The World Bank has recently released the latest Doing Business 2010 report, measuring the level of business and economic regulation around the world. In spite of the financial crisis and the global recession, Singapore, New Zealand, Hong Kong and the United States retained the leadership as the most friendly locations for doing business. Notably, some countries have achieved high ranks. For example, Saudi Arabia moved to 13th placed and Georgia, once the bastion of Soviet-style state capitalism, now ranks as 11th most friendly place for doing business with open investment environment and low regulatory barriers to trade, entrepreneurship and investment. Countries such as Georgia, Thailand and Saudi Arabia have surpassed countries such as Sweden, Finland and Iceland although there is a notable difference in international comparison of those countries when it comes to the issues of the rule of law, property rights and institutionaly quality.
Douglass North, the 1993 Nobel-winning economist once famously wrote the essence of institutionaly quality for economic development. He said that the inability of societies to develop effective low-cost institutions is the major reason of today's contemporary underdevelopment of the third world. In terms of the ease of contract enforcement, 3 out of top 10 countries are Iceland, Finland and Norway where institutional quality and the rule of law are on the high level by all international indices and comparison.
In recent decade, embracing free-market ideas has had a significantly positive impact on the institutional quality, regulatory barriers and the overall quality of business environment - all of which affect the size of transaction cost and, by empirical evidence, the standard of living and the wealth of nations. Global economic integration further induced institutional competition in terms of tax structure, regulatory environment, administrative barriers and labor market structures. Thus, when countries such as Georgia, FYR Macedonia, Moldova, Liberia and United Arab Emirates, enacted the liberalization of the business environment, the results were significant ever after. The World Bank also published the list of top 10 reforms in 2010 among which are Rwanda, Kyrgyz Republic, FYR Macedonia, Egypt, Moldova, Belarus, Columbia, United Arab Emirates, Tajikistan and Liberia (link).
The efforts to deregulate and liberalize business environment worldwide, will have a strong impact on high-income countries to remove the existing barriers to trade and investment such as high tax burden, rigid labor market structure and government size relative to private sector. 2008/2009 financial crisis and the growing role of government in the economy will probably deteriorate the country ranking in the next year. However, the leadership in the quality of business and regulatory environment will depend on further liberalization of the business environment, particulary the labor market, which is a major backbone of high-income countries where union density and regulated labor markets are widespread.
If countries such as Italy, France, Germany and the rest of the developed world will hesitate in reforming the remaining barriers to trade, more direct investment flows will move to high-growing emerging markets where macroeconomic stabilization is proceeding and where policymakers impose reforms faster then their peers in the developed world.
If such trend continues, emerging markets will soon reap the benefits and could become the leaders in reforming the business environment, attracting direct investment and, by and large, in economic growth and catch-up with the rest of the world.
Showing posts with label Business. Show all posts
Showing posts with label Business. Show all posts
Sunday, September 20, 2009
Thursday, August 06, 2009
ANTITRUST, MARKETS AND COMPETITION
Earlier today, I read Steve Forbes's discussion (link) of recent antitrust reaction to the announced Yahoo-Microsoft search-engine global partnership deal (here and here) by the Department of Justice. The merger of Yahoo and Microsoft is ought to create a new competitor to tackle Google's supposed 75 percent market share in search advertising. Back in 2008, Department of Justice swatted the aligned Google-Yahoo search-advertising partnership, saying that "it would have furthered Google's monopoly"(link). Google is currently also under investigation by Department of Justice which accusses Google of copyright infringement in company's book-scanning project (link). In addition, Christine Varney, Obama's antitrust appointee at the Department of Justice, targeted Google's dominance in search-ad market by blaming the company for "starting to colonize the emerging cloud-computing industry and amassing enormous market power" which customers would hardly escape.
The antitrust policy enhanced by Sherman Act, Clayton Act and Robinson-Patman Act prohibits the so-called "predatory behavior" that could restrain trade, induce monopolization efforts or impose unfair trade practices such as price discrimination. The antitrust targeting of Google has been inspired by the antitrust case from 1964 United States vs. Aluminium Company of America in which the court, headed by Judge Learned Hand, laid down a landmark decision that "under certain circumstances, a company may come to dominate its field through superior skill, foresight and industry." (here, here and here).
Donald Marron, former CEA economist, recently wrote a nice piece on how Google may defend itself against Department's potential antitrust investigation (link). First, Dept. of Justice will face a difficult task in defining Google's relevant market. Antitrust commentators often point out that Google possesses more than 70 percent of revenues in search-advertising market. However, Google's top antitrust attorney say that such definition of the relevant market is too narrow, arguing that the company actually receives less than 2 percent of revenues from search-ad market. The merger of Yahoo and Microsoft's internet search-engines could deteriorate Google's market share.
The enforcement of antitrust policy in preserving competitive market structures has resulted in complete failures several times. Recently, the European Commission imposed € 1.06 billion fine on Intel Corporation for exercising illegal practices such as giving loyalty discounts and implicit rebates to computer manufacturers and major retailer under the condition that Intel's chips are integrated into CPUs. The Commission argued that such "illegal practices" prevented customers from choosing alternative products (link) and thus, Intel supposedly abused the dominant position. That is against the provisions of EC Treaty.
The enactment of antitrust policy relies on the idea of competitive market structures. Microeconomic theory teaches that a monopoly leads to a deadweight loss and, thus, its relative efficiency is inferior to competitive market structure which operate under zero-profit assumption. However, the classic microeconomic theory neglects economies of scale in industries with significant fixed costs and entry costs such as high tech, health-care and airline.
However, antitrust policy embodied in Clayton Act, Sherman Act and other legislative acts, often leads to protectionist pressures from interest groups since the enforcement of antitrust is driven by the political process. Thomas DiLorenzo, famous Austrian economist, showed how interest group use lobbying pressures to exercise antitrust policy in favor of protecting competitors rather than competition (link).
In recent years Google acquired several smaller companies. The Federal Trade Commission and Dept. of Justice, for instance, put the acquisition of DoubleClick in 2008 under investigation. However, acquisitions in tech industry could produce significant efficiencies in distribution and consumer prices (link).
The notion of Sherman Act is that practices that restrain trade are illegal and doomed to be prosecuted. However, antitrust enforcers should recognized that high fixed costs and entry costs are not the result of market action or conspiracy but natural obstacle. Thus, industrial organization in technology, retail, health care and airline industries, enables significant economies of scale through lower average costs of production. This requires high levels of innovation including merging resources and joint cooperation. By the token of perfect competition for instance, Wal-Mart should be broken (link). If federal antitrust enforces forced Wal-Mart to split into more parts, gains in distribution which enable low prices and various discounts, would diminish considerably.
Thus, the real aim of antitrust enforcement should not be to prosecute successful firms and deprive them of productive gains, but to prevent alledged conspiracy that inhibits market entry and harms the consumers. In a free market, natural monopolies are short-lived and challenged by either new entrants or international competition.
The antitrust policy enhanced by Sherman Act, Clayton Act and Robinson-Patman Act prohibits the so-called "predatory behavior" that could restrain trade, induce monopolization efforts or impose unfair trade practices such as price discrimination. The antitrust targeting of Google has been inspired by the antitrust case from 1964 United States vs. Aluminium Company of America in which the court, headed by Judge Learned Hand, laid down a landmark decision that "under certain circumstances, a company may come to dominate its field through superior skill, foresight and industry." (here, here and here).
Donald Marron, former CEA economist, recently wrote a nice piece on how Google may defend itself against Department's potential antitrust investigation (link). First, Dept. of Justice will face a difficult task in defining Google's relevant market. Antitrust commentators often point out that Google possesses more than 70 percent of revenues in search-advertising market. However, Google's top antitrust attorney say that such definition of the relevant market is too narrow, arguing that the company actually receives less than 2 percent of revenues from search-ad market. The merger of Yahoo and Microsoft's internet search-engines could deteriorate Google's market share.
The enforcement of antitrust policy in preserving competitive market structures has resulted in complete failures several times. Recently, the European Commission imposed € 1.06 billion fine on Intel Corporation for exercising illegal practices such as giving loyalty discounts and implicit rebates to computer manufacturers and major retailer under the condition that Intel's chips are integrated into CPUs. The Commission argued that such "illegal practices" prevented customers from choosing alternative products (link) and thus, Intel supposedly abused the dominant position. That is against the provisions of EC Treaty.
The enactment of antitrust policy relies on the idea of competitive market structures. Microeconomic theory teaches that a monopoly leads to a deadweight loss and, thus, its relative efficiency is inferior to competitive market structure which operate under zero-profit assumption. However, the classic microeconomic theory neglects economies of scale in industries with significant fixed costs and entry costs such as high tech, health-care and airline.
However, antitrust policy embodied in Clayton Act, Sherman Act and other legislative acts, often leads to protectionist pressures from interest groups since the enforcement of antitrust is driven by the political process. Thomas DiLorenzo, famous Austrian economist, showed how interest group use lobbying pressures to exercise antitrust policy in favor of protecting competitors rather than competition (link).
In recent years Google acquired several smaller companies. The Federal Trade Commission and Dept. of Justice, for instance, put the acquisition of DoubleClick in 2008 under investigation. However, acquisitions in tech industry could produce significant efficiencies in distribution and consumer prices (link).
The notion of Sherman Act is that practices that restrain trade are illegal and doomed to be prosecuted. However, antitrust enforcers should recognized that high fixed costs and entry costs are not the result of market action or conspiracy but natural obstacle. Thus, industrial organization in technology, retail, health care and airline industries, enables significant economies of scale through lower average costs of production. This requires high levels of innovation including merging resources and joint cooperation. By the token of perfect competition for instance, Wal-Mart should be broken (link). If federal antitrust enforces forced Wal-Mart to split into more parts, gains in distribution which enable low prices and various discounts, would diminish considerably.
Thus, the real aim of antitrust enforcement should not be to prosecute successful firms and deprive them of productive gains, but to prevent alledged conspiracy that inhibits market entry and harms the consumers. In a free market, natural monopolies are short-lived and challenged by either new entrants or international competition.
Friday, November 21, 2008
SAVE TAXPAYERS BY DROPPING THE BAILOUT
Monday, September 22, 2008
DOING BUSINESS 2009
World Bank has issued the recent report Doing Business 2009, comparing countries throughout the world regarding the ease of doing business and entrepreneurship (link).
Wednesday, July 02, 2008
BEST PLACES FOR DOING BUSINESS
Forbes.com recently published its annual global research (link) on the attraction of particular countries on doing business from macroeconomic and microeconomic point of view. According to Forbes, the best place for doing business is Denmark, followed by Ireland, Finland, United States and United Kingdom. Among top 10 there are also Sweden, Canada, Singapore, Hong Kong and Estonia.
Monday, June 23, 2008
THE QUALITY OF BUSINESS LOCATION: THE CASE OF SWISS CANTONS
Credit Suisse recently published a research paper (link) where it's been shown that Swiss cantons with lower tax burden and improved regulatory environment are therefore more attractive as locations for doing business (link). Cantons Zug, Zurich and Obwalden got the highest score. Although tax rate structure in Zurich is not among the lowest in entire Switzerland, Zurich's high score can be explained by the fact that there's a high-quality access to demand linkages that certainly boosts the quality of Zurich as business location despite relatively high personal and corporate tax rates. In more distant cantons, tax competition certainly plays a bigger role since creating a business environment friendly oriented towards incentives to work, save and invest is a primary tool that boosts the locational quality of the region regarding economic outlook and the quality of the particular environment for doing business.
Monday, May 19, 2008
FRENCH WELFARENOMICS
Here (link) is an interesting story from The Economist which discusses huge price disparities between French and German retailers. For example, a basket of almost identical durable goods costs 30 percent more in France than in Germany.
The article reports that in many places in France there are local retail monopolies protected against domestic and foreign competition. There is also no free negotiation with suppliers, the sale of non-prescription drugs is prohibited, and the consumers do not support the new law that would deregulate the retail market to liberalize entry conditions and enforce competitive mechanism.
There is a well-known fact from microeconomic theory that consumer demand curve for monopoly firm equals average revenue of the monopoly firm and that monopoly firm will never like rigid or completely elastic demand but the elasticity of demand that will be equal to 1, given the point of the maximum profit taken by the monopoly firm. Hence, the price charged by the monopolist is P = MC/1+(1/Ex,px) which means that greater monopoly power leads to higher mark-ups. And also, the allocative inefficiency of the monopoly means that firm will set the price at the point where marginal revenue and marginal cost are crossed. Hence, higher prices and quantity regulation maximize the profit of the monopoly firm but consumers face a significant welfare loss.
In France, however, only 42 percent of the respondents favored more competitive retail market while 85 percent favored sales tax cuts and 72 percent prefered the rise in the minimum wage. Competitive market is always the only way to break the rigidity and monopoly position of the firm inparticular markets. For example, if there would be sales tax cut, that would not change the structure of the market but it would have an effect on the price elasticity of demand and since a local monopoly firm would face changes in the composition of the local demand, a tax cut would ease the prices but would still give local monopoly firms incentives to impose the mark-up. A rise in the minimum wage is a fallacy that, empirically, results in the rise of the unemployment and further labor market rigidity that hinders the growth of real productivity, decreases job growth and does not stimulate the real increase in purchasing power parity since higher prices, charged by firms to cover-up the loss from minimum wage, discourage the increase in purchasing power that is not linked to real productivity growth.
The article reports that in many places in France there are local retail monopolies protected against domestic and foreign competition. There is also no free negotiation with suppliers, the sale of non-prescription drugs is prohibited, and the consumers do not support the new law that would deregulate the retail market to liberalize entry conditions and enforce competitive mechanism.
There is a well-known fact from microeconomic theory that consumer demand curve for monopoly firm equals average revenue of the monopoly firm and that monopoly firm will never like rigid or completely elastic demand but the elasticity of demand that will be equal to 1, given the point of the maximum profit taken by the monopoly firm. Hence, the price charged by the monopolist is P = MC/1+(1/Ex,px) which means that greater monopoly power leads to higher mark-ups. And also, the allocative inefficiency of the monopoly means that firm will set the price at the point where marginal revenue and marginal cost are crossed. Hence, higher prices and quantity regulation maximize the profit of the monopoly firm but consumers face a significant welfare loss.
In France, however, only 42 percent of the respondents favored more competitive retail market while 85 percent favored sales tax cuts and 72 percent prefered the rise in the minimum wage. Competitive market is always the only way to break the rigidity and monopoly position of the firm inparticular markets. For example, if there would be sales tax cut, that would not change the structure of the market but it would have an effect on the price elasticity of demand and since a local monopoly firm would face changes in the composition of the local demand, a tax cut would ease the prices but would still give local monopoly firms incentives to impose the mark-up. A rise in the minimum wage is a fallacy that, empirically, results in the rise of the unemployment and further labor market rigidity that hinders the growth of real productivity, decreases job growth and does not stimulate the real increase in purchasing power parity since higher prices, charged by firms to cover-up the loss from minimum wage, discourage the increase in purchasing power that is not linked to real productivity growth.
Monday, May 05, 2008
RUSSIA'S ECONOMIC NATIONALISM
Financial Times reports that Russia's outgoing president Mr. Putin has signed an act which defined 42 sectors of the economy in which state control of the economy is expanded and foreign investment roughly restricted. Under new law, foreign-owned companies will have to seek government permission in case they want to stake more than 25 percent of the company share in the sectors where free investment and ownership participation is staunchly restricted.
Tuesday, March 11, 2008
AUSTRIA: ALPINE TAX HAVEN DEFENDS FINANCIAL PRIVACY LAW
Austria firmly rejected the initiative from the European Union to ease and possibly remove the legislation that aims at client data privacy and banking quality (link). The EU tries to impose sanctions on jurisdictions known for sound financial privacy, competitive tax policy and bank secrecy laws (link).
Friday, November 16, 2007
SLOVENIA GOING SLOW ON PRIVATIZATION
Here is a note from Economist on Slovenia:
Slovenia was already economically advanced by regional standards when it gained independence, so that it has experienced slow growth rates relative to other central European economies, and has adopted a more complacent attitude towards privatisation and economic reform... The main economic policy issues include the privatisation process and attempts to improve the business environment. Progress on both is made difficult by the consensus-based nature of policymaking.
Source: Economist, Country Briefings: Slovenia (link)
The empirical argument in favor of privatization is that the allocation of scarce resources is more efficient in private economy than in public sector regardless of the economy's sector. The only argument that could speak against privatization is the establishment of natural monopolies in case if competitive code is not fully enforced. In this case, control over natural monopolies is needed to prevent price speculations that could occur at the expense of consumer welfare.
The quality of Slovenia's business environment is restrained by administrative burden, restrictive labor regulation and high tax burden which disables the creation of productive behavior. The total number of reforms in Slovenia regarding the ease of doing business is zero (link).
The product quality of the country's business environment is, by competitive analysis, as any other market product. Higher the quality supplied (the number of implemented reforms to improve business environment), higher the demand for the product (the number of investors going for business in Slovenia and the growth of start-ups, spin-offs, and wanna-be's) and higher the reputation of the country as an investment location.
Slovenia was already economically advanced by regional standards when it gained independence, so that it has experienced slow growth rates relative to other central European economies, and has adopted a more complacent attitude towards privatisation and economic reform... The main economic policy issues include the privatisation process and attempts to improve the business environment. Progress on both is made difficult by the consensus-based nature of policymaking.
Source: Economist, Country Briefings: Slovenia (link)
The empirical argument in favor of privatization is that the allocation of scarce resources is more efficient in private economy than in public sector regardless of the economy's sector. The only argument that could speak against privatization is the establishment of natural monopolies in case if competitive code is not fully enforced. In this case, control over natural monopolies is needed to prevent price speculations that could occur at the expense of consumer welfare.
The quality of Slovenia's business environment is restrained by administrative burden, restrictive labor regulation and high tax burden which disables the creation of productive behavior. The total number of reforms in Slovenia regarding the ease of doing business is zero (link).
The product quality of the country's business environment is, by competitive analysis, as any other market product. Higher the quality supplied (the number of implemented reforms to improve business environment), higher the demand for the product (the number of investors going for business in Slovenia and the growth of start-ups, spin-offs, and wanna-be's) and higher the reputation of the country as an investment location.
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