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Chasing losses for Corporate tax planning

September 2, 2011

Loss making companies have acquired a new value in M & A activity, especially if they have accumulated losses which can be carried forward against future profits.  In some countries carry-forward losses are as high as 25% of GDP.

Shifting profits to tax havens has been used by corporates (and individuals) increasingly since the 1970’s, but shifting losses to high-taxed countries can be just as effective. A new report has just been issued by the OECD, Corporate Loss Utilisation through Aggressive Tax Planning, ISBN Number: 9789264119215, Publication Date: 12/08/2011, Pages: 92

An OECD press release  states:

30/08/2011 – Due to the recent financial and economic crisis, global corporate losses have increased significantly. Numbers at stake are vast, with loss carry-forwards as high as 25% of GDP in some countries. Though most of these claims are justified, some corporations find loop-holes and use ‘aggressive tax planning’ to avoid taxes in ways that are not within the spirit of the law.  

This aggressive tax planning is a source of increasing concern for many countries and they have developed various strategies to deal with it. Working cooperatively, countries can deter, detect and respond to aggressive tax planning while at the same time ensuring certainty and predictability for compliant taxpayers.

.. countries have identified financial instruments that create artificial losses or obtain multiple deductions for the same loss. They have also seen loss-making companies acquired solely to be merged with profit-making companies and loss-making financial assets artificially allocated to high-tax jurisdictions through non arm’s length transactions.

Reuters reports that

The OECD report, which singled out one industry — financial services — said banks headquartered in high-tax countries were buying and selling derivatives among operating subsidiaries in low-tax jurisdictions and then shifting losses to higher-tax jurisdictions to “manage large loss-making financial assets” held on their balance sheets.

Martin Sullivan, an economist at Tax Analysts, a trade publication, said he thought the majority of the loss-shifting described in the report “pertains to banks, since they are the ones that had huge losses in 2008 and now are making profits.”

The tax-boosting principle at work centers on loss carry-forwards, a legal accounting technique that allows corporations to apply their current year’s net operating losses to profits in future years. While the move is designed in part to help companies avert bankruptcy, it also allows them to reduce their tax bills. ..

The OECD report identified what it called three high-risk schemes designed to maximize the tax value of carry-forward losses. They are:

  • Corporate reorganizations, in particular those in which profitable companies buy money-losing companies solely for the tax benefits of their losses, which is illegal in the United States.
  • Certain financial instruments, including currency swaps and schemes that “refresh” soon-to-expire losses.
  • Non-arm’s-length transfer pricing, or the prices companies charge between subsidiaries for goods and services. This is not legal in the United States and is a subject of growing scrutiny by the Internal Revenue Service.

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Indian exports up 82% as focus shifts to new markets in Africa and S. America

August 12, 2011

Financial turbulence in India’s traditional markets in Europe and the US have threatened to limit  development. Even though domestic consumption has increased significantly in the last decade the Indian economy is still very dependent upon exports. There has been a shift of emphasis in the last few years as India has tried to emulate China and develop new markets in Africa and South America.

Although exports had contracted for 13 straight months beginning November 2008, India rebounded from the crisis quickly, logging an unprecedented 37.6% growth in 2010-11 on the back of incentives and a push into new markets in Latin America and Africa.

July exports surged nearly 82% from a year ago to $29.3 billion while imports grew 51.5% to $40.4 billion, trade data released on Thursday showed. 

Exports of engineering goods, which now account for as much as 30% of the export basket, to Latin America increased four-fold during April to July. The IT industry too intensified exports to the region while the pharmaceutical industry found huge demand for its generics in Brazil and Mexico.

This strategy targeting Latin America and Africa has its limits since in absolute terms the US and EU still account for a third of the country’s exports and a large portion of India’s imports. Any decline in exports to these regions will create a balance of payments problem. In April-July 2011, imports grew 40% to $151 billion, expanding the trade deficit to $42.7 billion. In July alone, the trade deficit was $11 billion.

Fortunately the 2011 monsoon looks like being  close to an “average monsoon” which should keep domestic demand buoyant. But the best long-term demand hedge for India will be in differentiating from Chinese products and increasing exports to China. Imports from China are growing fast and to get trade with China into a more healthy balance will also reduce the balance of payment risks.

From the Hindu Business Line (which is by far the most balanced and reliable financial newspaper in India):

NEW DELHI, AUG 11: 

Exports in July grew by an astonishing 81.8 per cent to $29.3 billion, according to provisional data released by the Commerce Secretary, Dr Rahul Khullar, on Thursday.

The drivers of this growth – the fastest since April 1995, according to Bloomberg – were sectors such as engineering, petroleum products, readymade garments, gems and jewellery. The strategy to diversify to new markets in Asia, Africa and Latin America has helped in maintaining high growth rates.

Dr Khullar, however, told reporters that the growth rates will definitely slowdown from August due to a demand contraction in traditional markets such as the US and Europe. He said the increase in interest cost is hurting small and medium exporters, adding that, “I am trying to get something done on that front”. …..

Since consumers in the US and Europe — owing to lower income and fear of job losses — are likely to switch over to cheaper products, exporters adapting quickly to cater such a demand will survive, Dr Khullar said. He added that the country is “better prepared” to face any slowdown than it was in 2008 during the global financial crisis.

Dr Khullar said that monthly exports are likely to fall to less than $25 billion, which would make it tough to achieve a figure of $300 billion for the entire fiscal. In 2010-11, India’s merchandise exports were valued at a record $246 billion. …… 

Meanwhile, imports in July rose 51.5 per cent to $40.4 billion. Trade deficit (gap between imports and exports) in July widened to $11.1 billion, up from $7.7 billion in June and $8.9 billion in April 2011. It had touched a $15 billion–high in May.

Dr Khullar said the high level of trade deficit continues to be a worry, adding that it could be over $130 billion for this fiscal. Trade deficit during April-July 2011 is already $42.7 billion.

Exports during April-July 2011 jumped 54 per cent to $108.3 billion, while imports during this period increased 40 per cent to $151 billion.

Engineering exports were $8.7 billion in July alone and $31.6 billion during April-July 2011 due to a huge increase in such shipments to Africa and Latin America. Thanks to high oil prices, shipments of petroleum products also rose. They were worth $4.6 billion in July and $18.6 billion in April-July, an increase of 60 per cent.

Mr Khullar said exports of most sectors have shown huge growth due to the ‘lag effect’ as these were the orders that Indian exporters received months before the recent crisis in US and Europe, tsunami in Japan, huge inflation in China and a robust growth in Latin America.

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Chinese trade surplus at a record high as US downgrade threatens their holdings

August 10, 2011
National emblem of the People's Republic of China

Image via Wikipedia

The Chinese economy is not immune to whatever craziness is going on around the world. They hold such a large amount of US treasury bonds that the gridlock and political irresponsibility in Washington is leading to some fundamental policy changes regarding their reserve holdings. The People’s Bank of China owns about $1.1 trillion of US Treasury bonds out of the  $1.5-trillion treasury bonds or so of foreign treasuries that it holds amid China’s total reserves of about $3.2 trillion.

It is not therefore surprising then that China is among those most concerned by Standard & Poor’s recent downgrade of the United States’ AAA credit rating. It was sufficiently concerned to publicly chastise the US for its irresponsibility!

“The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,” reported the Xinhua news agency.

Meanwhile

BEIJING, Aug. 10 (Xinhua) — China Wednesday reported faster than expected growth in exports, imports and trade surplus in July, but analysts said the picture would become worse in the coming months amid a faltering global economy.

The trade surplus rose sharply to a record high of 31.48 billion U.S. dollars in July from June’s 22.27 billion U.S. dollars and the 28.7 million U.S. dollars in the same period a year ago, the General Administration of Customs (GAC) said on its website.

July exports rose 20.4 percent year-on-year to reach 175.128 billion U.S. dollars, a record monthly high compared with 17.9 percent in June. Imports quickened from June’s 19.3 percent to 22.9 percent to 143.64 billion U.S. dollars.

The robust readings suggests both China’s competitiveness in exports and domestic demand are in relatively good shape, Bank of America-Merrill Lynch economist Lu Ting said in an email to clients.

Exports to the EU and Japan rose to 22.3 percent and 27.2 percent year-on-year in July from 11.4 percent and 20 percent in June.

And exports to the United States expanded 9.5 percent, down slightly from 9.8 percent in June, but down significantly from 13.3 percent in the second quarter and 21.4 percent in the first quarter, which indicated weakness in the U.S. economy has been weighing on its imports from China, according to Lu. ….

On Wednesday morning, yuan hit a record high of 6.4167 against the U.S. dollar.

US politicians in the Administration and those grand-standing in Congress will need to get their act in order if they are to avoid the day when the Chinese are no longer around to buy their debt. As it is, China is now engaged in diversifying its foreign reserves away from US dollars to other currencies and even other asset classes and is under severe internal pressure to accelerate this diversification.

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Hold on to bricks and mortar while stock markets crash as the bears go on a rampage

August 5, 2011

In spite of the US extending its debt ceiling over last weekend with great unnecessary drama, the stock markets this week have all given in to the bears. Massive losses of stock prices have been sustained from Tokyo to Bombay to London to Wall Street.

That the bears have managed to bring so many markets down strikes me as being mainly opportunistic. Of course the underlying weakness of the markets lies in the economic profligacy primarily of the US and also in Europe in Greece, Italy and Spain. But the weakness of the Euro allows the German manufacturing sector to flourish. And the “workers of the world” in China and India and Brazil and Germany have not been strong enough to resist and counteract the alarmist views now pervading the stock markets. A double dip recession now seems inevitable.

A curious combination of the irresponsibility of having bloated public sectors (albeit in over-zealous attempts at “do-gooding”) together with the ravenous greed of the financial speculators who feed upon others but create no real wealth themselves.

I do not know how long it will last or how deep this second dip will go, but bricks and mortar and the “making of real things” that people want will eventually prevail. So I shall get rid of my shares in any companies that do not make “real things” and create real wealth.

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US debt ceiling parasitism

August 2, 2011

After the high drama and late night sittings and doomsday rhetoric and slap-stick performances in the US congress over the last few weeks, I can’t help feeling that Vladimir Putin has a point. The agreement reached last night could – and should – have been reached 2 months ago but the Congressmen and Senators could not resist trying to show how tirelessly they work for the nation’s benefit. Sometimes they remind me of the players in a cheap musical farce where the terrible music is only topped by the dreadful actors.

Wall Street Journal

Russian Prime Minister Vladimir Putin called the U.S. “a parasite” because of its huge debt load. ….. 

In a speech Monday, Mr. Putin said Russia and other countries should seek new reserve currencies to hedge against “a systemic malfunction” in the U.S. Both Russia and China in the past have questioned the dollar’s pre-eminence as a reserve currency and its role in international trade and investment. Russia keeps almost half its reserves in dollar assets. “The country is living in debt,” Mr. Putin told a pro-Kremlin youth rally in central Russia. “It is not living within its means, shifting the weight of responsibility on other countries and in a way acting as a parasite.”

Kipper Williams US debt crisis: 02.08.2011

Kipper Williams US debt crisis: The Guardian 02.08.2011

The U.S. government’s debt will hit 100% of gross domestic product this year, up from 62% in 2007, according to the International Monetary Fund. Russia has low sovereign debt compared with the U.S. and other countries, with its state debt representing just over 10% of GDP. Still, when all the debt of its state-controlled companies is taken into account, the state is on the hook for an amount equal to 20% of GDP, according to a Deutsche Bank report. Russia’s state debt is expected to rise to 30% of GDP by 2020, according to Deutsche Bank.

The deal to raise the U.S. debt limit announced Sunday by President Barack Obama was a relief, Mr. Putin said, “but it simply delayed a more systemic solution.”

Uncertainties about the U.S. economy already have pushed Russia to seek alternatives such as gold and other sovereign debt. Russia curtailed its purchase of Treasurys in the past year, down from $176 billion last October to $125 billion in April, according to Treasury Department data.

 

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Signs that the Japanese recovery is beginning

July 4, 2011

Having a very strong belief in the resilience of Japan and the Japanese in the face of natural disasters, I have – paradoxically – been anticipating that the Great 2011 earthquake and tsunami will actually lead to a wave of infrastructure spending which can actually lead to a new spurt of economic growth. If political changes are also forthcoming this could be a wave of sustainable growth. 

Now 3 months after the quake and tsunami the first signs are visible that the recovery is beginning. There is a long way yet to go but I remain convinced that over the next 2 or 3 years we will see Japan re-emerging as a significant motor driving the world economy.

Bloomberg:

 

Japan’s industrial production rose at the fastest pace in more than 50 years, led by carmakers as they restored operations at plants after a record earthquake and tsunami on March 11.

Factory output increased 5.7 percent in May from April, the biggest gain since 1953, the Trade Ministry said in Tokyo today. The median estimate of 30 economists surveyed by Bloomberg News was for a 5.5 percent gain.

Output in the transportation industry advanced 36 percent from the previous month as automakers including Toyota Motor Corp. and Nissan Motor Co. restarted production lines. Manufacturers said they plan to increase output 5.3 percent this month and 0.5 percent in July, according to a survey of companies included in today’s report.

“The report shows that the auto industry is a strong driving force” in boosting production, said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “The post-quake shock is running its course and production is undergoing a V-shaped recovery.”

The output report follows data this week showing that retail sales rose 2.4 percent in May from April, in a sign that consumer demand is rebounding.

Business World:

 

THE AUTOMOBILE INDUSTRY foresees a more stable supply situation at the very least following reports that Japanese parts production has picked up following March’s deadly earthquake and tsunami. Timing of a return to full output, however, remains uncertain given power shortages caused by the shutdown of the Fukushima nuclear plant, industry officials said.

Japan’s Ministry of Economy, Trade and Industry last week said industrial production rose by 5.7% month-on-month in May from 1.6% in April, with transport equipment among the sectors leading growth. Inventory was said to have similarly increased by 5.1% in May from previous month on improved production of electronics parts and devices, among others.

 

 

 

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“Only way out of the Eurocrisis is for Greece to leave the Euro”

June 16, 2011

Dagens Industri’s panel of finance and economy experts have a bleak view of Greece remaining within the Euro. Emergency loans will be necessary anyway but in the long term, they feel, Greece has to leave the Euro not only for their own sake but also for preventing a collapse of the EMU.

The only way out of the euro crisis is with Greece’s exit from EMU, says Dagen Industi’s expert panel. But only after a lengthy process with more emergency loans to avoid the risk of a new financial meltdown a la Lehman Brothers in 2008.

“Greece is actually already bankrupt. Market prices speak for themselves. The country would not survive a day without an emergency loan from the European Union and IMF” said Marie Giertz, chief economist at Länsförsäkringar.

A new global financial crisis threatens if Greece does not get emergency loans and are forced to suspend payments to private lenders, including German and French banks, warns the European Central Bank ECB and the large rating agencies. Germany and others complain that European taxpayers cannot just continue to sponsor Greece’s debt tangle with never-ending emergency loans.

Cecilia Skingsley, chief analyst of Swedbank’s foreign exchange and fixed income trading, believes that the new emergency loan is the solution only for the short term. But that Greece must eventually leave the EMU. “With a further loan program maybe the market calms for a while. Then in a few years we realize again that this is not sustainable. Therefore I think that Greece must leave the monetary union. In return, they may get a little waiver of some of the emergency loans from the EMU ” said Cecilia Skingsley.

Jan Häggström, chief economist at Handelsbanken, points out that the euro country taxpayers have to bear the Hellenic liabilities no matter how it goes. The alternative to providing further emergency loans is credit losses in the European banking system, which in turn would require government bailouts. “In the end somebody has to write this down and it is not unlikely that Greece will have to leave the euro, but that is further ahead in time” says Jan Häggström.

Greece, in principle, needs to step out of the EMU in order not to drag down other crisis countries into a major depletion of their treasuries, reasons Tomas Pousette, chief economist at SBAB. “Otherwise it is difficult to see why, for example, Portugal should endure ten years of very tough fiscal policy while Greece simply chops off their debt. For a Greece outside the EMU, debt would be burdened by high interest rates and bankruptcies would threaten the country’s banking sector. But the country would also get a chance to revive its tourist industry with its own, lower, exchange rate “, says Tomas Pousette.

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German exports at all time high – proof of two-speed Eurozone

May 9, 2011

No doubt the value of the Euro which is being held back by the economically weak countries helps but it does not explain the strength of the recovery in Germany led by exports. It is not surprising that there are many Germans who are troubled by the burden placed on the European currency by Greece, Portugal and Ireland and begin to yearn for the return of the Deutschmark. There is a real fear among German savers that the achievements will be diluted by the weaker countries which in turn will destroy the value of their savings. The growth rate in Germany is second only to Sweden in Europe but the sheer size of the German economy makes it the real motor in Europe.

There is also an attempt by the German media to create a narrative that it is not unthinkable for a country to leave (or be pushed out from) the Euro. Last Friday’s media rumours about Greece leaving the Euro generally started in Germany. Even though the rumours were hastily denied by everybody, just the fact of bringing it up makes it less unthinkable.

Returning to the Deutschmark?

BBC: 

German exports surged in March to their highest level since records began, as the growing global economy lifted demand for its products and services. The country’s exports for the month totalled 98.3bn euros ($142bn; £87bn), 7.3% higher than February.

Its imports also reached an all-time high, up 3.1% to 79.4bn euros. Both imports and exports are the most since data started to be collected in 1950.

Germany is the world’s second-largest exporter.

Only China exports more than the European nation, and the latest monthly figure for German exports was much higher than market expectations.

“Germany is on the verge of a ‘golden decade’,” said Christian Schulz of Berenberg Bank. Fellow analyst, Carsten Brzeski at ING, said the German economy was now “cruising along smoothly”.

The latest German export figures provide yet more evidence of a “two speed” eurozone, with the German and French economies continuing to grow strongly, while others, such as Greece and Portugal are struggling against a backdrop of high national debt levels. 

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Eurozone crisis: Greece considering leaving the Euro and bringing back the drachma

May 6, 2011

The economic and fiscal variations within the Eurozone have become too large to be hidden away and perhaps it is time for the Euro to split. A two-tier Euro could be an interim solution but it makes no sense to force the currency to compensate for and match the wildly different shapes of the member economies.

Greece going back to the drachma or to an “olive” Euro may not be such a bad thing for the rest of the Eurozone though it will only probably lead the Greeks to delay taking the actions that will anyway be necessary. Fiscal profligacy cannot be sustained.

back from the euro to the drachma?

Der Spiegel:

The debt crisis in Greece has taken on a dramatic new twist. Sources with information about the government’s actions have informed SPIEGEL ONLINE that Athens is considering withdrawing from the euro zone. The common currency area’s finance ministers and representatives of the European Commission are holding a secret crisis meeting in Luxembourg on Friday night.

Greece’s economic problems are massive, with protests against the government being held almost daily. Now Prime Minister George Papandreou apparently feels he has no other option: SPIEGEL ONLINE has obtained information from German government sources knowledgeable of the situation in Athens indicating that Papandreou’s government is considering abandoning the euro and reintroducing its own currency.

Alarmed by Athens’ intentions, the European Commission has called a crisis meeting in Luxembourg on Friday night. In addition to Greece’s possible exit from the currency union, a speedy restructuring of the country’s debt also features on the agenda. One year after the Greek crisis broke out, the development represents a potentially existential turning point for the European monetary union — regardless which variant is ultimately decided upon for dealing with Greece’s massive troubles.

Given the tense situation, the meeting in Luxembourg has been declared highly confidential, with only the euro-zone finance ministers and senior staff members permitted to attend. Finance Minister Wolfgang Schäuble of Chancellor Angela Merkel’s conservative Christian Democratic Union (CDU) and Jörg Asmussen, an influential state secretary in the Finance Ministry, are attending on Germany’s behalf.

…… Sources told SPIEGEL ONLINE that Schäuble intends to seek to prevent Greece from leaving the euro zone if at all possible. He will take with him to the meeting in Luxembourg an internal paper prepared by the experts at his ministry warning of the possible dire consequences if Athens were to drop the euro.

“It would lead to a considerable devaluation of the domestic currency against the euro,” the paper states. According to German Finance Ministry estimates, the currency could lose as much as 50 percent of its value, leading to a drastic increase in Greek national debt. Schäuble’s staff have calculated that Greece’s national deficit would rise to 200 percent of gross domestic product after such a devaluation. “A debt restructuring would be inevitable,” his experts warn in the paper. In other words: Greece would go bankrupt.

It remains unclear whether it would even be legally possible for Greece to depart from the euro zone. Legal experts believe it would also be necessary for the country to split from the European Union entirely in order to abandon the common currency. At the same time, it is questionable whether other members of the currency union would actually refuse to accept a unilateral exit from the euro zone by the government in Athens.

What is certain, according to the assessment of the German Finance Ministry, is that the measure would have a disastrous impact on the European economy…..


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Could the disaster in Japan power a wave of sustainable growth?

March 20, 2011

Natural disasters and wars are in general very bad things.

Nobody in their right minds would wish for one. But they occur anyway. Disasters and wars have an immediate cost in human life and capital destruction which can never be a chosen path for any ethical course of action. But when they do occur the long term consequences  can critically depend upon the economic environment in which they occur. It seems to me that when they occur in times of economic depression or economic stagnation they can provide the stimuli which can lift countries and whole regions onto a new path of economic growth. Of course the spending that follows does not in itself create wealth. The spending could have taken place on something else (or the wealth spent could have been saved). But it is the direction of spending and the mood of the spending which, I think, creates the potential benefit. It can create a step-change in thinking and behaviour and resolve and shift the path on which economic movement occurs.

The May 2008 earthquake in Sichuan, China killed over 80,000 and destroyed infrastructure on an unprecedented scale for modern China. Yet, the economy was not derailed and instead the massive rebuilding effort that followed added an extra 0.5% or so to the economic growth that followed. The January 1995 Kobe earthquake killed over 6,000 and wiped out the older central areas of Kobe and yet the investment that followed lifted the Japanese economy as a whole – but only for a time. A new mood was created but it was not accompanied by any real political shift. And from about 1999 onwards the Japanese economy has not only been stagnating but Japanese policies have also been stuck in a political rut. In spite of much talk about demographics and the ageing of Japan and the need for new thinking, the political inertia prevailed. This has only been exacerbated by the global financial crisis.

The dislocation to Japanese society and the economy caused by the Great Tohoku quake and tsunami will be massive. But I am quite sure that the Japanese and Japan will overcome. It will take some time but it could even break them out of the political rut and onto a quite different and much more sustainable path. If there is a fundamental shift out of the deadly political complacency which is long overdue, then the short term stimulus that rebuilding will surely bring could become sustainable and the Japanese economy could again be a major driver of global improvements.

chart of the day, japan industrial production 1995Natural disasters can give a boost to the countries where they occur

Rebuilding efforts serve as a short-term boost by attracting resources to a country, and the disasters themselves, by destroying old factories and old roads, airports, and bridges, allow new and more efficient public and private infrastructure to be built, forcing the transition to a sleeker, more productive economy in the long term.

“When something is destroyed you don’t necessarily rebuild the same thing that you had. You might use updated technology, you might do things more efficiently. It bumps you up,” says Mark Skidmore, an economics professor at Michigan State University. “Disasters help people think about things differently.”

Studies have found that earthquakes in California and Alaska helped stir economic activity there, and that countries with more hurricanes and storms tend to see higher rates of growth. Some of the most recent work has found a link between disasters and subsequent innovation.

Mark Skidmore of Michigan State, along with the economist Hideki Toya of Japan’s Nagoya City University, published a 2002 paper in the journal Economic Inquiry that mapped the disaster frequency of 89 countries against their economic growth over a 30-year period. Skidmore and Toya found that, in the case of climatic disasters – hurricanes and cyclones, as opposed to earthquakes and volcanic eruptions – the more the better: nations with more climatic disasters grew faster over the long run than the less disaster-prone.

Jesus Crespo Cuaresma, a professor of economics at the University of Innsbruck, has found some support for Skidmore and Toya’s argument. In post-disaster rebuilding efforts in developing countries  at least in wealthier developing countries like Brazil and South Africa, there is indeed a tendency to use the rebuilding process as an opportunity to upgrade infrastructure that might otherwise have been allowed to grow obsolete.

War is also a “disaster” which costs human lives and destroys capital but can have similar effects.

As Prof. Joshua S. Goldstein puts it:

War is not without economic benefits. At certain historical times and places, war can stimulate a national economy in the short term. During slack economic times, such as the Great Depression of the 1930s, military spending and war mobilization can increase capacity utilization, reduce unemployment (through conscription), and generally induce patriotic citizens to work harder for less compensation.

War also sometimes clears away outdated infrastructure and allows economy-wide rebuilding, generating long-term benefits (albeit at short-term costs). For example, after being set back by the two World Wars, French production grew faster after 1950 than before 1914.

Technological development often follows military necessity in wartime. Governments can coordinate research and development to produce technologies for war that also sometimes find civilian uses (such as radar in World War II). The layout of European railroad networks were strongly influenced by strategic military considerations, especially after Germany used railroads effectively to overwhelm French forces in 1870-71. In the 1990s, the GPS navigation system, created for U.S. military use, found wide commercial use. Although these war-related innovations had positive economic effects, it is unclear whether the same money spent in civilian sectors might have produced even greater innovation.

Overall, the high costs of war outweigh the positive spinoffs. Indeed, a central dilemma for states is that waging wars – or just preparing for them – undermines prosperity, yet losing wars is worse. Winning wars, however, can sometimes pay.


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Posted in Behaviour, Economy, Ethics, Japan, Politics | 3 Comments »

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