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How South Asia can continue as world’s fastest growing subregion

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Since 2014, South Asia has been the fastest growing subregion in the world, with its eight economies collectively boasting average annual growth of 7.0%. This is higher even than East Asia (6.2%), which includes China; Southeast Asia (4.9%); and the Pacific (4.7%). To carry on this impressive performance beyond the next couple of years, though, will require reforms and investments.

Strong growth in South Asia has been largely driven by the performance of Bangladesh and India, with growth averaging above 7% in the past five years. Domestic demand in terms of consumption and investment has been strong. Major reforms such as the introduction of a goods and service tax in India and measures to make it easier to do business across the subregion have helped promote private investment. In next two years, India is expected to continue to grow above 7%, while Bangladesh’s growth is around 8%.

Among the smaller economies of the subregion, economic performance has been more varied. Bhutan and Maldives grew by more than 6%, while Nepal, the second poorest nation in South Asia after Afghanistan, grew a little below 5% on average from 2014 to 2018 due to the earthquake in 2016. But buoyed by domestic demand and public infrastructure spending, these three countries are expected to grow at around 6.5% in the next two years.

Pakistan and Sri Lanka, meanwhile, have built up persistent and large current account deficits, as well as borrowing from overseas to finance infrastructure, in recent years. To meet its balance of payment needs, Sri Lanka entered an International Monetary Fund program in June 2016. Pakistan has followed suit. Subsequently, as they rein in domestic demand and continue to address macroeconomic imbalances, both countries are expected to grow below 4% in 2019 and 2020.

Afghanistan, as the poorest country in the region as well as in Asia, faces longstanding security and political uncertainties. Its economy depends on foreign aid and defense spending. It has barely topped 2% growth in the past five years. Yet, the Afghanistan government has put in place a self-reliance strategy, involving significant structural reforms, with the goal of achieving 7% growth by 2025.

Overall, there is good reason to believe South Asia’s impressive economic growth performance at around 7% will continue over the next couple of years.

First, except for Afghanistan, the political situation is largely stable, with most countries having completed peaceful political transitions to newly elected governments in the past year or so.

Second, governments in the region have adopted a grand development agenda and taken reform measures to achieve it. For example, Bhutan has approved a new five-year plan, while Bangladesh’s new government has promised a “highway to development.” Maldives is formulating a national development plan while Nepal is working hard to attract foreign direct investment.

Third, the global environment, while slowing in major economies, is still positive for developing countries. Major risks are trade tensions and a sharper-than-expected slowdown in major economies. Yet, a slowing global economy would keep oil prices low and global financial conditions accommodative. South Asia is a major importer of oil and relies on external financing for its investment needs. Lower oil prices will help check general price levels and improve the current account in South Asia, where most countries run current account deficits.

Fourth, the infrastructure building boom seen in the region in the past decade or so will bear fruit as it continues in the coming years, boosting the region’s productivity and competitiveness.

Fifth, South Asia’s economic growth is largely driven by domestic demand and less affected by global economic developments. Domestic demand is expected to remain strong due to the large development and investment needs. Maldives is an exception and relies on tourism. A fast-expanding middle class in the region will also support consumption.

Despite these encouraging prospects, South Asia must not be complacent. To sustain strong growth, the countries of the subregion need to continue to implement announced reform measures and launch a new wave of structural reform, particularly in land, labor, and capital markets. These are critical for removing barriers to private investment and economic diversification. Afghanistan will continue to be an outlier, with permanent peace a precondition for sustainable end inclusive economic development. 
 
Trade and investment regimes should provide an incentive for the subregion to participate in global production networks. This is important for upgrading the region’s economies at a time when the global trading system is undergoing important changes. The subregion also needs to continue to invest in infrastructure, as there remains a huge shortfall. These moves will help unlock the huge potential of a subregion that can draw on a population of 1.8 billion – a quarter of the world – as well as vast natural resources.

The experiences of Pakistan and Sri Lanka confirm the importance of macroeconomic stability in sustaining economic growth. South Asian countries need to watch for macroeconomic imbalances and take preemptive actions. Current account deficits are desirable. Yet, a fast-rising deficit may indicate an economy is growing above its potential and needs to take precautions.

Moreover, as the least integrated subregion in the world, South Asia can benefit from a more integrated subregional market. Integration helps expand markets beyond national boundaries and promotes more efficient resource allocation across the subregion according to the comparative advantage of each. By enhancing productivity growth, regional cooperation and integration can accelerate economic growth and boost employment.

Continued annual growth of 7% will double the size of South Asian economies in 10 years. This will help significantly reduce the poor population of more than 200 million living below the international poverty line of $1.9 per day per capita, still unfortunately the largest in the world. To maintain such a growth rate and remain the fastest growing subregion in the world, South Asia cannot afford to rest on its laurels. It will prosper only if the subregion continues economic reforms, maintains macroeconomic stability, and fosters greater cooperation and integration among neighbors.

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Economy

A small deal but a big step in the right direction

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Authors: Yang Yizhong & Paul Wang

After more than one year of tortuous negotiations and the quarrels between the United States and China, one trade deal was finally done on December 13. China announced that it and the United States have come to an agreement on a Phase One trade deal, and the White House stated the two sides having reached an historic and enforceable agreement that requires structural reforms and other changes to China’s economic including trade regime in the areas of intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange. This trade deal also establishes a strong dispute resolution system that ensures prompt and effective implementation and enforcement. Thus, the United States has agreed to modify its Section 301 tariff actions in a significant way.

There is widespread relief at the prospect of ending this conflict between the two biggest economies in the world. For example, the Dow Jones Index soared more than 100 points in reaction to China’s announcement of the deal. It argues that the Phase One trade deal aims to provide a “critical pause in the trade war which is on the verge of acceleration” and ensures trade relations “are still manageable by engagement for further negotiations in the same trajectory.” Yet, while there is cause for celebration, this deal doesn’t mean a conclusion to the trade dispute between China and the United States. At this moment, it is a small deal but a necessary step towards a right direction. Since China and the United States are different in their social, cultural and even geopolitical strategies, the ruling elites of the two sides need to demonstrate their political vision and conventional wisdom in order to ultimately determine the outcome of the whole trade disputes.

In light of Heckscher-Ohlin trade theory, developing countries like and India started to export their labor-intensive manufactures to the United States and the G-7 bloc, which trade their capital-intensive industrial products to China. As a result, the opening of China to world trade has profoundly affected other countries, the developed and the developing ones as well. Yet, the issue arises how can each entity understand the national politics of trade within the broader international context? How does the strategic and institutional environment affect whether countries get what they want from world trade? As American scholar Jeffry Frieden put it, when governments make national trade policies, they take into account what other governments are likely to do in response. A government that raises tariffs dramatically might find other countries retaliating with even higher barriers to its exports.

According to what is said above, great power trade dispute or economic competition is nothing new. Yet, the trade war between the United States and China is clearly beyond normal. It is argued that the rivalry between China and the United States in the 21stcentury holds an uncanny resemblance to the one between Germany and Great Britain in the 19th century. Both rivalries take place amidst the emergence of economic globalization and explosive technological innovation. Both feature a rising power with a state-protected economic system challenging an established democracy with a free-market economic system. And both rivalries feature countries enmeshed in profound interdependence wielding tariff threats, standard-setting, technology theft, financial power, and infrastructure investment for advantage. Due to this, the two powers have made all efforts to find a useful guide for each policymakers to defuse the dynamics of the emerging Sino-American trade war. Yet, this is not easy because the issue is beyond trade itself. There is a patently systematic clash between China and the United States, which is perceived of trying to suppress China’s development with every tool available. For the sake of this, the Chinese government has to calculate how much of a compromise it is willing to make.

Meanwhile, the hawkish groups in the U.S. are trying to stir up confrontation between the two countries. This is the very reason why the trade war had lasted so long and the talks on the issues remained so tortuous. Frankly, the United States has much more leverages in the talks with China. It requires that American response should neither be blindly provocative nor naively cooperative; instead it should be competitive. The right approach, in contrast to tariffs, would be to work with allies to strengthen rules, set standards, punish Chinese industrial policy and technology theft, invest in research, welcome the world’s best and brightest, and create alternatives to its geo-economic statecraft. Yet, the result is that China is playing a good hand well, simply because the Trump administration did not work together with its allies.

Deeply involved himself into the domestic partisan strife, Trump and his core team finally agreed on the text of a phase one economic and trade agreement, based on the principle of equality and mutual respect. The text includes nine chapters: the preface, intellectual property rights, technology transfer, food and agricultural products, financial services, exchange rate and transparency, trade expansion, bilateral assessment and dispute settlement, and the final terms. For sure China agreed to increase imports of U.S. agricultural products, and more importantly for the first time in any trade agreement, China has agreed to end its long-standing practice of forcing or pressuring foreign companies to transfer their technology to Chinese companies as a condition for obtaining market access, administrative approvals, or receiving advantages from the government. China also commits to provide transparency, fairness, and due process in administrative proceedings and to have technology transfer and licensing take place on market terms. In effect, the Phase One deal is generally in line with the main direction of China’s deepening reform and opening-up, as well as the internal needs for advancing with high-quality economic development.

Strategically, this is a relatively small deal but a truly necessary step in the right direction. All is clear that phase two negotiations depend on phase one implementation of phase one agreement, therefore, both sides have agreed to complete their necessary procedures including the legal review, translation, and proofreading as soon as possible, and discuss the detailed arrangements for officially signing the agreement. Once the deal is signed, China will increase imports of agricultural products from the United States. In turn, the U.S. will import pears, oranges, and fresh dates from China. The U.S. also pledged to lift some restrictions on Chinese aquatic products. As a Chinese official added that China’s core concern in economic and trade negotiations has been the removal of additional tariffs, and now both sides have reached consensus in this regard. As the two largest economies of the world—China and the United States, phase one trade deal is equally good news for all other countries and surely provides stability in global trade.

All in all, although there were disputes and quarrels during the long negotiations, the phase one trade deal between the two sides will result in shoring up confidence in the world economy and maintaining international trade order. A patent lesson is also that there is no winner in a trade war and China is dedicated to oppose to protectionism since it is against the rule of WTO. To that end, the two powers are expected to meet each other halfway, effectively manage their differences and foster a coordinated, cooperative and stable relationship. Therefore, it is fair to say that this landmark trade deal marks critical progress toward a more balanced trade relationship and a more level playing field for both sides’ national security and business interests.

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IDA: Partnering with the Eastern Caribbean Small States

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With its natural beauty, blue seas, and white sands, the Caribbean has long been a prized destination for visitors.  The region’s location and geography – a source of tourist revenue – are also a source of high vulnerability. The Caribbean is situated in the path of powerful hurricanes, which are increasing in frequency and intensity as observed over the past few years, making disasters more than just a one-off event. The small territories and populations of Caribbean small island states constrain economic diversification, increase economic dependence on trading partners, and mean that a single shock can affect almost the entire country all at once. A disaster can cause damages and losses of over 200% of GDP in mere hours, as Dominica experienced in 2017.  

Recognizing the unique challenges facing several Caribbean small island countries, the World Bank provides concessional long-term financing through the International Development Association (IDA) to Dominica, Grenada, Saint Lucia, and Saint Vincent and the Grenadines – part of the Organisation of Eastern Caribbean States (OECS). 

In the most recent funding cycle of IDA, which takes place every three years, financing available for these countries increased more than fourfold. The increase in concessional finance has helped to ramp up support for building the Caribbean’s cross-cutting resilience. This entails taking a 360-degree approach, going beyond immediate disaster recovery response, providing ex ante support, and addressing vulnerabilities at the fiscal, financial, infrastructure, human, and environmental levels. 

It has also allowed the World Bank to accompany the region on many innovative programs, such as: a project to prepare for public health emergencies at the regional level, a framework to support the Blue Economy, progress on reducing marine pollution through bans on plastic bags and Styrofoam food containers, a regional program to develop the digital economy, and a broad-based fiscal resilience program. It has also further advanced financing for building back better, and for reducing disaster vulnerability of public infrastructure. 

Increased financing brought significant support after natural disasters. After Hurricane Maria in 2017, the World Bank provided over US$100 million, of which US$50 million are grants – to help Dominica restore livelihoods, rebuild housing, build resilient roads and apply resilient agriculture practices. 

Going beyond disaster response, the first aspect of building cross-cutting resilience is fiscal and financial. Countries need the resources to respond to disasters and invest in resilient infrastructure. The World Bank has been working closely with Grenada, Saint Lucia, and Saint Vincent and the Grenadines to develop fiscal responsibility rules and build fiscal buffers. This includes setting up contingency funds and improving domestic resource mobilization by strengthening tax collection and customs administration. The World Bank is preparing a contingent line of credit using IDA financing for the first time in the Caribbean as a rapid response and defense against disasters. A US$20 million contingent line of credit each for Grenada and Saint Vincent and the Grenadines is under preparation. 

Secondly, IDA has invested in environmental resilience and natural resource management. The World Bank supported Grenada and Saint Vincent and the Grenadines to sustainably manage ocean resources and develop the blue economy, such as through policies to ban single use plastic bags and Styrofoam containers. Support also includes the Caribbean’s first World Bank-financed geothermal plant in Dominica. Over US$17 million in IDA funds, which helped mobilize over US$20 million in grant resources from other partners, will increase Dominica’s renewable energy and serve as an example of the huge geothermal potential for the region. 

A third priority area for the Caribbean is building human capital, to maintain the dynamism and resilience of its population. Saint Lucia is establishing an essential public health benefits package and strengthening primary care with $20 million of IDA financing.  Social assistance, education, and skills development initiatives are also being supported. A first ever $30 million regional health project is under implementation to improve the ability of public health systems to respond to health emergencies and increase resilience of health infrastructure.

Finally, IDA funds are helping Caribbean countries look toward future opportunities by improving digital and physical connectivity. Building on the Caribbean Regional Communications Infrastructure Program, which finances underwater sea cables, the World Bank is working with the region on a program to develop the digital economy. Support to physical connectivity focuses on air transport safety and the resilience of airports to natural disasters in Dominica, Grenada, and Saint Lucia, which also supports the tourism economy. Both these initiatives are expected to receive over US$100 million additional IDA financing. 

By recognizing the special needs and vulnerabilities of these small island economies, IDA concessional financing is helping translate the Caribbean commitment to climate resilience into action. With its well-educated workforce of men and women, and a large share of youth, the region aspires to lead the way for developing a resilient, better connected, and more diversified economy. The World Bank is proud to be a partner, contributing to results and to the accomplishment of this goal. 

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Economy

Corporate Tax Havens

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We’ve all heard the term in the media, or tossed around by savvy financial planners or accountants. But what are corporate tax havens? Are they legal? And can they help you reduce your tax liability?

Read on to learn more…

What is a Corporate Tax Haven?

In lay terms, a “tax haven” refers to any jurisdiction or country that offers minimal or substantially reduced tax liability to foreign businesses and individuals.

These so-called havens typically place an emphasis on privacy, sharing little to no financial information with other foreign tax authorities, and often do not require residency or a physical business presence within their borders for a business or individual to benefit.

Criteria to Qualify as a Tax Haven

Interestingly, there are a number of qualifying factors that a jurisdiction must meet in order to qualify as a tax haven. The OECD (Organization for Economic Cooperation and Development), in 1998, offered a number of criteria that could be used to identify such financial centers worldwide.

Tax Haven Characteristics:

  • Zero, or minimal imposed tax on income
  • Privacy standards and no exchange of information with other parties
  • A lack of transparency (to improve privacy/anonymity)

What do Governments Have to Gain?

Tax havens are certainly attractive to investors, business professionals, and wealthy individuals. But what do governments stand to gain by establishing their jurisdiction as a tax haven?

Turns out tax havens have a lot to gain as well.

Benefits of Tax Havens for Countries and Governments:

  • Despite the name, tax havens aren’t typically “free” of cost or fees. Although favorable from a tax liability perspective, they often charge a nominal tax rate while making up for fees in other areas such as high import duties.
  • Registration fees and annual renewals. Some tax havens charge fees for registration, annual licensing and other fees.
  • The attraction of foreign investors and money brings with it a vital infusion of capital into the local economy. Further, the country may benefit from ongoing business operations within its borders, such as investments in local infrastructure, offices, job opportunities and more.

As you can see, there are a number of built-in incentives for a government to operate a tax haven, including capital injection into the country’s economy where investments may flow into local businesses, financial institutions, and other vehicles.

Key Tax Haven Benefits

International tax havens have long been the preferred domicile for Fortune 100 companies, astute investors and privacy-minded individuals. But why?

1. No (or minimal) Tax Liability

As the name clearly suggests, these domiciles are havens for corporations, individuals and investors seeking to reduce their tax liability. Many developed countries have implemented a “progressive” tax system that places an increasing burden on those with higher income.

International tax havens offer a clear path to minimizing taxes safely and effectively, with many locales having zero corporate taxes, capital gains tax, personal income tax and more.

2. Privacy and Discretion

Corporate tax havens offer more than just tax savings. These locations boast unmatched privacy for individuals and corporations alike. Many tax havens accomplish this by not keeping any publicly accessible bank account or company information, and policies preventing them from sharing any recorded information with outside third parties (such as international tax agencies). For example, in Antigua and Barbuda, it is actually illegal for a bank to disclose account holder information to any third party. Interestingly, not even Antigua and Barbuda’s own government can access this information.

3. Security and Peace of Mind

International tax havens often play by their own rules, outside of the jurisdiction of (sometimes) overbearing nations such as the United States or the governing bodies of the EU. This level of independence can be a major benefit for individuals who have concerns about their privacy and outside governmental agencies such as the IRS, FAFT, OECD, and others overstepping their bounds.

Furthermore, most corporate tax havens do not participate in what are known as TIEAs or “Tax Information Exchange Agreements” with the EU or USA.

This means that even if outside organizations try to investigate or uncover information, there is no legal framework in place to allow them to do so.

4. Convenience

For those seeking alternative locales to do financial business, corporate tax havens are attractive options due to their simplicity and well-defined processes for setting up new accounts. In fact, due to their business-friendly legislation, getting set up with many tax havens can take as little as 2-4 days. Not to mention business registration is typically low, with many jurisdictions charging $500 or less and can be done all without even visiting the country.

But that’s not where the convenience factor ends. In an effort to attract more business, many corporate tax havens work to make the process of running and managing a business within their domicile as easy as possible. This typically manifests as less paperwork and administration.

Highlighted Tax Havens

The number of popular tax havens is extensive. Below we’ll highlight two popular corporate tax haven destinations.

1. Malta

The nation island of Malta is a member state of the EU (European Union), a key reason why Malta passports are highly sought after around the world. Malta is a safe country, rich in culture and strategically located between Africa and Europe. Their program, simply named Malta’s Individual Investor Program (MIIP) is a popular option for many investors worldwide.

Malta’s Individual Investor Program (MIIP) Requirements:

  • Contribution of €650,000 to the National Development and Social Fund
  • Contribution of €25,000 for minor children and a spouse of the primary applicant
  • Contribution of €50,000 for each dependent child age 18-26 or dependent parents age 55 or older
  • Due diligence fees
  • Residence in Malta for 5 years
  • Purchase of property valued at €350,000 or lease a property at €16,000 or more per month
  • €150,000 deposit in a government-approved financial instrument

Benefit of the Program:

  • Advantageous tax system
  • Tax concessions
  • Centralized business hub
  • Tax treaties with over 50 countries
  • English as the primary language of business
  • Access to free EU healthcare and education systems
  • Malta passport opens up visa travel to over 160 countries
  • Stable and safe country
  • Lifetime citizenship can be passed to future generations

2. Saint Kitts and Nevis

The duel island nation, also sometimes referred to as the Federation of Saint Christopher and Nevis, represents one of the most popular corporate tax havens. Known for its charming islands and beautiful backdrop, the two offer what is known as the St. Kitts and Nevis Citizenship by Investment Program. This program, established in 1984 is the longest-running economic citizenship program worldwide.

Benefits of the Saint Kitts & Nevis Citizenship Program:

  • Passport can be obtained within 6 months
  • Enjoy citizenship in a Commonwealth country
  • Dual citizenship is allowed
  • Enjoy visa-free travel to more than 168 countries
  • No physical residence required
  • No education, test or interview requirements
  • No tax on worldwide income
  • Full citizenship for life that can be passed on to future generations

3. Other Popular Corporate Tax Havens Include

  • Bermuda
  • Netherlands
  • Bahamas
  • Cayman Islands
  • Luxembourg
  • Isle of Man
  • The Channel Islands
  • Singapore
  • Mauritius
  • Ireland
  • Switzerland

Closing Thoughts

Corporate tax havens provide a myriad of benefits for those businesses and professionals seeking to reduce their tax liability, increase privacy, obtain second citizenships/passports and more. These benefits are key drivers for so many corporations, large and small, to seek out these domiciles for their business and investments. With proper due diligence and planning, you too can take advantage of all these havens have to offer.

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