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Archive for the ‘Economic Rankings’ Category

The World Bank has released its annual report on the Ease of Doing Business.

Unsurprisingly, the top spots are dominated by market-oriented jurisdictions, with New Zealand, Singapore, and Hong Kong (at least for now!) winning the gold, silver, and bronze. The United States does reasonably well, finishing in sixth place.

It’s also worth noting that Nordic nations do quite well. Denmark even beats the United States, and Norway and Sweden are both in the top 10.

Georgia gets a very good score, as does Taiwan. And I’m sure Pope Francis will be irked to see that Mauritius ranks highly.

I’m surprised, though, to see Russia at #28 and China at #31. That’s better than France!

And I’m even more surprised that normally laissez-faire Switzerland is down at #36.

What economic lessons can we learn from the report? First, the authors remind us that less red tape means more prosperity.

Research demonstrates a causal relationship between economic freedom and gross domestic product (GDP) growth, where freedom regarding wages and prices, property rights, and licensing requirements leads to economic development. … The ease of doing business score serves as the basis for ranking economies on their business environment: the ranking is obtained by sorting the economies by their scores. The ease of doing business score shows an economy’s absolute position relative to the best regulatory performance, whereas the ease of doing business ranking is an indication of an economy’s position relative to that of other economies.

By the way, here’s a simple depiction of the World Bank’s methodology.

It’s also worth noting that less intervention means less corruption.

There are ample opportunities for corruption in economies where excessive red tape and extensive interactions between private sector actors and regulatory agencies are necessary to get things done. The 20 worst-scoring economies on Transparency International’s Corruption Perceptions Index average 8 procedures to start a business and 15 to obtain a building permit. Conversely, the 20 best-performing economies complete the same formalities with 4 and 11 steps, respectively. Moreover, economies that have adopted electronic means of compliance with regulatory requirements—such as obtaining licenses and paying taxes—experience a lower incidence of bribery.

Poor countries, not surprisingly, have more red tape.

An entrepreneur in a low-income economy typically spends around 50 percent of the country’s per-capita income to launch a company, compared with just 4.2 percent for an entrepreneur in a high-income economy. It takes nearly six times as long on average to start a business in the economies ranked in the bottom 50 as in the top 20. There’s ample room for developing economies to catch up with developed countries on most of the Doing Business indicators. Performance in the area of legal rights, for example, remains weakest among low- and middle-income economies.

Africa and Latin America are especially bad.

Sub-Saharan Africa remains one of the weak-performing regions on the ease of doing business with an average score of 51.8, well below the OECD high-income economy average of 78.4 and the global average of 63.0. …Latin America and the Caribbean also lags in terms of reform implementation and impact. …not a single economy in Latin America and the Caribbean ranks among the top 50 on the ease of doing business.

I’m disappointed, by the way, that Chile is only ranked #59.

Now let’s shift to some very important graphs about the relationship between economic freedom and national prosperity.

We’ll start with a look at the relationship between employment regulation and per-capita income. Not surprisingly, countries that make it hard to hire workers and fire workers have lower levels of prosperity.

Here’s a chart showing the relationship between employment regulation and the underground economy.

The moral of the story is that lots of red tape drives employers and employees to the black market.

Perhaps most important, there’s a very clear link between good regulatory policy and overall entrepreneurship.

Here’s a bit of good news.

Developing nations have reduced the burden of red tape in some areas, in part because Ease of Doing Business puts pressure on governments.

We can see the results in this chart.

I’ll close with a look at the regulatory burden in the United States, which also can be considered good news.

Here’s the annual score for the past five years (a higher number is better).

I’m frequently critical of this White House, but I also believe in giving credit when it’s deserved. The bottom line is that Trump’s policies have been a net plus for businesses.

In other words, lower tax rates and less red tape have more than offset the pain of protectionism.

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The Tax Foundation churns out lots of good information, but I especially look forward to their International Tax Competitiveness Index.

It shows how nations rank based on key tax variables such as corporate taxation, personal income tax, and international tax rules.

The latest edition shows good news and bad news for the United States. The good news, as you see in this chart, is that the 2017 tax reform improved America’s ranking from 28 to 21.

The bad news is that the United States is still in the bottom half of industrialized nations.

We should copy Estonia, which has been in first place for six consecutive years.

For the sixth year in a row, Estonia has the best tax code in the OECD. Its top score is driven by four positive features of its tax code. First, it has a 20 percent tax rate on corporate income that is only applied to distributed profits. Second, it has a flat 20 percent tax on individual income that does not apply to personal dividend income. Third, its property tax applies only to the value of land, rather than to the value of real property or capital. Finally, it has a territorial tax system that exempts 100 percent of foreign profits earned by domestic corporations from domestic taxation, with few restrictions. …For the sixth year in a row, France has the least competitive tax system in the OECD. It has one of the highest corporate income tax rates in the OECD (34.4 percent), high property taxes, a net tax on real estate wealth, a financial transaction tax, and an estate tax. France also has high, progressive, individual income taxes that apply to both dividend and capital gains income.

Here are some other important observations from the report, including mostly positive news on wealth taxation as well as more information on France’s fiscal decay.

…some countries like the United States and Belgium have reduced their corporate income tax rates by several percentage points, others, like Korea and Portugal, have increased them. Corporate tax base improvements have been put in place in the United States, United Kingdom, and Canada, while tax bases were made less competitive in Chile and Korea. Several EU countries have recently adopted international tax regulations like Controlled Foreign Corporation rules that can have negative economic impacts. Additionally, while many countries have removed their net wealth taxes in recent decades, Belgium recently adopted a new tax on net wealth. …Over the last few decades, France has introduced several reforms that have significantly increased marginal tax rates on work, saving, and investment.

For those who like data, here are the complete rankings, which also show how countries score in the various component variables.

Notice that the United States (highlighted in red) gets very bad scores for property taxation and international tax rules. But that bad news is somewhat offset by getting a very good score on consumption taxation (let’s hope politicians never achieve their dream of imposing a value-added tax!).

And it’s no big surprise to see countries like New Zealand and Switzerland get high scores.

P.S. My only complaint about the International Tax Competitiveness Index is that I would like it to include even more information. There presumably would be challenges in finding apples-to-apples comparative data, but I’d be curious to find out whether Hong Kong and Singapore would beat out Estonia. And would zero-tax jurisdictions such as Monaco and the Cayman Islands get the highest scores of all? Also, what would happen if a variable on the aggregate tax burden was added to the equation? I’m guessing some nations such as Sweden and the Netherlands might fall, while other countries such as Chile and Poland (and probably the U.S.) would climb.

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The folks at the Fraser Institute in Canada have just released a new version of Economic Freedom of the World.

As has been the case for many years, Hong Kong is #1 and Singapore is #2, followed by New Zealand (#3) and Switzerland (#4).

Interestingly, the United States improved one spot, climbing to #5.

Here’s the data for the top two quartiles.

The new version includes 2017, so fans of Trump will be able to claim vindication.

But not much.

As you can see, the EFW data shows that America’s score rose only slightly, from 8.17 to 8.19.

My view, for what it’s worth, is that Trump’s economic policy is somewhat incoherent.

He’s been good on taxes and red tape, but bad on spending and trade. So I’m not surprised we’re mostly treading water.

Now let’s look at the bottom half of the ranking.

In last place, unsurprisingly, we find Venezuela.

Let’s close with two final visuals.

Here’s a chart showing that poor people in the nations with the most economic liberty have much higher incomes that poor people in countries with less economic liberty.

The moral of the story, needless to say, is that people who genuinely want to help the poor should support free markets and limited government.

Last but not least, here are two tables I prepared.

The one on the left shows the nations with the biggest positive and negative changes since 2010, while the one on the right shows the biggest changes since 2000.

In some cases, such as Zimbabwe, a nation improved because it was in such terrible shape that it would have been difficult to do worse.

Though Venezuela seems determined to show that a terrible score can drop even farther.

For what it’s worth, Egypt’s slide toward statism is being subsidized by massive amounts of aid from American taxpayers.

And speaking of America, I’m embarrassed to acknowledge that the United States has suffered the 10-largest drop when looking at changes since 2000. That’s a legacy of the bad policies we got from George W. Bush and Barack Obama. Thanks for nothing, guys!

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I periodically mock the New York Times when editors, reporters, and columnists engage in sloppy and biased analysis.

Now we have another example.

Check out these excerpts from a New York Times column by Steven Greenhouse.

The United States is the only advanced industrial nation that doesn’t have national laws guaranteeing paid maternity leave. It is also the only advanced economy that doesn’t guarantee workers any vacation, paid or unpaid, and the only highly developed country (other than South Korea) that doesn’t guarantee paid sick days. …Among the three dozen industrial countries in the Organization for Economic Cooperation and Development, the United States has the lowest minimum wage as a percentage of the median wage — just 34 percent of the typical wage, compared with 62 percent in France and 54 percent in Britain. It also has the second-highest percentage of low-wage workers among that group… All this means the United States suffers from what I call “anti-worker exceptionalism.” …America’s workers have for decades been losing out: year after year of wage stagnation.

Sounds like the United States is some sort of Dystopian nightmare for workers, right?

Well, if there’s oppression of labor in America, workers in other nations should hope and pray for something similar.

Here’s a chart showing per-capita “actual individual consumption” for various nations that are part of the Organization for Economic Cooperation and Development. As you can see, people in the United States have much higher living standards.

By the way, I can’t resist pointing out another big flow in Greenhouse’s NYT column.

He wrote that the U.S. has “the second-highest percentage of low-wage workers.” That sounds like there’s lots of poverty in America. Especially since the U.S. is being compared to a group of nations that includes decrepit economies such as Mexico, Turkey, Italy, and Greece.

But this statement is nonsense because it is based on OECD numbers that merely measure the percent of workers in each nation that earn less than two-thirds of the national median level. Yet since median income generally is much higher in the United States, it’s absurd to use this data for international comparisons.

In other words, Greenhouse is relying on data that deliberately confuse absolute living standards and relative living standards. Why? Presumably to try to make the United States look bad and/or to advance a pro-redistribution agenda.

P.S. You can find similarly dishonest ways of measuring poverty from the United Nations, the Equal Welfare Association, Germany’s Institute of Labor Economics, the Obama Administration, and the European Commission.

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I’ve applauded China’s economic progress.

It’s economic liberty score jumped from 3.64 in 1980 to 6.46 in the most recent edition of Economic Freedom of the World.

That shift toward markets (which started in a village) helped to dramatically reduce poverty and turn China into a middle-income nation.

That’s the good news.

The bad news is that most of China’s economic liberalization (from 3.64 to 6.15) occurred between 1980 and 2003.

Since that time, China’s score has improved at a glacial pace. Moreover, because other nations have been more aggressive about reducing the burden of government, China’s relative ranking has actually dropped (from #88 to #107) since 2003.

Which is why I’ve warned that China needs another burst of pro-market reform if it wants to become a rich country.

Regarding this issue, the Wall Street Journal has a very interesting report about how China is under-performing.

The country’s state-led growth model is running out of gas. A recession or crisis may not be imminent, but the long-run implications are just as serious. Absent a change in direction, China may never become rich. …First, official statistics probably paint too flattering a picture. Per-capita income may be a quarter lower than reported, based on a study of nighttime light co-authored by Yingyao Hu of Johns Hopkins University. …Second, it doesn’t measure up to the economies China seeks to emulate. Taiwan, South Korea and Japan all opened their economies to global trade and investment, enjoyed superfast growth for several decades… In fact, China seems to be slowing sooner than the others.

Why is China underperforming?

Too much statism. Simply stated, the government has too much control over the allocation of labor and capital.

For 30 years the Communist Party opened ever more of the economy to private enterprise, trade, foreign investment and market forces. Yet it never relinquished its commitment to socialism and Mr. Brandt says that since the mid-2000s the government has tightened control over sectors… An inefficient state sector matters less if the private sector grows fast enough. But in recent years, private firms in China have faced multiple headwinds. State-controlled banks prefer to lend to state-owned enterprises… The domestic private sector’s share of total sales has dropped about 5 percentage points since 2016, according to Goldman, while the state sector’s share has risen roughly as much.

By the way, many observers (from the American Enterprise Institute, Peterson Institute for International Economics, the New York Times, the New York Post, and Investor’s Business Daily) echo the concern about China becoming more statist in recent years.

I’ll make a more restrained point.

I’ll start by sharing this very interesting chart from the WSJ story. It shows how China’s growth, while impressive, has not been as rapid as the growth enjoyed by other Asian economies.

If you look below, you’ll see I’ve now augmented the chart to explain why China has under-performed.

On the right side, I’ve added the historical rankings from Economic Freedom of the World. As you can see (and just as theory and evidence teaches us), the other nations on the chart enjoyed more growth because they had more economic freedom.

These numbers reinforce my argument that China needs more pro-market reform. Though I should add the caveat that EFW has added more nations over time, so this comparison overstates the degree to which China is lagging.

But it is lagging. The bottom line is that China needs to copy Hong Kong and Singapore if it wants to become a rich nation. Or even Taiwan, which is an under-appreciated success story.

P.S. Keep in mind that China also faces demographic decline, which makes good policy even more necessary and important.

P.P.S. Amazingly, both the OECD and IMF are trying to sabotage China’s economy.

P.P.P.S. The WSJ story is an example of good reporting. If you want an example of bad reporting about China, check out this bizarre story from the New York Times.

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It’s not easy picking the most pessimistic chart about Japan.

The country suffered several decades of economic stagnation following the collapse of a bubble about three decades ago.

That means it’s a bit of a challenge to identify the worst economic numbers.

  • Is it the data on ever-rising levels of government debt?
  • Is it the data on an ever-rising burden of taxation?
  • Or is it the data on an aging population and falling birthrate?

For what it’s worth, I thought the tax data was the most depressing.

But now there’s a new challenger for the grimmest chart.

I’m currently in Japan, where it’s almost bedtime. I just heard a speech from the governor of the Tokyo Prefecture.

As part of her remarks, she shared a slide showing how Japan has plummeted in the IMD competitiveness rankings.

I don’t have her chart, but I found another version with the same data.

And Japan has dropped to #30 in the recently released 2018 version.

By the way, you won’t be surprised to learn that Economic Freedom of the World shows a similar decline.

Japan was ranked in the top-10 back in 1990, but now it’s dropped to #41.

This is not quite as pronounced as Argentina’s drop in the rankings for per-capita GDP, but it’s definitely a sign that something’s gone wrong in the Land of the Rising Sun.

P.S. Japan has a very strong entry in the contest for the world’s most inane regulation.

P.P.S. And if there was a contest for the most ineffective form of government waste, Japan would have a very strong entry for that prize as well.

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Because they directly measure economic liberty, my favorite global rankings are Economic Freedom of the World and the Index of Economic Freedom.

But I also like the World Economic Forum’s Global Competitiveness Report and the Institute of Management Development’s World Competitiveness Rankings, both of which basically measure the degree to which a nation is hospitable to business activity (which is correlated with economic liberty).

The United States dominated the IMD rankings until 2010, and America managed to reclaim the top spot for 2017. But according to new numbers from IMD’s World Competitiveness Center, Singapore and Hong Kong are now at the top.

I’m also not surprised to see Switzerland ranked highly.

And it’s worth noting that the Netherlands, Ireland, and Denmark are top-10 nations, similar to their scores in the Human Freedom Index.

Here’s some additional information from the press release.

Singapore has ranked as the world’s most competitive economy for the first time since 2010, according to the IMD World Competitiveness Rankings, as the United States slipped from the top spot… Singapore’s rise to the top was driven by its advanced technological infrastructure, the availability of skilled labor, favorable immigration laws, and efficient ways to set up new businesses. Hong Kong SAR held on to second place, helped by a benign tax and business policy environment and access to business finance. …The IMD World Competitiveness Rankings, established in 1989, incorporate 235 indicators from each of the 63 ranked economies. The ranking takes into account a wide range of “hard” statistics such as unemployment, GDP and government spending on health and education, as well as “soft” data from an Executive Opinion Survey covering topics such as social cohesion, globalization and corruption. This information feeds into four categories – economic performance, infrastructure, government efficiency and business efficiency – to give a final score for each country. There is no one-size-fits-all solution for competitiveness, but the best performing countries tend to score well across all four categories. Switzerland climbed to fourth place from fifth, helped by economic growth, the stability of the Swiss franc and high-quality infrastructure. …The United Arab Emirates – ranked 15th as recently as 2016 – entered the top five for the first time. …Venezuela remains anchored to the bottom of the ranking, hit by inflation, poor access to credit and a weak economy. The South American economy ranks the lowest for three out of four of the main criteria groups – economic performance, government efficiency and infrastructure.

Venezuela in last place? I’m shocked, shocked.

There are two specific items from the report I want to highlight.

First, notwithstanding the bleating from Trump and others about a supposed crisis of inadequate spending, notice that the United States is in first place for that category.

Also, notice that the jurisdictions with high scores for government efficiency are all places with (by modern standards) small government.

This is very similar to the “public sector efficiency” scores from the European Central Bank.

The moral of the story is that small government is the way to get competent government. It’s almost as if there’s a recipe that generates good outcomes.

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