Wednesday, May 19, 2010

US health expenditures

The US has the highest percentage of health expenditure in OECD countries. The finding is surprising given the fact that the role of government in US health care delivery is among the smallest in the world. However, health insurance in the US is conducted through insurance companies and not directly between the patient and health-care provider. Such interaction creates the third party payer problem. Much of the health insurance in the US is provided through employer mandates. Such a scheme entitles employers to buy health insurance on behalf of employees via insurance company. The scheme, due to the lack of direct payment, creates the so called moral hazard, giving employees incentives not to provide themselves with full insurance coverage. Average American spends $7.250 on health per year, which is more than two and half times the average expenditure in the OECD ($3.000).

The US health-care reform should focus on deregulation of health insurance market across the country. The provision of free interstate health insurance market would force insurance companies to cut predatory premiums and end insurance denials to their customers. In addition, health-care reform should encourage out-of-pocket payments given the fact that these payments are strongly correlated with overall health conditions. Switzerland enjoys one of the highest life expectancies in the world alongside very high out-of-pocket payments for health care. The US should move in the direction of elimination of employer provided health insurance. This step would gradually reduce the size of health expenditures and would also contribute to the reduction of the number of uninsured.

Health Expenditures in the OECD
Source: OECD (2010)

Saturday, May 15, 2010

Children living in one-parent households

Evidence suggests that living in one-parent household increases the probability of child poverty. In the OECD, 85 percent of single-parent households are headed by women. The highest percentage of single-parent households prevails in English-speaking countries (US, UK, Canada and New Zealand). The highest proportion of children aged 14 or below and living in one-parent household was found in the US (25.8 percent), Estonia (24 percent), the UK (22.9 percent). The lowest proportion was found in Portugal (9.8 percent), Italy (9.2 percent) and Greece (7.4 percent). It seems that the proportion is closely related to the religious pattern of the society, meaning that more traditional societies emphasize long term marriage and matrimony stability. The issue deserves more attention as the childrens' wellbeing, earnings and state of health are, in a large part, determined in early childhood.

The proportion of children living in one-parent households
Source: OECD (2010)

Friday, May 14, 2010

Productivity gap between the US and OECD countries

I collected data from the OECD on GDP per hour worked in each country as a percentage of the US level. The highest level of GDP per hour was found in Luxemburg (140.4 percent of the US level), Norway (136 percent of the US level) and the Netherlands (100.4 percent of the US level). In these countries, the level of productivity is higher as the workers there work fewer hours per year than in the US, so it is no surprise that relative productivity is higher. The least-performing countries are Poland (37.9 percent of the US level), Mexico (33.6 percent of the US level), and Chile (28 percent of the US level). These countries are catching-up developed nations, so in spite of relatively high number of working hours per year their level of productivity is significantly lower.

In the long run, productivity is the only engine of economic growth and the wealth of nations. It is the only hope for less-developed and developing nations to catch the income per capita level of advanced countries. There are many obstacles to higher productivity in the labor market. First, many countries impose minimum wage laws, risking higher unemployment among less-skilled workers. Minimum wages increase labor costs and reduce overall employment. Second, the number of working hours is often restricted by trade union determination of labor contracts and entry requirements in many sectors. Third, some countries reduce labor supply incentives through higher hourly wages on extra working hours so that employers do not encourage employees to work longer hours. And fourth, high marginal tax rates discourage workers from longer work. A reduction in marginal tax rates, the abolition of minimum wages, deregulation of entry requirements and tax incentives for extra hours of work could significantly boost productivity growth and higher standards of living.

GDP per hour in OECD countries
Source: OECD (2010)

Thursday, May 13, 2010

IMF Borrowing Crisis

The graph shows 10 largest borrowing arrangements by International Monetary Fund (IMF). Recent $140 billion rescue package for Greece is one of the largest cradit loan arrangements in the 21st century. The fund's contribution to Greece has surged the overall indebtedness of the Euroarea. During the financial crises IMF usually extended credit lines to the countries in trouble. Recently IMF extended borrowing arrangements to Latvia and Iceland. Before Greek rescue aid, IMF's contribution to Iceland's rescue package was one of the largest borrowing expansions ever given to such a small country. In the future, as emerging economies will further grow, IMF will have to be keen on the possibilities of systemic crises in these countries. The IMF should not extend the rescue loan to every country as this is not always effective in the end. The main purpose of the IMF is to help counties facing balance-of-payments crisis and not being the borrower of the last resort as in the case of Greece.

Italian Big Government

The figure from The Economist showes that the number of official cars on the streets in Italy is 6 times as much as in the average European country. The figure doesn't seem to reflect the terrible state of the Italian economy. In 2009, Italy's public debt grew up to 115.3 percent of the GDP. Given the worrying state of public finance, Italy's one of the riskiest countries in the Euroarea. It is a country of an enormous contrast between the developed North and the agrarian South. The country also has one of the largest shadow economies and widespread corruption perceptions in the developed world. Because of reginal income per capita disparity, Italy is a country of significant differences in youth and adult unemployment across the country. According to the OECD, Italy has one of the highest youth unemployment rates in the EU (26.3 percent). In the last year, youth unemployment rate in Italy grew by 5 percentage points. The proportion of youth in employment is 20 percentage points below the OECD average.

Source: The Economist

Tuesday, May 11, 2010

Mortgage crisis in the UK

Bank of England published a very interesting survey of household financial conditions in the UK. The following graph shows quarterly percentage changes in the house purchase and remortgaging dynamics in the UK between Q2:2007 and Q1:2010. As the graph indicates, there is an excess volatillity in the housing market as a result of loose monetary policy and unpredictable mortgaging changes. Housing markets reflect the instability of the UK economy.

House purchase and remortgaging dynamics in the UK

Source: Bank of England, 2010 (link)

Sunday, May 9, 2010

Youth unemployment in OECD

Youth unemployment is one of the major macroeconomic problems in the OECD countries. High youth unemployment rates are a significant concern mainly because joblessness affects housing market, inflation outlook and demographic picture. Persistent unemployment rate means less purchasing power and a strong downward pressure on prices.

According to the latest data for 21 OECD coutries, the highest youth unemployment rates (15-24 years) in the fourth quarter in 2009 were in Spain (43.6 percent), Slovak Republic (31.9 percent), Ireland (29.1 percent) and Hungary (28.8 percent). The labor market outlook in Spain is very worrisome given the fact that almost half of the young population is jobless. Spain's youth unemployment is almost 4 times the youth unemployment rate in Germany (10.2 percent). The OECD forecast a growing unemployment rate until 2011, which means that current unemployment figures could get worse in the coming years. The lowest youth unemployment rates were found in Netherlands (7.6 percent), Norway (8.9 percent) and Korea (9.4 percent).

Youth Unemployment Rate in Q4:2009 in OECD
Source: OECD (2010)

The biggest difference between youth and adult unemployment rate was in Sweden where youth unemployment rate was 4.3 times higher than adult unemployment rate. Similar differences were found in Norway and Luxembourg (both 3.87). The smallest differences were found in Germany (1.42), Portugal (1.96) and Denmark (2.03).

Youth-to-Adult unemployment ratio in Q4:2009 in OECD
Source: OECD (2010)

Saturday, May 8, 2010

How farm subsidies kill Europeans

Cardiovascular diseases (CVDs) are the main cause of deaths in the Europe, approximately 49 percent of all deaths, out of which 30 percent of all premature deaths before the age of 65. Cardiovascular diseases are estimated to cost the EU €169 billion every year.

Let take a look at the data. In Germany, 907 men and 237 women on average die prematurely each year before the age of 75 due to coronory heart diseases (CHD). In the UK, 479 men and 1453 women die each year due to premature death alone. The number of premature deaths is high in Mediterranean countries (Italy, Spain) as well. In Italy, 233 men and 826 women die because of the premature death (link).

"The school milk subsidy scheme introduced by the European Commission likewise means that a child drinking full-fat rather than skimmed milk will consume an additional 1.5 kg of saturated fat every year approximately 4 g per day. British children obtain 23% of their daily saturated fat intake from full-fat milk (link)."

To prevent premature deaths in Europe, European policymakers should impose a tax on the products causing significant health problems such as diabetes, obesity, lung cancer, incresing blood pressure, raising cholesterol etc., and by doing so save more lives. The EU Common Agicultural Policy (CAP) annual budget represents approximately €45 billion which represents 45 percent of the overall EU budget. Through subsidies and direct payments, CAP is a source of massive oversupply and overproduction of dairy products. These products are the main source of excessive butter and full-fat milk consumption which further leads to raising cholesterol, coronary heart diseases, incresed blood presure etc. The CAP has a deadly cost - human lives.

Friday, May 7, 2010

Taxing luxury yachts

The lawmakers in Florida have considered cutting the 6 percent boat registration tax. Florida already has one of the highest sales taxes in the US. Buying a $1 million boat will cost you $60.000 in sales tax. In nearby states such as North Carolina, yacht registration costs you $1.500 at most, whereas only $600 in Rhode Island and $500 in South Carolina. Even more attractive are Cayman Islands where you pay close to zero tax on yacht registration. Because of Florida's uncompatitive tax regime, 8 out of 10 boats in the state are registraed somewhere else, either in other costal states or abroad. The message is clear, raising taxes is tempting but in reality it leads either to tax evasion or capital escape. Higher tax rate lead to the opposite results of what the policymakers expected. Their decision costs Florida $120 million in lost revenue.

This is a clear evidence that higher tax rate does not lead to more revenue, as people and businesses easily move to more favorable tax destinations. To keep the citizens and businesses at home, you should build a more attractive business environment with lower tax rates and friendlier regulations (link).

Wednesday, May 5, 2010

Doing Business in OECD

Some of the issues that careful investor would consider when chosing the best country for doing business are the flexibility of the labor market, the nature of the tax system, the cost of starting a business, the protection of investors, contract enforcement, getting credit, etc. To investigate the issue, I collected data on doing business in 27 OECD countries from World Bank's Doing Business.

In the graph you can see the ranking of countries according to the ease of doing business. The best performing OECD country is New Zealand. New Zealand's business environment is known for low corruption perception, strong contract enforcement, low tax rates on labor and capital, not to mention flexible and non-distortionary business legislation. The second best performer is the US followed by Denmark and the UK. In spite of one of the highest fax rates in the world, Danish business environment is a benchmark for the rest of the world in two major policy fields. First, a flexible labor market and second, a robust sistem of legal protection of investors. Among the best performing countries are Anglo-Saxon countries and Nordic countries. These countries are known for relatively free business environment although Nordic countries are characterised by high tax burden and high government spending.

Countries of Continental Europe are ranked in the middle. Their business environment is unfortunately known for high tax burden, high government spending, rigid labor market and, nevertheless, strong governmant intervention. For example, the collective bargaining coverage of labor contracts in Austria and Germany is close to 100 percent which is a measure of strong union power.

The Ease of Doing Business in 27 OECD countries
Source: World Bank

The worst performers in the OECD are Mediterranean and Vishegrad countries (Czech Republic, Slovakia, Poland, Hungary). In addition to high taxes, big government and rigid labor market, Mediterranean countries suffer from a weak rule of law and costly contract enforcement which hinders investor protection and diverts investment from productive into shadow sector of the economy. It is not surprising that in these countries union strikes and shadow economy are widespread.

Days to start business in 27 OECD countries
Source: World Bank

In the upper graph, you can see the number of days necessary to start a business. The findings reflect the pattern of the ease of doing business. Countries with higher administrative burden have the longest procedures in starting a business. Spain and Continental European countries were ranked on top with the highest number of days in starting a business while Anglo-Saxon countries are admired for quick and flexible administrative procedures in starting a business.

Tuesday, May 4, 2010

Economic freedom and the wealth of nations

Today, I would like to present the impact of GDP per capita on economic freedom across the world in 2010. Economic freedom is a measure of country's freedom to invest, consume, work and produce in any way pleased. It is also a measure of state's protection of private property rights under the rule of law. In the graph, I compared the GDP per capita (PPP-adjusted) in international dollars and economic freedom score from Index of Economic Freedom. The index ranges from 0 to 100; where higher number indicates higher level of economic freedom.

As you can see, higher GDP per capita is associated with more economic freedom. I found that if GDP per capita increases by 1000 USD, economic freedom score, on average, improves by 0.6 percentage points, all other remaining constant. In addition, 48.03 percent of the variation in economic freedom is explained by the variability of GDP per capita.

Economic freedom is an essential determinant of economic development. The lack of institutions of private property, rule of law and contract enforcement is the main source of economic underdevelopment and contemporary stagnation in the third world.

It is not natural disasters and the lack of humanitarian aid that keeps Haiti poor but the absence of economic freedom which has lead to widespread corruption in judiciary, business and politics, and to the diversion of investment out of the country. Haiti's economic freedom index (50.8) is among lowest in the sample of 50 countries.

The least economically free countries are Venezuela (37.1), Libya (40.2), Belarus (48.7) and Russia (50.3). The best performing countries in economic freedom are Australia (82.6), New Zealand (82.1), Ireland (81.3) and Switzerland (81.1).

Economic freedom and GDP per capita in 50 countries

Source: Heritage Foundation, IMF (2010)

Monday, May 3, 2010

Corruption and economic welfare

I collected data on GDP per capita and Corruption Perceptions Index (CPI) for 50 countries in the year 2009, disregarding the level of GDP per capita. The sample consists of developed, developing and least developed coutries. I discovered significantly negative relationship between GDP per capita and perception of corruption. CPI ranges from 1 to 10. Higher index implies lower corruption perception.

Corruption and economic welfare across nations
Source: IMF (2010), Transparency International (2009), own estimate

In general, countries with higher GDP per capita have significantly lower corruption perception and better institutional governance as well as the rule of law. The main finding is that if GDP per capita increases by 1000 USD, Corruption Perceptions Index will, on average, increase by 0.2 index points, all other remaining constant. It means that the persistence of corruption drops when countries become wealthier. GDP per capita is a good predictor of corruption perception. In general, 74 percent of the variability of corruption perception in the sample is explained by GDP per capita variation.

The least corrupt countries in the sample are New Zealand (9.4), Denmark (9.3), Sweden (9.2) and Switzerland (9.0). The highest perception of corruption was found in Haiti (1.8), Venezuela (1.9), Russia (2.2) and Belarus (2.4).

As we can see, fighting corruption is an important policy measure of encouraging economic development on the road to prosperity.

Sunday, May 2, 2010

Corruption eruption

The Economist wrote an interesting article about corruption where it discussed the problematics of corrupion and why does it exist. The answer is simple. The chances of being cought are small while the temptation of bribery is too high as benefits are so great. According to "When in Rome act like a Roman" argument, bribery is the price the you have to pay to enter the world's most difficult markets. Bribery can also speed up the bureaucratic procedures. On the other hand, tackling corruption can make your way a bit more difficult as in the case of IKEA when the company entered the Russian market and decided to fire managers who were paying bribes to local officials. Ethics is the only weapon that can overtake the corruption.

Ethical principles are the ones that can make people, firms and govermnents change the why they deal with the situations. Moreover, in the US, the Department of Justice is prosecuting far more cases than ever before. In 2001, only eight cases were prosecuted. Now there are 150 cases, which confirms that things are improving. As the likelihood of being cought is dramatically higher than few years ago, firms are not taking on more risk that before. That is why not so many firms tend to do their work in the corrupt way. Internet as well makes it easier to control firms' activities. Thus, it is easier to reach the information. There is still a lot to be done with the help of a watchful eye.