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the economic basket case of Europe

Kitty Miv, Editor
31 July, 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 used to be known as the bread basket of the Soviet Union. Now Ukraine is more like the economic basket case of Europe. What's happening in the east of Ukraine right now is truly tragic. But leaving aside that ethnic conflict, the other tragedy is that things ought to have turned out so much better. When Ukraine gained independence from the Soviet Union, it was generating one-quarter of the USSR's agricultural output while its diversified industrial sector was one of the bloc's main workshops. But instead of building on this base, successive governments seem to have squandered Ukraine's economic potential to the point where it has probably gone backwards rather than forwards. A huge problem is that corruption is rife and pervades the public and private sector at all levels. Surviving as a business very much depends on who your friends are, and while some well-connected business people are able to avoid paying taxes entirely, others end up paying two or three times more than they need to, with the excess usually going into the pockets of poorly-paid tax officials. Fail to pay these almost obligatory bribes and expect a visit from the Tax Inquisition. And don't even bother going to court because the judiciary is just as bad, pressured as it is by the Government to arrive at the "right" decision in many cases. Corruption was the major reason given by European businesses for their reluctance to invest in Ukraine in a recent report by the US State Department and is probably the reason why FDI has been so dismally low in recent years compared with other emerging economies. Not that attempts haven't been made to modernize. Indeed, the country's flirtation with the EU was seen as a significant step in the right direction. However, the tug-of-war between East and West over Ukraine has probably been just as damaging for the country as its weak and self-interested governments. Surprisingly then, we award Ukraine an encomium this week, after Prime Minister Arseniy Yatsenyuk ordered a tax reform which has as one of its goals the reduction of corruption within the tax service. Although it has to be said that his motives for doing so aren't exactly driven by a sense of idealism. What he is trying to achieve is to ensure that more tax revenue actually reaches the Government's coffers so it can afford to fight the Russian-backed rebels in the east. Shame though that it has taken such a crisis for action like this to be taken.

It's hard to fathom what has gone wrong for some of the many wealthy offshore financial centers that they seem perpetually to be struggling with budget deficits and considering introducing new, or raising existing, taxes. True, the financial crisis, the effects of which still linger, hit company formations and investment flows – the bread-and-butter of the standard IOFC – and taxes are very low in most of these places. Yet you'd still think they'd be raking it in given the hundreds of thousands of companies, investment funds, insurers, trusts and others that call these places home. Apparently not. We have seen fiscal crises spread across the Caribbean offshore territories in recent years, and now Guernsey, while not really anywhere near crisis point, has seen its deficit increase and looks like going the way of its friend, neighbor and competitor Jersey in introducing a goods and services tax. It probably won't affect the finance industry very much, but a lot of local businesses are up in arms about it, especially as they only found out about the plans through a government leak. The Government says that GST will enable it to cut income tax. But it's hard to see how this move can be passed off as "revenue neutral" when the objective is to increase the tax take. Guernsey does a lot of things right, but this time it seems to be getting it wrong.

The Chilean Government's plan to invest heavily in education, part of its wider strategy to reduce income inequality, is a laudable one. However, the plan isn't without its risks: much of the money will come from a hike in corporate tax from 20 percent to 27 percent, recently endorsed by Chile's Senate, which is a pretty hefty increase when you consider that the global corporate tax trend has been firmly downward over the last few years, hardly reversing even when the financial and economic crisis struck. It remains to be seen how foreign investors react to the move, but it is probably safe to say that stakeholders in the Chilean economy are hardly jumping for joy at the prospect of a 7 percent income tax increase. Since the dictator General Pinochet was ousted, Chile has actually become one of the region's economic success stories: growth averaged 5 perent a year between 2003 and 2013, and GDP per capita, at USD19,000, is not far behind some EU countries like Greece and Portugal. Its sovereign bond rating is also the strongest in South America. So you could say that there is quite a lot to lose if the Government's policies go wrong. Even though she leads a left-wing coalition including the Communist party, Chilean President Michelle Bachelet is also a pragmatist, noting recently that without growth, there will be no fall in inequality. If that's the case, maybe she should revisit the tax reform plan.

Prime Minister Tony Abbott won a decisive victory in last year's Australian general election. But it is Clive Palmer, leader of Palmer United, who, along with his three Senators (four if you count the alliance with the Australian Motoring Enthusiasts Party's senator), who seems to hold the keys to power there at the moment. Yes, they sound more like an Australian Rules football team than a political party, but without the PUP's Senate votes, Abbot wouldn't have repealed the carbon tax, his main objective for this parliament. This whole affair has not really shown the Australian political system in the most favorable light. But I think Abbott deserves something of a break, so his government gets the thumbs up for its proposal to expand tax breaks for pensions, which can only be a good thing given the demographic time bomb waiting to explode in many advanced countries. I read some worrying statistics from the UK a couple of days ago, which showed how live-for-today Brits are going to suffer tomorrow for their lack of prudence today. If attitudes don't change rapidly, a substantial proportion of the population in the future will be relying on state support, and it is a pattern repeated around the world. So anything that governments do to encourage saving for retirement is positive. Let's hope Clive Palmer agrees!


Kitty's Encomiums and Execrations

Methodology: each week (this is the 115th) one or more countries are given encomiums and one or more 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 at plus 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. Etc etc and now it's on plus 1 again.

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:

Australia defusing the time bomb

Ukraine corruption reduction

And Kitty's Execrations:

Chile against the grain

Guernsey fiscal mystery




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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