Thursday, June 14, 2007

Uncompetitive countries

Much hot air has been talked about how "competitive" some countries are. As the Financial Times commentator Martin Wolf put it in his book: "The notion of competitiveness of countries, on the model of the competitiveness of companies, is nonsense." He's right: countries and companies are two very different things, of course, and "compete" in very different ways. On an intuitive level, however, some countries are clearly more "competitive" than others. The World Bank, the World Economic Forum and the African Development Bank, have just produced an Africa Competitiveness Report 2007, based on a series of judgements about property rights, public trust of politicians, quality of infrastructure, inflation, and various other things. Oil-rich Angola is at the bottom of the table -- the world's least competitive country. Which raises interesting questions.

Angola, according to the UN, was also the world's fastest growing economy last year (based on fast-rising oil production -- and the IMF is now forecasting Angola's GDP will grow at an astonishing 35% this year.) Those who routinely equate "competitiveness" with economic growth would need to explain this. Countries are not just moneyboxes: there are so many other things going on, and those who argue that floods of money into a country are always a good thing are clearly mistaken. Here's another interesting fact about Angola: its 2007 budget, at $31 billion, is the same size as all foreign aid from OECD countries to all of sub-Saharan Africa last year -- and yet, according to the UN, Angola has the world's second worst child mortality -- worse, even than Afghanistan. Taking a broader view of this question, one might raise the same question about a country's financial-services industry -- Britain's, for example -- does inviting dirty money from overseas to wash into an economy really cause widespread prosperity? As we have pointed out below, Britain now has the second highest child death rate among the 24 richest countries in the world, with infants in the UK twice as likely to die before the age of five as children in Sweden. (Questions like this are explored in more depth in an interesting report on taxation by the Canadian Center on Policy Alternatives.)

Yet there is another point that Angola's paradoxical performance brings up. As our recent EITI blog, below, highlights:

It is hard for many people to accept that great wealth can produce great poverty, but academic research, particularly over the past decade, has confirmed this relationship to be robust. Tax is a central reason for this paradox: in “normal countries” like France or Sweden, citizens pay tax and demand accountability from their rulers in return. It works well enough. In mineral- dependent countries like Angola, however, rulers tax oil companies, and their citizens are left out of the loop. Accountability evaporates, and rulers can behave as badly as they like, for their revenues are guaranteed anyway by the taxes flowing from the mineral industries.

The proponents of the idea that tax competition between countries is essential to drive tax rates relentlessly downwards don't seem to be able to deal with the central role that healthy taxation plays in fostering healthy political relationships between rulers and ruled.

And, finally, there is one more thing they aren't so keen to advertise. Moving from the Africa Competitiveness Report to the Global Competitiveness Report, here is some more interesting data. As the World Economic Forum puts it on its front page, "good institutions and competent macroeconomic management, coupled with world-class educational attainment and a focus on technology and innovation," are the keys to success. There is no mention of tax rates. Three of the world's five most "competitive" countries are among the highest-tax countries in the world: Finland, Sweden and Denmark -- and all are judged to be more competitive than the United States, for example. The friends of tax competition should try to explain that away too.

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