THE MIRAGE OF SWEDEN'S WELFARE STATE

Today's edition of the Wall Street Journal includes an opinion (link) where the author describes how the costs of social engineering are strongly underestimated in Sweden which is considered a paradise and haven of the welfare state. Throughout the content of the article, several examples are cited to show how immigration benefits the well-being and how welfare state eroded wealth creation and stimulated the decline of entrepreneurship and growth.

The set of arguments for the welfare state often includes egalitarian reasoning that has hardly anything to do with economics except for the famous Lorenz curve, showing the size of the distribution of income and wealth across population quantiles whereby the empirical outcome represents the Gini index of inequality. However, there could hardly be found sufficient arguments in favor of welfare egalitarianism exercised by high tax rates on personal and corporate income and other notable sources of productive behavior.

NORWAY'S OIL SAVINGS AND PETROLEUM FUND

More than a year ago, I noticed an article written by Stefan Karlsson entitled "Norway's National Day" where the author explain how Norway's oil-savings policy and also the recycling of savings accumulated from Norway's oil exports redirected into oil fund which invests into foreign securities and creates huge trade and current account surpluses. In fact, Norway is the third largest exporter of oil in the world after Russia and Saudi Arabia.

Using PPP measure of the GDP, Norway is the 6th wealthiest country in the world, having a per capita GDP at $46,300 USD, surpassing Ireland and the United States (link). High GDP per capita in terms of purchasing power parity is the result of gigantic increases in the GDP in recent decades due to high oil prices and oil exports which benefited the Norwegian economy. It would be a mistake to think that Norway's economic policy reflects its gross domestic product. Public ownership remains high (link). Welfare policies tend to contain a degree of inefficiency and fiscal sustainability (link) is risky in a long term perspective as the petroleum and pension fund are set to decline in its size subject to strong dependency and ageing population pressures (link).

SOVEREIGN FUNDS IN EMERGING MARKETS

Standard Chartered predicts the great controversy may be bubbled by the most secretive sovereign funds in emerging markets. The reports suggests more transparency such as establishing a code against protectionist pressures from western markets.

Source:
Financial Times, Sovereign funds warning, October 14 2007 (link)

WEALTH MANAGEMENT OF SOVEREIGN FUNDS

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

INTERNATIONAL TAX COMPETITION

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

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

THE SETBACK OF GOVERNMENT OWNERSHIP

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

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

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

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