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entrenched backwoodsmen on both sides are holding their fire

Kitty Miv, Editor
07 November, 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.

Despite occasional mis-steps, such as over solar panels, and the little "misunderstanding" between the US and Europe over phone bugging, you've got to hand it to the EU on the free trade front. A Commission Vice-President weighed in this week in support of the TTIP (Transatlantic Trade and Investment Partnership), and talks continued both on an investment agreement with China, and a free trade agreement with Japan. Full marks for trying, but one has to be sceptical about the chances for all three of these deals to come to fruition. Of the three, perhaps the most likely to work out is the China investment deal: it's a fact that current levels of investment between the two parties are extremely feeble, although the figures given by the Commission may underestimate triangular flows, for instance through Hong Kong into China and via such as the British Virgin Islands into the EU. At all events, this is definitely a win-win situation, with few vested interests standing in the way, something you cannot say of the TTIP, where entrenched backwoodsmen on both sides are holding their fire until they can see the whites of their enemies' eyes. I wouldn't want to equate the US Democrats with the European Parliament in too many respects, but it's fair to do so in terms of their ability to spoil trade deals.

It's also true that the pro-trade interests on both sides are not masters in their own houses. In the US, the absence of the Trade Promotion Authority (the TPA) hobbles the President, whose support for free trade is in any case ambiguous at best, so that the game will be played out to a large extent in Congress. What chance is there of an accord between Republicans and Democrats on such a thorny subject? And if the Democrats win back the House in the mid-terms, something that is much more likely than a Republican victory in the Senate, the TTIP is surely dead meat. In Europe, the equivalent battle will be between the Commission (mostly pro-trade) and the Parliament (mostly against everything except making endless, vexatious changes to the Commission's proposals on behalf of the "social partners," Eurospeak for Luddite, anti-competitive workers). And I haven't even mentioned the French.

That leaves the Japanese FTA. If it were not for Shinzo Abe's astonishing success so far in pushing his reform agenda, I would say the EU FTA was a non-starter, and there is plenty of raucous opposition to it already from Abe's political opponents. Probably it all depends on Abe's ability (and willingness) to tame the farm lobby, and the jury is very much out on that score. I am not very sanguine.

Jam tomorrow for the Portuguese, facing another year of austerity under the country's 2014 budget, but at least corporation tax is being cut, if only by two percent, to 23 percent. It's billed as a step on the way towards a target rate of 19 percent by 2018; but the situation is worse than that for bigger companies, which pay up to five percent more in surtax, plus a local supplement of up to 1.5 percent, making a total of 29.5 percent, which suddenly doesn't sound so attractive. The Spanish headline rate is stuck at 30 percent, so maybe there's an element of local competition in Portuguese thinking. Portugal is still under an EU bailout program worth EUR68bn, but does seem to be struggling free of the worst of its crisis, with a return to growth in the second half of this year and a small fall in unemployment. It reckons to return to the bond markets on its own account early in 2014, if not before the end of this year. Portugal may therefore be the second country after Ireland to return to stability, but it doesn't have Ireland's advantages: in 2012 Ireland pulled in USD29bn in FDI, whereas Portugal managed only USD9bn despite having more than double the population, meaning that Ireland's FDI per head was more than six times greater than Portugal's. It's no coincidence of course that Ireland's corporation tax rate is a minimal 12.5 percent.

Hopping across to Northern Africa via "Play It Again, Sam" Casablanca brings us to Morocco, which has also just recently published its budget for 2014 (it's that time of year) and it makes no nicer reading, unfortunately; in fact the Government is blatantly increasing taxation, driven at least partly by the World Bank and the IMF, which have been lending it money. The IMF will approve of the country's intention to reduce unemployment, running at 17 percent, but certainly won't approve of the Government's plan to do so by hiring a further 18,000 civil servants. This won't do much for the deficit, which the Government claims improbably will fall from 5.5 percent this year to 4.9 percent next year. Perversely, the World Bank has spent most of the last ten years helping the country to cut its public sector work-force. Morocco's main problem however is its bloated agricultural sector, which employs 45 percent of the workforce, and which the Government has encouraged with subsidies and tax breaks; but the only result of that will have been to discourage mechanization – why bother to work for a degree in engineering when your paymasters will shower you with cash for digging the fields? Presumably there is a major element of electoral calculation here, as is the case in Japan, and even in France, Morocco's ex-colonial ruler. Pressured by the IMF and the World Bank, the Government is now finally biting the bullet and cutting back on agricultural subsidies, which will of course simply increase unemployment – hence the 18,000 unnecessary new bureaucrats. FDI in 2012 was a paltry USD2.8bn, for a population of 32 million (per head, that is 60 times less than in Ireland). That's more than any other North African country, amazingly, and most of it came from France, as you would expect, which is hardly in a position to increase its assistance to the Maghreb when it can't even help itself out of its debt morass.

France actually provides the only mildly funny story in this week's doleful tax news, with the threat of French footballers to go on strike if the Government puts through its plans for a 75 percent tax on earnings over EUR1m. And there you were with images of plutocratic captains of industry tucking in to foie gras and champagne at Maxim's. No, it's the beautiful game where the truth is to be found! Mind you, they probably go to Maxim's as well.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 77th) 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 this week 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:

China invests

EU has a good week

And Kitty's Execrations:

France being beautiful

Morocco hiring more bureaucrats




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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