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This is Part of the Sochi Effect

Kitty Miv, Editor
16 January, 2014

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 would have been better if Russia had abolished its "recycling" fee altogether, but it has done the next best thing by removing the exemptions for domestic manufacturers. It's not like Russia to roll over so easily (it's only a few weeks since the EU and others complained to the WTO about the levy), so it's tempting to suppose that this is part of the Sochi effect, a general clearing out of difficult and embarrassing dossiers in advance of the Games in February. I wonder what other rabbits Mr Putin will produce from his hat during the next few weeks in order to bring us to the starting line in a glow of bonhomie? Perhaps he will invite the media to the secret palace he has apparently been constructing on the Black Sea coast and tell us where the money came from for this modern Versailles? Russian presidents already had a substantial villa near Sochi at their disposal, used for entertaining foreign dignitaries and just for relaxation, but this evidently wasn't enough for Putin. Estimates of the cost of construction of the new "cottedzh" range from EUR350m to 1 billion, but in its pictures it looks really rather dull, however grandiose.

Russia's president is already probably quite happy at the recent turn of events on the world stage, certainly as regards trade, having "saved" part of his "near abroad", the Ukraine, from the clutches of the evil EU at the 11th hour, and having enticed Uzbehistan into his CIS (Commonwealth of Independent States) free trade area. One has got to welcome free trade wherever it exists, and the current members of the CIS free trade area – Russia, Ukraine, Belarus, Kazakhstan, Armenia, Kyrgyzstan, Moldova, and Tajikistan – represent a sizeable chunk of real estate. Uzbekistan applied to join the WTO in 1994, but negotiations have been unsurprisingly glacial, given the nature of the regime. Boss Islam Karimov is a holdover from the USSR, one of the few that remain in power, and does not seem to have very progressive economic policies. Gold is the word that comes to mind in association with Uzbekistan, and cotton, I suppose, and the destruction of the Aral Sea. Otherwise, I can't say that the hour I spent on the runway in Tashkent twenty years ago taught me much about the country, and most of what is said about it is negative, so don't read too much into this temporary bouquet, which will probably wither quickly. And I don't recommend making an investment in the country, not that they seem to invite FDI.

Singapore has issued some quite sensible guidance on tax aspects of bitcoin transactions, which suggests that there must be a fair amount of bitcoin activity there. The first Asian bitcoin conference was held in Singapore last year, at any rate. Bitcoins join Uzbekistan on the list of subjects on which I am passing ignorant. I keep trying and failing to understand the phenomenon of bitcoins. Theoretically one should be in favor of a virtual currency with, so to speak, monetary limits (unlike existing national paper currencies, which are being inflated out of sight by central banks who want to keep interest rates low), but I question the usefulness of a currency which by definition can never exist in large quantities. On the other hand, other, similar currencies could exist in large numbers. If there is a bitcoin, why shouldn't there be a bitcoin2, and so on? So in the end that would be just as inflationary as a normal fiat currency. For a while it seemed as if securitization was going to provide the answer to the value of money conundrum, and it may yet do so: if all real estate (to pick one sector of the economy) is securitized, and all real estate transactions take place using "real estate units" (we will call them) then there is an automatic cap on the money supply. A real estate company can sell its stock of real estate units for cash, but it can only create more such units by building; the supply of land is finite (more or less, unless you are a fish). Don't get scared: they aren't going to let me anywhere near the money supply, so you're safe with your bitcoins for a while yet.

Turning from the sublime to the gorblimey, I am gobsmacked by the strange dance going on in Germany over the Grand Coalition's proposals for a new sort of vehicle tax. First of all, Germany's doesn't need any new taxes at all, and should be getting rid of existing ones rather than making up new ones. Austria for example has said that it will oppose a toll system that differentiates against non-German drivers, and it's quite hard to see how it wouldn't, given that the Coalition means the toll to replace an existing tax (not paid by Austrians, evidently). In any case, a toll would be extremely clunky to operate and would erect new barriers in a Europe which is supposed to be about demolishing existing ones. If I arrive at a German toll-road in a 30-year-old Italian sports-car, how are they going to know what to charge me (the toll is supposed to vary with emissions)? There will have to be testing stations at the borders which have been abolished by Schengen. What this is all about, in reality, is the somersaults Angela Merkel was forced to turn in order to reach agreement with her Grand Coalition partners; the deal looked suspect as soon as it was announced, and here are its first noxious fruits. Plenty more to come, I suppose.

Austria is right to protest Germany's car tax plans, but it is scarcely a paragon of virtue itself on the tax front, and indeed is another instance of the rule that Coalitions tend to add rather than subtract from the tax raft. It seems that there will be two budgets for 2014, perhaps on the principle that tax increases in the first one will have been forgotten about by the time the second one rolls along. The tax take runs at about 42 percent of GDP, with a top income tax rate of 50 percent, with social contributions on top of that, of course. There are worse countries in the EU, but these numbers are much too high. Public debt topped 74 percent in 2012 and is thought to have exceeded 75 percent in 2013. Other macroeconomic indicators are not terrible: unemployment low at 4 percent, deficit only just above the magic 3 percent. Austria has the normal "social partners" problem of excessive entitlements; I was quite shocked at how high pensions are when I swapped notes with an Austrian friend over Christmas. Coming from the UK, I was very much the church mouse by comparison. The budgets are full of assurances that Government spending will be cut back; but the reality, as ever, is that it was higher in 2013 than in 2012. Like every other government in Europe, the Austrian Coalition hopes to be saved by growth. It's not happening.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 87th) 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, but then quickly recovered one step.

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:

Russia's Olympic halo

Singapore coins it

Uzbekistan glitters

And Kitty's Execrations:

Austria on the take

Germany off its trolley




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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