Tuesday, October 19, 2010

Left at Booth 1

This paper was left at booth one. Apparently it is an assignment for an economics class. You have found this paper left on the booth seat as you slide in with your cappucino and croissant. So, you decide to read it while you wait for your laptop to boot up.

Econ 2304

Assignment #3: Heritage Foundation rankings of two countries for potential investment

My company will manufacture “net refractors,” which is a thin “webbing” that will cross the lenses still in place in many unused lighthouses across both coasts of the United States and Canada. My “net refractors” will transform each of these unused lenses into very powerful transmitting devices that will connect with all satellite systems and all communications around the world. Being almost invisible, they will also not detract from the natural beauty of the lenses, and they will need no maintenance, requiring only minimal additional personnel in the lighthouses. Plus, when in place, each of these lighthouses is guaranteed even further protection from possible dismantling, for, along with their historical value, they are now again generating income.

Since I’ve already determined that conditions in Houston (where I live) will be cost-prohibitive to start such a factory, I am looking outside the States, and because of my family and professional ties, have settled on either Ireland or El Salvador as a location to build my factory. Let us also assume that other factors are equal, such as the cost of transportation of the product from either place to the States will be equal.

OK, let’s see what the Heritage Foundation ranking has to say about my possible choices, going over each factor:

#1. Business Freedom
The world average to start a business is 35 days. In Ireland I might be able to start it in about 13 days, and in El Salvador, around 17 or 18 days. From what I’ve read, if I have to file bankruptcy, it’s a relatively straightforward deal in Ireland, although in El Salvador, bankruptcy is lengthy but not costly. To me, that means if I do go under, I’d be spending a lot more time in El Salvador than if I was in Ireland. Personally, that just depends on what type of beach/ocean I prefer: sandy/warm or rocky/crisp.

#2. Trade Freedom
As part of the European Union, Ireland’s tariff rate is set by European policies and had a weighted average of 1.3 percent in 2008 (El Salvador’s weighted average was 3.1); however, while both of them score in the 80th percentile range (87 and 83 % respectively), from what I understand of the description, Ireland has more mercurial and difficult laws regarding trade, a few obscure restrictions on imports of certain goods and services.

El Salvador appears a little more straightforward and open with their restrictive and somewhat restrictive trade practices, particularly on their sanitary and phytosanitary barriers. I have to admit, I had to look up “phytosanitary” – which refers to the regulations surrounding the import of plants and other agricultural goods. Since I’m not in the agricultural business, I wouldn’t think that would sway my decision; however, what this means is that there may be certain non-tariff restrictions on whatever materials I might need to bring into the country as part of my overhead.

#3. Fiscal Freedom
I’ve always been aware of the high income tax rate of Ireland – I mean, I used to live there, and so I have a slight taste for understanding how 20% of the people could be on the dole at any given time! I was pleasantly surprised to discover that the corporate tax rate caps out at about 12.5 % - compared to 25% in El Salvador, which is still about average in the world. Ireland has a lot higher percentage of tax rate as part of GDP, but to be honest, I rather expected that, in the Socialist bent that is what we so dearly love (and hate!) about Europe.

#4. Government Spending
The Heritage Foundation tanks Ireland with a 61% rating for government spending – but remember what I said about Socialism? To me, that was to be expected, and personally I take it more as an irritant rather than a prohibitive factor. But that’s probably just me not thinking like a Capitalist! In Ireland, government spending is 35.7% of GDP. The population is aging and Ireland just had their bubble burst – and the slowdown in economic activity is creating a greater fiscal deficit. It may not be much comfort to know that the little known philosopher, Giuseppe Salinghetti, once wrote that “Ireland is a country where the people know how to make personal wealth out of public poverty.”

El Salvador, on the other hand, is low in government expenditures. Some of those liberal types would be quick to point out that this is typical of Latin American countries and is evidence that the plutocrats who actually run those countries care nothing for their people, but those liberals just love to spoil the fun, don’t they? There IS a lot of privatization in the country, but there are a few monopolies in transportation, banking, and electricity distribution. I’ll have to keep that in mind when determining how much I want to pay to move goods around the country and how to keep the utilities going in my factory. Looks to me like it’s a choice between the Irish government or a few rich elite in El Salvador.

#5. Monetary Freedom
Both are in the 70’s of the Heritage Foundation ranking, with Ireland a bit higher, possibly due to the lower inflation in Ireland. Ireland has definitely benefited from being a member of the Euro Zone, which does attempt to assist its member in controlling inflation through subsidies. Also, back to what I mentioned about Socialism – Ireland also influences prices through state-owned enterprises.

El Salvador, during the 1990’s, tried to ward off inflation by dumping their currency (the colon) for the American dollar. This helped for a time, but inflation has still risen recently, more than in Ireland, averaging 6.3 percent between 2006 and 2008, according to the Heritage Foundation. The government controls the price of public transport, electricity, and sets prices for distribution services. All in all, it seems these countries are roughly equal in monetary freedom, the deciding factor being the inflation rate, which to me, seems like could easily be swayed by future economic events.

#6. Investment Freedom
95% for Ireland compared to 75% for Ireland – that’s quite a wide disparity. Let’s find out why:
Apparently anybody can own land, whether you’re Irish or not. That was actually a surprise to me, because I had always thought that the Irish had a strong tie to the land and land ownership, given that their own land had been stolen from them for 600 years under British rule. Perhaps that left them with a national conscience that understands the impermanence of land ownership. Whatever the reason, the regulations are apparently easy to understand, and land owners get equal treatment, both foreign and domestic alike. Perhaps I haven’t accounted for the stereotypical good nature of the Irish character. Or maybe I need to think more like a businessman than a romantic. Oh well.

In El Salvador, it seemed similar in that foreign and domestic investors are given equal treatment under the law. If I start with fewer than 10 employees in my net-refractor factory, the government wants a plan from me detailing how I plan to increase employment. However, I’m thinking I can employ at least 100, and I don’t know if even that size will face extra regulations.

On the other hand, I know that regulatory agencies are understaffed and inexperienced. I may be able to use that to my advantage (but don’t tell anybody you heard that from me!) The HF admits “bureaucratic procedures are relatively streamlined, although commercial law enforcement remains inefficient and inconsistent.”

But here’s the kicker: “El Salvador’s 1983 constitution allows the government to expropriate private property for reasons of public utility or social interest, and indemnification can take place either before or after the fact. No single domestic or foreign entity can own more than 245 hectares of land. Rural lands may not be acquired by foreigners from countries where Salvadorans do not enjoy the same right.”

Hm. That’s food for thought. Imminent domain? In a country the size of Massachussetts? restricting how much land I can buy? Just because I’m American? No wonder they only got a 75%!

#7. Financial Freedom
Ireland 80%/El Salvador 70% Ireland had a heck of a time with recent banking failure, and the government has practically privatized the largest bank (AIB), while El Salvador, on the other hand, has a banking system that is very well capitalized and hasn’t suffered great fluctuations in the housing market. I guess there is something to be said for being a small country tucked away inside a volcanic ring. In Ireland, the government is still injecting capital into the banking system, and the latest reports I’ve heard (independent of the Heritage Foundation) still lump Ireland in with other struggling EU countries, such as Greece, Spain, and Portugal.

I wondered why, then, the HF gave Ireland a full ten point lead over El Salvador, especially since it was speaking highly of its “robust growth” – then it caught me: “Non-bank financial institutions are limited by the lack of personal savings and low disposable income.” Basically, the people are still much poorer there than in Ireland. Basically, we’re talking a risk factor here, I believe – with the belief that powerhouses like Germany won’t let a fellow member fail, but El Salvador really has no safety net, after all.

#8. Property Rights
Here’s the kicker: Ireland gets 90% and El Salvador comes in at a 50% in Property Rights. This might be a deal-breaker: in Ireland, it seems, intellectual property is well-protected by an efficient and fair legal system – accessible to foreign investors (I refer to the previous question about the land!)

El Salvador, on the other hand, has a legal system that appears to be a little cumbersome and slow, which makes me concerned that somebody might rip off my idea and start a factory on the other side of the Rio Lempa where I plan to build my factory! Basically, the gist is that the judges can be bought, which I hate to say, has been often factored as a cost of doing business in Central America. Private parties can buy the judges, and even if I might be able to get a ruling in my favor, enforcing a ruling might be another matter indeed. That makes me think long and hard about investing there, especially in a new venture, with my brand new product.

#9. Freedom from Corruption
As an extension of #8, El Salvador tanks this category with only 39% score. Corruption is apparently rampant, whereas it’s apparently minimal in Ireland. Of course, El Salvador has laws against bribery, but everyone knows that these are paper tigers at best. Ireland, on the other hand, not only investigates corruption, but has “ratified the OECD Anti-Bribery Convention and is a member of the OECD Working Group on Bribery and the Group of States Against Corruption.”

Again, I think we really have to look into cultural development to try to understand the reasons: Ireland faced centuries of being robbed of their land, their language, their names, and their identity by an invading power (England), and so it may be a natural course of democratic development for the collective country to desire a freedom from corrupting powers – especially given that such pillaging of the country could have only taken place by complicit Irish working in collusion with the English landowners.

El Salvador, like other Latin American countries, was basically founded by a cadre of wealthy invading Spaniards who only wanted to make money, and those who settled forced the native population into slave labor, and those who weren’t absorbed were killed off, to the end that any governmental structure was built on military and monetary power, with the ingrained political consciousness that to rule means to take all that you can and the people can move aside or get run over.

But then, those are just speculations as to why – what I have to deal with is, do I want to place my business in a place where I might have to be paying off officials just to keep the lights running, the trucks delivering, and the inspectors looking the other way?
The answer, hopefully, lies in

#10. Labor Freedom
Quoted verbatim from the Heritage Foundation:

Ireland: Labor regulations are flexible. The non-salary cost of employing a worker is low, and dismissing an employee is relatively easy. Restrictions on work hours are flexible.

El Salvador: Relatively flexible labor regulations enhance employment opportunities and productivity growth. Restrictions on work hours are not rigid. The non-salary cost of employing a worker is low, but dismissing an employee is difficult.

Hm. So, in Ireland, if a guy comes in five minutes late and all drunk, I can fire him – after all, dismissing an employee is easy. And I can apparently make them work overtime, hopefully without having to pay them. It’s even better in El Salvador, because the lax labor laws mean I can get out of them all I can get. I mean, I already know for a fact that I can pay a Salvadoran in the capital $2.00/hour, when I’d have to pay the same worker here $8.00/hour – that’s why I’m going out of the country in the first place, right? So maybe I can’t fire a Salvadoran as easily as I can in Ireland, but boy, I can work them to death and there won’t be anybody there to stop me! My goodness, it’s wonderful to be a Capitalist, isn’t it?

Flexible labor regulations = productivity growth. Isn’t it wonderful to live in a world where people can publish such callous disregard for their fellow human beings with such impunity! Heritage Foundation . . . thank you for being so honest so that any thinking person can know exactly what you are!

As for me, I’ve made my decision: I’m going to build my factory in El Salvador. No, not so I can pillage the people, but because I live in Houston and my wife is from El Salvador, which means we have a reason to fly down there almost every week! (and with the money we make, we can go vacation in Ireland!) Plus, El Salvador has great economic potential. If they could just get rid of their gang problem, that would be a great start, but the people are known to be hard workers, and perhaps I can give them wages somewhat slightly above the nominal rate, and perhaps get some skilled hands from the workforce.

But mainly, all in all, it’s because my wife likes to see her family and her home country often, and you know what they say, “When the wife is happy, everybody’s happy!”

And that’s just good economics!

Thank you everybody, good night!

1 comment:

  1. Man......you have the "wife happy" part correct!!!!
    This is "the little drummer boy" comin at you straight!!
    Can't wait for a little rib crib and alot of my buddy and fam!!!
    I like your site, when I have more time I will read more