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.

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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.

The Former Soviet Republics: A Recapitulation (Part One)

Communism Schmommunism

Not all former Soviet countries were created equal. In fact, some of those nations experienced their own post-Soviet versions of communism, which later on, after getting rid of the humiliating subjugation they suffered under the communist regime, once that deplorable government system collapsed at the beginning of the 90s, it allowed them to flourish and prosper with relative ease, sprinting themselves above and beyond their former subjugators, in the social and economic sense.

When analyzing how the former communist countries have been performing in recent years –including Russia–, after the collapse of the USSR, there are some remarkable stories of countries that went through a relatively quick and successful adaptation to a market economy and to a democratic system. Granted, none of those countries have done a complete conversion yet, it is a work in progress. Judging by the results, however, some of those successful countries are much closer to their destination point (becoming a fully developed nation), than to their parting point (the big mess from which they started when abandoning the state-controlled economic model).

As we can see in the table below, the most outstanding performance cases, in descending order, are: Slovenia, the Czech Republic, Slovakia, Estonia, Poland, Lithuania, Hungary, Croatia, and Latvia. The first six of these countries already enjoy a significantly higher output per capita than Russia’s, their former ruler, double digits superiority (Slovenia has a whopping 58% advantage, while Poland has a 18% favorable difference). It is important to keep in mind that Russia has an output per capita of a mediumlydeveloped nation, like Argentina, Chile, and Malaysia.

Former USSR Countries

To simplify and make more sense of the comparative analysis, let’s group the nine mentioned countries in four subgroups:

  • Subgroup One, Slovenia and Croatia. These countries (along with five more) were part of the former Yugoslavia, which was dissolved starting in June 25, 1991 and ending in 1998 —when the last Serb-held enclave in eastern Slovenia was returned to Croatia, under UN supervision..
  • Subgroup Two, the Czech Republic and Slovakia. Both republics were part of Czechoslovakia, before a peaceful, negotiated dissolution of that former nation in January 1, 1993.
  • Subgroup Three, the three Baltic Republics: Lithuania, Estonia, and Latvia.
  • Subgroup Four, the two remaining nations: Poland and Hungary.

There rarely are any accidents in social sciences. The relative overperformance of the nine countries of the four subgroups clearly adheres to a most rigorous cause/effect analysis. Let’s see why.

As previously stated, Slovenia, along with six more nations (Croatia, Montenegro, Serbia, Macedonia, Bosnia and Herzegovina and Kosovo –in descending order of  current economic output per inhabitant) were part of Yugoslavia. Yugoslavia is a fascinating subject for study.

In a nutshell, Yugoslavia, having been occupied by the Axis forces, emerged from WWII with Marshall Tito’s (Josip Broz) ruling, under the USSR’s umbrella.  Thus, Yugoslavia was initially part of the Soviet system at the end of WWII, even being considered very loyal to the Soviets the first few years after the war. However, Tito had a very clear spirit of independence, never showing any real submission to the Kremlin, just the standard respect and cooperation attitude as equals, and a little bit of deference to a larger, presumably more consolidated nation. That spirit of independence proved to be unbearable to Stalin, who as history clearly shows, preferred to view the satellite Soviet republics as subjects, not equals. Tito was the only government leader within the USSR to successfully challenge Stalin, getting away with it. On June 28, 1948, Yugoslavia was formally expelled from the Communist Information Bureau (Kominform), a de facto official withdrawal from the Soviet sphere.

Hence, thanks to Tito’s stern spirit of independence, all present republics that were part of Yugoslavia had a significantly better head-start when the USSR collapsed and Eastern Europe began to re-encounter the path of free markets and democracy.

Upon Tito’s death in 1980, and with the fall of communism throughout eastern Europe, the Yugoslav federation began to unravel, once the demands for independence among the different ethnic groups intensified.

On June 25th, 1991, Slovenia declared its independence from Yugoslavia, based on a landslide –88% of the vote– referendum for independence held on December 23, the prior year. Unlike Croatia, Serbia, and Bosnia and Herzegovina, Slovenia was able to secede from Yugoslavia with relatively little violence. For the rest of the republics, seceding from Yugoslavia and becoming independent turned out to be a bloody and long civil war. That explains most of the lagardness of those republics; of course, there are also other factors that explain why they are currently so behind the rest of the pack.

As for the second subgroup, the Czech Republic and Slovakia, there are three major positive factors that have greatly contributed towards their relative outperformance in relation to the former USSR countries:

a) Czechoslovakia was the industrial bastion of the Habsburg Empire in the XIX century. Hence, there was sort of like a historic memory imbued in society’s subconsciousness, in such a way that when circumstances required it, in the new found independence, it was relatively less difficult for them to make a successful transition towards a market economy and a democratic system.

b) Both, the Czech Republic and Slovakia have always considered themselves to be fully Europeans. Geography, in turn, also has heavily contributed in that direction, given their proximity to Austria, Germany, and Poland.

c) Although not necessarily at the same level than Yugoslavia’s, the spirit of independence of Czechoslovakian society has also been very marked. During the spring of 1968, Alexander Dubcek, the then newly appointed head of the communist party, initiated a liberation movement, the Prague Spring, which adopted the motto “socialism with a human face”, for their cause. Undoubtedly, in no small measure, Dubcek’s attempt to liberalize Czechoslovakian society was inspired and encouraged by Yugoslavia’s example. Although Dubcek affirmed his loyalty to communism and the Warsaw Pact, that proved too hard to stomach for the USSR, who seven months later, on August 21, ended that experiment by sending Warsaw Pact troops to Czechoslovakia and removing Dubcek from his post, sending him to an obscure forest supervising position in a remote area in his native Slovakia, where he was not allowed to talk to anyone besides his family.

The third subgroup’s history is a truly fascinating and encouraging one. These three relatively tiny nations have been invaded and submitted time and time again throughout history, mainly by the Russian Empire.

The way the Baltic republics have taken advantage of their relatively new independence has been remarkable, a genuine role model for the rest of mankind.

Despite lacking critical mass given their relatively small population size (only in that respect), they have shown the whole world what a determined society eager to improve their standard of living can accomplish in just a couple of decades, and counting.

The great success of the Baltic states must be particularly painful to digest for an autocrat like Putin. It is very interesting to observe how the income gap between these tiny nations and their former ruler is getting bigger by the day. An unquestionable testimony of the evident superiority of the Baltic Republics’ socio-economic system versus Russia’s.

Finally, the fourth subgroup is also very interesting: Poland and Hungary. Both nations are medium sized, both in population and in territorial extension. Poland is in a class by itself, since its break with the forced communist past has been wholeheartedly, very frank, open and consistent. Hungary’s conversion to a market economy and a free democratic system has been a very hesitant process, particularly under the present government. Even so, the initial impetus Hungary received in foreign investment and technology transfer was sufficient to achieve its current level of development, despite its many drawbacks, challenges and threats.

This brief recount of historic events clearly explains a great deal about the relative performance of most of the overachievers among the former Soviet republics; the cause/effect relationship is quite evident. There is no price too high to pay for a free, orderly society, under the rule of law. The results speak for themselves.

Continue reading in the next post of this two-part series.

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