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France and Germany are going to pick up the tab

Kitty Miv, Editor
08 November, 2012

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

Through the dense fog of partisanship and a divided legislature, it's sometimes difficult to be sure what's going on in (wait for it, you thought I was going to talk about the US, right?) Germany (ha, ha, gotcha!) but it does seem that the government is both running a reasonably tight ship, debt-wise, even after paying its contribution to one or more of those European funds for saving southern member states from the consequences of their fiscal follies, and actually managing at the same time to abolish an unpopular tax without, apparently, introducing a new one. Was that sentence Churchillian? If not, I'll try to do better next time. How does Germany manage it? Taxes are high, higher than they ought to be, but there is a general presumption in favour of business, which operates at all sorts of levels. The problem for Germany is that it is part of the EU, so that it is encumbered with all of the social partners nonsense and vast amounts of monetary support for the old, the weak, the sick, and the feckless. So far this doesn't seem to have prevented it from competing against the rising powers of the East, but for how long can it continue?

Another fog has settled over India's attitude towards foreign investors in the wake of the Vodaphone case, and the cack-handed way and apparently vindictive way in which the country introduced retrospective legislation in its recent budget aimed at taxing overseas m&a transactions involving Indian companies. The only result was to cause general shock and horror, and a hiatus in FDI while investors re-examined their options. A new finance minister has attempted to repair the damage, but the Indians can't quite bring themselves to admit the mistake outright. It took an impending visit by Canadian ministers, with improvement of investment conditions high on the agenda to wring a sotto voce admission that the whole subject is being reviewed at a high level. That itself wins them an encomium, but they'll have to back off: everybody seems to know it but them, so they might as well come straight out and say it. Pride must come next after jealousy as the second most damaging human emotion.

No fog in Hong Kong, however, which remains transparently the best place to be if you are doing business in the region, and was nominated top world financial center for the second year running by the WEF. I don't lightly use the word 'transparently': one of the factors that helps Hong Kong to stay on top is its stock market, which has tried extremely hard to move from being a Victorian businessmens' club to having a fully open and well regulated listing regime. Just this week the authorities were fine-tuning their rules to 'ensure an orderly, informed and fair market'. It wasn't always thus, and some past major listings were very flawed, particularly those of the mainland Chinese banks. But Hong Kong raised more company finance through IPOs last year than any other exchange, which is some sort of vote of confidence by investors. There are downsides to being in Hong Kong, notably the ridiculous real estate prices, and it's a very over-crowded place in general, but for most companies wanting a foot in the Chinese market, it's hard to avoid.

As far as I can make out, the Argentine tax authority, AFIP, can issue 'General Resolutions' under various powers it has through legislation, but these are not directly subject to the control of the legislature. I presume that there is some mechanism through which the victims of adverse General Resolutions can challenge them, but it is probably very obscure, long-winded and without question would involve myriads of extremely expensive lawyers. These thoughts are brought to mind by AFIP's summary actions last week in which it removed tax privileges from various international exporting companies because of what it called 'irregularities' or 'discrepancies'. That's to say, it would like to screw more tax out of them and this is an easy way to do it. Argentina has suffered a number of dictatorships in its history, sometimes overt and sometimes covert, and after several recent attacks on international law (repudiation of bond debts, the abrogation of tax treaties and the YPF sanctions) the regime is looking more and more like the latter type. Better not go there until things improve!

This year the two sectors everybody loves to hate are banking and mining, and this makes them sitting targets for governments, who go after the money, especially if it's baddies that have got it. The catch phrase is: 'make sure they pay their fair share', never mind that they already pay more than anybody else. I'd like to ban the word 'fair' as in 'fair trade' and 'fair share'. It's hypocritical and judgmental. Now New Zealand, having seen that Mrs Gillard across the water has gotten away with bare-faced theft from the miners, has jumped onto the bandwagon and is going to extract a 'fair' amount of tax from its miners. Not having any bankers to speak of, I suppose. Needless to say, 'fair' implies an increase: when was the last time that a government told a bank or a mining company that it ought to pay less tax?

Cyprus has the presidency of the European Union until the end of the year, and perhaps it's this that has encouraged it into imagining that it is immune from the laws of economics. How its banks could have been so stupid as to invest heavily in Greek bonds in 2011 when they had proudly boasted six months before that they had already got rid of them all is one of nature's mysteries, like the fact that prime numbers come in pairs, that will never be unravelled. Presumably someone knew someone. Nowhere was it ever more true that 'it's not what you know, it's who you know' than it is in Cyprus. But even if it's true that the banks have got themselves into a EUR10bn hole (equal to EUR15,000 per head of the population), that's not really the problem, since it's been agreed by now that France and Germany are going to pick up the tab in the spanking new United States of Europe. The real problem is that the government is one of the worst in the whole world, and in complete denial of economic reality under a Communist President, except that he isn't really a Communist, or for that matter anything at all except a nice, cuddly old bloke who does what the unions tell him. He is telling the Troika that he would fight in the streets rather than give up the COLA (wage/price escalator), and the unions would be happy to see him do it as well. Even in Italy they gave up the scala mobile (moving staircase) 20 years ago. You have to be seriously bonkers to think that this is going to cut it in the modern world. They say they're going to run out of money in December. Not even Russia is going to help them this time. When Angela Merkel says that she doesn't expect serious negotiations to start until next spring, what she really means is: 'until he's gone'.

Kitty's Encomiums and Execrations

Methodology: each week (this is the 25th) three countries are given encomiums and three 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 has a ranking of €“ 1, 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, falling back again in week 24 to minus two.

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:

Germany dumps a tax

Hong Kong leads the world

India won't admit defeat

And Kitty's Execrations:

Argentina - rogue state in the making

Cyprus in cloud-cuckoo land

New Zealand copy-catting




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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