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Japan's problem is debt

Kitty Miv, Editor
10 October, 2013

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.

It's rare event that I find myself agreeing with Angel Gurria, Secretary General of the OECD, but I have to join the chorus of plaudits for Japanese Prime Minister Shinzo Abe's decision to go ahead with an increase in the country's consumption tax from five percent to eight percent from April 2014. Actually, it's the accompanying support measures for business that are more praiseworthy, including accelerated depreciation for companies spending on high-technology plant and machinery from April 1 next year and – less admirably – a payroll subsidy (remember the "lump of labor" fallacy).

Japan's problem is debt, oceans of it, much the highest of any significant nation at 230 percent of GDP – next comes Greece at 161 percent and Italy with 130 percent. Greece is on life-support, while Italy is being kept afloat only thanks to the printing presses of the European Central Bank and Chancellor Merkel's good offices. So how does Japan manage it? With a 10-year bond yield of 0.64 percent, that's how, and a program of quantitative easing (that's printing money, in plain English) that makes the Fed look miserly. Also, the patriotic Japanese lap up their country's bonds for their savings. Perhaps that's got more to do with Japan's relative cultural isolation than clear-headed calculation; but either way the result is a kind of zombie economy – the lost decades, as they are called. It's a very hard trap to clamber out of, once you are in it. The Tea Party is coming in for a lot of flak this week for trying to stop an increase in America's debt ceiling (a mere 80 percent of GDP), which most people take for granted should happen; but just take a look at Japan, folks.

There has been some criticism of the Chinese Government for not being bolder in its formulation of the country's first pilot free trade zone in Shanghai, which will ease restrictions on RMB convertibility, financial and insurance services, trade and investment. Others see the Shanghai experiment as amounting to competition for Hong Kong; but the SAR itself sees matters more clearly, and has welcomed the plan, saying that it will help to deepen economic integration between Hong Kong and the Mainland, while bringing more business opportunities to related industries in Hong Kong. That word "pilot" is highly significant: in this, as in other reforms, China has proceeded cautiously with the regional introduction of reforms befor launching them nationally, most recently with its expansion of VAT, which is eventually to replace the counter-productive business tax altogether. If the Shanghai program is adopted over large parts of the country, as the Government says it intends, that will amount to the most sweeping liberalization measure so far in China's long march towards capitalism. Far from seeing Hong Kong as an excresence on the pure damask skin of the Chinese economic model, the Beijing leadership seems to want to emulate it – nationwide. The consequences will be scary for Old Europe and other parts of the world which are stuck with a 19th century industrial structure and polity they can't seem to shake off.

Time to start crying for Argentina, sinking into a morass of economic woes under its inept leadership. An apparent annualized rise of 32 percent in VAT revenues last month reflects bouncing inflation rather than any economic surge, and is a more accurate indicator than the Government's pretend inflation statistic of 10 percent. The Government is short of money, in fact, especially foreign currency, as citizens do everything they can to put their assets anywhere other than in Argentina. Even the head of the tax authority says that the Government's foreign currency amnesty has been a failure; no-one trusts the Government's word or its credit. Meanwhile, the Government stumbles from one economic disaster to another: having brutally expropriated oil firm YPF without compensation, it can't be any surprise that no partners can be found to invest in it; and now it looks as if the Buenos Aires transport system will be nationalized as well, that is, the few parts of it that the State doesn't already own. By way of bread and circuses, 90 percent of the system's operating costs are already paid by the State, while ticket prices raise a mere 10 percent of revenues. The Government hasn't learnt from its catastrophic nationalization of Aerolineas Argentinas in 2008: feather-bedding and mismanagement resulted in a loss of a stunning one billion dollars in 2012. And wherefore all these unsuccessful nationalizations? Is there a Marxist in charge in the Pink House? No, this is Peronism, pure and simple, and if you lifted the lid on Argentine affairs, it would not be a pretty sight. Seldom can a country with such natural advantages have been cursed by such a succession of incapable, grasping, populist administrations. Don't go there! I went there, forty years ago, and thought it was wonderful; but even then there were "meatless days" in an attempt to boost beef exports, and this in a country with more cattle than people. That says it all. Now, plus ca change . . .

Skipping across the Atlantic, and up a bit, we come to Nigeria, another mis-governed, basket-case state blessed (or cursed) with natural riches. We won't be taking a private jet, though, because the Government will charge us USD4,000 to leave again. Presumably the Government's thinking is that, since it can't seem (or doesn't want) to control wholesale stealing of oil and gas revenues, at least it can profit from the multiplicity of private jet purchases that the stealing enables. And that brings me to hats, the wearing of same, that is, because you-know-who is rarely seen hatless. It's a kind of trademark, that hat, but for me, there is something sinister about it, not just because it carries echoes of Chicago underworld mobsters and the Ton-Ton Macoute, but because one of the generalizations (OK, prejudices) that my father bequeathed to me was against men wearing hats. OK, from the 17th to the 19th centuries everyone wore hats, at first in the street, for obvious reasons, and then by 1890 as part of the uniform disguise which men hid behind. But by 1950 hats had become an oddity, although still worn by soldiers and policemen (making Dad's point). Women's hats, then? Well that's for another time, I've used up my word count for today; but just consider the word "fascinator."

Kitty's Encomiums and Execrations

Methodology: each week (this is the 73rd) two or three countries are given encomiums and two or 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 is on + 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, 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, though.

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:

China sets the pace

Japan making sense

Nigeria fly away

And Kitty's Execrations:

Argentina doesn't need QE




Tags: Euro

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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