24 November 2007

Paying Taxes

PricewaterhouseCoopers and World Bank have just published a new report on corporate taxation, "Paying Taxes 2008":

"Paying Taxes 2008" offers data on total tax rates, payment frequency, and the time needed to comply with tax regulations in 178 economies. This year's report finds that business taxation goes well beyond corporate income taxes. It identifies five types of taxes that firms pay: profit, social, property, turnover, and other taxes, such as municipal fees and fuel taxes. The number of steps, time requirements, and various cost indicators are used to determine the overall burden of paying taxes.

You are probably wondering who is No. 1? Ireland? Honkkong? Or
maybe some Central - Eastern European country, e.g. Estonia? No.

One more surprise: it is Maldives.

21 November 2007

RIO'S VOICE: Growth and development styles?

From the WSJ "Brazil Says ‘Não Obrigado’ to China-Style Growth Rates":

At the International Monetary Fund meetings, most ministers points to the 10% growth rate of China with a mixture of envy and awe. But Brazil’s finance minister Guido Mantega says 5% will do just fine. “I don’t know if it’s desirable to grow more than 5%,” he said in an interview. “We prefer to grow at a medium rate.”

My first reaction was to wonder who could possibly believe that. I couldn't, and I'm Brazilian! If Mr. Mantega's claim were true, we would be willing to forego half of the income per period we could have if growth rates were equivalent to Chinese ones. Keeping the pace, Chinese will double their GDP in 7 to 8 years, while it will take us around 15 years to double ours. Everything else equal, that roughly translates into twice as much time to double our standards of living, and why would anyone go for that?

According to the WSJ article, it seems as if Mr. Mantega is concerned about inflation, which is easier to keep under control when growing moderately because of lower demand pressures, and about being able to lower interest rates:

At mid-level growth rates, he said, it was easier to keep inflation under control – and provide additional incentive for Brazil’s central bank to lower the country’s sky high interest rates. The Brazilian benchmark Selic is now 11.25%, down from 19.75% in Sept. 2005.

“The conditions are there so that interest rates can head toward levels in civilized nations,” said Mr. Guido, by which he said he meant a nominal rate of 7% to 8%

But wouldn’t that ignite inflation?

I'll ignore the contradiction this time. Important to note now, however, is that China's 10-year high inflation is well within Brazil's target of 4.5% ± 2 p.p. It is possible to grow fast while maintaining prices under control, as long as the economy is not growing beyond it's potential rate. [For those thinking of accelerating inflation in China, remember growth was also accelerating past 10% a year.]

Funny enough, the other day I ran into China Daily's op-ed "China is on the right path to development". From what I wrote above, one could think I would agree with it, and that was my impression at first too, however the title of the article is rather misleading. Instead of focusing on the policies and institutions allowing for Chinese growth, the author in fact discusses the responsibilities that come along with the country's rise.

He declares that "the current international economic order and rules, which were mostly formulated by Western powers to reflect their interests, do not work well for the realization of China's long-term and strategic interests", and goes on to essentially state that China ought to abide by its own commitments, but shouldn't give in to "ceaseless demands from Western powers for further opening and reform".

Unfortunately reality is not so easy to deal with. Policies that benefit a country at the expense of its trading partners will certainly lead to retaliation, as history has shown over and over. The US Congress has already indicated it will pass a bill raising tariffs if the Chinese don't revalue the Yuan, recent events also indicate China's beggar-thy-neighbor policies are irritating the Europeans. Soon, Brazil and other nations will follow. The China Daily's article seems to ignore how others interested parties react to China, and it would be wise to remember these words from the World Economic Outlook of April 2006:

Even as linkages between economies grow, far too many governments are putting the slightest domestic constraint above any international interest. Others are reviving beggar-thy-neighbor policies, except they are now on the capital account—shielding large swathes of their own economy from corporate takeovers while encouraging their own companies to take advantage of the continued openness of others.

This is dangerous, short-sighted and sub-optimal. As Raghuram Rajan (Economic Counsellor and Director, Research Department, IMF), "I hope good sense will prevail".

And what about Brazil? Well, one can debate all day which development style to use. The most serious problem with our minister's statement is that we cannot talk about a style of growth when there is no growth to begin with! I have a feeling we will come back to this some time soon...

17 November 2007

CITIZEN OF EUROPE: F-16 Planes, the Euroarea and Falling Dollar

What do F-16 fighter planes, joining the Euroarea and the falling dollar have in common?

It seems that they do have a lot.

As Gazeta Wyborcza (a large Polish centre-of-the-left newspaper, with very good econ articles) wrote, the Polish government decided to increase the number of F-16s Fighting received this year from 4 to 6 (Poland bought 48 planes to be received in the coming years and is thinking of joining the JSF programme)

There are two connections between this purchase, joining the Euroarea and the falling dollar..

The connection No. 1 is simple: the cheaper dollar is, the less you have to pay for the planes.

But there is something more to it that meets the eye.

Poland wants to join the Euroarea around 2011-2012. So far it has met all monetary requirements (inflation, interest rates etc). Nevertheless, the situation with fiscal requirements is not that good: budget deficit is still more than 3% (the Euroarea reguirements are here).

At the moment, the economy is booming - the growth is around 6%. Nevertheless, economists predict a mild slowdown next year. That means budget revenues will be smaller and budget deficit may increase.

By paying for two additional F-16s now, the government decreased expenses scheduled for the next year of about 90M USD. The predictions are that, thanks to this, the budget deficit will drop below 3% next year.

As a result, Poland will be able to start negotiations on accession to the Eurozone.

Shrewd, isn't it?

14 November 2007

Indonesia - On International Confidence

Indonesia’s Position and Potential in the International Economy

As an archipelago of 17,508 islands, located at a strategic position on major trade routes and possessing a rich variety of natural resources[1], Indonesia could have great potential in a capitalist world. Still, it is one of the target countries of the UN Development Goals (UNDP). The islands of Indonesia have experienced centuries of Dutch colonization. ‘Have been dominated by’ would perhaps be a better phrasing, because the development of Indonesia has been influenced greatly by the Dutch (Geertz, 1963: 47). One could argue that the current economic state of the country is entirely due to colonization and associated exploitation and violence, but given the efforts that have been made since 1945 to alleviate poverty and boost the economy, this is not a very likely hypothesis. Instead, a significant role should also be attributed to international confidence in the country. An analysis of the post-war national economy of Indonesia shows that growth rates fluctuate with foreign investment.

Starting with a historical introduction to the Indonesian economy, this article contrasts past foreign dominance to the current independent Indonesian economy. It examines in particular the latter’s current perception by international economic parties, mainly foreign investors. Indonesia’s position in the globalizing world economy is a relevant example of how national and international trends influence each other, and together determine the path that the economy of a development country will follow.

Colonization by the Dutch started shortly after 1600. The Dutch settled mainly on Java, where the company chose as its ‘headquarters’ the city of Batavia (the current Jakarta).[2] From this period onwards, Java was to be the center of Indonesian development. Jakarta, currently the capital city of Indonesia, is still the economic center of the country, and deep contrasts exist between the latter and the country side, which is more often than not characterized by extreme poverty.

On other islands, the Dutch initiated cultivation of former rainforest, in order to export goods like nutmeg, coffee, pepper and sugar. Because of Dutch interference, the original trade with continental Asia was paralyzed and villages were no longer self-sustainable. The infrastructural orientation changed profoundly. Village production was taken to the main export centers like Batavia, instead of being exported to continental Asian countries, as was done before the Dutch arrived. In and between these colonial centers (mostly located on Java), ports, road systems and railways were developed. Because of their ‘core’ function (politically and economically), capital accumulation occurred mainly here.

The main export industries were established during the 19th century. There was now more direct involvement of the Dutch in the Indonesian agriculture, including Dutch settlement and exploitation, mainly as resource depletion. This was linked, first, to the Cultivation System[3], which also resulted in more large scale land cultivation and massive migrations to Java, and later to Dutch traders leasing Indonesian land.[4] On the East-coast of Sumatra, plantation economy arose. (Britannica)

The main industrialization took place on Sumatra and Java, due to the relative wealth of, and the amount of Westerners on, these islands. Very influential were the new agricultural technologies that were introduced in this period. This enabled rubber and petroleum production and exports to rise during the early twentieth century (Library of Congress Country Studies, 1992). Mainly on Java and Sumatra, irrigation systems were introduced to flood the rice sawas.

Decolonization started in 1945, when Indonesia declared itself independent. Four years of severe violence followed, which were, of course, far from beneficial to the country’s overall well being.[5] Sumatran exports only recovered in 1965 to pre-war levels (Airries, 1991: 5). In the second half of the twentieth century, heavy population growth occurred and urbanization figures (mainly in Jakarta) exploded (figure 1 and 2).

Figure 1. Urbanization in Indonesia. Adapted from UN World urbanization prospects (2005)

Figure 2. Urbanization: Jakarta. Adapted from UN World urbanization prospects (2005)

Industry and agriculture were somewhat diversified. Garment became a major export category under Sukarno (Antlov. 1997, 1172), further shifting land use and the orientation of labor from agriculture to basic industry. The dominant picture since this period is one of small scale villages exercising handicraft on the countryside, while more and more administrative occupations were located on Java. These developments led to an even more clear-cut division between a ‘core’ region (centred around Java), and a peripheral region.

Globalization and the emergence of the tourist sector were mainly influential in the core, where much more capital was located than in the outer regions, enabling more investment in trade, tourism, industrialization and infrastructure. There is still great inequality between the ‘core’ and ‘peripheral’ regions in infrastructure and economic growth.

Clearly, the legacy of colonization has been far from positive. But what happened after 1945? Why has the economic potential of the fourth largest country in the world still not been realized? The lack of economic growth and the ‘underdevelopment’ of Indonesia are often mentioned as a result of integration in the world economy. As stated by Barro, however, until the Asian crisis of 1997, there was rapid economic growth in Indonesia:

“Before the 1997 financial crisis, the fast-growing economies of East Asia were favorites of economists and international investors. Then Indonesia, Malaysia, South Korea, and Thailand were hit hard with currency devaluations and high interest rates. A 40-year period of sustained rapid growth was replaced in 1998 by sharp economic contractions in these countries, ranging from 7% in South Korea to 15% in Indonesia.” (Barro, 2001: 1)

Also, in the 1970s, plantations’ exports rose from 445,611 tons to 951,985 tons (PBS 1985, 100), a more than 100% growth. Between 1965 and 1990, Indonesia’s rate of economic growth was twice as high as the World Bank figures for the Middle Income group of countries (Hill, 1994: 833). In fact, as can be seen in figure 4, it was the 1997 crisis that changed the economic situation, not only of Indonesia, but of the ASEAN countries in general.

Figure 4. Per capita GDP growth in Indonesia. Adapted from van Leeuwen, 2007.

Of the four countries mentioned by Barro, Indonesia is the slowest to recover from the 1997 crisis. Barro rightly points out that an important factor in this is the current lack of foreign investment (Barro, 2001: 1). He comments that “the failure of investment to recover suggests that businesses do not anticipate returns to the sustained high growth of the past.” Thus, logically, the current investment climate is caused by sharply decreased confidence in the economy, which can also be seen in the stock market.

That the national economy is indeed ready for, and, to be more precise, deserving foreign investment is clear from the flexibility that has assured fast recovery from former economic slumps and from the process of structural reformation of “banking sectors (…), protection (…), state enterprises (…), taxation structures (…).” (Hill, 1994: 834). The Indonesian government tries to stimulate a more positive image of the Indonesian investment climate, mentioning very positive numbers:

“The rupiah has appreciated from a low of 17,000 to the dollar to a steady 8,500. The budget deficit has shrunk from 4.8% of GDP to 1.8%, and government debt from 100% to 67%. Inflation, which peaked at 60% in 1998, is down to 6% and still falling. Buoyed by this parade of encouraging figures, the stock market has recently hit several successive three-year highs.” (Economist, 27 Sept. 2003).

However, the Economist also points out some less positive trends(27 Sept. 2003). Politics are still highly unstable, and it is mainly the IMF, not the Indonesian government, that made the figures the latter is so proud of come into being. The IMF program has ended in 2004, and corruption and bureaucracy persist. “During Indonesia's rainy season, the dirt tracks that connect Javanese villages to their fields often become impassable. According to one estimate, every dollar spent surfacing these roads--with sand, rock and gravel--brings benefits worth $3.30 over the roads' lifetime. (…) Some of the World Bank money allocated to village infrastructure ends up greasing palms, not smoothing gravel.” (Economist, 18 March 2006).

Corruption and political instability are the main reasons for a lack of international confidence. However, corruption has a particular origin in Indonesia. According to King, there were corruption-like practices in the traditional tribal society, already in the 10th century. These were not illegal, but constituted a system of reward: the king could grant a good civilian a position in which the latter was expected to engage in self-enrichment (King, 2000: 605). Later, the Dutch used these mechanisms in the same way (King, 2000: 606). Corruption rose to current numbers under presidents Soekarno and Soeharto, as a consequence of his ignorance and personal benefit to maintain the status quo (King, 2000: 607-609). For many, there was no other way to urn a living. Furthermore, law-enforcement was hardly exercised with respect to corruption, allowing a climate of disregard of the law to emerge. King remarks that during the initial post-war growth, corruption declined profoundly, mainly because of the favorable economic climate, idealism, and effective law-enforcement (King, 2000: 606). Thus, on the long term, there is hope for foreign investors, provided that the government resumes enforcement of the law. However, their contribution is also necessary to establish, via economic growth, more favorable conditions for the people.


  • Airries, C.A. “Global economy and port morphology in Belawan, Indonesia”. Geographical Review, Vol. 81, Issue 2, 1991.
  • Antlov, Hans (Review author). [Kosuke Mizuno. “Rural Industrialization in Indonesia: A Case Study of Community-Based Weaving Industry in West Java”.] The Journal of Asian Studies, Vol. 56, No. 4 (November 1997), pp. 1172-1173.
  • Barro, Robert J. “A 'YANKEE IMPERIALIST' OFFERS ASIA A ROAD MAP”. Business Week, Issue 3736, 2001.
  • Britannica (Indonesia). Date of access: 18 September 2007. http://www.britannica.com/eb/article-22814/Indonesia
  • Countryprofile (Indonesia). Date of access: 18 September 2007. http://www.asianinfo.org/asianinfo/indonesia/pro-history.htm
  • Geertz, Clifford. Agricultural Involution. The Process of Ecological Change in Indonesia. London: University of California Press, 1963. Fourth ed. 1970.
  • Hill, Hal. “ASEAN Economic Development: An Analytical Survey--The State of the Field”. The Journal of Asian Studies, Vol. 53(3), 1994.
  • King, Dwight Y. “Corruption in Indonesia: a Curable Cancer?” Journal of International Affairs, Vol. 53(2), 2000.
  • Leeuwen, van, Bas. (2007). Human Capital and Economic Growth in India, Indonesia, and Japan: A quantitative analysis, 1890-2000. Doctoral thesis Utrecht University.
  • Library of Congress Country Studies (Indonesia). Date of access: 18 September 2007. Contents page: http://lcweb2.loc.gov/frd/cs/idtoc.html . Quotation from: http://lcweb2.loc.gov/cgi-bin/query/r?frd/cstdy:@field%28DOCID+id0021
  • PBS (Pelabuhan Belawan statistik). 1985. Medan: Port of Belawan Statistics Department.
  • UNDP (Indonesia). Date of access: 18 September 2007. http://www.undp.or.id/
  • UN World unrbanization prospects, 2005. (Indonesia). Date of access: 18 September 2007. http://esa.un.org/unup/p2k0data.asp

[1] The resources listed by the CIA Factbook are: “petroleum, tin, natural gas, nickel, timber, bauxite, copper, fertile soils, coal, gold, silver” (CIA Factbook).
[2] Java was an interesting place for the company since it was already developed as a regional trade centre (Tichelman, 1980: 105). Infrastructural changes were, at first, hardly implemented, since these trade centres were located in the Pasisir (i.e. coastal) region of Java.
[3] The Cultivation System held that every village or settlement had to export the crops produced on one fifth of all its cultivatable land to Holland.
[4] There were conditions to prevent too rigorous exploitation. For example, Dutch entrepreneurs could only lease the land if that would not imply that the local inhabitants were enough denied resources to sustain their livelihood.
[5] As is quite usual when large scale violence occurs, there was no money or initiative to start building up an infrastructural network or invest in industrialization.

11 November 2007

Australia’s Current Boom: Boon or Bane?

Melvin Watts looks at an economy rarely mentioned in economic news nowadays.

Australia is booming. Its business cycle yields a continuous upswing, including full employment (with an unemployment rate around 4 percent). The persisting high demand for human capital has enticed the government to recruit migrant labourers. Companies have been vigorously investing. Having benefited from high revenues the government has run a budget surplus since FY 2005/06, which was the first time for more than three decades. In order to further stimulate the already high consumption behaviour of private households, it has initiated a generous tax cut in May 2007. In the face of the stable boom, economists have forecasted a growth of 3.3 percent for 2008.

One of Australia’s core businesses pertains to mining and commodity production, which form about 6 percent of the national income. The service sector however, which generates 80 percent of the national income, is closely geared with the former: Those benefiting from the booming exports of raw materials encompass subcontractors of both mining firms and building enterprises, shipping companies, and architecture firms. The Australian financial market, which provides financial experts for investments in mineral resources, is regarded as a hub of global commodity trade. Mining giants such as BHP Billiton and Rio Tinto invest several million to develop new ore, gold, or nickel deposits.

Economists regard Australia’s ongoing performance not only as a result of the booming commodity trade but also as a result of far-reaching economic reforms that were implemented since the 1980s, transforming the country to a liberal national economy. According to these reforms, the government deregulated the financial market and lowered the customs tariff, leading to currency import and a stimulation of foreign trade. Besides, roads and highways, as well as airports and power suppliers were privatised and the value added tax was adopted at coeval abatement of the income tax. Government influence was reduced, while individual responsibility was stipulated. Previous year the government disempowered the labour unions; collective labour agreements were substituted by workplace agreements according to which the employers negotiate with their employees individually. Also, the dismissal protection for firms with up until 100 employees was abolished. After initial protests against these new rules people finally accepted the more flexible labour market in the face of low unemployment. Job advertisements have increased by 36 percent compared to previous year.

Despite the boom however, Australia has other worries to cope with: the increasing indebtedness of both, private households and firms. More and more Australians buy now and pay later. On average, every holder of a credit card has debited his account with 3000 Australian dollars. At the same time, the cost pressure increases, considering the privatised educational and health care system, as well as child care, or tolls for highways and tunnels. Apparently, the whole country is on the nod. For decades, imports used to exceed exports, leading to a high deficit of the trade balance. Since the financial market was opened, Australia increasingly borrowed more money from abroad than it earned by itself, while firms strongly financed themselves by more favourable foreign debt. Economists fear now that either a possible shock in the form of economic slump occurring in either of its important trade partners, China and Japan, or a recurrence of an international financial crisis could make Australia abruptly run short of liquidity. Moreover, the country is highly dependent on Asia’s excessive demand for raw materials. The agriculture is sagging after six years of drought; also, the manufacturing industry hardly contributes to economic growth. The trade balance is expected to improve this year only due to the increasing exports of commodities. Therefore, some Australians already talk about a commodity curse.

--Melvin Watts


Downwonder. (March 29, 2007). The Economist. Retrieved on: 18 October 2007 on http://www.economist.com/

Sprothen, V. (August 28, 2007). Boom auf Pump. Wirtschaftswoche, pp.36-38)

08 November 2007

Investment Banks

Two days ago, I was at workshops organised by one of the leading investment banks. Apart from some ibk case solving and currency trading exercise, there was a speach of one of the managing directors. The guy talked on why it is worthy to work for this investment bank and not another one.

And believe me: for most of the speach the guy tried to convince us that the subprime crisis is not a big issue for his company...

Look at an article from the Economist.