China, Poland, and Divergence

I created the Anti-Convergence Club so I could have concrete examples of how more economic liberty translates into higher living standards.

In effect, it’s the data-driven version of my Never-Answered Question.

Yesterday, I provided another example of anti-convergence by comparing Australia, Switzerland, and the United Kingdom.

Today, let’s look at Poland and China. This tweet from Professor Noah Smith shows that Poland was richer than China 30 years ago and – contrary to convergence theory – has become even richer over time.

I closely follow international economics, but I confess that this data came as a surprise.

It’s not that I have had an overly optimistic view of China (see here, here, here, and here).

But I obviously have overlooked Poland’s progress (even though I wrote about that nation’s relative success in both 2014 and 2017).

And why is Poland also enjoying relative success when compared with China? The answer, at least in part, is that Poland enjoys more economic freedom.

By the way, Poland is not a role model. Many of its neighbors (the Baltic nations, Germany, and the Czech Republic) have significantly higher levels of economic liberty.

That being said, the comparison between Poland and China shows that sometimes you win a race because you are fast and sometimes you win because the other contestant is slow.

P.S. To continue that metaphor, China may be even slower than what we see in the official data (though still not as slow as basket cases such as Argentina, Cuba, and Venezuela).

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Bizarre Moments in Taxation

Every so often, I share very weird stories about government regulations, from both America and around the world. And when I say weird, I’m not exaggerating.

But we also have some strange examples of tax loopholes.

I’m not talking about corporate jets, which should be characterized as a business expense.

Instead, I’m referring to bizarre examples of income that is arbitrarily exempt from tax.

The weirdest example in the United States is from Nevada (probably because politicians have a conflict of interest).

Today I want to write about a new tax loophole in Poland.

Polish lawmakers have approved a measure that would exonerate most workers under the age of 26 from income taxes… The bill would exonerate workers under the age of 26 from Poland’s 18 percent personal income tax for those whose gross earnings don’t surpass 85,500 zlotys (20,000 euros, $22,500) per year. That level is higher than Poland’s average income… Some two million people could benefit from the measure.

So what’s motivating this example of age-based tax discrimination?

Poland has long been haemorrhaging skilled workers to other EU states where they can find better paying jobs, posing both a long-term demographic risk and short-term problem finding enough labourers to continue the country’s streak of economic growth since the fall of communism in 1989.

I certainly agree that Poland faces a demographic challenge (along with other nations in Eastern Europe), both because of emigration and low birth rates.

And I also agree that Poland’s economy has been relatively successful since escaping the evil of communism.

But I’m not very confident that this policy is the right recipe for continued prosperity.

• First, I don’t like discrimination in the tax code, whether based on the source of income, the use of income, the level of income, or – in this case – the age at which income is earned.
• Second, this policy doesn’t affect social insurance taxes and value-added taxes, which are actually the biggest burden for ordinary workers in many Eastern European nations.
• Third, unless Poland’s government imposes some spending discipline, a tax preference for young people may lead to higher taxes on other groups, thus offsetting any economic benefit.

To be sure, I’m glad Poland is addressing the issue by lowering taxes rather than by creating new programs and subsidies, as we’ve seen in some other European nations.

I’m simply not expecting big results.

P.S. You can click here to peruse other oddball examples of international tax policy.

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Poland’s Reward for Good Economic Policy

Earlier today, I gave a speech about populism and capitalism at the Free Market Road Show in Thessaloniki, Greece.

But I’m not writing about my speech (read this and this if you want to get an idea of what I said about American policy under Trump). Instead, I want to share some remarkable data from a presentation by Ewa Balcerowicz of Poland’s Center for Social and Economic Research.

She talked about “The Post Socialist Transition in Poland in a Comparative Perspective” and showed that Poland and Spain has similar living standards after World War II. But over the next 40 years, thanks to the brutal communist system imposed by the Soviet Union, Poland fell far behind.

But look what has happened over the past 25 years.

Per-capita GDP has skyrocketed in Poland and the gap between the two nations has dramatically narrowed.

So why is Poland now rising relative to Spain?

For the simple reason that public policy has moved in the right direction. Here’s the data from Economic Freedom of the World, comparing Poland’s score in 1990 and today. Poland has jumped from 3.54 to 7.42, and the nation has jumped from a dismal ranking of #104 to a respectable ranking of #40.

By the way, Spain’s score also has increased, but by a much smaller amount. And because the world has become more free, Spain’s ranking has dropped. Indeed, Spain now ranks below Poland

Which means that we shouldn’t be surprised if per-capita GDP in Poland soon jumps about Spanish levels.

Just as Poland has out-paced Ukraine because it has better policy.

Here are additional examples showing the long-run benefits of pro-market policy.

• Chile vs. Argentina vs. Venezuela
• Hong Kong vs. Cuba
• North Korea vs. South Korea
• Cuba vs. Chile
• Hong Kong vs. Argentina
• Singapore vs. Jamaica
• United States vs. Hong Kong and Singapore
• Botswana vs. other African nations

And here’s a must-watch video on the relationship between good policy and better economics performance.

All of which helps to explain why I’m so disappointed in both Bush and Obama. Their statist policies have caused a drop in America’s score and relative ranking.

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