Globalization is leading to a restructuring of taxation. The increasing mobility connected with globalization is fundamentally altering governments' capabilities to tax, thereby limiting governmental spending.
More than ever before, companies have found themselves with the choice between locations in different countries for investment. The countries are then faced with two alternatives: either they receive the investment (and the associated tax returns) or it goes elsewhere. Countries aim to do their utmost to make their countries desirable locations to invest. One of the major ways this is done is through lowering taxes. If they receive more business as a result, lowering taxes paradoxically leads to greater tax revenues.
The clearest example of this trend has recently been found in Europe, where the superstate of the EU has caused actual conditions to be more similar to the idealised theories of globalization than anywhere else. That capital and labor flows more easily through Europe than between, for example, the United States and China, hardly comes as a shock. Inside the open markets of the EU, however, are great variations in labor costs and capital: broadly speaking, Eastern Europe has lower labor costs and less capital than Western Europe. As a strategy to develop their economies, many of the governments of Eastern Europe have simplified and lowered their taxes in order to get investment from the wealthier economies of Western Europe. In countries such as Slovakia, which has adopted a 19% (very low) flat tax rate, the strategy has been successful, with many companies shifting investment from more expensive countries, such as Germany and Austria. This led to a rise in tax receipts for Slovakia because of the new investment and jobs. The real question remains, however, whether this is a long-term solution.
In response to the competitive low taxes and capital flight, many Western European countries have lowered their taxes in order to maintain their competitiveness. Germany's corporate rate dropped from 39% to 30%, and Austria's from 34% to 25%. The issue is that of a shrinking pie: as countries compete for a limited amount of investment (on the whole, low taxes do much more to redirect investment rather than to create it), the fear is that tax revenues will fall below the minimum required to provide essential state services. This downward trend, especially in corporate taxes seems unlikely to end any time soon. There have been some tentative attempts to compromise and gradually harmonise tax policies across the EU, but they have been entirely ineffectual.
How governments might restructure their finances in light of the increasing competitiveness of taxation remains to be seen. Even income taxes, especially at higher income brackets, are somewhat vulnerable. The critical criteria is mobility; both multi-national companies and the super-rich have a mobility which is unavailable to poorer tax-payers. Does this mean that tax burdens will progressively shift towards the relatively immobile lower classes? It is a possibility. In an effort to reduce tax-evading emigration by wealthy French people, President Nicholas Sarkozy eliminated the highest income tax bracket in order to encourage wealthy citizens to return and pay French income tax. Certainly the falling tax revenues will continue to put pressure on the funding of social safety networks upon which the disadvantaged in wealthy countries often rely.
This trend is liable to be affectected by the ongoing economic crisis. It is difficult to determine exactly how, but there are numerous possibilities. In the medium term, the lower tax rates recently instituted in many countries will exacerbate the enormous budgetary deficits caused by economic contraction and fiscal stimuli. Most importantly, the eventual fate of globalization and non-state capitalism will have a profound effect on tax policies. If, as some predict, the current crisis leads to a withdrawal from the liberal economic policies of the past 30 years which have led to globalization, it is quite likely that the competitive pressures on corporate taxes will ease. There is even the possibility that taxes might climb quite significantly in the wealthy world to match the rising cost of social welfare programs brought about by ageing populations. Alternatively, if the recent trend towards globalization remains more or less intact, it follows that there is a great likelihood of continued tax decreases and the retreat of the state from more and more aspects of society. If ever there was an exciting period for taxation, this is it.
Thursday, January 22, 2009
Sunday, December 21, 2008
GDP Growth Per Capita
When giving indication of the economic well-being of the residents of a country, the most commonly used measure is GDP per capita, the national annual production of a particular country divided by the population. There are different ways of calculating GDP per capita, which differ in how they account for the dissonance between exchange rates and relative prices, but it remains a fair tool for comparison. It is not perfect, but GDP is useful for comparing countries' relative wealth. For example, if Eritrea has a GDP per capita (PPP) of about $750 and Italy has a GDP per capita of about $30,000 (IMF, 2007), you cannot really say that Italy is exactly 40 times richer than Eritrea, but you can say that it is much, much richer. Where current uses of GDP do not work very well, however, is in measuring economic growth.
Similarly to GDP, one of the main purposes of calculating GDP growth is to indicate whether the economic condition of the people of a particular country is getting better or worse, and to what extent. Simple GDP growth, the most commonly used measure in these circumstances, is insufficient. That is because it does not take account of a very important factor - population growth. The effect of population growth is significant, not just a splitting of hairs concerning only experts. This point is most clearly made through some simple statistics.
Over the past few years, global population growth has been between 1% and 1.5% annually, ranging from a decrease of nearly 1% in some countries to growth of over 3% in others. Meanwhile, global economic growth has been in the range of 3% to 5%, but with wide variation between countries, some with decreases of approximately 5% to others with increases of over 10%.
To show how problematic inferring change in economic well-being from GDP can be, it is useful to return to the examples of Eritrea and Italy. GDP growth does not account for population growth. These two countries were picked because their GDP growth in 2007 was roughly the same - 2% (CIA World Factbook) - but they have widely divergent population growth rates. Looking strictly at the GDP growth rates, it would appear that the economic well-being of the two countries' inhabitants is improving at the same rate. This is not the case, however, because Eritrea's population is growing at over 3% per year (3.24% - IMF, 2006) and Italy's is roughly static (0.13% - IMF, 2006). Because of this disparity between population and GDP growth, Eritrea's population is actually experiencing a degradation of their economic well-being, whereas Italy's population is experiencing moderate growth (in 2007, that is - currently, Italy is in a recession).
A more accurate measure of change in economic well-being - and that is what is usually desired when GDP growth is given - is GDP growth per capita, which takes into account the distortion rendered by population growth. An estimate of GDP growth per capita can be found simply by subtracting the population growth rate from reported GDP growth rate. What one can find is very enlightening about the economic situation of people all across the world, especially in the long term (over generations). For example, one might wonder why most African countries have remained underdeveloped, in spite of their moderate (if very unstable) GDP growth rates. In purely statistical terms, much of that can be explained by the high rates of population growth found in most African countries. If global economic growth is, on average, about 3% annually, and a particular country has a 3.5% population growth, it must maintain an above-average rate of economic growth simply to keep itself at a steady level of economic well-being. This simple fact is a large part of why economic development usually coincides with declining birth rates.
That is not to say that plain GDP growth should be abandoned; it is a tool with a particular use, and it fits that use. It just has come to be found in uses for which it is not ideal. What GDP growth measures is the change in the size of a country's economy, irrespective of population changes. While it is not wholly appropriate in discussions of quality of life, it is much more appropriate in other parts of economics, when discussing topics such as market size. It is a measure that perhaps is most appropriate in more specialist discussions of economics, where readers already are aware of what GDP growth is and what it isn't.
Similarly to GDP, one of the main purposes of calculating GDP growth is to indicate whether the economic condition of the people of a particular country is getting better or worse, and to what extent. Simple GDP growth, the most commonly used measure in these circumstances, is insufficient. That is because it does not take account of a very important factor - population growth. The effect of population growth is significant, not just a splitting of hairs concerning only experts. This point is most clearly made through some simple statistics.
Over the past few years, global population growth has been between 1% and 1.5% annually, ranging from a decrease of nearly 1% in some countries to growth of over 3% in others. Meanwhile, global economic growth has been in the range of 3% to 5%, but with wide variation between countries, some with decreases of approximately 5% to others with increases of over 10%.
To show how problematic inferring change in economic well-being from GDP can be, it is useful to return to the examples of Eritrea and Italy. GDP growth does not account for population growth. These two countries were picked because their GDP growth in 2007 was roughly the same - 2% (CIA World Factbook) - but they have widely divergent population growth rates. Looking strictly at the GDP growth rates, it would appear that the economic well-being of the two countries' inhabitants is improving at the same rate. This is not the case, however, because Eritrea's population is growing at over 3% per year (3.24% - IMF, 2006) and Italy's is roughly static (0.13% - IMF, 2006). Because of this disparity between population and GDP growth, Eritrea's population is actually experiencing a degradation of their economic well-being, whereas Italy's population is experiencing moderate growth (in 2007, that is - currently, Italy is in a recession).
A more accurate measure of change in economic well-being - and that is what is usually desired when GDP growth is given - is GDP growth per capita, which takes into account the distortion rendered by population growth. An estimate of GDP growth per capita can be found simply by subtracting the population growth rate from reported GDP growth rate. What one can find is very enlightening about the economic situation of people all across the world, especially in the long term (over generations). For example, one might wonder why most African countries have remained underdeveloped, in spite of their moderate (if very unstable) GDP growth rates. In purely statistical terms, much of that can be explained by the high rates of population growth found in most African countries. If global economic growth is, on average, about 3% annually, and a particular country has a 3.5% population growth, it must maintain an above-average rate of economic growth simply to keep itself at a steady level of economic well-being. This simple fact is a large part of why economic development usually coincides with declining birth rates.
That is not to say that plain GDP growth should be abandoned; it is a tool with a particular use, and it fits that use. It just has come to be found in uses for which it is not ideal. What GDP growth measures is the change in the size of a country's economy, irrespective of population changes. While it is not wholly appropriate in discussions of quality of life, it is much more appropriate in other parts of economics, when discussing topics such as market size. It is a measure that perhaps is most appropriate in more specialist discussions of economics, where readers already are aware of what GDP growth is and what it isn't.
Wednesday, July 16, 2008
After the Demographic Transition - The Future of Population Growth
Demographic theory, especially growth theory, is based largely in the basic truth of the theory of the demographic transition (http://en.wikipedia.org/wiki/Demographic_transition). What this standard theory proposes is that, as countries develop (always a slippery and inexact
act word), the mortality rate (particularly infant mortality rate) falls and leads to falling fertility rates.
The reasons for the Demographic Transition are complex, but it has been a fairly good model for predicting population dynamics, at least the order, if not a time-frame. Nearly every country is passing through, or has passed through the demographic transition. As can be seen in the map (yellow: finished demographic transition; orange: late demographic transition; red: early demographic transition), there are already many countries which have passed through the four stages of demographic transition. In fact, nearly half of the world's population lives in such countries, a number which will most likely increase in the future.
What this means is that in the near future, the majority of the world will live in countries for which there is not an effective model for predicting future growth. The Demographic Transition model itself suggests that upon reaching stage 4 the population growth will remain roughly static. In the long term, this may well be the case, but the issue is that alternative possibilities do not seem much-considered.
The most important projections of the next 50 years are those which come from the United Nations Population Division (http://esa.un.org/unpp/index.asp?panel=4). These projections work under several assumptions, which are described in the above link, of which one strikes me as questionable: the UN shows high fertility, low fertility, and medium variants of population growth over the next 42 years, in which the fertility rate are assumed to converge on a single rate:1.35, 1.85, or 2.35 children per woman. This seems pretty odd, especially considering that no country has yet to have a particularly stable fertility rate at any level. Part of this may be wishful thinking, as a fertility rate of around 1.85 (medium variant) is just below replacement and would eventually lead to a very slow decline in population.
Basically, the UN predictions (and other such predictions) assume that once a country reaches a certain stage in its development, its once dynamic demographic structure freezes, in the long term. I would say that the model is much too uncertain for that, largely because of the simple fact that demographers have very little experience with stage four of the demographic transition in the long term. Only in the 1970s did most of Europe's (http://www.ihs.ac.at/pdf/soz/macinnestabs%20and%20fig.pdf), Japan's (http://www.un.org/esa/population/publications/migration/japan.pdf) and the USA's (http://en.wikipedia.org/wiki/Demographic_history_of_the_United_States) fertility rates pass below replacement. Therefore, it's sensible to at least be open to the possibility that total fertility rates will do something other than remain static.
It's possible that they will continue to drop.
The first countries to pass through the demographic transition (Western Europe and the USA) mostly have not fallen very far below replacement. Few passed below the threshold of 1.5. However, the more recent countries to reach the fourth stage of the demographic transition have reached much lower rates. It may even be that every Eastern European, Southern European, and East Asian country which has been in stage four for 10 years or more has at least had a fertility rate of 1.5 or lower, while none of the earlier countries have done so (in order for this to be true, one must consider Germany to be an East European country. A bit of a stretch, but demographic and cultural borders need not be exactly the same). This may be accounted for by swiftness of transition; The countries of Western Europe and the USA took much longer to pass into the fourth stage of the demographic transition than those of Eastern Europe and Eastern Asia. Might that mean that these countries will stabilize their populations at a lower fertility rate? Would that mean that the next countries (such as Iran, whose fertility rate has gone from 7 to 2 in just twenty years) would stabilize at an even lower level?
Perhaps rates will rise again.
If one believes that the demographic transition is, in fact, a transition, with demographic stages through which one must pass through in the proper order, then a look at the future might best be found in the countries which first past through the transition: Western Europe and the USA. Judging by the three most populous countries in this group, the USA (http://en.wikipedia.org/wiki/Demographic_history_of_the_United_States), the UK (http://news.bbc.co.uk/2/hi/health/6729953.stm), and France (http://en.wikipedia.org/wiki/Demographics_of_France), it is possible that rates are already rising. The fertility rates in the USA have been tentatively rising for over thirty years, from around 1.75 in the mid-70s to around 2.1 today. The trend is more short-term for France, but more dramatic, with a rise from 1.66 in the mid-90s to nearly 2.0 today. For the UK, the possible trend is even smaller and shorter, rising from a record-low 1.63 in 2001 to around 1.85 today. These trends are not much, but they give some idea of how dynamic demographics remain.
I do not claim to know the trends which countries will follow after the fourth stage of the demographic transition. However, I do believe that trends will eventually emerge and the demographic transition model will eventually be modified.
The demographic Transition graph was taken from bbc.co.uk.
The Demographic Transition Map was made by TheDauds
act word), the mortality rate (particularly infant mortality rate) falls and leads to falling fertility rates.The reasons for the Demographic Transition are complex, but it has been a fairly good model for predicting population dynamics, at least the order, if not a time-frame. Nearly every country is passing through, or has passed through the demographic transition. As can be seen in the map (yellow: finished demographic transition; orange: late demographic transition; red: early demographic transition), there are already many countries which have passed through the four stages of demographic transition. In fact, nearly half of the world's population lives in such countries, a number which will most likely increase in the future.
What this means is that in the near future, the majority of the world will live in countries for which there is not an effective model for predicting future growth. The Demographic Transition model itself suggests that upon reaching stage 4 the population growth will remain roughly static. In the long term, this may well be the case, but the issue is that alternative possibilities do not seem much-considered.
The most important projections of the next 50 years are those which come from the United Nations Population Division (http://esa.un.org/unpp/index.asp?panel=4). These projections work under several assumptions, which are described in the above link, of which one strikes me as questionable: the UN shows high fertility, low fertility, and medium variants of population growth over the next 42 years, in which the fertility rate are assumed to converge on a single rate:1.35, 1.85, or 2.35 children per woman. This seems pretty odd, especially considering that no country has yet to have a particularly stable fertility rate at any level. Part of this may be wishful thinking, as a fertility rate of around 1.85 (medium variant) is just below replacement and would eventually lead to a very slow decline in population.
Basically, the UN predictions (and other such predictions) assume that once a country reaches a certain stage in its development, its once dynamic demographic structure freezes, in the long term. I would say that the model is much too uncertain for that, largely because of the simple fact that demographers have very little experience with stage four of the demographic transition in the long term. Only in the 1970s did most of Europe's (http://www.ihs.ac.at/pdf/soz/macinnestabs%20and%20fig.pdf), Japan's (http://www.un.org/esa/population/publications/migration/japan.pdf) and the USA's (http://en.wikipedia.org/wiki/Demographic_history_of_the_United_States) fertility rates pass below replacement. Therefore, it's sensible to at least be open to the possibility that total fertility rates will do something other than remain static.
It's possible that they will continue to drop.
The first countries to pass through the demographic transition (Western Europe and the USA) mostly have not fallen very far below replacement. Few passed below the threshold of 1.5. However, the more recent countries to reach the fourth stage of the demographic transition have reached much lower rates. It may even be that every Eastern European, Southern European, and East Asian country which has been in stage four for 10 years or more has at least had a fertility rate of 1.5 or lower, while none of the earlier countries have done so (in order for this to be true, one must consider Germany to be an East European country. A bit of a stretch, but demographic and cultural borders need not be exactly the same). This may be accounted for by swiftness of transition; The countries of Western Europe and the USA took much longer to pass into the fourth stage of the demographic transition than those of Eastern Europe and Eastern Asia. Might that mean that these countries will stabilize their populations at a lower fertility rate? Would that mean that the next countries (such as Iran, whose fertility rate has gone from 7 to 2 in just twenty years) would stabilize at an even lower level?
Perhaps rates will rise again.
If one believes that the demographic transition is, in fact, a transition, with demographic stages through which one must pass through in the proper order, then a look at the future might best be found in the countries which first past through the transition: Western Europe and the USA. Judging by the three most populous countries in this group, the USA (http://en.wikipedia.org/wiki/Demographic_history_of_the_United_States), the UK (http://news.bbc.co.uk/2/hi/health/6729953.stm), and France (http://en.wikipedia.org/wiki/Demographics_of_France), it is possible that rates are already rising. The fertility rates in the USA have been tentatively rising for over thirty years, from around 1.75 in the mid-70s to around 2.1 today. The trend is more short-term for France, but more dramatic, with a rise from 1.66 in the mid-90s to nearly 2.0 today. For the UK, the possible trend is even smaller and shorter, rising from a record-low 1.63 in 2001 to around 1.85 today. These trends are not much, but they give some idea of how dynamic demographics remain.
I do not claim to know the trends which countries will follow after the fourth stage of the demographic transition. However, I do believe that trends will eventually emerge and the demographic transition model will eventually be modified.
The demographic Transition graph was taken from bbc.co.uk.
The Demographic Transition Map was made by TheDauds
Wednesday, June 18, 2008
South Sudan
I feel it is fitting to make the first blog post about something that I consider to be both of great importance and also routinely overlooked. This is the purpose of my blog: to focus on issues rarely focused on. Therefore - Abyei is where I begin.
With the continuing violence in Darfur, the many eyes of the media have rightly been drawn towards Sudan, but only to that conflict. The South has largely been forgotten, as it is in a period of relative calm. But the tenacity of this calm is doubtful. First, some background.
Sudan, the largest African nation by area, has suffered from the same artificiality that has afflicted many other modern African states. Like elsewhere, this is a product of colonialism, though native Sudanese were more involved in the formation of Sudan than other African states. The story of modern Sudan goes in some way back to the Egyptian conquest of Sudan in the early 19th century. Prior to this conquest, Sudan had been divided into several large states, most importantly the Kingdom of Sennar in the northern Nile Valley and the Sultanate of Darfur in the west. The South was most likely divided into smaller units and was a major source of slaves.
Particularly after the opening of the Suez Canal in 1869, the British came to dominate Egypt, and Sudan was largely neglected. In this environment, a Muslim ascetic came to power in 1881, calling himself the Mahdi, redeemer of Islam. His movement controlled almost all of modern Sudan until the British reasserted a stronger control over Sudan in 1898
With the continuing violence in Darfur, the many eyes of the media have rightly been drawn towards Sudan, but only to that conflict. The South has largely been forgotten, as it is in a period of relative calm. But the tenacity of this calm is doubtful. First, some background.
Sudan, the largest African nation by area, has suffered from the same artificiality that has afflicted many other modern African states. Like elsewhere, this is a product of colonialism, though native Sudanese were more involved in the formation of Sudan than other African states. The story of modern Sudan goes in some way back to the Egyptian conquest of Sudan in the early 19th century. Prior to this conquest, Sudan had been divided into several large states, most importantly the Kingdom of Sennar in the northern Nile Valley and the Sultanate of Darfur in the west. The South was most likely divided into smaller units and was a major source of slaves.
Particularly after the opening of the Suez Canal in 1869, the British came to dominate Egypt, and Sudan was largely neglected. In this environment, a Muslim ascetic came to power in 1881, calling himself the Mahdi, redeemer of Islam. His movement controlled almost all of modern Sudan until the British reasserted a stronger control over Sudan in 1898
The British ran Sudan as two separate territories, starting in 1924. People from the north were not allowed to travel to the south and vice-versa, so the already significant isolations between the two were accentuated over the last fourty years of British rule.
After independence in 1956, little changed. For the fifty years of Sudanese independence, there has been civil war between the South and the central government most of the time. The first war ran 1955-72, and the second 1983-2005.
Since the second Sudanese civil war, it has become relatively clear that the South intends to secede from Sudan, which is not at all surprizing; The central government is controlled by the slightly larger Arab population, and South Sudan has more or less never actually been ruled by the central government anyway. A referendum on southern secession is scheduled for 2011, as is a referendum on the status of Abyei as part of the South or North.
The central government would be uncomfortable with the secession of the South in any circumstance, but several other factors make it more difficult, Abyei being among the most difficult. Abyei is home to around a quarter of Sudan's oil reserves, but is very small and lightly populated, making a referendum easy to manipulate. Hence the conflict. In May, the region erupted into violence, with 90 deaths and, perhaps more importantly, 50,000 people displaced. This has completely thrown any chance of a fair referendum into turmoil.
Currently, both sides are seeking arbitration by the Permanent Court for Arbitration in the Hague regarding Abyei's status, but that may only lead to a temporary peace. I would personally not be surprised if a war begins following the 2011 independence referendum and likely declaration of independence by the South, for one very significant reason. In the 2005 deal which ended the second civil war, there is a provision that, it seems to me, gives the South 50% of all oil profits from southern oil fields. I feel that, in the eventuality of the independence of the South, they would not be satisfied with 50% of profits on oil deposits in their own territory. At the same time, the North would not accept a change in the status quo.
Sudan will remain a place to watch in the decade to come. The issues of the South, compounded by the struggles in Darfur, will continue to place a huge strain on the unity of Sudan. It would be possible to see, in five or ten years time, either one, two or three states emerging from Sudan. One thing that is quite likely, however, is that Sudan will not look the same in just a few years time, especially with the approach on the referendm in 2011. I hope it will avoid a third civil war, but I am not confident
Currently, both sides are seeking arbitration by the Permanent Court for Arbitration in the Hague regarding Abyei's status, but that may only lead to a temporary peace. I would personally not be surprised if a war begins following the 2011 independence referendum and likely declaration of independence by the South, for one very significant reason. In the 2005 deal which ended the second civil war, there is a provision that, it seems to me, gives the South 50% of all oil profits from southern oil fields. I feel that, in the eventuality of the independence of the South, they would not be satisfied with 50% of profits on oil deposits in their own territory. At the same time, the North would not accept a change in the status quo.
Sudan will remain a place to watch in the decade to come. The issues of the South, compounded by the struggles in Darfur, will continue to place a huge strain on the unity of Sudan. It would be possible to see, in five or ten years time, either one, two or three states emerging from Sudan. One thing that is quite likely, however, is that Sudan will not look the same in just a few years time, especially with the approach on the referendm in 2011. I hope it will avoid a third civil war, but I am not confident
Sunday, June 15, 2008
Welcome
Welcome to the second incarnation of The Fresh Global News, from whence a slightly different perspective on global news emanates. It should be updated several times a week. Please leave comments so as to begin a dialog. Thank you!
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