Integration Vs. Separation

Global-Systems-IntegrationMuch was written in recent weeks and months about Scotland’s separationist movement. Most fortunately, the outcome of last week’s referendum on the subject is that Scotland will remain part of the UK, not becoming an independent nation.

In no way do I intend to be disrespectful to the large minority of Scots that voted for independence. Not at all. My position in this type of issue is based on what works better for the majority in the long run. I am a profoundly political person, in the Aristotelian way: looking for the common good. I am not a partisan person. I have never belonged to any particular affiliation and I try to be, as much as I can, a pragmatist.

Thus, at the end of the day, what really matters is the result of a well done cost/analysis of a possible separation. Indeed, it is hard (if possible at all) to run across any solid, comprehensive case where the benefit of separation of any region within a country far outweighs the associated costs. A notable exception to this would be any instance where civil rights are not fully respected, as was the case of the former USSR satellite countries that as soon as they had a chance when the USSR imploded, they didn’t hesitate to go towards the independence route. That certainly is not the case of Scotland, Catalonia, and many more jurisdictions that are part of a democratic developed nation.

The September 18th referendum on the possibility of Scotland becoming an independent nation must be seen as a wake-up call for the world at large about the risks inherent in separationist movements in different parts of the world, particularly in developed nations.

From my perspective, the major reason against any separationist movement is that the traditional nationality concept is increasingly becoming an anachronism, given its many limitations and inconveniences. As I explain in chapter 5 (Globalization’s Reach and Implications) of my book GLOBALIZATION:

“In many ways the traditional citizenship concept is outdated and obsolete due to the instantaneousness of modern communications and the globalization of the products and services markets. It is no longer functional, and therefore a new approach is needed.

Naturally, all the essential elements related to citizenship are basically immutable. Culture is the most essential element of citizenship, with multiple subdivisions and ramifications, like local art. Specific items essential to the nature of citizenship are language, history, geography, customs, cuisine, music, literature, proverbs, and so on. These concepts are so deeply rooted in the collective psyche that no human power can disrupt them. The cultural and artistic aspects of a nation’s collective are so strong that they cannot be manipulated or modified immediately. However, they are modified—to a degree—in an evolutionary manner, naturally and slowly. Additionally, cultural boundaries do not allow much room for more than gradual marginal changes.

Citizenship’s formal elements are those that basically no longer make sense: borders and currencies…

With the current needs and opportunities the world presents us, it has become consistently clear that our individual and collective mindsets must change into that of a global citizen. This means incorporating our own culture and upbringing into a broader mind frame, that of the global citizen.”

Most regrettably, mankind’s history has been characterized by a myriad of grievances, wars, deaths, misery, territorial annexation by military force, and so on. Theres is no exception to this. However, if constructive and practical thinking is utilized, the cost/benefit of trying to turn the clock backwards in history, trying to restate a past situation, is overwhelmingly tilted towards the cost side. The benefits to be reaped by any possibility of independence are washed away by the multiple costs associated with it, particularly when the independence movement is related to a region with a rather small population —with insufficient economies of scale. That is the case of Scotland and Catalonia, among many others.

In addition to the previous point, from the moral and spiritual perspective, past grievances and offenses must be forgiven. Otherwise, the seeds for perpetual conflict are in place everywhere in the world (i.e., the Arab/Israeli conflict, which has been going on for over two millennials).

However imperfect the current democratic system is (and boy, it truly is!), there does not seem to be a better way to settle differences than through negotiation, and free vote, just as it happened in Scotland. Undoubtedly, the perfect balance won’t be ever achieved, among other things because it is a moving target.

Plenty of mirages and delusions behind most separationist movements surface once a careful analysis is made. The economy, the world, and even psychology do behave in a certain given way. Experience and history unequivocally show it. Hence, a personal perspective, if is not rooted in reality is doomed to failure. The different separationist movements in different parts of  the world are not rooted in a clear understanding of how society and the economy work. Not coincidentally most separationist movements have a profound resemblance to the relatively recent vote in Switzerland whereby severe restrictions to the inflow and long-stay residence of foreigners is going to be limited (see related Post, Does Protectionism Protect?).

Throughout history, Scotland has produced very bright people. Among them, Adam Smith, deservedly known as the father of economics. The big irony being that in the land where the father of economics was born, lived, and died (224 years ago), a significant part of the population does not have a clue about the great findings their brilliant countryman made over two centuries ago. If they did, they would be addressing their cultural and identity efforts in a more constructive direction and manner.

Most certainly society requires a profound structural change. However, the great virtuous change inevitably requires as a prerequisite the preservation and fortifying of the many strengths the current system has, and a very well-calibrated effort to revamp and remove only the major weaknesses. The old adage “If it ain’t broke don’t fix it” must be carefully observed at all times.

The most harmonious way to progress is through teamwork, with collective efforts towards the common good. Unity is a must.

Mankind has struggled a lot to get where it is today, far from the cavemen we used to be thousands of years ago. We all should strive for unity not for divisionism.

Granted, the world is far from perfect. However, it is rather naive to expect a sort of magical solution to most (if not all) challenges by dividing already established nations. That is a misguided effort and objective. Most of the time, separationism is an on-balance value destructive proposition.

Unity within and among nations is a major strength. The myriad of imperfections within the system must be overcome, within the system, not severely impairing or destroying it.

Mankind’s collective knowledge on globalization, integration, and free markets —among other subjects— is a work in progress, and thus with plenty of catching up to do. Nonetheless, when dealing with the integration Vs separation of nations it is already unequivocally clear what works, what doesn’t work, and why. Hence, it is truly sorrowful to still see some separationist movements trying to materialize naive and impractical dreams and aspirations with the wrong approach.

Competitiveness Among Nations: Taxes (Part One)

tax-burdenIn recent months there has been a worrisome trend among a certain segment of the US’ political spectrum. Said political segment is against the redomiciliation (tax diversion) of US corporations to countries with a substantially lower tax burden.

If successful, this repudiation would be an escalation of a shameful movement in that direction initiated around ten years ago, when Section 7874 of the tax code was enacted, imposing significant limitations to the free movement referred. Before that, there were no regulations and limitations to tax diversion movements by US corporations.

In principle, such a relocation by US corporations is a zero-sum game and hence, it is against the economic interest of the US Treasury, since it tends to lower its tax base.

The major considerations made by the US Congress in support of that initiative are mainly two:

  • The harm made to the US’ tax base.
  • Corporations engaged in such redomiciliations are behaving in an unpatriotic manner, so that trend has to be stopped in its tracks or, at the very least become more limited and regulated.

To avoid making a confusing reading of the subject a clarification is in order. Nobody will question the legal power any Congress in the world has to enact laws and regulations: that’s the essence of their existence.

My focus is not from the legal perspective. It goes well beyond legal aspects. It goes to the core of things in socioeconomic issues: the common good. Hence, my objective is a pragmatic and moral analysis about what should be done and why.

Assuming the initiative were enacted into law, if no further analysis were made, that could be the end of it.

However, a further analysis of the issue very rapidly unfolds a radically different conclusion to the group’s redomiciliation repudiation.

Aiming to put this issue under the proper perspective and arrive to a solid, self-sustainable solution, it is indispensable to analyze and answer the following seven questions:

  1. Is competition among nations valid?
  2. Is competition among corporations valid?
  3. Is global competition (as a concept) essentially OK?
  4. Are nations legitimately entitled to differentiate themselves, among other things, with different tax structures?
  5. Is it logically sound and morally valid that governments try to shield themselves from the effects of society’s free will, from free markets, from the common good?
  6. What is the (philosophical) limit of the state in tax matters, particularly in the light of the global economy? What should be the limit if current practices are not self-sustainable?
  7. What is right, what isn’t, and why?
  8. Where to draw the line between right and wrong?
  9. How to deal with this situation looking for optimal results?

The answer to the first four questions is a resounding yes, since those questions deal with the very essence of  free markets and that of the global economy; the US has essentially been championing (very successfully, in fact) this political philosophy during most of its existence.

Questions 5 to 9 are a bit more complex, yet relatively easy to answer properly. To that end, let’s keep in mind three fundamental guiding concepts, already mentioned, that should be observed at all times as a sine qua non condition for answering questions 5 to 7:

  • The common good
  • The search for an answer logically sound and,
  • Morally right

Reiterating, the core issue is what to do about corporations moving to countries with a substantially lower overall tax burden? How to deal with them and why?

If the three previous conditions are met, the solution is inescapable. A correct differentiation between cause and effect provides the solution. Balanced and effective solutions to any situation should always strive to deal with the causes, not only with the symptoms.

As it can be seen, the group of politicians behind repudiating the redomiciliation are trying to deal with the symptoms, and not with the causes. Hence, they are wrong from inception. Moreover, their strategy does not place the common good at the top. Hence, this group of politicians isn’t providing a solution that is logically sound (for obvious reasons, already expounded), nor morally right.

Contrary to the strategy being pursued by the policy makers repudiating the tax diversion process, the root of the solution in this issue is not to try avoid competition (among nations, in this case) but to meet it head on.

Granted, facing challenges head on requires a great stature, greatly lacking in most congresses throughout the world. That’s why congresses are (most of the time), so adept to “easy” ways out, and “quick fixes”. I emphasize the words “easy” and “fixes” because the type of solutions congresses usually develop when confronted with tough situations are anything but “easy” and, regrettably, most of the time they do not “fix” anything.

Is shooting-the-messenger a morally valid and effective strategy? Absolutely not. We all know that.

What must be wholeheartedly repudiated are those ridiculous attempts of avoiding tough decision making by congresses, in this case the US’.

That pernicious way of thinking —and acting—, avoiding tough decision making,  is extremely costly to society.

When compared to nations like Ireland, Singapore, Switzerland, Canada, and others, the US’ tax structure is not competitive. Hence,the real solution lies in reengineering the federal government, which would inevitably conduct to belt-tightening, and drastic reduction of government expenditures, a truly tough ordeal. That is why the political group trying to repudiate the redomiciliation is attempting to go after a smoke screen, instead of doing what is right, however difficult and challenging it might be.

From many angles, it is inconceivable to see that 238 years after the publication of The Wealth of Nations, Adam Smith’s superb book about free markets, mankind is still struggling to grasp the basics of Smith’s findings (read more here). Naturally, Smith did not invent the way the economy works, he simply conceptualized it in a superb manner. His findings were so powerful (valid and true) that they have stood the test of time unscathed.

As the issue under focus clearly exemplifies it, there is still a lot of collective learning to be done, given some unsettling trends and attitudes, like the one we’re dealing with. The lack of understanding of capitalism, the common good, and of how things really work and why is quite evident.

Part Two continued here.

Top 10 Posts of Understand Globalization

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When ordering the Russian Army to take control of key points of Ukraine’s Crimean Peninsula on the first weekend of March, it is highly unlikely that Vladimir Putin had appropriately contemplated the full financial and economic implications of such a decision. Read More

Globalization and The Olympics (Part I)

Every four years, during two weeks and a half, the entire world –figuratively speaking– takes a breather to see and learn about high-performance athletes competing with the best-of-the best, in search of  new olympic –and world– records setting and all sort of sports feats. Read More

From Hydra to Phoenix. The Transformation of Developing Nations

Indeed, occasionally it is both amazing and truly ironic how the global socio-economic cycle evolves. Not so many years ago, during the late 80s and early 90s, most of the underdeveloped world was in shambles, overburdened with debt, high levels of inflation, and frequent recessions and currency crises. Developing nations were, at that time, a basket-case. Read More

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Globalization and Capitalism

Both, capitalism and globalization have often been vilified –sometimes even paired up as a super villain duo. They have been charged with pretty much everything going wrong in our lives. Granted, sometimes, poorly implemented versions of both phenomena are to be blamed (The Cyprus debacle being one of the most recent manifestations). However, a careful and more detailed analysis will reveal that things are not as simple as they are often believed to be. In other words, let’s not shoot the messenger. Read More

Outsourcing: Opportunities, Myths and Realities

Outsourcing is a very widespread practice, with unknown boundaries.  In that respect, the US is a leading nation, as in many other areas. A constructive and realistic way to visualize jobs displacement by outsourcing is as an opportunity to upgrade skills and remuneration. History and experience unmistakably show that, in the long run, excessive emotional attachment to personal working habits does not pay well. An open, flexible mind, with a strong desire to learn new skills, is the best preparation of them all, for the hyper-competitive global economy. Read More.

Adam Smith: The Wealth of Nations and Globalization

An Inquiry into the Nature and Causes of the Wealth of Nations (1776) was the original title of the seminal book that lay down the conceptual framework for modern Economics. The book is commonly known as The Wealth of Nations; it was written by the Scottish Adam Smith (1723–1790). The impact of his brilliant work in the following generations has been such that Adam Smith is indisputably considered the father of economics. Read More.

David Ricardo: Comparative Advantages and Globalization

In the previous post we boarded a similar line of thought, regarding Adam Smith and The Wealth of Nations. It is only natural, almost a reflex, to do the same thing with another pillar of economics, the  British, David Ricardo (1772-1823). Read More.

Five Positive Effects of Globalization You Might Have Missed

There’s much that’s happening around the world and in your own backyard as world leaders, academics and everyday people like you and me push toward a more unified global existence. These people are asking and finding answers to some of the toughest questions we face. These are five really good articles we found that you might like. Read More. 

Joseph Schumpeter and Creative Destruction

The original concept of creative destruction was introduced by the German economist and sociologist Werner Sombart (1863–1941) and developed and popularized by the brilliant Austrian-American economist Joseph Schumpeter (1883–1950) in his book Capitalism, Socialism and Democracy (1942). Read More.

The New World Order: G7 and E7 Nations

There has been a profound change in the world’s progress as we have known it up to recently; capitalism’s geography is changing. In recent years, the average economic growth rates gap between the big emerging countries versus the big developed ones has been both substantial and consistent; that has already been going on for a considerable number of years, overwhelmingly favoring the largest emerging nations. The relative economic and political weight of the E7 economies has been the net result, said weight has been progressively increasing compared to the G7 countries’ weight. Read More.

The Former Soviet Republics: A Recapitulation (Part Two)

 

One of the many fascinating subjects of analysis in globalization is how the former Soviet republics have evolved after the 1991 implosion of the USSR to this date.

Continued from Part One of this series, the table below summarizes some key information, an indispensable element in order to make an objective assessment based on the most relevant hard data available.

Former USSR Countries 2

 

Out of the 27 countries on the table, 7 have been highlighted in italics; they are the countries that were part of Yugoslavia. Two of these countries have already surpassed Russia in their GDP per capita, Slovenia and Croatia. From the remaining 20 non-Yugoslav nations, 7 of them already  have reached output per capita levels higher than those of Russia’s: Czech Republic, Slovakia, Estonia, Poland, Lithuania, Hungary, and Latvia.

What is the lesson to be learned from this most welcome development?

From my standpoint, the lesson to be learned is a simple one: Any nation, regardless of its size and natural resources, can accelerate its rate of economic growth while simultaneously enhancing its social fabric. This is particularly more so if the nation in question is far behind in economic development from the first tier countries (developed countries). There are only two indispensable prerequisites:

  • A genuine desire to fast-track the country’s development.
  • That desire has to be transformed into intensive work and order, of a creative and constructive nature, making the most of the country’s comparative advantages.

All former Soviet nations reconstructed their societies and economies essentially from scratch, once the USSR collapsed. They had plenty of headwinds working against them: they were financially broke, with negligible monetary reserves, and they had no capitalist nor democratic system in place. Their economies were mostly in shambles—or not far from it—after over four decades of being satellites of the Soviet Union. In some respects, they were in a worse shape than if they had just emerged from a military war.

If those 7 nations have been able to transit from such a deplorable socio-economic system as the Soviet one to a relatively high level of social and economic well-being in around 20 years, any other underdeveloped nation has no valid reason for not doing so.

During 2013, Russia’s output per capita ($17,920) was #77 in the world, just a notch below Argentina’s ($18,600, #75).

The merit behind those 7 nations cannot be overstated. Having been a part of the Soviet system and being able to surpass its former ruler was no easy task.

As for the rest of the former Soviet republics that are at the bottom of the table, the conclusion is the same as before: their economic output per capita is a fair reflection of the day to day capabilities each one of them has—or lack thereof—to properly organize themselves, implementing constructive structural reforms within a progressively decreasing corrupt sociopolitical system.

That simple, irrefutable truth is not fully understood; otherwise, constructive change would be at work at turbo speed everywhere.

That is the great challenge, yet the greatest opportunity of our generation, to implement the required structural reforms, creating the right incentives for  new jobs and wealth generation, to close the huge gap that separates all underdeveloped nations from the developed world. That challenge is worth several trillion dollars of wasted opportunities, as it is clearly explained in my book GLOBALIZATION.

The closer the political subjugation of any former soviet republic is to Russia, the poorer it is. In other words, the most independent, free-minded former soviet republics are, not coincidentally, the most affluent.

Is Panama Taking Off for Good?

Panama-City-SkylinePanama was formed as an independent nation in 1903, by a separation from Colombia. Since then until 2009 Panama had been a typical underdeveloped nation, basically characterized by mediocre government management.

On July 1st of 2009, Ricardo Martinelli was sworn in as Panama’s president; his term expires shortly, next June 30.

The transformations that president Martinelli made to the Panamanian society during the past five years as head of that Central American nation converted it from a sleep economy, into a roaring one.

Taking the Panama Canal’s expansion program as the initial platform, Panama has been able to successfully transit an important part of its economy to banking, services, medical tourism, and rising commerce. Panama has also increasingly become a very attractive country to set-up regional offices of large multinational companies.

Panama has a population of 3.6 million (90th in the world), a total area of 75,420 sq. km. (118th in the world), a total GDP of  US $61.5 billion (90th in the world), and a GDP per capita of US $16,500 (81st in the world).

Panama is an excellent example of a relatively tiny nation that has been recently moving smartly along the lines of its basic competitive advantages.

Irrespective of its tiny size, Panama’s average growth rate during the past three calendar years was a whopping 9.66% (10.8%, 10.7%, and 7.5%, for 2011, 2012 and 2013, respectively).

Within Latin America, Panama’s $16,500 GDP per capita (2013) places it 14% below Chile’s and a notch below Uruguay’s; looking in the opposite direction, Panama’s per capita GDP is a notch above Puerto Rico’s and 6% above Mexico’s. So, the way things stand today, if current trends were extrapolated forward, the first two Latin American nations to achieve full developed status in the years ahead would be Chile and Panama.

During the five years of Martinelli’s administration Panama’s extreme poverty levels were reduced from 38% to 29%. Still very high, albeit a remarkable improvement in such a relatively short period, five years.

In Panama, the demand for workers is so high that even a relatively large dislocation of workers —just a few weeks ago, around 9,000 workers were fired from the Panama Canal’s expansion project—  did not destabilize the economy because they were quickly absorbed and placed in other jobs. The firing of those workers was brought about by a controversy between the subcontractors; currently the case is being disputed in court. Thankfully, the expansion works have already resumed, one month after being suspended.

Hence, time and time again history has proved that although a substantial critical mass can be an advantage for an accelerated pace of development (China’s case), the lack of it is a factor that, with the right government policies and initiatives, can be easily overcome.

It is almost a certainty that, among others, Martinelli was inspired for the design and execution of his strategy by the Four Asian Tigers’ near miraculous turnarounds from rags to riches in less than three decades by the end of last century.

How did Martinelli achieve such a dramatic injection of vitality and growth in Panama?

With the classical recipe, a-la-Singapore: mainly through heavy investment in public infrastructure, opening-up the economy, and removing the major obstacles that hamper growth.

Martinelli lacked previous government experience. He did have though, a good trajectory as a businessman; as a supermarket tycoon, with around 10,0000 employees under his umbrella. In no way am I suggesting that this is a guaranteed recipe for success. It is not. The are innumerable examples of former businessmen and/or corporate officers who have failed miserably when being elected Presidents or Prime Ministers, like president Vicente Fox (2000-2006) in Mexico. Thus, although Martinelli’s experience in business surely was of great help, to be able to achieve such dramatic results in a relatively short time requires many additional attributes which, unfortunately, are in short supply.

Behind major success, as has been Panama’s economic case under Martinelli, there is a state of mind, a different mind frame than the one prevailing for decades (generations, in most cases). It is about leadership, statesmanship, about wise, well implemented profound structural change that unleashes the creative potential and productivity of a lagging society.

A break with the past in many aspects is a must. Martinelli has recently stated “We Panamanians are the Phoenicians, the new Phoenicians of the modern world”.

Martinelli has proved to be a master student of history and of the true foundations of sound economics.

In Panama’s case —like practically everywhere else that this has happened— such a great break with the past is essentially the work, vision, and determination of a single person, the outgoing president Martinelli. Hence, it can be done. Moreover, such a constructive break with a mediocre past should be done everywhere, most particularly starting with the poorest nations on earth.

In the political front, Martinelli has been a vocal, unwavering critic of the many atrocities and extremely poor government policies pursued by Venezuela, Ecuador, and Argentina. That did not gain him many friends, particularly among the abundant populist media in Latin America.

Not all of Martinelli’s efforts were addressed in the right direction. After all, he is only human.

  • Martinelli unsuccessfully tried to change the constitution to extend his stay in office.
  • Likewise, he was also behind his wife’s candidacy for Vice President of Panama, which  surprisingly resulted in a losing ticket.

By itself, the first point did not necessarily entail poor judgement. However, when combined with his wife running for the Vice Presidency —fortunately in a failed ticket—, the mere appearance of nepotism is utterly unacceptable, suggesting Martinelli’s obsessive attachment to power, with all the vicious consequences inherent to it.

In the economic front though, the cause/effect relationship in Panama’s case (like in all other virtuous transformations) is so evident that it can almost be touched.

Life is an open book, an encyclopedia. Thus, we have to learn to learn from it. That’s wisdom. Most fortunately, as Panama’s example proves it, this critical learning process is alive and well, albeit far from running at full steam. Read more on Why are most of the world’s nations socially and economically underdeveloped?.

Aside from Martinelli’s notorious attachment to political power, it is very encouraging and gratifying to witness the work, vision and execution of a government leader like him, injecting such a powerful dynamism into an otherwise rather ordinary country.

There is no substitute for good (preferably great) management.

Juan Carlos Varela, the winning candidate in the recent presidential elections, is programmed to take office next July 1st, for a five-year term. Varela has been part of Martinelli’s administration during most of it. First as the Foreign Secretary, and later on as Vice President. To Varela’s credit, he turned sour on Martinelli when the later intentions to place his wife in his protege’s ticket to the presidency transpired.

Infrastructure investment in Panama has not kept pace with economic growth: electricity and water are rationed in the tallest buildings; the sewage system easily overflows when raining, among other pending tasks. As a result, there is a fair risk the economy can overheat, if it has not already done so.

Assuming the previous aspects are appropriately dealt with, and if Varela sticks to the essence of Martinelli’s economic agenda, in addition to adding his personal touch for improving it (for instance by demonstrating to be an effective fighter against corruption —the backbone of his presidential campaign), Panama could become a bright star in the world.

Panama is not that far from becoming another role model country, a living example of what really works in economics and society.

The key behind this turbocharged growth possibility for decades to come lies in consolidating the good work, and strengthening institutions, transforming it into state policy. Varela has the great opportunity to do so.

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