When studying and/or doing a job in macroeconomics, it is important to keep an eye on three key features: economic growth, inflation and unemployment. Macroeconomic analysis also emphasized the stability of macroeconomic aggregates such as GDP, public spending and budget consumption. An article Tax tinkering won't fix Hungary's growth problem published by The Guardian briefly outlined Hungary's macroeconomic turbulence in terms of low growth, high government spending and pretty high unemployment rate. Hungary's economy is facing significant macroeconomic problems. In third quarter of the year, Hungary's output grew by as little as one percent (link). In addition, fiscal issues accelerated the fragility of macroeconomic stability.
Tax reform: evidence from Sweden and Iceland
From previous decade onwards, tax reforms have become the guideline of macroeconomic policy. Significant tax cuts on labor supply, entrepreneurship and savings boosted the competitiveness and growth performance in those countries that implemented rigorous economic reforms. In Iceland, the combination of the lower government spending and tax cuts on personal and corporate income generated the Laffer Curve effect, when tax revenues were higher (in the share of the GDP) while tax rate on corporate income was lower (link). Sweden imposed substantial marginal tax cuts and tax revenues grew substantially in the share of the GDP (link).
Don't expect significant Laffer Curve effect in case if public spending is not reduced substantially
As a successful "case-study" of macroeconomic and microeconomic transformation into a market economy, Hungary (link) welcomed foreign investment by slashing the corporate tax rate to the lowest level in Europe, after Ireland and Cyprus. However, Hungary's policymakers decided to build a model of economic policy based on high government spending (link) and resumed budget deficit. The main source of the issue is not budget deficit itself, but the size of government spending in the share of the GDP. Including transfer payments and consumption, Hungary's government spending is extremely high. In recent year it equaled 49,5 percent of the GDP.
High marginal tax rates lead to tax evasion and underground economy
Hoping to restore revenue increases after imposing tax cuts on productive activity in the absence of lower government spending is hopeless nevertheless. Discretionary fiscal policy, high marginal and overall tax rates and highly volatile public finance besides high public expenditures are the main reasons why tax evasion occurs. Tax evasion is nothing else but the consequence of the fact that investors and individuals perceive the opportunity cost of high tax rates as significant. The usual effect of high and marginally progressive tax rates is that tax evasion accelerates the establishment of informal sector known as grey or underground economy. In Hungary, grey economy equals an estimated 17-18 percent of the GDP (link).
Hungary in regional competition
Slovakia (link), Hungary's neighbor went through a period of pro-growth economic and tax reforms. Tax rate on personal and corporate was slashed to flat 19 percent and government spending, including consumption and transfer payments, was reduced substantially. As a result, Slovakia became the Monaco on Danube, a high-growing Eastern European economy known as investment haven. A significant number of international companies such as Peugeot, Citroen and Volkswagen set their production establishments in Slovakia. Also, Slovakia's economy experienced a robust, non-inflationary output growth while Slovakia's macroeconomic institutions streamlined competitive, non-discretionary and stable macroeconomic policy based on expenditure cuts and growth agenda. Hungary has been losing its investment potential subject to abovementioned reasons. Recently, two companies - Audi AG and Servier - have taken alternative consideration of their operations location because of Hungary's statist tax system (link) and discretionary macroeconomic policy.
Reform or die slowly
In 2007, Hungary imposed the 3rd highest tax hike on labor supply in OECD. This could be a substantial incentive for tax evasion. Consequently, productivity growth would definitely stagnate. Timid initiatives to impose tax reform are completely useless unless government spending is cut radically. As a consequence, there would be much less pressure on budget deficit which is estimated to drop from 9,2 percent of the GDP to 4 percent of the GDP. However, deficit is often the wrong number. Also, social security contributions present a persistent barrier to employment and job growth. Long and generous unemployment periods do not create a job-seeking. Nonetheless, the combination of high unemployment and low growth is a deadly situation where the risk of stagnation is huge in case if substantial pro-growth reforms are not implemented. As an economy in transition, Hungary's macroeconomic policy will have to cut spending radically or it will quickly become the France of Eastern Europe (link).
Rok SPRUK is an economist.
Copyright 2008 by Rok SPRUK
Showing posts with label International Competitiveness. Show all posts
Showing posts with label International Competitiveness. Show all posts
Sunday, February 17, 2008
Monday, January 28, 2008
R&D, ENTREPRENEURIAL EDGE AND COMPETITIVENESS
Dani Rodrik recently published a post entitled How Ireland does it, where he cited an article from The New York Times about the competitive and growing entrepreneurship in Ireland. The article emphasized the combination of pro-growth economic policy, economic liberalization and tax cuts that empowered the growth of innovative and competitive entrepreneurship.
The central question concerning the economic policy is whether government agencies such as Enterprise Ireland really support growth and innovation or do they actually present a barrier to the entrepreneurial edge. There has been different evidence in different countries. The answer to this particular question rather depends on the size of government spending as a share of the GDP. For example, Ireland is known for restrictive fiscal policy, low corporate tax rate and low public spending while countries in continental Europe have had quite different experience. In Slovenia, public spending equals almost 50 percent of the entire output and public administration accounts for a considerable part of the GDP. In fact, cuts in public spending revived Ireland's "the-sickest-and-poorest-of-the-rich" economy to become a roaring Celtic tiger (link).
Different quantitative studies suggested that there is a positive correlation between the efficiency and quality of services provided by public administration and low public spending. The empirical evidence has confirmed that the inefficiency of services provided by the public administration strongly correlates with oversized and inadequate staff with poor track on productivity performance.
There is hardly any externality that could justify the existence of government agencies as information providers. True, the coordinative, productive and cooperative government inputs are essential to the core public products such as the rule of law, sound regulatory environment and administrative quality. New economy and the age of IT have succinctly eliminated a large slice of the information asymmetry and markets can successfully provide the needed information to entrepreneurs and start-up companies.
Should government agency support R&D activities at the university and at the company level. Again, it depends on behavior. Cooperative behavior may definitely enhence the efficiency of such incentives while rent-seeking behavior may definitely provide political incentives to manipulate with the information resulting in a growing rate of inefficiency.
The question is to which extent can government agencies such as Enterprise Ireland promote the entrepreneurship. First, it is important to rely on private-decision making instead of the enhencement of government ownership and intervention. Second, competitiveness is a microeconomic phenomena that emerges from the product and service quality of the companies competing on a rock-bottom incentive to provide the largest possible quantity and the lowest possible price. Third, the ultimate way to promote the entrepreneurship is the economic policy. Restrictive fiscal policy, lower public spending, product market deregulation, administrative reforms, tax cuts and the liberalization of the productive capacity, the rule of law and efficient institutions provide important incentives to launch the productive behavior such as saving, investment, labor supply and entrepreneurship nonetheless.
There is also a doubt whether public funds are truly as efficient as the conventional wisdom claims. Honestly, the best and most attractive R&D projects are privately funded. Google Inc. has been started by Sergey Brin and Larry Page. Apple was started by Steve Jobs, Jerry Yang started Yahoo.com and Pierre Omidyar succeeded with eBay without government funds and public R&D programs. Also, cutting-edge innovation in pharmaceutics and life sciences is usually pioneered by providing private funds.
Rok SPRUK is an economist.
Copyright 2008 by Rok SPRUK
The central question concerning the economic policy is whether government agencies such as Enterprise Ireland really support growth and innovation or do they actually present a barrier to the entrepreneurial edge. There has been different evidence in different countries. The answer to this particular question rather depends on the size of government spending as a share of the GDP. For example, Ireland is known for restrictive fiscal policy, low corporate tax rate and low public spending while countries in continental Europe have had quite different experience. In Slovenia, public spending equals almost 50 percent of the entire output and public administration accounts for a considerable part of the GDP. In fact, cuts in public spending revived Ireland's "the-sickest-and-poorest-of-the-rich" economy to become a roaring Celtic tiger (link).
Different quantitative studies suggested that there is a positive correlation between the efficiency and quality of services provided by public administration and low public spending. The empirical evidence has confirmed that the inefficiency of services provided by the public administration strongly correlates with oversized and inadequate staff with poor track on productivity performance.
There is hardly any externality that could justify the existence of government agencies as information providers. True, the coordinative, productive and cooperative government inputs are essential to the core public products such as the rule of law, sound regulatory environment and administrative quality. New economy and the age of IT have succinctly eliminated a large slice of the information asymmetry and markets can successfully provide the needed information to entrepreneurs and start-up companies.
Should government agency support R&D activities at the university and at the company level. Again, it depends on behavior. Cooperative behavior may definitely enhence the efficiency of such incentives while rent-seeking behavior may definitely provide political incentives to manipulate with the information resulting in a growing rate of inefficiency.
The question is to which extent can government agencies such as Enterprise Ireland promote the entrepreneurship. First, it is important to rely on private-decision making instead of the enhencement of government ownership and intervention. Second, competitiveness is a microeconomic phenomena that emerges from the product and service quality of the companies competing on a rock-bottom incentive to provide the largest possible quantity and the lowest possible price. Third, the ultimate way to promote the entrepreneurship is the economic policy. Restrictive fiscal policy, lower public spending, product market deregulation, administrative reforms, tax cuts and the liberalization of the productive capacity, the rule of law and efficient institutions provide important incentives to launch the productive behavior such as saving, investment, labor supply and entrepreneurship nonetheless.
There is also a doubt whether public funds are truly as efficient as the conventional wisdom claims. Honestly, the best and most attractive R&D projects are privately funded. Google Inc. has been started by Sergey Brin and Larry Page. Apple was started by Steve Jobs, Jerry Yang started Yahoo.com and Pierre Omidyar succeeded with eBay without government funds and public R&D programs. Also, cutting-edge innovation in pharmaceutics and life sciences is usually pioneered by providing private funds.
Rok SPRUK is an economist.
Copyright 2008 by Rok SPRUK
Wednesday, January 02, 2008
SOUTH KOREA'S REFORM AGENDA
Lee Myung Bak, South Korea's newly elected president and former chief executive of Hyundai Construction and Engineering proposed a package of economic reforms such as tax cuts by cutting the corporate tax rate from 25 percent to 20 percent, fuel taxes by 10 percent, real estate tax, and public expenditure respectively. Korea's new president also pledged to privatize state-owned companies and remove the restrictions preventing industrial groups from owning banks.
Source: Yahoo News (link)
Source: Yahoo News (link)
Thursday, December 20, 2007
JOHNNY MUNKHAMMAR: GUIDE TO REFORM
In a thorough, understandable and comprehensively written book “Guide to Reform” Johnny Munkhammar addresses some fundamental issues and perspectives about the need to implement long-term economic and structural reforms. The content of the book is divided into several chapters. Each of them reflects key areas of economic reform and each of them highlights the essentials on the road to prosperity through today’s change towards tomorrow’s benefit. In this brief review, I shall highlight the main premises drawn upon the economic reform. As an economist, I will attempt to make essential conclusions regarding author’s groundbreaking book.
The first question is whether economic reform is good. The author of the book has concluded that the main purpose of the economic reform is to pursue economic freedom and guideline the course of public policy instituted upon the ideas that brought nations an unparalleled increase in prosperity. Such conclusion is relevant and supported by countless empirical evidence. The general parameters that reflect the quality of macroeconomic and business framework are crucial to essential conditions regarding growth performance and increases in standards of living. What distinguished sound business environment and macroeconomic picture from restrictive and risky type of macroeconomic framework is the extent of coercion and government involvement into business affairs and personal lives. There is a positive correlation between high real GDP per capita and high level of economic liberty. Nations that have pursued economic freedom and the principles of limited government have observed what could (in German) be described as “Wirtschaftswunder”, an economic miracle.
Let’s start with a methodological, theoretical and empirical grounds and arguments for structural change and major long-range reforms. The author of the book supported the arguments with a significant and incredible amount of economic and political literature. As for an economist, the quest for economic reforms is fairly simple. The economist is interested about the outcome of the reforms and how to design a theoretical framework after data collection, data analysis and after relevant and empirically-tested conclusion are finalized. Throughout the course of the book, the author used a series of graphs and charts to show the how economic activity and standards of living grow together with fundamental economic reforms regarding welfare state, labor market, business environment, health care system, education system and structural performance.
The author succinctly shows how reforms implemented in recent years and decade worked tremendously well in countries that have adopted them. From the theoretical point of view, it depends which side of the economy is taken into the analytical account. The experience such as stagflation has shown that Keynesian economic perception about the real economy was wrong. John Maynard Keynes believed that the economic performance can be restored by the acceleration of aggregate demand. Keynesians also believed that government intervention and a significant monetary expansion can boost the growth performance. However, if newly printed money is injected into the economy, the inevitable consequence is higher inflation which negatively affects the ability of the economy to operate at the optimal capacity regarding long-term sustainability of economic growth. The main consequence of high inflation is a deep negative shock on price behavior resulting from the overweight money funds chasing too few goods.
Thus, there is a paradox given the fact that money injection into the economy inevitably reduces consumer purchasing power. On the other side, the neoclassical growth theory supports the view that the essential condition for long-term growth is the quality of growth engines such as human capital, low tax burden, investment, and productive behavior in general. At the end of 1970s, stagflation, rising inflation and unemployment, indicated the collapse of the Keynesian politico-economic doctrine. From a theoretical perspective, productivity growth is the essential condition for the increase of living standards. Any kind of particular burden that hampers productivity growth also reduces the potentiality of higher living standards and general welfare.
Throughout the book, the author underpins the classical essence of economic success: good governance, limited government, low taxes, sound monetary and macroeconomic framework, low regulation, privatization of public services and competitive product markets, including labor market. In moving towards the solutions and proposals suggested by Johnny Munkhammar in the book deserves an analytical outline of the policy areas that impede economic growth and increase risk of low growth, weak economic performance and an overall decline.
The author suggests radical cuts in public expenditure. The proposal is relevant since reductions in public spending boost growth and productive behavior. In fact, low tax rates on labor supply, savings, investment and entrepreneurship positively correlate with economic growth. The evidence has shown that tax cuts do not reduce revenues following the Laffer curve statement, saying that tax revenue is higher when tax rates are low. The author makes a strong point for privatization and cutting-edge competition in policy innovation. He says that “different reasons may exist for selling publicly owned activities, for example increasing competition, improving management or increasing citizens’ ownership… Competition brings innovation, variety, improvements and lower costs. Increased competition is necessary in publicly provided services and this can be achieved by several methods”.
The author has put a significant amount of effort in the analysis and key policy solutions pertaining to the areas that hinder the evolutionary process of sustainable economic growth. Among the most vital reforms are labor market reforms, product market deregulation, tax cuts, the introduction of competition and private initiative in health-care and education system under sound capital and financial markets, solid infrastructure and the reform of the business environment. He also lists a growing list of nations that implemented productive reform solutions;
The main problem in implementing the economic reforms is not that politicians are unaware of the economic reforms but the fact that their political support is subject to special interests emerging from rent-seeking patterns of behavior placed in societies where the weakness of institutions enables interest groups to gain privileges from the state, codified into the law and made permanent. Powerful stakeholders in the corporativist model of society will thus resist change at any cost. Such case is the collective bargaining which distorts the competitive equilibrium in the labor market at the cost of lower productivity growth and slower structural adjustment to economic change and globalization. Special interest groups possessing a degree of coercion and political influence will inevitably refuse reform proposals and mobilize its force to do everything possible to prevent the implementation of economic reforms by the means of fear and propaganda.
The author suggests a strategic set of combinations of political decision-making, game theory and tactical methods that could reduce the opposition to economic reforms and structural advancement. As an important feature, the author also makes strong point on the continuum of economic reforms as the main policy asset that reformist politicians should embrace. True, there will always be those who oppose economic reforms everywhere but, as Harold Wilson said, “those who reject change are the architects of tomorrow’s decay.”
The book is not only a great source of inspiration but also a great educational material that provides important data, information and answers to some of the greatest tasks of tomorrow’s challenge.
Copyright 2007 by Rok SPRUK
Tuesday, December 18, 2007
OBWALDEN APPROVES 1,8 PERCENT FLAT INCOME TAX RATE
Obwalden is a Swiss canton situated in central Switzerland. SwissInfo reports that Obwalden has recently become the first Swiss canton to adopt 1,8 percent flat income tax rate on all categories. In December 2005, Obwalden decided to slash the corporate tax rate to 6,6 percent. The canton also decided to impose degressive tax system which was later declared as unconstitutional. In the first six months of this year, the canton saw an astonishing 230 percent growth of company registration. In addition, 90,7 percent of voters approved changes in tax regime.
Monday, December 03, 2007
Monday, November 26, 2007
SWITZERLAND VS. EU
The EU recently persecuted Switzerland because because bureaucrats in Brussels believe that Swiss market-friendly model of cantonal tax competition is a form of state-aid.
Here is a report by Tax-news.com:
"The European Commission is basing its legal argument against Switzerland on the latter's alleged breach of state aid rules, which, in the EU, are in place to prevent member states from favouring certain companies and industries with beneficial tax rules and subsidies. But the Swiss say that the EC's arguments rest on shaky very legal ground, pointing out that the country is neither an EU member or part of the Single European Market, nor party to the competition regulations of the EC Treaty, including those on state aid. Moreover, Bern insists that even if the tax laws in question were covered by the 1972 Free Trade Agreement, they would not fall under the EU's definition of state aid, because they do not favour certain companies or industries."
Swiss Federal Council issued a report on state-aid to companies (link). Claiming that regional (cantonal) tax competition is a government aid is a myth. In fact, EU countries such as Germany and France maintain a bulk of government-owned enterprises.
An example of government intervention into the course of market forces is EU's Common Agricultural Policy (CAP) massively endorses income redistribution from European taxpayers into the hands of agricultural lobbies. Another obscure example of statism is EU are subsidies as a "third-party" payer problem.
The majority of EU's budgetary means and fiscal expenditures are funded directly into farming in the form of subsidies. 65 percent of all EU subsidies go to manufacturing, causing disallocation and the distortions in output and productivity. In addition, there're vast sub-funds whereby subsidies and handouts are granted to enterprises in the EU.
On the other hand, there is no such thing in Switzerland. Even more, Swiss government does not penalize businesses competing in low-tax jurisdictions compared to EU's expanding of the power of government such as efforts to establish tax harmonization.
Here is a report by Tax-news.com:
"The European Commission is basing its legal argument against Switzerland on the latter's alleged breach of state aid rules, which, in the EU, are in place to prevent member states from favouring certain companies and industries with beneficial tax rules and subsidies. But the Swiss say that the EC's arguments rest on shaky very legal ground, pointing out that the country is neither an EU member or part of the Single European Market, nor party to the competition regulations of the EC Treaty, including those on state aid. Moreover, Bern insists that even if the tax laws in question were covered by the 1972 Free Trade Agreement, they would not fall under the EU's definition of state aid, because they do not favour certain companies or industries."
Swiss Federal Council issued a report on state-aid to companies (link). Claiming that regional (cantonal) tax competition is a government aid is a myth. In fact, EU countries such as Germany and France maintain a bulk of government-owned enterprises.
An example of government intervention into the course of market forces is EU's Common Agricultural Policy (CAP) massively endorses income redistribution from European taxpayers into the hands of agricultural lobbies. Another obscure example of statism is EU are subsidies as a "third-party" payer problem.
The majority of EU's budgetary means and fiscal expenditures are funded directly into farming in the form of subsidies. 65 percent of all EU subsidies go to manufacturing, causing disallocation and the distortions in output and productivity. In addition, there're vast sub-funds whereby subsidies and handouts are granted to enterprises in the EU.
On the other hand, there is no such thing in Switzerland. Even more, Swiss government does not penalize businesses competing in low-tax jurisdictions compared to EU's expanding of the power of government such as efforts to establish tax harmonization.
Thursday, November 01, 2007
WORLD ECONOMIC FORUM: THE GLOBAL COMPETITIVENESS REPORT 2007-2008
The World Economic Forum released the global ranking of economic competitiveness. The essence of the report is to highlight the areas of competitiveness in each country in a global perspective.
The key fields reflecting the competitive advantage and strenghts of particular economy are divided into three groups which are enhanced into several sub-groups. The pillars in which competitive advantage can be achieved globally are (1) the quality of institutions, (2) the strength of infrastructure, (3) macroeconomic stability, (4) health and primary education, (5) higher education and training, (6) good market efficiency, (7) labor market efficiency, (8) financial market sophistication, (9) technological readiness, (10) market size, (11) business sophistication and (12) innovation.
Thus, the economy can be classified as driven by factors, efficiency and innovation. The gap between each phase is defined as a transition process. The question what makes country competitive is hard to be answered, depending on the input quality of economic policy and company performance, strategies and operations.
Whether the aim of economic policy to boost sustainable growth and the aim of legislature to provide first-class business environment to assure solid conditions for a globally competitive economy, the realm of competitiveness is easier to achieve.
In microeconomic terms, the performance and ability of firms to go for growth and global markets is essential as well as the value-added agenda, sophistication and innovation. Traditional economic environment in which rigidity and cost-reducing strategies dominate has been replaced by fluid strategies, risk and innovation. Less stability is not tragic and damaging.
In fact, firm's growth in a global environment is the purest reflection of instability and a disequilibria. Every day, new firms grow, old ones quit and shut down. The sophistication of the market broadly outlines the stage development of a particular economy, especially in the area of supply-chain sophistication.
Using the powerful inputs and combining the productive set of measures, leadership and strategy is what makes firms globally competitive. Nevertheless, the role of financial markets and the availibility and access to venture capital, equity and investment funds, should not be neglected.
Venture capital is the primary source of a growing firm, and the majority of start-ups are funded through venture capital. The degree of microeconomic competitiveness also depends on the ability of the firm to use its comparative advantages to the fullest in productive purposes.
Innovation is the result of entrepreneurial spirit and behavior to become a global leader in pursuing quality through cutting-edge products and services. It also outlines the degree of competitive mentality in particular country.In this respect, IT plays a tremendous role, taking the edge of comparative advantage in the age of future expectations.
The availibility of skilled and trained labor force is sometimes an essential determinant of the presenece of the firm in the market. Flexibility and deregulation, by empirical means, reduce the scope of risk which firm faces in the market penetration. Regulated and rigid labor market does anything else, but contributes to the overall rigidity and growing non-salary labor costs, reducing the ability of the firm to maximize the productivity and adjust to fluctuations.
In fact, the productivity determines the living standard, not the collective bargaining. The United States has one of the highest living standards due to relentless increases in productivity in past decades; in output per capita and working hours as well. On the other side, Europeans prefer holiday over work. Harvard economist Alberto Alesina and Francesco Giavazzi have written a powerful brief on this topic, The Future of Europe: Reform or Decline.
In macroeconomic terms, stability is ought not to be neglected. Responsible macroeconomic policy, prudent anti-inflationary monetary policy and predictive fiscal policy namely describe the three components of macroeconomic competitive advantage. The outcome is, of course, sustainable growth and dynamic responses to the economic fluctuations without government intervention and similar discretionary distortions.
To be a good economist, you have to keep an eye on three macroeconomic areas: inflation, growth and unemployment. While the inflation pressures have been nominally anchored in many countries (Canada, Sweden, UK) by the exercise of inflation targeting strategy, growth perspective dominate the question of future state and vitality of the economy. Even small, minute differences in annual or periodic growth rates, means the loss of competitive advantage in advance.
Of course, it'd be foolish to predict an unparalleled growth performance with high growth rates through and through. High and possibly robust growth rates have been observed in transition economies and also confirmed empirically. When the catch-up period is ended and GDP convergence process accomplished, the growth rate performs one of the most fundamental laws in economics - the law of diminishing return.
Estonia and Slovakia grow faster than Germany because of the ability to operate at a full capacity and the competitive advantages, and Germany grew faster than the United States when it was growing under catch-up conditions. Over time, when the real GDP per capita is higher, the growth normally slows.
In this year's report, the United States tops the overall competitiveness ranked chased by Switzerland, Denmark and Sweden. The report is availible here. Scandinavian countries performed very well. Despite an uncompetitive tax structure, the business environment deserved an A+, with deregulated product markets and high level of market liberalization, freedom to trade internationally and deregulated business environment in general.
My native country Slovenia performed poorly. It is ranked as the 39th most competitive economy in the world, performing poorly in the areas such as taxes, regulation, labor market flexibility, the structure of the workforce, working ethic, infrastructure supply and access to financing. Macroeconomic stability in Slovenia is risky as government fiscal spending has been reaching historic highs.
When center-left government seized power back in early 90s, wages in public administration and government sector have been increasing tremendously. in the first year, the wage rate increased by 40 percent and has been growing increasingly ever since in addition to widespread government ownership of large corporation, dominating the entire market through politically-managed mergers and acquisitions. Also, the center-right government has not done any better job. The fiscal expenditure grew at a brisk rate, enormously high spending remains anchored in budget deficit and general indebtedness and generous welfare system have set a high debt levied on future generations. Business rules and legislation are hostile to foreign direct investment and the regulation is rampant in this respect.
Thus, Slovenia has one of the lowest per capita shares of foreign investment in Europe and globally. Labor market, as abovementioned, is one of the most rigid in the world, including staunch hiring and firing practice and the non-salary cost pressure through which generous system of welfare, pension and social security is funded. More hours in the labor market are taxed progressively and labor relations are the most socialistic ones in Europe. I'm saying this also from personal experience, not just from the analytical, data point of view. Therefore, it is not surprising why Slovenia is one of the worst laggards in the EU.
The rankings are availible here and the country analysis can be reached here.
Rok SPRUK is an economist.
Copyright 2007 by Rok SPRUK
The key fields reflecting the competitive advantage and strenghts of particular economy are divided into three groups which are enhanced into several sub-groups. The pillars in which competitive advantage can be achieved globally are (1) the quality of institutions, (2) the strength of infrastructure, (3) macroeconomic stability, (4) health and primary education, (5) higher education and training, (6) good market efficiency, (7) labor market efficiency, (8) financial market sophistication, (9) technological readiness, (10) market size, (11) business sophistication and (12) innovation.
Thus, the economy can be classified as driven by factors, efficiency and innovation. The gap between each phase is defined as a transition process. The question what makes country competitive is hard to be answered, depending on the input quality of economic policy and company performance, strategies and operations.
Whether the aim of economic policy to boost sustainable growth and the aim of legislature to provide first-class business environment to assure solid conditions for a globally competitive economy, the realm of competitiveness is easier to achieve.
In microeconomic terms, the performance and ability of firms to go for growth and global markets is essential as well as the value-added agenda, sophistication and innovation. Traditional economic environment in which rigidity and cost-reducing strategies dominate has been replaced by fluid strategies, risk and innovation. Less stability is not tragic and damaging.
In fact, firm's growth in a global environment is the purest reflection of instability and a disequilibria. Every day, new firms grow, old ones quit and shut down. The sophistication of the market broadly outlines the stage development of a particular economy, especially in the area of supply-chain sophistication.
Using the powerful inputs and combining the productive set of measures, leadership and strategy is what makes firms globally competitive. Nevertheless, the role of financial markets and the availibility and access to venture capital, equity and investment funds, should not be neglected.
Venture capital is the primary source of a growing firm, and the majority of start-ups are funded through venture capital. The degree of microeconomic competitiveness also depends on the ability of the firm to use its comparative advantages to the fullest in productive purposes.
Innovation is the result of entrepreneurial spirit and behavior to become a global leader in pursuing quality through cutting-edge products and services. It also outlines the degree of competitive mentality in particular country.In this respect, IT plays a tremendous role, taking the edge of comparative advantage in the age of future expectations.
The availibility of skilled and trained labor force is sometimes an essential determinant of the presenece of the firm in the market. Flexibility and deregulation, by empirical means, reduce the scope of risk which firm faces in the market penetration. Regulated and rigid labor market does anything else, but contributes to the overall rigidity and growing non-salary labor costs, reducing the ability of the firm to maximize the productivity and adjust to fluctuations.
In fact, the productivity determines the living standard, not the collective bargaining. The United States has one of the highest living standards due to relentless increases in productivity in past decades; in output per capita and working hours as well. On the other side, Europeans prefer holiday over work. Harvard economist Alberto Alesina and Francesco Giavazzi have written a powerful brief on this topic, The Future of Europe: Reform or Decline.
In macroeconomic terms, stability is ought not to be neglected. Responsible macroeconomic policy, prudent anti-inflationary monetary policy and predictive fiscal policy namely describe the three components of macroeconomic competitive advantage. The outcome is, of course, sustainable growth and dynamic responses to the economic fluctuations without government intervention and similar discretionary distortions.
To be a good economist, you have to keep an eye on three macroeconomic areas: inflation, growth and unemployment. While the inflation pressures have been nominally anchored in many countries (Canada, Sweden, UK) by the exercise of inflation targeting strategy, growth perspective dominate the question of future state and vitality of the economy. Even small, minute differences in annual or periodic growth rates, means the loss of competitive advantage in advance.
Of course, it'd be foolish to predict an unparalleled growth performance with high growth rates through and through. High and possibly robust growth rates have been observed in transition economies and also confirmed empirically. When the catch-up period is ended and GDP convergence process accomplished, the growth rate performs one of the most fundamental laws in economics - the law of diminishing return.
Estonia and Slovakia grow faster than Germany because of the ability to operate at a full capacity and the competitive advantages, and Germany grew faster than the United States when it was growing under catch-up conditions. Over time, when the real GDP per capita is higher, the growth normally slows.
In this year's report, the United States tops the overall competitiveness ranked chased by Switzerland, Denmark and Sweden. The report is availible here. Scandinavian countries performed very well. Despite an uncompetitive tax structure, the business environment deserved an A+, with deregulated product markets and high level of market liberalization, freedom to trade internationally and deregulated business environment in general.
My native country Slovenia performed poorly. It is ranked as the 39th most competitive economy in the world, performing poorly in the areas such as taxes, regulation, labor market flexibility, the structure of the workforce, working ethic, infrastructure supply and access to financing. Macroeconomic stability in Slovenia is risky as government fiscal spending has been reaching historic highs.
When center-left government seized power back in early 90s, wages in public administration and government sector have been increasing tremendously. in the first year, the wage rate increased by 40 percent and has been growing increasingly ever since in addition to widespread government ownership of large corporation, dominating the entire market through politically-managed mergers and acquisitions. Also, the center-right government has not done any better job. The fiscal expenditure grew at a brisk rate, enormously high spending remains anchored in budget deficit and general indebtedness and generous welfare system have set a high debt levied on future generations. Business rules and legislation are hostile to foreign direct investment and the regulation is rampant in this respect.
Thus, Slovenia has one of the lowest per capita shares of foreign investment in Europe and globally. Labor market, as abovementioned, is one of the most rigid in the world, including staunch hiring and firing practice and the non-salary cost pressure through which generous system of welfare, pension and social security is funded. More hours in the labor market are taxed progressively and labor relations are the most socialistic ones in Europe. I'm saying this also from personal experience, not just from the analytical, data point of view. Therefore, it is not surprising why Slovenia is one of the worst laggards in the EU.
The rankings are availible here and the country analysis can be reached here.
Rok SPRUK is an economist.
Copyright 2007 by Rok SPRUK
Tuesday, October 30, 2007
MONTENEGRO'S ROAD TO FREE MARKET ECONOMY
The International Monetary Fund recently released the report on Montenegro's overall economic performance, emphasising basic fiscal and macroeconomic policy perspectives. In English the report is availible here while it can also be reached in Montenegrin (here).
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
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
Sunday, October 21, 2007
CANADA: CUTTING TAXES TO BOOST ECONOMIC SOVEREIGNITY
There is a good news coming from Canada. When Liberal Party was in power, it slashed the federal corporate tax rate from 28 percent to 19 percent. Stephane Dion, party's leader, seemingly understands the benefits of lower corporate tax rate for Canada's international competitiveness (link):
"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)
"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)
AUSTRALIA - TAX HAVEN?
Here is an article from The Age describing the systemic intentions to turn Australia into fund management tax haven. As a jurisdiction with the enforcement of tax competition, Australia could attract a singificant inflow of foreign direct investment into various investment funds, depending on the legal requirements set-up by the legislation.
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.
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.
ROMANIA INTRODUCES PRIVATE RETIREMENT ACCOUNTS (PRA's)
Romania has recently joined a growing list of nations that have switched from tax-funded state budget retirement system towards private pension investment funds (link).
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.
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.
Sunday, October 14, 2007
HONG KONG: 16 PERCENT CORPORATE AND PERSONAL INCOME TAX IS TOO HIGH
Hong Kong's leader Donald Tsang recently announced a personal and corporate tax cut to 15 percent and 16,5 percent to boost growth, investment and global competitiveness (link).
BUSINESS COMPETITIVENESS AND THE ROLE OF TAXES
The Tax Foundation presented the 2008 version of the State Business Tax Climate. The research is a valuable tool in comparing the level of competitiveness among states regarding the favorability of tax regime for business and capital creation. Through empirical point of view, the productive mechanisms such as investment and labor supply (link) are highly sensitive to tax rates and the level of levied taxes which businesses and individuals have to bear.
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.
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
SWEDISH LESSONS ON SCHOOL CHOICE
Marek Hlavac, a visiting fellow at the Adam Smith Institute proposes that if British prime minister Gordon Brown really wants to enforce a legislation that would improve standards in the UK's quality-falling school system, then he should consider the Swedish-styled reform choice from 1992:
"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.
Read also:
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)
"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.
Read also:
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 05, 2007
NORWAY'S FISCAL TERRORISM
Wall Street Journal investigates recent tax hikes imposed on Norwegian shipping industry by Norway's left leaning socialist government. In particular, Norwegian Minister of finance, Kristin Halvorsen's budget plan suggests the retroactive taxation of reinvested profits. Due to the impact of shipping industry on the competitiveness of the Norwegian economy in a global arena, it is doubtful whether such tax hike are grounded on the basis of detailed analysis.
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:
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:
"Over the past seven years, as the regime took effect, maritime employment in Norway has climbed almost 20% to about 100,000 and the number of ships on order by Norwegian fleets has risen more than threefold — keeping pace with rapid international shipping growth since the turn of the century. That boom has attracted the attention of Norway’s finance minister, Kristin Halvorsen, a member of the country’s Socialist-Left Party. Under her budget plan, all profits reinvested by the industry since 1996 would be subject to a retroactive tax. Many ship owners are considering reflagging their vessels in nearby countries, such as the U.K. and Denmark. Moving could mitigate their future liabilities, but that will be little consolation to firms that remained in Norway over the past decade and invested in their fleets, only to be betrayed by politicians."
Source: Shipping Blues, Wall Street Journal (link)
Source: Shipping Blues, Wall Street Journal (link)
Sunday, September 30, 2007
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.
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)
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 CanadaOn 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)
Friday, September 28, 2007
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
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.
Thursday, September 27, 2007
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
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
Friday, September 21, 2007
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).
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