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Wednesday, Nov. 28, 2012

Failures in market economies


LONDON — The eurozone has not yet collapsed and all countries not in the zone must hope that it will survive. If it did fall apart and new currencies were established, there would be serious threats not only to international trade but also to economic growth and prosperity. Competitive devaluations would exacerbate international tensions and high inflation, which might follow, could lead to the collapse of democratic governments.

Fortunately there is not yet a revolutionary situation in eurozone countries, but there have been waves of protests in those worst affected by austerity.

In Greece, which has suffered a fall in GDP of over 25 percent, there have been riots and rightwing anti-immigrant extremists pose a threat to democracy and the rule of law. In Spain, where unemployment is over 25 percent and one in three young people cannot find work, efforts have been made to organize general strikes. Spanish banks and Spanish regions have real difficulty in covering their liabilities, In Portugal and Italy protests against austerity have been vociferous. In France Francois Hollande, the socialist president elected earlier this year, has been forced to modify his promises to reduce cuts in expenditure.

The United States, which has so often in the past been a motor for world growth, faces the so-called fiscal cliff. If Congress cannot agree on a package of spending cuts and tax changes, swinging cuts in government expenditure accompanied by tax increases will automatically come into force. These would force the U.S. into recession and have a serious impact on the rest of the world.

Japan shows no sign of returning to steady growth. The outlook seems to be one of further stagnation exacerbated by friction with China. The new Chinese leadership face increasing pressures to improve standards of living among China's masses and deal with the problems of corruption and pollution. They also have to find ways of managing the overweight state enterprises that are often inefficient and distort the economy.

Austerity has been necessary because governments and banks have often behaved as if there were no tomorrow. The property bubbles induced a false sense of prosperity and a mistaken belief that all would end well.

Many governments, especially in Southern Europe, failed to recognize that with aging populations and low productivity growth, pensions and health care were becoming unaffordable. Because of popular opposition they avoided necessary measures such as increasing the retirement age in line with increases in longevity.

Governments almost everywhere have also failed to ensure that the necessary taxes needed to meet social and other expenditures have been collected. In some countries where corruption is endemic, payment of tax has been a matter for negotiation with the tax authorities. The richest people have no difficulty in hiring the ablest tax lawyers and accountants.

Greece has a number of wealthy businessmen, including ship owners, politicians and professional people with secret bank accounts in Switzerland and bolt-holes in London. The Greek authorities made themselves look foolish (or complicit) when they allowed a journalist who had published a list of Swiss account holders to be prosecuted. The list had been given some time ago to the Greek government by Christine Lagarde, the French head of the IMF; it had been allowed to languish in the desk of an official. There was such an outcry in Greece and abroad that the journalist had to be released.

Greece is not alone in facing tax collecting problems. Italy, Spain and other countries have similar problems.

Britain is relatively tough in dealing with tax evasion which is illegal, although the Revenue have been criticized for being too lenient in some cases. The biggest problem lies in tax avoidance which is legal. People who are not domiciled in Britain can avoid paying income tax and inheritance tax if they keep out of Britain for most of the year.

The best known tax haven for British people is the principality of Monaco in southern France, a holiday port for billionaire yacht owners. Other British tax havens include the Channel Islands and the British Virgin Islands in the Caribbean.

Attention has recently been focused on large international companies, which do a lot of business in Britain such as Amazon and Starbucks, but which manage to pay little or no tax here by manipulating their accounts so that profits are registered in the country with the lowest tax rate.

When people and companies enjoy the benefits open to all in Britain, including the rule of law and the protection of Britain's defense forces, they should contribute fairly to Britain's costs. When they do all they can to avoid paying tax, their behavior is immoral. National and international rules need to be tightened to ensure that all individuals and companies contribute fairly to the protection of our democratic societies.

The gap between the wealth of the very rich and others on middle and lower incomes has continued to widen. The differences seem ever starker as austerity bites. This gap is particularly apparent in the fashionable parts of London. Foreigners and non-domiciled British people have sent prices of properties in prime areas sky-high.

Many of these newly rich think nothing of spending vast sums on basements to house private swimming pools, gyms and cinemas. After causing maximum disruption to neighbors, these oligarchs may only use their properties only very occasionally.

The mega-rich of today are different from the French or Russian aristocracy before the French and Soviet revolutions as their power is limited. But they would be wise not to flaunt their wealth as government will be increasingly induced to take action to make them contribute more to society.

The British cleric, who will become the next archbishop of Canterbury and therefore leader of the Christian Church of England, has been urging banks and companies to consider carefully not only their profits but also what they can contribute to society.

The crisis in the market economy requires positive and responsible responses from governments, companies and individuals.

Hugh Cortazzi served as Britain's ambassador to Japan from 1980-1984.


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