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The SAR's Huddled Masses of Unfranchised Citizens

Kitty Miv, Editor
11 July, 2013

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.

Another week, another superlative for Hong Kong, this time for the nth successive increase in the number of foreign and Chinese companies setting up there. Every year, there are more businesses, more people, more profit, more capital and more capitalists in Hong Kong. What are the limits? It all depends on Mother China, obviously; but Mother China is nothing if not pragmatic, and is most unlikely to upset the golden apple-cart. You have to wonder, under your breath, how many of China's great and good have personal financial interests in or through Hong Kong. It's a bit like the UK Government and the Channel Islands, or even Washington and Delaware. Nothing illegal, of course; but with all the pressure there is on super-cleanliness, there must be a lot of prominent figures in Europe and the US thinking hard about their untransparent international business interests. Not followed by the Chinese, perhaps, because why would anyone worry about having a Hong Kong connection? Curiously, the main threat to Hong Kong's stability may come from the SAR's huddled masses of unfranchised (mostly Chinese) citizens. Yet, why would they want to push it to a crunch, any more than the Bejing bosses? Revolutions normally need a large constituency of oppressed have-nots, and that's hardly a good description of Hong-Kongers. So the city-state, as it used to be called, will in all probability continue on its path of turning its corner of China into a world-beating semi-democratic megalopolis, with the distinctions between the city itself and its "Chinese" environs becoming ever harder to discern. No doubt it's silly to think of such a tiny region of such a massive country as leading the way towards a new Chinese paradigm. But not that silly.

While favorite son Hong Kong powers ahead with reinventing itself as a regional financial hub, Mother China shows its true intentions by energetically pursuing trade deals which would have been unthinkable a decade ago. Last week good progress was said to have been made in FTA negotiations with arch-rival South Korea; and as a follow-up to the Economic Cooperation Framework Agreement between Taiwan and Mainland China, the two sides have now also concluded a long-awaited cross-strait agreement for trade in services. Taiwanese Premier Jiang Yi-huah said he looked forward to it providing a further impetus to closer business relations with the Mainland, and leading to further agreements on, for example, dispute settlement and double taxation, while also underlining Taiwan's commitment to trade liberalization and for it to take part in the on-going regional economic integration through more, what he called, "free trade agreements." Taiwan is to open up 64 sectors to mainland China, including banking, insurance, health services, securities broking, technical certification and analysis, and tourism. In like manner, the Mainland is to lower the threshold for market access to Taiwan investment in 80 sectors covering banking, insurance, securities broking, e-commerce, technical certification and analysis, and transportation. Fraternization between China and Taiwan, welcome as it is, can be seen as a part of domestic politics; but if China really means to strike a trade deal with South Korea (which would one day surely include North Korea), then this really is a signal of opening-up on a par with China's WTO membership. Add in Japan (also being talked about) and you are looking at an Asian single market to outclass the creaking, uncompetitive, introspective European single market.

I am bewildered by the stance of the French Government, and possibly they are bewildered themselves. Amidst all the grand rhetoric there is no distinguishable, coherent fiscal policy. What there is however is a series of tax rises here, there and everywhere, responding it seems to shortfalls in revenue which appears unable to keep pace with runaway spending. This week we had an increase in the tax on advertising signage (it reminds me of the old Marxist belief that advertising was in some obscure sense capitalist profit and it was taxed accordingly), and a rise from 7 percent to 19.6 percent in VAT on a raft of services, including gardening work, land clearance, home study courses (excluding tutoring), technical support and maintenance services and business agency services. A sudden shaft of light from the Court of Auditors demanding that public spending should be curtailed turned out on closer inspection to be a request for tax breaks to be cut back, i.e. an increase in taxation. Real public spending (bureaucrats spending their time inventing new difficulties for business) is of course sacrosanct, and any attempt to cut it would be met with a hail of paving stones; but there won't be one. A report on improvement of the business taxation environment which is supposed to deliver a "simplification shock" was presented by a socialist politician, and will now go through an extensive consultation exercise; that's to say it will be shelved, along with all the others.

Another (neighbouring) country which is using the word "savings" to cover extensive tax increases is Belgium. They talk about reducing the costs of the State apparatus, and that would be good, if true, but there are no specifics, no forced 10 percent cuts in departmental budgets as has happened across the Channel in the UK. What is sure is that lawyers will become subject to VAT (how did they escape in the first place?), bank taxes will rise, alcohol and tobacco will cost more (of course, leading to even more smuggling), but worst of all is the imposition of a minimum tax on corporations which pay dividends. There are few details in what has been published so far, but that would seem to mean a withholding tax or what used to be called "advance corporation tax" in the UK. How that will square with the EU's Parent/Subsidiary Directive (which exempts dividend payments from tax) and tax treaties remains to be seen. Sounds as if the European Court of Justice will be busy! One of the generalizations that resulted from my education at the hands of some rather extreme characters – prejudices, many people would call them, but they have stood me in good stead – is to be wary of men who wear bow ties, which is the case of the Belgian Prime Minister. Of course, I am wary of all men, but I do stand an extra foot away if he has a bow tie. Belgium is currently under the EU's "excessive deficit" procedure, which leaves it with no choice but to trim its budget; but with a tax to GDP ratio of more than 47 percent in 2012 (second highest in the Union after Denmark) it would do better to make some real savings instead of going on about "fairness" and bashing business.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 60th) 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 + 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.

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 means trade

Hong Kong redux

Taiwan and South Korea cozy up to the dragon

And Kitty's Execrations:

Belgium and austerity

France taxes everything




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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