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The opposite of open-ness is protectionism

Kitty Miv, Editor
29 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.

This column hasn't got much time for the IMF, which seems to spend most of its life telling governments to increase taxes, but just for once I have to agree with its glowing report on Panama, although why does the IMF carp about Panama's open-ness to other economies? The opposite of open-ness is protectionism, don't they realize? At all events, Panama seems to be getting everything right nowadays. You may say that it has the immense advantage of the canal, economically, and that's true, but it could so easily have gone the other way: twenty years ago or so Panama had the biggest collection of crooked banks to be found anywhere, had a booming drugs trade, and a President who ended up in American and French gaols. Noriega is back in Panama now, on parole from France, but must be tailed by more minders than anyone else on the planet. Panama has the US to thank for its good fortune, probably, but has run a tight ship in recent years and maintains a reasonable balance between respectability and low taxes. Two stars!

As suggested in our news round-up, the FTA negotiations just starting between China, Japan and South Korea can be seen as a riposte to the American-led Trans-Pacific Partnership; but hey!, there are no bad FTAs, and this competition, if that is what it is, creates a virtuous circle of progress towards a tariff-free region. The TPP already has whiskers: originally (2005) it was a local affair between New Zealand and some of its Pacific neighbours, but for the last five years it has been much grander. China is staying aloof from the TPP, but South Korea is joining the fun, and Japan has said it wants to take part as well. But the TPP has just held its fifteenth round of negotiations, and the bigger it gets the further off seems any outcome. A touch of the Dohas, you might say. Perhaps the Japanese are just being cunning and are intent on spoiling the party? But when you look at how long it took the US Congress to ratify KORUS they probably needn't worry. The tripartite grouping is more real though: South Korea has some of the best free-trade credentials around, and will drive the negotiations hard. The sticking point will surely be the Japanese agricultural lobby? Presumably they have thought of that, so you have to assume that they are aiming for a limited agreement covering a number of industrial and perhaps financial sectors, with agriculture, fishing and other 'sensitive' sectors to follow along later. Fishing, gulp: they'll have to sort out the Spratlys and the rest before there's much chance of ratification in the Diet. It's trade that drives progress in human affairs, you see. If South Korea and China encircle North Korea in trade terms, how long could even that rogue state hold out in its ruinous anti-capitalist obsession?

Perhaps I shouldn't penalize governments for just thinking bad thoughts, and it's not as if UK finance minister George Osborne is likely to be influenced by what I say, although I am sure that Global Tax Weekly is required reading in the Treasury; but if it's true that he is going to launch a further attack on pensions in his Autumn Statement then he thoroughly deserves a spanking. Successive British governments have undermined saving in every possible way in the last fifteen years, beginning with Gordon Brown's notorious theft of untold billions when he removed tax relief from pension funds' investment returns and culminating in the recent limitation of tax-privileged pension pots and contribution levels. Worst of all, the continued debasement of the currency through spendthrift government policies has contributed to agonizingly low annuity rates. It's true that the government can't be blamed for greater life expectancy, which is equally a factor, in fact it probably should be praised for providing care and supporting medical research. But the balance sheet is overwhelmingly negative. You can see that to a Treasury official, allowing a rich person to put GBP50,000 a year of income into a pension, tax-free, just amounts to giving away precious tax money, almost half of which 'belongs' to the government. But that's the wrong way to think. Hands off our pensions, please, Chancellor!

I don't know whether to laugh or cry about Italy's redditometro, and the pious hope of the tax authority that people will use 'the family computer' to find out if they are 'incongruous', tax-wise. Will a person willingly install an official program on her computer, accepting official assurances that using the program will leave no trace on the Internet, just to find out what she must surely already know, ie that she is or isn't gaming the system? Then, what will be the response of individuals and businesses to the redditometro itself? The machine relies on information provided by credit card companies, retailers etc to build a picture of a person's expenditure, to compare with their declared income. Now, will that cause more or fewer transactions to be carried out in cash? No prizes for guessing the answer. There is only one way for Italy to dig itself out of its crisis, and that is to cut public expenditure and tax levels. There isn't the slightest sign of either happening. The tax authority may win a breathing space this year or next by raking in, as it hopes, EUR40bn from Swiss bank accounts, if the Italo-Swiss deal goes ahead as planned. But it is just putting off the inevitable.

Jam tomorrow. Or perhaps in Brazil it's coffee tomorrow. Anyway that's how the government justifies pretending that it will make its budget forecast this year. It is so sure that it will have good growth in 2013 that it is kicking forward 20bn dollars worth of capital expenditure (money already spent this year). Neither the IMF nor any other international onlooker thinks that this is fair play. If a company did it, it would be reprehensible if not worse. And why? So that President Dilma Rousseff doesn't have to make mandatory but politically inexpedient cuts in public spending. OK, so they just change the rules! Not in my book; so a big black mark. They are fooling only themselves.

Kitty's Encomiums and Execrations

Methodology: each week (this is the 28th) 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:

China to melt down its iron rice bowl?

South Korea will encircle the North

Japan can they be serious?

Panama blessed by the IMF

And Kitty's Execrations:

Brazil cooking the books

Italy having the tax man to dinner

United Kingdom stealing your savings




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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