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Anyone noticed how popular free zones are becoming?

Kitty Miv, Editor
12 May, 2015

Kitty's Kountry Rankings are below, with a description of how they are kompiled. This week, as every week, I give out Encomiums to countries which have done Good Things, and award Execrations for countries which according to my highly personal and partial views have done Bad Things.

Anyone noticed how popular free zones are becoming? Rarely a week seems to go by without a report about one country or another preparing to launch new free zones. Since the turn of the year we have seen Costa Rica explore the establishment of a special economic zone, China announce new free trade zones, Mexico set out plans for SEZs, Madagascar confirm ambitions for a SEZ, and seen new free zones in the Gulf region, including in Oman and Qatar. According to the World Free Zone Convention, more than 120 countries now have some form of free zone development program in place. One free zone that appears to be going from strength to strength is Brazil's Manaus Free Trade Zone, in the isolated Amazonas region of the country. Revenues for manufacturing companies based in the zone increased by five percent during 2014 and employment rates hit record levels over the course of the year, with a monthly average of 122,329 in the ten months to November. And this is no flash in the pan either. At the end of last month, the zone's board of directors approved another USD1.6bn worth of investments across 108 projects, and these are expected to create almost 2,500 new jobs. So the zone appears to be a success story in an area of the country where opportunities for people are limited. You could argue that free zones wouldn't be needed if governments reduced tax and regulation across the board, giving whole economies a chance to flourish. But that's almost a moot point these days because it would take such a seismic shift in thinking as to render such a prospect almost impossible. Still, as Manaus demonstrates, free zones are a useful tool to promote economic regeneration in particularly impoverished cities or regions. You'd think that they could be of major benefit to the troubled economies of Europe, like Greece, Italy, and Spain. They probably would, but EU rules on state aid don't allow free zones. The OECD doesn't like them much either because they could be considered "harmful" tax regimes that erode the tax bases of other countries. As I mentioned last week, it's a viewpoint that just goes to show how skewed the international tax debate has become, with the eradicate-tax-avoidance-at-all-costs camp drowning out any alternative arguments.

Another policy that looks to be proliferating around the world is the tax amnesty. Just last week, we reported Greece's new tax amnesty plans on the same day that Indonesia introduced a one-year tax amnesty. Last month, Puerto Rico enacted another tax amnesty law and the Ukrainian Government announced that its tax amnesty, introduced in January this year, had resulted in over 3,000 applications. In March, the Russian Parliament approved a draft offshore amnesty law, and the Seychelles confirmed a tax amnesty that same month. At the end of January, Ireland launched a five-month tax amnesty, and Australia's offshore tax amnesty concluded in December 2014. You get my drift. On the question of whether tax amnesties are good things or not, the jury is still out. Some say they merely encourage non-compliance, especially if they are wheeled out by governments on a regular basis – Italy is probably a prime example. And why is it that those who play by the rules never seem to get a break? On the other hand, the benefits of an amnesty in tax revenues must outweigh the cost in terms of investigating and prosecuting suspected tax evaders. However, I really want to talk about Greece rather than amnesties in general, because its tax amnesty is symptomatic of the nation's increasing desperation to stay afloat. The Greek tax amnesty comes in response to collapsing tax revenues, a trend that began when Syriza came to power, perhaps because people think they will be let off their tax debts when the new Government reaches a more favorable bailout deal with the troika. After months of negotiations however, it looks to be more a case of if Greece can strike a deal, rather than when. And it's a mighty big if. Looking back, the notion that Greek Finance Minister Yanis Varoufakis would breeze into the talks with hard-nosed technocrats from Berlin, Frankfurt, Brussels, and Washington (home of the IMF), attired in his snazzy open-collared shirt, and come away declaring an end to austerity, now looks quite ridiculous. However, Greece must be running out of time. Recent signs, if any more were needed, that the country is edging closer to the precipice include the new tax on cash withdrawals - an attempt to prevent a run on the banks - and raids on departmental budgets to meet its latest debt payments. It's interesting that the EU is being particularly stubborn, refusing point blank to give Greece some slack. Certainly, it wants to avoid setting an austerity-relaxing precedent. But pushing the country closer and closer to the Grexit isn't in the EU's interests either, as it will be tantamount to admitting that the euro experiment was a failure. So with Greece seemingly on the brink, surely something will have to give one way or another soon.

Well, I suppose it would be somewhat remiss not to mention the UK election, which was keenly watched by investors around the world. But really, what was all the fuss about? After all, the result was never in doubt! That is, if you ignored every single opinion poll produced during the election campaign (I wonder if any pollsters will be joining Miliband, Clegg, and Farage in the queue for a new job). Move along, nothing to see here. By the time this blog is published, David Cameron will be a few days into his second term as Prime Minster with a small but eminently workable majority, making all those predictions about unholy alliances and Faustian pacts between parties look like mere scaremongering. In the end though, the Conservatives used scaremongering very much to their advantage in something of a masterclass in negative campaigning. The Scottish bogeyman, in the form of the SNP, hasn't completely gone away, having almost completely swept the board north of the border, but it won't now have the ability to tear up the former coalition's economic plan in cahoots with Labour. So business as usual then? Well, not quite. Businesses were heard calling for more tax cuts just ahead of the election. But the Government is going to have bigger fish to fry. The fallout from the SNP's annihilation of the Labour vote in Scotland (one result the pollsters did get right) will probably mean more fragmentation of the United Kingdom. (Is there be a more inappropriately named nation in the world?) It could mean maximum devolution for Scotland, if not complete independence. But then things will start to get messy, with talk of English votes for English laws, an English Parliament, and more regional assemblies. And we haven't even mentioned Wales and Northern Ireland. What investors are really worried about though is the UK's position vis-à-vis the EU. The Tories have promised to hold an "in/out" referendum by 2017, and unless Cameron achieves the seemingly impossible and negotiates a transfer of powers back from Brussels to London, there's a very real chance that the UK's membership of the European club might be cancelled. Irrespective of whether this will be a good decision for Britain or not, it's going to mean two more years of uncertainty and sweating over opinion polls. A familiar refrain from Cameron throughout the election campaign was "vote Miliband, get (SNP leader Nicola) Sturgeon." What the British appear to have done is vote for stability, but got chaos!


Kitty's Encomiums and Execrations

Methodology: each week (this is the 147th) one or more countries are given encomiums and one or more are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is at minus 2, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52. Some weeks ago it dropped a place, but then quickly recovered one step. Etc etc.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

Kitty's Encomiums:

Brazil free (Ama)zone

United Kingdom coalition-free

Kitty's Execrations

Greece teetering



About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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