Monday, 27 January 2014

Rent seeking

This article was published in The Malta Independent on Sunday - 26th January 2013


Prof Joseph Stiglitz
Nobel Laurate economist Prof Joseph Stiglitz’s latest publication ‘The Price of Inequality’ has brought growing social inequality on to the agenda of the 44th World Economic Forum presently going at Davos, Switzerland. 

According to an analysis report prepared by Oxfam for the Davos meeting, the 85 richest people on the planet have accumulated as much wealth between them as the bottom half of the world’s population. The tiny elite of multibillionaires, who could fit into a double-decker bus, have piled up fortunes equivalent to the wealth of the world’s poorest 3.5bn people.   Oxfam condemned the “pernicious” impact of the steadily growing gap between a small group of the super-rich and hundreds of millions of their fellow citizens, arguing it could trigger social unrest.

Stiglitz passionately describes how unrestrained power and rampant greed are writing an epitaph for the American dream. The promise of the US as the land of opportunity has been shattered by the modern tyrants, who make up the 1%, while sections of the 99% across the globe are beginning to vent their rage. The anger, seen in Occupy Wall Street and Spain's los indignados, is given shape, fluency, substance and authority by Stiglitz. He does so not in the name of revolution but in order that capitalism be snatched back from free market fundamentalism and put to the service of the many, not the few.

Stiglitz’s arguments apply mostly to the US.  There is no doubt that in particular countries globalisation has helped to reduce poverty.  China and Brazil are typical examples where governments have spread the benefits of globalisation to benefit the bottom layers helping to extract millions out of poverty.   There is an argument to be made that rather than fighting globalisation per se, Occupy movements and Oxfam should be fighting the social policies, or lack of them, in particular countries, the US in particular.

Even with liberal Obama in the White House, the social inequality in the US has continued to accentuate, showing that politicians seem powerless to reverse the trend in spite of good intentions. The reason may be found in the ability of the top 1% to use their huge economic power to consolidate their ‘rent seeking’ abilities.

For roughly 30 years after the second world war, the US top 1% had a steady share of the US cake. In the five years to 2007, however, the top 1% seized more than 65% of the gain in US national income. In 2010, their share was 93%. This did not create greater prosperity for all. On the contrary, much of this gain was "rent seeking", not creating new wealth but taking it from others. The inequality gap is becoming a chasm. Stiglitz demonstrates how, in the US, those born poor will stay poor; yet nearly seven in 10 Americans still mistakenly believe in the American dream.

Rent seeking comes in different forms but the ultimate aim is the same:  tilting the playing ground in favour of the top 1%. Lower tax rates for capital gains as against earned revenues; tax loop holes such as allowing non-repatriated corporate profits go untaxed; monopolies or market distorting incentives working against the consumer; preference to reduce tax rates at the upper margin rather than distribute wealth through social programmes or investment in infrastructure; explicit and implicit state guarantees like ‘too big to fail’ tolerance for large financial institutions; these  are all living examples and results of rent seeking lobbying.

This is leading to accumulation of huge cash and liquidity reserves by the largest corporates who rather than invest for organic job creating economic growth, prefer to use the cash for job destructing mergers and acquisitions or share buy backs and dividends that benefit the rich.

Thanks to the social benefit net largely put together by Labour governments of the seventies and which the PN governments of the nineties were obliged to respect and extend under the inspiration of the great mentor the late Fr. Peter Serracino Inglott, in Malta we do not suffer from such grave inequality problems.  The size of the country is what it is.  Here the rich and the poor unavoidably rub shoulders.  Inequality cannot be allowed to grow as much as in large countries where the 1% can live secluded and blind to the needs of the 99%.   God bless Malta!


Hats off to Judge J.R. Micallef for coming out with two judgements for the long outstanding court cases related to National Bank of Malta saga.   In so far as this Judge is concerned, accusations of undue delay in giving judgements are out of order as since the cases came under his tutelage he advanced them after many other Judges, for one reason or another, washed their hands off them. 

As a taxpayer I continue to oppose any out of court settlement.  Only a court judgement in its final format will come with conviction that government has acted in the interest of general taxpayers.

But I smile when I hear the expectations of  ex-NBM shareholders following the judgement which confirmed that their rights under Section 37 of the Constitution were prejudiced when “the method how their shares were taken over infringed the basic elements of this article”.

One can agree that the method used was deficient and that due process was not respected.   But translating this into fair compensation, something the Judge still has to do, cannot be as straight forward as some zealots have recently expressed, because:

1.       Commercial compensation could only apply to those shareholders who did not sign over their shares to government or who can prove the transfer they signed was legally invalid.   The zealots do not mention another case decided concurrently by the same Judge, that threw out a case where four shareholders who signed over their shares without compensation tried to argue for invalidity of the transfer.   Whilst arguments and circumstances may differ from shareholder to shareholder there is no doubt that the onus of proof to nullify a signed share transfer has been set very high by the Courts.  Careful reading of this second judgement, which is conveniently never referred to by the zealots, disproves and buries the myth that then Prime Minister Mintoff had actually threatened shareholders with lifting of their limited liability to force them in signing over their shares.


2.       Commercial compensation has to be based primarily on the value of the shares at the time they were taken over.  Judge Micallef in the second sentence upheld and respected the Judgement passed by the Court’s Second Hall in 1973 when authorising transfer of shares held by minors, which was based on the opinion that at the time the shares had no commercial value.

Reading the two judgements together the impression I form is that compensation is only due to those who did not sign their shares or who can successfully prove in court that the transfer was invalid for reasons at law, and that given that at the point of takeover the shares had no commercial value, any compensation has to be based on moral considerations.

I continue to respect the due process of law but not the process of rent-seeking.

Thursday, 23 January 2014

Children of a lesser god

In Malta thankfully we do not suffer from gross economic inequality as Oxfam have reported to the Davos World Economic Forum, where 85 richest persons in the world possess as many riches as the bottom half of the world's population.   We do however suffer another type of inequality, which I refer to as the syndrome of labourites being children of a lesser god.

It seems that the PN still embrace a political credo that they have a God given right to be in government and that when  democracy ultimately works to put them in opposition, no matter how small or how large the electorate’s mandate, they can still claim a divine right to obstruct the government, nationally and internationally, to the best of their ability in the hope of shortening their stay out of executive power.

The European Parliament vote they forced against the IIP scheme has humiliated Malta.   The PN preferred their party’s interest to the national interest.   Contrast that to how the PL used to behave when in opposition.

Imagine if the PL rather than extend friendly consensus to the PN government over a quarter century to build our financial services sector on a stable political platform, instead exposed the PN government internationally as a beggar thy neighbour tax cheat.    Tax efficiency mechanisms to attract international business can easily be exposed as immoral and support can be gained from other countries that can be persuaded to view such schemes in ‘our gain is their loss’ terms.

The PL proved themselves a loyal opposition working in the national interest and consistently supporting such PN government initiatives to stay as much as possible below the radar of potential objectors. Not so the PN.   On the first opportunity they were asked to stand up to be counted as a loyal opposition that can be expected to support the national interest , they failed miserably.   They went to unimaginable extremes, harming the country’s interest purely to try obstruct government economic plans in the hope this will shorten their stay in opposition.   May be they dream of replaying 1998 all over again not realising that government commands a parliamentary majority nine times bigger than in 1998.  As the saying goes, hope springs eternal.

My stomach turns whenever I hear PN exponents misrepresenting the IIP as citizenship for sale.   Sale is what happens in January on most high streets.   Anyone with money can go into a shop and no questions asked buys the items displayed with prices marked down as displayed.   The IIP is not open for anyone with cash and certainly not at a discount.    Applicants have to undergo a very thorough multi-level due diligence process before they  can be short-listed as qualifying for IIP. Following that given that the quantum of IIP’s is capped, a selective process will be made by Identity Malta to choose the applicants with the greater potential for inward direct investment and deep rooted economic linkages, beyond the minimum requirements of the scheme.

How can the opposition underestimate the economic potential of the IIP?  Bring out the calculator.  Multiply 1800 by EUR 650k, ignoring all the other bells and whistles.   That comes to EUR 1.17 billion which I round down to one billion Euro to allow for administration and expenses.  That is 14% of our GDP which if one applies a conservative multiplier effect of 50% is equivalent to 21% of the GDP.   Assuming the Scheme can be rolled out over 3 years that is equivalent to 7% of the GDP p.a. for each of the next three years.  

That is twice the normal organic nominal economic growth.   Now that makes a difference.    That could make a step change to the economic growth capacity of the country without causing inflation and without any borrowing or deficit.    That could see our national debt sink back to below 70% of the GDP in a matter of few years.

And by what reasoning would 1800 IIP awards be considered as beggar thy neighbour policy by five hundred million Europeans.    If their argument is that citizenship should only be gained after a period of residency why should our colleagues in Europe fear that people who find difficulty to reside in Malta and have freedom of movement to move wherever through Schengen area, would if given citizenship without residence conditions do anything differently.  I would argue that the contrary would apply.   Citizenship without residency requirements would probably mean that the applicant will continue to reside in their country of first residence and use the Malta passport purely as an insurance policy in case threats to stability in their home country materialise.

In due time Maltese citizenship would grow on such IIP citizens when knowing us at first hand will expose the hidden benefits of doing business in and through Malta.

The success of the IIP will come back to haunt the PN and will ultimately deliver a death blow also to political inequality whereby PL sympathisers are still considered as children of  lesser god.


Sunday, 12 January 2014

Restoring political democracy

This article was published in The Malta Independent on Sunday - 12th January 2014

10 months ago a new government was sworn in following a clear-cut election result.

Labour was mandated to govern for a five year legislature with majorities that leave absolutely no doubt about what the electorate wanted.   The PN were given a trashing and a lesson about the truism that under the sun nothing lasts for ever.

Nobody expected a new Labour government to start functioning effectively immediately.  They had to take over an executive corpse where all decision making positions were filled over a quarter century by successive PN governments that gave priority to party loyalty rule over meritocracy.

Nobody expected that the PN will gracefully slip into Opposition and focus on internal regeneration.
Old habits tend to die hard and adjustment to the new reality had to take some time.

But 10 months down the road I find it strange that the PL government often still acts as if it is in opposition and the PN opposition acts as it were still in government.

Nothing bears truth to this better than the way government and opposition have behaved regarding the Individual Investor Programme (IIP) – Citizenship Scheme.

Small countries like us must innovate in order to prosper.   We do not have the economies of scale to beat larger competitors by playing their game.  We must play a different game.   We must differentiate ourselves and move fast in doing so before others catch up.   Particularly in sectors where we have no intrinsic natural advantages (as we have in tourism and to some extent in manufacturing) we had to devise new innovative ways to compete.

In financial services, gaming and back office services we have used our intrinsic advantages of having a well-educated, English speaking, competitively priced work-force and network of  professional services, and coupled them with fiscal advantages which competitors with large legacy fiscal base find it impossible to imitate.    Our best kept open secret is that our full imputation corporate tax system effectively means that on profit distribution the shareholder is given full credit for the corporate tax paid on the distributed profits.  This essentially renders our effective corporate tax as zero permitting flexibility in taxing dividend recipients in a way that renders us tax competitive for corporates booking their international profits through Malta without attracting the international bashing recently served upon Ireland, Luxembourg and Netherlands that are constrained to devise ad hoc tax structures for what we can do unobtrusively through mainstream tax systems.

The PN government had the full explicit and implicit co-operation of the Labour opposition in building and adapting these financial and tax structures right from the beginning of the offshore regime in 1988 to all developments and adaptation up to the current regime.  All legislative measures were passed with consensus and debates often where held in camera where differences were trashed out away from the spotlight.

The IIP is a further innovation to extend our international services offering.   Many EU countries already offer golden visas permitting free movement within the EU with minimal residency requirements without the need to pay anything upfront except making moderate investment in real estate.   Launching a similar scheme would have presented no competitive edge and no upfront fee which we can use to build  a sovereign wealth fund  (SWF) with which to finance infrastructure investments ideally on a PPP basis.

Offering citizenship gives us the innovation edge but opens up certain risks which had to be addressed.   The first risk was filtering out unsavoury characters.   To ensure that we do not tarnish our reputation as an honourable financial centre it was necessary to set up robust due diligence tests and to reserve the final judgement on each application.  There was the risk of perception by our EU and visa waiver partners of our adopting beggar thy neighbour policies to cash in on privileges, offering them wholesale to non-residents.  This needed the establishment of fixed quotas.   There was the risk of our being perceived as desperate for new revenue sources to close up some dangerous fiscal hole.  This needed assurance that with or without the IIP our fiscal accounts were in good shape and that most of the funds would be allocated separately to SWF type of investments rather than taking it into the mainstream budget to finance operational expenditure.

In all these matters the Labour government operated as if it were still in opposition, effective in generating ideas but with no experience of execution.    It took various tweaks, showing an unsteady hand at the wheel, to bring the scheme to a form which addresses the risks and gains support from interested private sector players.   Labour should learn from this event that the best ideas could be ruined through lackadaisical execution.

The PN opposition on the other hand behaved in denial of the message that the electorate gave them last March.   They could have disagreed with the Scheme on a matter of principle, voted against it and refused to enter negotiations.   That’s how democracies work.   But entering into negotiations and seeking consensus on the basis of my way or the highway is not fit for purpose.  Threatening to revoke what predecessor governments would have legally contracted portrays us as a banana republic especially if the opposition gloats about it on foreign media.

The Opposition has a duty to oppose but pretending it has the right  to impose the minority view on the majority is no way to run a democracy.  Arguments that public opinion was generally against the Scheme hardly works in a democracy.  No serious government can govern on the basis of public opinion.   No serious government can execute by opinion polls.   Governments govern over a legislature, execute in terms of law, and after that if generally they do more right than wrong they get re-elected and if not they get replaced.

As we start a new year and the first full year of this legislature it is time for our political democracy to revert to normal operations.   The government has a mandate to govern.   It should consult before deciding, it should seek as broad an approval as possible, but once it decides it has to move on.

The PN has to accept that it is no longer in government.  If they cannot find the inner strength to sustain the consensus they enjoyed from Labour opposition (even in areas where Labour had reservations) in so far as financial services and such matters, they should register their disagreement but allow to government to move on with their mandate, warts and all.   The more warts the more probable they can convince the electorate to change their mandate when elections are due again.

It is time for both sides to respect the electorate’s mandate.  The government has to govern, the opposition has a right to oppose but the duty to let the government govern even where they disagree.

And it is super-rich from the Opposition to pretend to influence their way the choice of the next President.   They appointed their own ever since the late Pawlu Xuereb was removed from Acting President and in the process appointed three ex-Ministers and one ex-Prime Minister from their own stables.  Only when they won the 2008 election  by a hair’s breadth margin they made the only token concession to Labour by appointing to the Presidency Dr George Abela who as time has proven had all the merits for the position irrespective of his political affiliation.

This is not to say that Labour should compulsory appoint one of their own.   The chosen candidate should be appointed on the basis of merit and ability to unite the nation.   The political class should not be considered as having the exclusive patrimony of such merits.  

Tuesday, 7 January 2014


Jack Lew, the US Financial Secretary came to deliver a clear message to his EU peers.  It is gravely risky to proceed with a banking union without a backstop of sorts that can fill any capital deficiency hole resulting from a credible Asset Quality Review, bank stress test or call it what you like.

Jack Lew is speaking with the experienced gained on the other side of the Atlantic from the successful recovery  from the banking crisis of 2008.    The US threw capital at the banks in 2008/2009, sometimes against the banks' own wishes, to ensure they could be restored to health quickly and re-start servicing through proper credit channels the needs of the economy to grow out of the recession.

Having a federal system with one Treasury and a federal parliament/government, the US could use fiscal policy for providing the  capital funds needed to restore confidence in its banking system.

Europe can't do that as it has no federal set-up.   So it is struggling to restore its banks back to health. Without succeeding to restore banks' ability to perform their function of transmitting credit where the ECB monetary policy aims to deliver it, Europe's growth will continue to be sub-optimal and recovery will be painfully slow.

Those who ultimately matter in Europe, will politely invite Mr Lew to mind his own business.   Germany has decided that it does not want to risk its taxpayers' money by providing a creditable backstop for a banking union crisis.   The policy choices were made in 2013 and now the future can only unfold the consequences of such policy decisions.

The Germans hope that over a long time countries like Italy will gradually restructure and shape their economy in German tradition.   The risk is that the Italians, tired of austerity without growth, will protest by electing to government, probably in 2015, extreme parties which challenge the status quo and prefer bread and butter to fiscal orthodoxy and democratic principles.

Italy's importance to the Eurozone can hardly be overstated.  Italy still needs to fix its banking crisis to end its credit crunch.   It needs to cut business taxes on labour to gain competitiveness.   It has no fiscal space to finance such tax cuts so it would have to raise other taxes or cut social expenditures.  To reduce its debt level to within 70% of the GDP over the next 20 years it would have to run a primary surplus, i.e. a fiscal surplus before payment of interest , on a scale never seen in modern history.

Italy has not yet undertaken serious economic reform like Ireland, Spain and Greece, and is the source of gravest risk for the stability of the Eurozone.   Given the political fragility of all Italian governments it is more likely that the electorate will rebel against endless austerity rather than continue reforms on a length of scale which tire the healthy let alone the feeble.

As is common knowledge policy choices can be revised, but only when in severe crisis mode.  Italy has all the ingredients to bring about such crisis that Jack Lew has come to Europe to warn about.   But about that the Germans are stone deaf with double layered plugs in their ears.