Sterling Terrell

smart ideas from books (mostly)

Mauritius: A Glimmer of African Freedom

Mauritius: A Glimmer of African Freedom

Without a doubt, the nation of Mauritius is the freest country that you’ve (probably) never heard of — indeed, it is the freest country in all of Africa.

Located far off the east coast of Africa, just east of Madagascar, Mauritius is an island that rests on the west side of the Indian Ocean.

With a population of about 1.3 million people living on a little more than 2,000 square kilometers, Mauritius’s citizens enjoy a temperate climate, beautiful scenery, and a life in one of Africa’s least corrupt countries, according to Transparency International. Most of Mauritius’s citizens work primarily in sugar, tourism, textiles, and the growing financial sector. Nobel laureate and writer J.M.G. Le Clézio even calls Mauritius home.

Arab and Malay sailors first happened upon Mauritius in the 10th century, but it was not until the 16th century that the West found it. First settled by the Dutch, the French took control of the island in 1715, and the British took control in 1810.

Finally, Mauritius gained its independence from the United Kingdom in 1968 and grew into what it has become today — a model of freedom for the continent of Africa.

Just check out their most recent ranking in the Heritage Foundation’s Index of Economic Freedom. The index ranks nations based on freedom in categories such as business, taxes, money, finance, and labor.

To see the flavor of the polarities involved, Hong Kong, Singapore, and Australia were ranked in the top three spots. Conversely, Cuba, Zimbabwe, and North Korea came in at the bottom of the list. The nations of Afghanistan, Iraq, Liechtenstein, and Sudan were not ranked, due to insufficient data.

To get a flavor, look at some of the points form 2011:

Mauritius particularly stands out in its investment freedom, ranking sixth in the world. The index states,

Foreign and domestic investors are treated equally, and foreigners may control 100 percent of companies in most economic sectors. A transparent and well-defined foreign investment code makes Mauritius one of the best places in the region for foreign investment. The domestic legal system is generally non-discriminatory and transparent. Residents and non-residents may hold foreign exchange accounts. There are no controls on payments or transfers. Foreign nationals may acquire property subject to some restrictions. Foreign investments have never been targets of nationalization or expropriation.

In regard to fiscal freedom, only 16 countries ranked higher than Mauritius. On that category the report declares,

Mauritius has a very competitive tax regime. Both the income tax rate and the corporate tax rate are a flat 15 percent. Other taxes include a value-added tax (VAT) and a property tax. Employers and employees pay social security and pension contributions. In the most recent year, overall tax revenue as a percentage of GDP was 19 percent.

To put those numbers into perspective, the United States currently has a graduated income tax that tops out at 35 percent and a corporate tax rate of 35 percent. The top income tax rate in Germany is 47.5 percent, with a corporate tax rate of 33 percent, and in France those rates are 40 percent and 34.4 percent. In Italy they are 43 percent and 31.4 percent.

Trade freedom was another category in which Mauritius scored relatively well on the index — with a weighted average tariff rate of 1 percent in 2009. Meanwhile, the United States had a weighted average tariff rate of 1.8 percent.

Also noteworthy is Mauritius’s record of government spending. On an index scale with 100 being the most free rating possible in the category, Mauritius scored 80 points. On this area the study noted,

Stimulus spending targeting infrastructure investment and job preservation began in December 2008 and continued through 2010. In the most recent year, total government expenditures, including consumption and transfer payments, showed a modest increase at 25.8 percent of GDP.

While the government spending of Mauritius totaled 25.8 percent of GDP, American government spending during the same period totaled 38.9 percent of GDP.

Consequently, the United States was awarded only 54.6 of the possible 100 points in the category of government spending. The study said of the United States,

In the most recent year, total government expenditures, including consumption and transfer payments, equaled 38.9 percent of GDP. Spending increases totaled well over $1 trillion in 2009 alone, an increase of more than 20 percent over 2008. Stimulus spending has hurt the fiscal balance and placed federal debt on an unsustainable trajectory. Gross government debt exceeded 90 percent of GDP in 2010.

In Germany government spending equaled 43.7 percent of GDP, in France it accounted for 52.8 percent of GDP, and in Italy the number was 48.8 percent.

Gone are the days when the West in general, and America in particular, was an example of hope and freedom that the world could look to. Don’t get me wrong, we still do a lot of things right in America — but watching the government spend and regulate while the nation burns is not one of them.

Sure, Mauritius is an exception in Africa — but they are an exception to be emulated by all of Africa, and much of the West.

So cheers to Mauritius.

Who knows, though — maybe Mauritius is less than optimal. I mean — like Hawaii — they do live on top of a volcano.

First published by the Mises Institute.

A Dearth of Savings

A Dearth of Savings

The economy is floundering as a result of increasing regulations, ill-advised monetary and fiscal policy trying to prop everything up, and more international competition at every turn.

One other thing is also true: we are not saving enough.

Well.  Maybe that’s not true.  What is “enough,” really?  And enough compared to what?  The personal savings rate is actually up from its all-time lows of the last decade.  (Historically, U.S. saving has also been low compared to in other countries.)  But in this case, comparisons matter little.  The reason that we don’t save enough is simple: We don’t save “enough” because economic growth has slowed — making us worse off; and savings fuels economic growth — making us better off.Any student taking an undergraduate intermediate macroeconomics course should be able to expound on the subject through a reasoned explanation of what is called the Solow Growth Model, also referred to as the Exogenous Growth Model.  In a short, non-technical manner, the Solow Model says that, all other things equal, the savings rate will basically determine economic growth.  Said differently, more saving means more output.  And more output is good.

This line of thought makes sense if you think about it.  People save.  The more savings there are, the more capital accumulation there will be.  The more capital that is accumulated, the more capital per person there is in a given society.  The more capital per person there is, the higher a given worker’s productivity will be.  And the higher a worker’s productivity is, the higher that worker’s wages will be.

Because of this, from a policy standpoint, America should encourage savings and discourage borrowing.

But is that what we do?  Of course not.  We do the opposite.  We encourage borrowing and penalize savings.

In the housing market, in particular, America encourages borrowing by those who can least afford it, through manipulative bank regulations with help from the likes of Fannie Mae and Freddie Mac.  This issue really begins with the Community Reinvestment Act of 1977.  On the CRA, economist Thomas DiLorezo holds nothing back:

When the CRA was created during the Carter administration, the administration also funded with tax dollars numerous “community groups” that have helped the Fed, the Comptroller of the Currency, and other federal regulatory agencies to enforce the act. Under the CRA, if a bank wants to make virtually any change in its business operations – merging, opening up a new branch, getting into a new line of business – it must first prove to regulators that it has made “enough” loans to the government’s preferred borrowers. The (partially) tax-funded “community groups” like ACORN (Association of Community Organizations for Reform Now) can file petitions with regulators that stop the bank’s activities in their tracks, perhaps defeating them altogether. The banks routinely buy off ACORN and other “community groups” by giving them millions of dollars as well as promising to make even more dubious loans.

The issue is the same when it comes to other forms of credit.  In the housing markets, as well as the credit card market, restrictions are made on “predatory” lending.  All that means is that lenders are by law prevented from being able to match interest rates on loans with the amount of risk associated with that loan.  Only having to pay 10 percent interest, when one’s risk profile dictates a 20-percent interest rate, leads to more borrowing.

At the same time that America is encouraging borrowing, it is also penalizing savings through confiscatory estate taxes, one of the world’s highest corporate tax rates, the double-taxation of corporate dividends, high state property taxes, and progressive income taxes.

For what?  More earmark spending?  Higher pay for civil “servants“?

Maybe even more significantly, savings is also penalized through inflation.  The late economist Ludwig von Mises provides a great explanation of the effects of inflation from years gone by:

An example of what I mean was furnished by the president of a bank in Vienna. He told me that as a young man in his 20s he had taken out a life-insurance policy much too large for his economic condition at the time. He expected that when it was paid out it would make him a well-to-do burgher. But when he reached his 60th birthday, the policy became due. The insurance, which had been a tremendous sum when he had taken it out 35 years before, was just sufficient to pay for the taxi ride back to his office after going to collect the insurance in person. Now, what had happened? Prices went up, yet the monetary quantity of the policy remained the same. He had in fact for many, many decades made savings. For whom? For the government to spend and devastate.

Inflation does make sense, however, in the face of hard decisions.  Facing the facts of large budget deficits, there are really only four alternatives that can turn the tide back: Grow the economy faster than the debt (the opposite of what America is currently doing), make huge cuts in government spending (that are public and unpopular), raise taxes to pay off the debt (also public and politically ill-advised), and finally, inflation (a move that is quiet and essentially invisible).  What politician wouldn’t prefer an invisible tax?  Look to the nation of Zimbabwe for an exaggerated recent example.

(Some economist argue for “measured” inflation as a means of avoiding deflation at all cost.  For the life of me, I can’t understand why.  Would you rather that, with every year that passes by, that dollar in your pocket be worth more and more, or less and less?  The answer seems obvious.)

Until America and its policymakers decide to foster a culture of savings in an environment that does not destroy it, we will suffer the consequences.

And indeed, we are.

First published by American Thinker.

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