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Liberland or another Tax-haven on demand?

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In the beginning of April, world got a brand new country: The Free Republic of Liberland. It occupies 7 square kilometers of no man`s land between Croatia and Serbia. The self- appointed president is Vít Jedlička, a regional party leader of the Czech Republic`s northern district and part of the Free Citizens Party of libertarian views.

Liberland already has its own flag, a national anthem and a provisional government although it is still unclear whether it is a real country or not. One issue is associated with its president that has a history of pulling pranks and pointed out in a recent interview that Liberland started out as a protest and political stunt. He also admitted that his actions were inspired by Jeremiah Heaton, an American who claimed a remote patch of land between Egypt and Sudan and claimed by neither, so his 14- year-old daughter could be a princess.

Apart from these (common- sense) reservations there is also the questionable accordance to the formal and empirical sovereignty demands. Formal apply to the legal equality of nation-states in terms of their rights and obligations in the international system. An empirical aspect of sovereignty demands states to have population, territory, effective rule over territory and population and the recognition of other nation- states. Thus, sovereignty is both a legal and empirical phenomenon; it must display certain observable characteristics however, this is not enough. For a state to be perceived as sovereign it must be recognized as such by others; arguably, sovereignty is therefore mostly granted in a socio- legal context.

Liberland, for now, has sort of a territory, sort of population and a sort of rule over its citizens, formed on voluntarist basis. By purely legal means, Liberland is not a state. Its population is largely the President and the self- proclaimed citizens, who all still seem to be living in the Czech Republic. Additionally, Liberland does not exercise effective rule over its territory, since the entry into the “country” is granted by Croatian border patrol. Effectively, in terms of international law, the best we could say on the sovereignty of Liberland is that it is a failed state, occupied by a foreign nation. Pragmatically speaking, Liberland is just a website that Jedlička made.

The issue with sovereignty is also closely linked to the philosophy of Liberland (if we can imply such a thing), which is based on libertarian political thought. Libertarianism is formed on the idea that upholds liberty as its key objective; accordingly it seeks to maximize autonomy and freedom of choice, political freedom and voluntary association; it is also against discrimination and strongly supports non- aggression. Libertarians are highly disinclined to state authority however, the desired scope of state activities differs in various schools of libertarianism. The prevalent school of thought represents the idea that governments should do as minimal as possible, limiting its responsibilities to a standing army, local security and courts system. In the case of Liberland, we see a more radical approach, for Liberland will not have an army and the country is designed to find out the minimum amount of taxes and regulations needed to live. All the coverage of basic needs and services- banks, cell phone service, hospitals etc.- are to be provided on an entirely voluntarist basis. Therefore it is hard to determine whether the Liberland government does nothing because it is so libertarian (and this is a concept I am sure the late Douglas Addams would greatly appreciate) or because it simply does not exist.

The outlined characteristics of this new proto- country at the same time point out to the mostly criticized libertarian principles and in my opinion most important social and economic consequences of libertarian thought. The calls for minimum taxes and minimum government involvement definitely align with the current wild neoliberalism and businesses, enamored with tax havens. Clearly, this is exactly what Jedlička had in mind, for he was quoted saying “I would categorize it [Liberland] as tax haven. The reason why Liberland was created was that the rest of the world ended up being a tax hell”. Additionally, he vocalized his hopes that Liberland would become a successful financial center due to its loose tax laws. In a world of incomprehensively disproportional wealth distribution, it is obscene to form yet another financial haven, accompanied with political clichés about individual freedom, liberty and recognition of private property.

In terms of economic criticisms, another very important one is also connected to the moral philosophy of libertarians. Within libertarian framework, choice is a binary concept: either it is consensual or coerced, good or evil, beneficiary of malevolent. Therefore, following this line of argument, a worker being underpaid and working in inhumane conditions is not faulty, because the responsibility rests solely upon the worker to submit himself to such conditions. This is a very dangerous concept because it disregards the impact environment, living conditions and social options have on individual choices. It also introduces the belief that the poor are to blame for their state of livelihood and the rich deserve to be rich. The accompanying line of thought here is the belief in the trickle down economy, which we noticed is not working, since the 1 % of richest people combined wealth is greater than that of the remaining 99 %. Choices are not binary, they are a scope of intertwined elements, presenting possible and more importantly, acceptable choices individual has in the terms of pros and cons for each of the presentable options.

I am sure that a true libertarian would counter me on the last paragraph, correcting me that the injustices and inequalities spring out only due to the existence of regulated international system of states and other institutions. If we dismantle the letter, the sun will be shining, the grass will be greener and everybody will be happy (or at least have exactly what they deserve). I believe that the issue with the lack of rules and authority is firstly, the lack of coordination and secondly, the inevitable clashes between stretches of personal liberty, whereas the letter is actually the consequence of the former. To expect that a world of 7 billion people can operate on a stateless basis, according to individual personal morality and choices is really a political equivalent of getting a tongue ring or a hideous tattoo at the age of 16. It just does not work in the long run, not at the current state of mind of people and at the level of social and technological human evolution.

That is also why the libertarian thought, put in practice, only comes across as another neoliberal triumph of private property and tax evasion; individual rights are in the current world framework translated from Libertarian-ese to English only with business and its profit. Accordingly, the greatest catchphrase Liberland is associated to is not that it is a haven for freedom- seekers but that it is a new haven for the wealthy. In the world, where every country is a h(e)aven for the wealthy, excuse me for not being too excited about the newest sprout of Friedmanism.

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Economy

Economy Contradicts Democracy: Russian Markets Boom Amid Political Sabotage

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The political game plan laid by the Russian premier Vladimir Putin has proven effective for the past two decades. Apart from the systemic opposition, the core critics of the Kremlin are absent from the ballot. And while a competitive pretense is skilfully maintained, frontrunners like Alexei Navalny have either been incarcerated, exiled, or pushed against the metaphorical wall. All in all, United Russia is ahead in the parliamentary polls and almost certain to gain a veto-proof majority in State Duma – the Russian parliament. Surprisingly, however, the Russian economy seems unperturbed by the active political manipulation of the Kremlin. On the contrary, the Russian markets have already established their dominance in the developing world as Putin is all set to hold his reign indefinitely.

The Russian economy is forecasted to grow by 3.9% in 2021. The pandemic seems like a pained tale of history as the markets have strongly rebounded from the slump of 2020. The rising commodity prices – despite worrisome – have edged the productivity of the Russian raw material giants. The gains in ruble have gradually inched higher since January, while the current account surplus has grown by 3.9%. Clearly, the manufacturing mechanism of Moscow has turned more robust. Primarily because the industrial sector has felt little to no jitters of both domestic and international defiance. The aftermath of the arrest of Alexei Navalny wrapped up dramatically while the international community couldn’t muster any resistance beyond a handful of sanctions. The Putin regime managed to harness criticism and allegations while deftly sketching a blueprint to extend its dominance.

The ideal ‘No Uncertainty’ situation has worked wonders for the Russian Bourse and the bond market. The benchmark MOEX index (Moscow Exchange) has rallied by 23% in 2021 – the strongest performance in the emerging markets. Moreover, the fixed income premiums have dropped to record lows; Russian treasury bonds offering the best price-to-earning ratio in the emerging markets. The main reason behind such a bustling market response could be narrowed down to one factor: growing investor confidence.

According to Bloomberg’s data, the Russian Foreign Exchange reserves are at their record high of $621 billion. And while the government bonds’ returns hover at a mere 1.48%, the foreign ownership of treasury bonds has inflated above 20% for the second time this year. The investors are confident that a significant political shuffle is not on cards as Putin maintains a tight hold over Kremlin. Furthermore, investors do not perceive the United States as an active deterrent to Russia – at least in the near term. The notion was further exacerbated when the Biden administration unilaterally dropped sanctions from the Nord Stream 2 pipeline project. And while Europe and the US remain sympathetic with the Kremlin critics, large economies like Germany have clarified their economic position by striking lucrative deals amid political pressure. It is apparent that while Europe is conflicted after Brexit, even the US faces much more pressing issues in the guise of China and Afghanistan. Thus, no active international defiance has all but bolstered the Kremlin in its drive to gain foreign investments.

Another factor at work is the overly hawkish Russian Central Bank (RCB). To tame inflation – currency raging at an annual rate of 6.7% – the RCB hiked its policy rate to 6.75% from the all-time low of 4.25%. The RCB has raised its policy rate by a cumulative 250 basis points in four consecutive hikes since January which has all but attracted the investors to jump on the bandwagon. However, inflation is proving to be sturdy in the face of intermittent rate hikes. And while Russian productivity is enjoying a smooth run, failure of monetary policy tools could just as easily backfire.

While political dissent or international sanctions remain futile, inflation is the prime enemy which could detract the Russian economy. For years Russia has faced a sharp decline in living standards, and despite commendable fiscal management of the Kremlin, such a steep rise in prices is an omen of a financial crisis. Moreover, the unemployment rates have dropped to record low levels. However, the labor shortage is emerging as another facet that could plausibly ignite the wage-price spiral. Further exacerbating the threat of inflation are the $9.6 billion pre-election giveaways orchestrated by President Putin to garner more support for his United Russia party. Such a tremendous demand pressure could presumably neutralize the aggressive tightening of the monetary policy by the RCB. Thus, while President Putin sure is on a definitive path of immortality on the throne of the Kremlin, surging inflation could mark a return of uncertainty, chip away investors’ confidence: eventually putting a brake on the economic streak.

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Economy

Synchronicity in Economic Policy amid the Pandemic

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business-economy

Synchronicity is an ever present reality for those who have eyes to see.Carl Jung

The Covid pandemic has elicited a number of deficiencies in the current global governance framework, most notably its weaknesses in mustering a coordinated response to the global economic downturn. A global economy is not fully “global” if it is devoid of the capability to conduct coordinated and effective responses to a global economic crisis. What may be needed is a more flexible governance structure in the world economy that is capable of exhibiting greater synchronicity in economic policies across countries and regions. Such a governance structure should accord greater weight to regional integration arrangements and their development institutions at the level of key G20 decisions concerning international economic policy coordination.

The need for greater synchronicity in the global economy arises across several trajectories:

· Greater synchronicity in the anti-crisis response across countries and regions – according to the IMF it is a coordinated response that renders economic stimulus more efficacious in countering the global downturn

· Synchronicity in the withdrawal of stimulus across the largest economies – absent such coordination the timing of policy normalization could be postponed with negative implications for macroeconomic stability

· Greater synchronicity in opening borders, lifting lockdowns and other policy measures related to responding to the pandemic: such synchronicity provides more scope for cross-country and cross-regional value-added chains to boost production

· Greater synchronicity in ensuring a recovery in migration and the movement of people across borders.

Of course such greater synchronicity in economic policy should not undermine the autonomy of national economic policy – it is rather about the capability of national and regional economies to exhibit greater coordination during downturns rather than a progression towards a uniform pattern of economic policy across countries. Synchronicity is not only about policy coordination per se, but also about creating the infrastructure that facilitates such joint actions. This includes the conclusion of digital accords/agreements that raise significantly the potential for economic policy coordination. Another area is the development of physical infrastructure, most notably in the transportation sphere. Such measures serve to improve regional and inter-regional connectivity and provide a firmer foundation for regional economic integration.

The paradox in which the world economy finds itself is that even as the current crisis is leading to fragmentation and isolationism there is a greater need for more policy coordination and synchronicity to overcome the economic downturn. This need for synchronicity may well increase in the future given the widening array of global risks such as risks to cyber-security as well as energy security and climate change. There is also the risk of the depletion of reserves to counter the Covid crisis that has been accompanied by a rise in debt levels across developed and developing economies. Also, the speed of the propagation of crisis impulses (that effectively increases with technological advances and globalization) is not matched by the capability of economic policy coordination and efficiency of anti-crisis policies.

There may be several modes of advancing greater synchronicity across borders in international relations. One possible option is a major superpower using its clout in a largely unipolar setting to facilitate greater policy coordination. Another possibility is for such coordination to be supported by global international institutions such as the UN, the WTO, Bretton Woods institutions, etc. Other options include coordination across the multiplicity of all countries of the global economy as well as across regional integration arrangements and institutions.

Attaining greater synchronicity across countries will necessitate changes in the global governance framework, which currently is characterized by weak multilateral institutions at the top level and a fragmented framework of governance at the level of countries. What may be needed is a greater scope accorded to regional integration arrangements that may facilitate greater coordination of synchronicity at the regional level as well as across regions. The advantage of providing greater weight to the regional institutions in dealing with global economic downturns emanates from their greater efficiency in coordinating an anti-crisis response at the regional level via investment/infrastructure projects as well as macroeconomic policy coordination. Regional development institutions also have a comparative advantage in leveraging regional interdependencies to promote economic recovery.

In conclusion, the global economy has arguably become more fragmented as a result of the Covid pandemic. The multiplicity of country models of dealing with the pandemic, the “vaccine competition”, the breaking up of global value chains and their nationalization and regionalization all point in the direction of greater localization and self-sufficiency. At the same time there is a need from greater synchronicity across countries particularly in the context of the current pandemic crisis. Regional integration arrangements and institutions could serve to facilitate such coordination in economic policy within and across the major regions of the world economy.

From our partner RIAC

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Economy

A New Strategy for Ukraine

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Authors: Anna Bjerde and Novoye Vremia

Four years ago, the World Bank prepared a multi-year strategy to support Ukraine’s development goals. This was a period of recovery from the economic crisis of 2014-2015, when GDP declined by a cumulative 16 percentage points, the banking sector collapsed, and poverty and other measures of insecurity spiked. Indeed, we noted at the time that Ukraine was at a turning point.

Four years later, despite daunting internal and external challenges, including an ongoing pandemic, Ukraine is a stronger country. It has proved more resilient to unpredictable challenges and is better positioned to achieve its long-term development vision. This increased capacity is first and foremost the result of the determination of the Ukrainian people.

The World Bank is proud to have joined the international community in supporting Ukraine during this period. I am here in Kyiv this week to launch a new program of assistance. In doing this, we look back to what worked and how to apply those lessons going forward. In Ukraine—as in many countries—the chief lesson is that development assistance is most effective when it supports policies and projects which the government and citizens really want.

This doesn’t mean only easy or even non-controversial measures; rather, it means we engage closely with government authorities, business, local leaders, and civil society to understand where policy reforms may be most effective in removing obstacles to growth and human development and where specific projects can be most successful in delivering social services, particularly to the poorest.

Looking back over the past four years in Ukraine, a few examples stand out. First, agricultural land reform. For the past two decades, Ukraine was one of the few countries in the world where farmers were not free to sell their land.

The prohibition on allowing farmers to leverage their most valuable asset contributed to underinvestment in one of Ukraine’s most important sources of growth, hurt individual landowners, led to high levels of rural unemployment and poverty, and undermined the country’s long-term competitiveness.

The determination by the President and the actions by the government to open the market on July 1 required courage. This was not an easy decision. Powerful and well-connected interests benefited from the status quo; but it was the right one for Ukrainian citizens.

A second area where we have been closely involved is governance, both with respect to public institutions and the rule of law, as well as the corporate governance of state-owned banks and enterprises. Poll after poll in Ukraine going back more than a decade revealed that strengthening public institutions and creating a level playing field for business was a top priority.

World Bank technical assistance and policy financing have supported measures to restore liability for illicit enrichment of public officials, to strengthen existing anticorruption agencies such as NABU and NACP, and to create new institutions, including the independent High-Anticorruption Court.

We are also working with government to ensure the integrity of state-owned enterprises. Our support to the government’s unbundling of Naftogaz is a good example; assistance in establishing supervisory boards in state-owned banks is another. We hope our early dialogue on modernizing the operations of Ukrzaliznytsia will be equally beneficial.

As we begin preparation of a new strategy, the issues which have guided our ongoing work—strengthening markets, stabilizing Ukraine’s fiscal and financial accounts; and providing inclusive social services more efficiently—remain as pressing today as they were in 2017. Indeed, the progress which has been achieved needs to continue to be supported as they frequently come under assault from powerful interests.

At the same time, recent years have highlighted emerging challenges where we hope to deepen and expand our engagement. First, COVID-19 has underscored the importance of our long partnership in health reform and strengthening social protection programs.

The changes to the provision of health care in Ukraine over recent years has helped mitigate the effects of COVID-19 and will continue to make Ukrainians healthier. Government efforts to better target social spending to the poor has also made a difference. We look forward to continuing our support in both areas, including over the near term through further support to purchase COVID-19 vaccines.

Looking ahead, the challenge confronting us all is climate change. Here again, our dialogue with the government has positioned us to help, including to achieve Ukraine’s ambitious commitment to reduce carbon emissions. During President Zelenskyy’s visit to Washington in early September we discussed operations to strengthen the electricity sector; a program to transition from coal power to renewables; municipal energy efficiency investments; and how to tap into Ukraine’s unique capacity to produce and store hydrogen energy. This is a bold agenda, but one that can be realized.

I have been gratified by my visit to Kyiv to see first-hand what has been achieved in recent years. I look forward to our partnership with Ukraine to help realize this courageous vision of the future.

Originally published in Ukrainian language in Novoye Vremia, via World Bank

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