is #4 principle of economics (link)
The question regarding Sweden's recent outlook as well as broader perspective of economic and structural policy is whether shock therapies are consistent in the long-run.
The answer is, of course, interpretative and each economic school or doctrine may endorse the answer in several different ways. The answer depends on the role and credibility of fiscal policy in response to macroeconomic shocks. Among economists, there has been a widely accepted belief that countercyclical fiscal policies have stabilizing effects on the economic performance. But, the question is whether discretionary actions assume the expectation of policy and market. In fact, analyzing the broad picture on the basis of intertemporal margins is much more efficient, since the employment change and income dynamics reflect the pure effect of fiscal policy against the cyclical trend. A very detailed study on this particular subject was written by David B. Gordon and Eric M. Leeper (link) as their findings comprehend the counter-cyclical effect of fiscal policies:
"This paper highlights these expectations effects. Connecting the theory to U.S. data we find: (1) through this expectations channel, countercyclical policies may create a business cycle when there would be no cycle in the absence of countercyclical policies; (2) nontrivial fractions of variation in investment and velocity can be explained by variation in macro policies alone - without any nonpolicy sources of fluctuation; and (3) persistence in key macro variables can arise solely from expectations of policy."
Tuesday, October 09, 2007
Friday, October 05, 2007
Perhaps, there is only a quest for higher public spending and Norwegian government is desperately seeking new revenue source to fund a growing public expenditure. In fact, the relationship between equity and efficiency is one out of many trade-off case studies in economic analysis and higher government spending causes distortions and reduces incentives to work, save and invest as marginal tax burden (a portion of the added burden relative to tax burden in a previous period) is a penetrating source of inefficiency since firms and individuals are discouraged from further engagement in productive behavior. And shipping industry is no exception.
The overall effect of imposed taxation will affect the attractiveness of Norwegian shipping centers and, nevertheless, ship owners could reflag the vessel to nearby locations where the tax treatment of shipping industry is more favorable relative to Norwegian jursidiction, and also where created profits are not subject to discretionary taxation.
Here is a part of the abovementioned article:
Source: Shipping Blues, Wall Street Journal (link)
Wednesday, October 03, 2007
Nevertheless, the issues deserves the piece of attention through the prism of economic analysis.
First, assume that Kosovo's long term objective is to seek the course of output growth and good structural environment that could, in turn, boost both: growth and development. As an empirical matter, the correlation between growth and democracy is weakly negative, meaning that the case of full democracy leads to the loss of growth momentum as well as to the widespread increase of bureaucratic and administrative means which deprive the dynamics of growth in a broader perspective.
Second, one of the main engines of prosperity and growth is the country's business and investment environment. Assuming the "catch-up"effects of a country with comparably low GDP per capita, the Kosovo's GDP would streamline the convergence quickly but in a larger sense, the quality of investment environment determines the intensity of investment, since a degree of firm's interest, looking forward to invest in particular segments of the region, would largely depend on the quality of the legal environment, such as the absence of barriers to saving and investment.
The ability to open the enterprise quickly, is also a part of the ability of how quickly job creation could go on. In fact, one of the broadest standpoints on which nearly all economists agree is that job creation is the best way to reduce structural unemployment of a typical post-communist economy in transition. In addition, high quality of the business environment is a thorough indicator of country's openness to trade and investment.
Third, the area in which most of post-communist countries lag is the labor market. In fact, labor is product that is traded in a voluntary agreement between the employee and employer at a certain price called the wage. In this respect, the general equilibrium of labor supply and demand for labor works as in usual cases.
If there is a scare labor supply in concrete area (say IT) compared to derived demand, then the price per unit of labor will go up and so will the employee's return to education and skills derived from labor's human capital. On the other side, if there is an extensive labor supply in concrete area (say sociology) and demand for labor is low, then the return to education will fall, raising the probability of unemployment and causing an incentive to accept the fact of lower return on education in case if labor demand is low in quantity terms.
The price behavior in this exchange partly depends on the willingness of labor supply to embrace lower price than in comparable areas, since an employer is induced and given an opportunity to hire the labor supply at a lower cost than under conditions of high demand and scarce availibility of labor supply.
From labor market aspect, democracy entails a bulk of negative effects that hinder productivity growth and reduce the extent of flexibility of labor market through means of collective bargaining and monopoly power exercised by labor unions. By empirical and practical terms, productivity is the leading engine of growth of standard of living and thus, lower productivity growth correlates with a lower comparable standard of living.
Fourth, the comparison of benefits between multiple option of independence deserves a detailed study and empirical investigation. A macroeconomic quest for this particular choice, is the question of exchange rate risk but this also depends on the ability of the country to have its own independent central bank.
In fact, if the National Bank of Serbia suddenly started to manipulate with exchange rate such as subsidizing the export sector through inflationary policies, and if Kosovo had no central bank, then it could openly feel the negative effects of high inflation. On the other side, if National Bank of Serbia maintains tight anti-inflationary policies, then the absence of costs and risk could benefit Kosovo's economy. But of course, to analyze the effects of multiple options, there must be concrete data to start disseminating and analyzing the effects of political status regarding the future growth and prosperity.
And fifth, as an economist, I think that political mitigation of future status of Kosovo is overhaul. In fact, the systematic efficiency of political status includes the efficiency of institutions protecting the enforcement of private property rights and individual liberties. Nevertheless, individual rights emerge from the private property, i.e. from the ability to manage private property without external interference.
In fact, the question which country advances in economic and structural terms significantly and competitively, does not depend on whether country is fully democratic or not, but on which country is freer than others in terms of taxation, choice and deregulation, enabling faster and higher growth of output and productivity, and thus creating a comparative advantage.
Steffen Ganghof, Phillip Genschel: Taxation and Democracy in the EU (link)
Amleto Cattarin: "Hands off my taxes!": a comparative analysis of direct democracy and taxation, NYU Law School (link)
Kosovo, Economic Profile, European Commission (link)
Capitalism & Freedom: Kosovo, European Hong Kong? (link)
The State of Kosovo's Economy; Perspectives and Development, CEEOL Südosteuropa Mitteilungen, Issue no.3/2005 (link)
Monday, October 01, 2007
"China's economic success has been based on the essential ingredients of growth: high savings, openness to trade, good education and strong productivity growth. This means its long-term prospects remain strong, although its trend growth rate will inevitably slow as its economy matures and its labour force starts to shrink."