Is TAP worth taxpayers’ money?

The nationalization of TAP Air Portugal (hereby simply referred to as TAP) has been a hotly discussed topic recently. In this article, the major pros and cons of such a move by the Portuguese government are put into perspective, during a time in which taxpayers cannot afford to cover a bad decision from those in charge.

Founded back in 1945, under the Estado Novo dictatorship, TAP was initially a private company. During the first three decades of existence, its development occurred at a slow pace, mainly due to the fact that Portugal was a poorly internationalized country by the time. With the deposition of the regime, which led to the nationalization of the company (along with many other businesses), and a further global integration of the country, TAP could grow, expanding its routes and reaching more points on the globe. The fact that TAP took almost 20 years to reach the one million passengers milestone, compared to the 17 million attained in 2019, is a proof of the tremendous development registered not only by the company, but also by the sector as a whole.

What’s the company’s current situation?

Despite the pronounced long-term growth of the aviation industry, TAP exhibits long-lasting liquidity/solvency problems, presenting, year after year, worrying financial statements. As a matter of fact, the incapability of the firm to deliver sustainable results throughout decades led to its reprivatization (2015) in the aftermath of the financial crisis that hit Portugal.

Before diving into the numbers, let us proceed with a brief characterization of the firm’s organization nowadays. In fact, the aviation company itself, TAP SA, belongs to a holding, TAP SGPS, founded in 2003. Besides TAP SA, the group owns eight additional subsidiaries working on related businesses, such as catering, maintenance, cleaning services and computer engineering.

In 2015, under Pedro Passos Coelho’s government, the group was privatized and the Atlantic Gateway consortium, headed by David Neeleman and Humberto Pedrosa, acquired a participation of 61%. Later, in 2016, António Costa’s office partially reverted the process and secured a 50% share to the state, assuring an even split across private and public ownership. This ended up translated into an ambiguous shareholder structure, which has remained unchanged since then. But for how long?

TAP SGPS is in severe financial distress. The graph below says it all. In 2008, owners’ equity became negative and net income simply disappeared, almost never to be seen again. To make things even worse, the level of indebtedness is currently at dangerous levels (above 200%) and, even though the expansion of the aircraft fleet has been contributing to increased assets, liabilities struggle to be reduced. In finance, such analysis should ideally be conducted via peer comparison, but the values presented (namely, those relative to income) are intrinsically poor and are a good portrait of the group’s frightening financial situation.

Data Source: Sabi Nova SBE

Data Source: Sabi Nova SBE

Should TAP become a state-owned company again?…

In this dramatic scenario, one may wonder what factors could be a justification for state ownership, as the financial situation does not seem to be one. Consequently, on the one hand, nationalization’s supporters argue that private management would only care about profit and this would potentially mean the elimination of important routes for the Portuguese community, such as the links with Guiné-Bissau or Cabo Verde. On the contrary, the state would defend the best interests of citizens, even if they led to inefficient outcomes. In this domain, the fact that most European countries have state-owned airlines is often used as an authority argument to back nationalization.

Another idea in favor of state control is the role of ambassador of the Portuguese culture that TAP is believed to play abroad. The defendants of this thesis argue that, by becoming private, the brand would lose connection to its Portuguese background and start to be seen as just another airline, which would harm Portugal’s international exposure. In fact, this is one of the main concerns of António Costa’s government, which considers TAP as a «strategic company». Taking into account that the aviation industry is among the most affected by the COVID-19 pandemic, he says that the government will avoid its bankruptcy at all costs. Also, TAP employs more than 10,000 people nowadays and many believe that privatization, a merger or an acquisition by a competitor would mean many jobs lost.

Could thousands of employees fill unemployment claims in case of privatization? 

Could thousands of employees fill unemployment claims in case of privatization? 

… Or should it be effectively privatized?

On the privatization side, people argue that the state has no right to arbitrarily inject taxpayers’ money into a company near bankruptcy and which can well be run by a private entity with no prejudice for national interests. If for a bank that is admissible due to systemic risk, an airline company is not believed to be worth of taxpayers’ effort, especially considering that there are loads of similar companies providing the same kind of services, many times at a lower cost for the client.

An interesting counterargument to that of national interests is precisely that, as opposed to the theorized, TAP does not defend the interests of Portuguese citizens, but rather those of Lisbon. The company is accused of regionalism, namely owing to the fact that it announced the re-establishment of more than 70 routes from Lisbon and just 3 from Oporto after the lifting of containment measures. So, if the company only serves one city, it is argued not to be fair that all taxpayers are equally liable for it.

To rebut the vision of job posts loss, the apologists of privatization argue that, if TAP goes bankrupt, other companies will come over and fill its place. This would mean that, despite scale advantages, most workers will not lose their jobs, but will rather be hired by other companies. In the context of Lisbon’s airport, given TAP’s large share, this could mean lower fees in case of bankruptcy, as competition would increase. The case of the United States of America seems to support this theory. After World War II, the country deregulated airlines market and, despite Pan American (their public company by the time) went bankrupt, the increase in competition led to lower fees and routes’ expansion.

What does the future hold?

At this moment, there is no certainty about the future of TAP and, even though state’s help (through convertible bonds, for instance) is a possibility, nationalization is unlikely to happen, as the burden it would imply on households during these times would be massive. Extraordinary times demand extraordinary policy action, but taxpayers could well not be able to deal with a questionable public rescue to TAP.

Sources: ECO, Jornal de Negócios, NiT, Notícias ao Minuto, Sabi Nova SBE, Showbiz Cheat Sheet, TAP, Wikipédia

The Federalist Papers: Short overview and considerations about the future of fiscal federalism in the EU

“After full experience of the insufficiency of the existing federal government, you are invited to deliberate upon a New Constitution for the United States of America. The subject speaks its own importance; comprehending in its consequences, nothing less than the existence of the UNION, the safety and welfare of the parts of which it is composed, the fate of an empire, in many
respects, the most interesting in the world.”

— Alexander Hamilton as Publius, Federalist No. 1

Following the American Revolutionary War, and the drafting and ratification of the Articles of Confederation by the 13 states, it soon became obvious that the young confederate government was severely hindered in its functioning by an overall lack of power. Indeed, without an executive or judicial branch, the new government lacked the power and authority to tax, for example. Since it could only request money from states but didn’t have any ability to enforce these requests, both the government and the U.S. army were majorly underfunded.

It was, therefore, to evaluate and, possibly, amend the Articles of Confederation and improve the current situation that delegates from the 13 states gathered in Philadelphia, in 1787, in what was called the Philadelphia (or Constitutional) Convention. Even though a new constitution was drafted and signed in this convention, it was not with this goal in mind that these delegates joined in assembly. However, since many were convinced of the inadequacy of the current system, the convention soon evolved into an effort to redesign and rebuild the whole political structure of the union from a loose confederacy into a more solidly cemented federal union.

However, the drafting of the new constitution and its signing in the convention was only the first step. Next, and most critically, to enter into force, the new Constitution needed to be ratified by 9 of the 13 states. It was to lobby votes in favor of ratification that Alexander Hamilton, one of the convention delegates from the state of New York and the 1st Secretary of Treasury of the United States of the future government, wrote, along with James Madison, one of the most central figures in the drafting of the new Constitution and the Bill of Rights and future president of the U.S., and with John Jay, future 1st Chief Justice of the Supreme Court of the new government, a series of essays whose collection is referred to as The Federalist Papers.

Alexander Hamilton

Alexander Hamilton

The Federalist Papers

The Federalist Papers

James Madison

James Madison

These essays, 85 in total (1), were published as serial installments in newspapers and discussed topics ranging from the benefits of a federal union under the Constitution on matters of war and taxation to the discussion of the principles of separation of powers, how it is upheld by the Constitution and how the system of checks and balances between the three branches of government works under the Constitution, all the while attempting to refute many of the anti-ratification arguments of the time.

Although their effect in promoting the ratification of the Constitution is unverifiable, they certainly are a window into the political and historical framing of the federalists vs anti-federalists debates of the time and can prove useful in understanding some of the debates and arguments employed with regards to federalism in the European Union.

In Federalist No.11, Hamilton talks about the advantages of a common commerce policy, as achievable by federalization with, for example, the ban on inter-state tariffs, echoing many of the free-trade ideas that helped create and develop today’s European Union’s common market.

In Federalist No.30, Hamilton describes the poor situation of the government’s revenues under the Articles of Confederation and argues, namely, that the state of public debt of such a government will be extremely precarious. Indeed, while talking about the future creditors of the government he says:

“to depend upon a government, that must itself depend upon thirteen other governments, for the means of fulfilling its contracts, (…) would require a degree of credulity, not often to be met with in the pecuniary transactions of mankind”

— Alexander Hamilton as Publius, Federalist No. 30

The solution to such a problem, he argued, lied in giving the new Congress the general power to tax and levy tariffs.

However, federal revenues were mainly dependent on tariffs until the beginning of the 20th century, before the creation of the income tax (2). As this new tax was being levied and grew in size, federal fiscal policy also grew in scope, with the creation of the New Deal during the Great Depression, for example.

Both Hamilton’s arguments at the time for a more energetic government, empowered by the power to tax, and the expansion of the scope of federal fiscal policy after the Great Depression timed with the creation of the income tax provide insights into the current discussions on the expansion of centralized fiscal responses by the European Union.

Indeed, for the central institutions of the European Union to be able to provide a more timely and powerful response to a crisis such as the present one, they must also be able to access bigger sources of revenues.

If we want more powerful central institutions in the EU their budgets must also increase.

In 2017, EU budget expenditures were about €137,000 million. These paled in comparison to the U.S federal government’s almost $4,000,000 million in outlays. In Europe, where countries’ governments are already very fiscally active, it is hard to imagine a scenario where an increase of the central EU budget to levels more comparable to those of the U.S. federal government would not come at the cost of shrinking national government’s budgets.

Whether a more centralized response by the EU would, then, be net-beneficial is not something I’m arguing for or against. Indeed, the question that I desire to pose is whether this response, at the expense of member-states’ fiscal power, is politically achievable. Such a question is impossible to definitively answer. On one hand, emergency situations, like the Great Depression in the U.S., seem to be breeding grounds for centralization, on the other, the shifting political landscape in Europe, namely with the rise of Euro-skeptic parties, may foresee a grimmer fate for European federalism.

(1) You can find The Federalist Papers at: or listen to public domain recordings of it by LibriVox at:

(2)-  Even though Clause 1 of Section 8 of Article 1 of the U.S. Constitution gave Congress the ability to levy taxes it was only with the creation of the 16th Amendment to the U.S. Constitution that Congress was able to levy country-wide income taxes.

The Impact of Globalization on Inequality

Since the European discoveries, several waves of globalization have shaped the way we live today. The most recent one started around the 80s/90s of the previous century and was pushed by several circumstances. First of all, the economic reforms implemented in China around that time by Deng Xiaoping, who ruled the country as paramount leader* between 1978 and 1992 and the fall of the USSR in 1991 brought economic development and openness to vast territories, changing its interaction with the rest of the world. In addition to these two events, the improvements in communication and transportation technologies were key aspects that enabled all the process, boosting global trade and movement of capital between countries. For instance, according to the World Bank, exports of goods and services grew from US$4.1 trillion in 1980, to US$23 trillion in 2015, at constant on 2010 prices

Since the beginning of the process until now, globalization is said to have taken a lot of people out of poverty due to those infusions of foreign capital and technology in less privileged areas of the globe, bringing them economic development and spreading prosperity. Stil according to the World Bank, the global population living with less than US$1.90 per day in this condition decreased from 36% in 1990 to 10% in 2015. The two countries that most contributed to this outcome were China, where this indicator fell from around 66% to 1% in the same time-frame; and India, where poverty affected almost 49% of the population in 1987, shrunk to 21.2% in 2011. Undoubtfully, this is clearly positive and a major advance towards the United Nations’ sustainable development goal of eradicating poverty.

However, even though poverty has shrunk at a global level, the fact is that the increasing wealth that is created and the benefits of globalization are said not to be distributed fairly.

Global real income growth (1988-2008)

Source: Equitymaster

Source: Equitymaster

This chart was elaborated by Branko Milanovic, an economist recognized for his work and research in inequality and income distribution, and depicts the variation in real income according to each percentile of the global income distribution between 1988 and 2008. It can be clearly seen that, during this time frame, the ones who saw their income increase the most was the population living in emerging countries and also the richest citizens of the world. On the other hand, the middle classes of developed countries and the extremely poor virtually remained the same, with some even getting worse off. 

When looking for answers that may explain why this has happened, the novelties brought by this recent wave of globalization should be taken into consideration. The reductions in transportation costs and trade barriers created an atmosphere of incentives for capital owners to move the production segment of the supply chain from developed countries to others with better cost advantages, mainly regarding labor, in order to pursue competitiveness. Therefore, these new opportunities have benefited the global elite, as well as the population of where these jobs were created. On the other hand, this has led developed countries to experience major job losses and its working class to see their real wages/income stagnated overtime, and even decreased.

Even though globalization may have contributed for more inclusiveness and less poverty at a global level, smoothing differences between the richer and the poorer countries, the fact is that, when considering the internal situation of each nation, it may be a different story. 


Distribution of pre-tax national Distribution of pre-tax national income in the United States income in China

bvf c.png
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Source: World Inequality Database

Source: World Inequality Database

These graphs clearly show that inequality in the United States as well as in China increased. In both countries, independently of whether real incomes increased or not, the share of national income received by the bottom 50 percent of the population fell, while the top 10 percent saw their share of income increase. This being said, it is quite clear that inequality should be a priority for national governments.

*Paramount leader: informal term for the most prominent political leader in the People’s Republic of China, not necessarily involving an official position.


Sources: Forbes, The World Bank Data, Equitymaster, World Inequality Database

Corona, an Economic Virus

As it is noticeable, we have just entered a downturn cycle in the economy. The uncertainty on the markets, the general panic, sudden decrease in consumption, production and investment are primary presages of economic dark times, and it is up to all of us to prepare for the upcoming storm. The next months won’t be easy and irreversible economic losses have already contributed to an approaching feasible collapse in the global economy.

The coronavirus isn´t only responsible for contaminating our health, this contagious virus has and will certainly play a big role in the future of worldwide economies.


EU’s real GDP was expected to grow around 1,4% in 2020, after the hit of the pandemic COVID-19 EU´s output may fall to 0% or even reach a negative growth. Even the Chinese economy, which has been continuously growing in the past decades, was anticipated to grow around 2% more than what it will predictably grow after the spread of the virus and the USA’s real GDP may grow less 1% than previously expected. Overall global GDP growth may fall from 2.5% to between 2% and -1.5%, depending if there is a quick recovery on the economy or a global slowdown.

All industries in the global economy are being contaminated by the virus and the duration of the predicted recovery fluctuates, depending on the economic sector.

As expected, tourism will take the longest time to recover.It is foreseen that it will only restart in the 4th quarter of 2020 (in October), imposing a threat for various countries. A good example is Portugal, whose GDP is highly dependent on the industry, having represented 14,6% of the portuguese GDP in 2018. On the other hand, consumer electronics and consumer products are the sectors that are anticipated to have the fastest economic recovery. Their  global downturn reversal is estimated to be in the 2nd quarter of 2020 (April).


Even though there will certainly be an economic global slowdown in the economy many specialists argue that the economic incidence of covid-19 is merely conjunctural. Since it´s repercussions aren’t enrooted in the economy, a severe recession isn’t bound to happen, “markets will recover”.

If we reflect on it, an appearance of the epidemic coronavirus will pose as a temporary shock in the economy and it is one that is far from being neglected. 

Let us take into consideration the 08 financial crisis, a great recession derived from an inundation of continuous bank runs, lack of credit crunch and condensed investment in toxic assets. Within the recession downtimes there was a high level of leverage in the financial market which turned rather more difficult the monetary response of the central banks. Many even argue that the prolonged and inaccurate response of Central Banks took a big part in the colossal breakdown of the economy.

 In the feasible upcoming coronavirus crisis, governments and central banks are already concerned with how to prepare for it, how to mitigate the alarming consequences this global pandemic seems to be able to induce in the economy, and how to aim for a “surely recovery”.


It is definitely extremely hard to predict the right measures to fight such an erratic enemy, thankfully many allies have already started to plan ahead.

Central banks are taking out the big guns. The Fed just announced this last Sunday, March 15, 2020 , that it will lower interest rates to 0%, the first time since the financial crisis of 08, and that it will buy at least $700 billion in government and mortgage-related bonds.The drastic low interest rates are expected to remain until the US economy recovers from the coronavirus economic slowdown.

The ECB is also expanding money supply in the economy, buying financial assets with newly created money. However, their fixed interest rates have been on negative territory since 11 of june of 2014, therefore the central bank has no room to lower interest rates.

It becomes clear that European government’s fiscal policy will play a big role in safeguarding the economies. For the approaching months it will definitely be crucial that assertive fiscal policies are created, in order to safeguard employment and ensure direct credit to companies, with the intent that solvency and liquidity issues are avoided.

Acknowledging that the coronavirus outbreak is an exogenous temporary shock in the economy and that global entities are already taking measures to safeguard its repercussions, independently if the recovery process may elongate, there is hope that our economy won’t suffer an irreversible collapse and fall into the next big recession. Nonetheless, we should be aware that an economic downturn is advancing,  it is time for governments to strengthen their weapons and get ready for the shooting.



  • European Commission, McKinsey & Company, Washington post, BBC news, INE, NY Times, Economic Times, European Central Bank- Euro system

Does a flat tax on personal income make sense?

Throughout history, disparities about the definition of social justice, across regions, led countries to adopt different income-tax systems (1). Despite being the most accepted, the progressive way of taxes has been increasingly questioned by academics and political leaders, arguing that a flat-tax system would be a better fit for countries regarding fairness and economic dynamics.

What distinguishes a flat rate from a progressive rate?

Simply put, a flat income-tax system applies the same income-tax rate to all taxpayers, regardless of their income level. Contrarily, a progressive system increases the rate as the income level increases, where the income range can vary greatly, depending on the country.

On the one hand, those who defend the first method argue that it is unfair to charge higher-income individuals a greater tax rate. The rationale behind this position is that they should not be penalized for adding more value to the economy. On the other hand, supporters of the progressive system believe that income distribution before taxes is not fair, i.e., earnings do not necessarily match economic contribution. Furthermore, wealthier households are considered to have the moral duty to aid those struggling. In their view, adjustments are needed and desirable.

Historically, the progressive system has been prevailing in most developed Western countries. In the USA, for instance, only 9 states (Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, Pennsylvania and Utah) out of 50 have a flat income-tax. In turn, only 8 of the 36 OECD member countries currently have a somewhat flat system (Czech Republic, Denmark, Estonia, Hungary, Iceland, Ireland, Poland and Sweden) (2).

In order to accurately address the origins and the main effects of a flat-tax system, some of the referred countries will be used as case-studies in this article.

What caused some countries to adopt a flat-tax system?

It is not a coincidence that most European countries which adopted a flat-tax system were once part of a bigger state. Estonia, for instance, which is perhaps the successful case in the adoption of a flat-tax (1994), was part of the USSR until its breakup in 1991, as well as Latvia (1994), Lithuania (1995) and Georgia (2005). In turn, Serbia and Montenegro, which adopted a flat tax in 2003 and 2007, respectively, are former members of Yugoslavia.

What these countries have in common is the lack of openness of their economies prior to their independence, as seen in the graph. Nowadays, approximately thirty years after the breakup of their previous federations, countries like Estonia and Serbia have shown an intensive internationalization process. Indeed, economic history tells us that global trade increases the welfare of nations. Therefore, it seems logical that former USSR and Yugoslavia members would aim at opening their economies so that they could thrive and catch up with Central and Western European more developed states.

Data source: The Global Economy

Data source: The Global Economy

In a report for The Heritage Foundation, Mart Laar, former liberal-conservative Prime Minister of Estonia (1992-1994; 1999-2002), explained that, when the USSR broke up and the country conquered its independence, the Russian ruble no longer had any value, Estonian industrial production declined by more than 30%, real wages fell by 45%, while inflation was running at more than 1000%. GDP per capita in the country was at $2,000, compared to the $14,370 attained by the Finnish neighbours. This Baltic country was totally devastated, after being pushed to the limit by Moscow, hence lacking urgent and impactful policies to invert its economic path.

Among a set of important measures to stabilize and boost the economy such as the introduction of an own currency (the kroon) which was pegged to the German mark, and balanced Government budgets, openness to global markets also played a significant role by fostering competition and attracting direct foreign investment. Nonetheless, the decisive move «to achieve a lasting breakthrough in Estonia’s development» would be the flat tax.

In the words of Laar, it was all about providing the right incentives to people:

“when people who had started companies realized that the tax system punished success, their enthusiasm to persevere and determine their own future declined considerably”

— Laar

Similarly, in Lithuania and Latvia, nations that share many characteristics with Estonia (these three would become known as Baltic Tigers), the flat tax was introduced to improve the economic outlook after Soviet ruling. Besides, they had to compete with Estonia for foreign investment, for which fiscal policy was a powerful tool. On the other hand, in Russia and Ukraine, the flat-tax was introduced mainly to incentivize higher-income households not to evade their taxes.

How does flat taxation impact economies and societies?

Despite all the positive results political leaders aimed at achieving with a flat-tax system, do/did they really happen? Looking at tax revenue, GDP per capita, income reporting and tax compliance and Gini Index, we can take some conclusions.

Regarding tax revenue, the year immediately after Russia changed from progressive (12%, 20% and 30% rates) to flat taxation (13% in 2001), personal income-tax revenues increased 26% in real terms and 2% as a percentage of GDP, a working paper of the IMF from 2005 concluded. In the case of all Baltic Tigers, Deena Greenberg, despite finding out in the paper The Flat Tax: An Examination of the Baltic States that tax revenue increased after the adoption of a flat tax, could not conclude that both were linked, leaving space for ambiguity as for the effect of flat taxation on personal income-tax revenue. Nevertheless, the fact that these countries decreased their tax rate after some years raises doubts on the effectiveness of this method.

Data source: Taylor & Francis Online

Data source: Taylor & Francis Online

Analysing the evolution of real GDP per capita of some European countries with flat taxation, there is a clear trend: all of them grow significantly in the first years after its introduction, but then growth rates slow down. However, this has more to do with their historical precedents and consequent policies (macro stabilization, property reforms, openness to trade) than with the adoption of the flat tax itself. They happened simultaneously, which may induce misleading conclusions. So, it doesn’t seem to be enough evidence that GDP per capita improvements in these countries over time are due to flat taxation.

Data source: AMECO

Data source: AMECO

In terms of income reporting and tax compliance, it is not clear that a flat tax improves the standards, as the study ‘Flattening’ tax evasion? (2019) concludes by analysing a set of transition European countries. The already referred working paper from the IMF (2005), though, points out that tax compliance in Russia increased after the introduction of a flat tax. Therefore, despite not being totally clear, we could admit some positive impact of a flat tax in tax compliance, especially in less developed countries, in which standards are low.

From an inequality point of view, the Gini Index gives us an accurate insight. The higher the index, the higher the inequality. In this regard, findings are that flat taxation is positively correlated with income inequality, as the following table shows.

Data source: World Bank

Data source: World Bank

All in all, income inequality ends up being a determinant when it comes to deciding which taxation system to use. Despite being correlated with economic improvements, there is no clear evidence that flat taxation plays a role in them. The fact that Slovakia (2013) and Latvia (2018) have recently abandoned their flat systems in favour of the progressive method should be a matter of reflection. Even though the social justice argument is debatable, the economic side does not seem to support flat-tax admirers.

(1) For the sake of this article, only personal income was considered.

(2) Although only Estonia has a perfectly flat tax system, the remaining countries are included in the list either because they consider very few income ranges or because higher tax rates are charged only to abnormally wealthy individuals.


AMECO, Deena Greenberg, European Central Bank, European Commission, Global Tax News, International Monetary Fund, LSE Blogs, ProPublica, Taylor and Francis Online, The Balance, The Global Economy, The Heritage Foundation, The Slovak Spectator, Verena Fritz, World Bank

What lies behind Singapore’s economic success?

On the tip of the Malaysian Peninsula, lies a string of islands that sit on the cross-roads of one of the most important choke points in international trade, through which more than 750 billion dollars-worth of trade pass yearly. However, as astounding as this tropical wonderland may seem, it is also a dangerous place. To the north looms the oil-rich Malaysia; to the south, the demographic behemoth of Indonesia. Even further north, lies the great dragon of the People’s Republic of China. In the midst of this blessed location, yet where so many powers intersect, is Singapore. How was this tiny city-state, of just around 5.8 million people, able to succeed in becoming one of the richest countries in the world and a beacon of stability in the region?


In order to understand the path that led to Singapore’s success, we first have to go back to its foundation. Its strategic geographic position for trade made it ideal for the British to found a colony in 1819. However, the location is not the sole reason behind its success. Afterall, many countries such as Thailand or Indonesia also benefit from a similar position, yet they were not able to follow such a successful path. The fact that Singapore belonged to the British Empire contributed to develop it into an important hub for connections between the colonies of the far east and Europe. Nonetheless, when the country became independent from Malaysia in 1965, it was considered to be far behind the so-called industrialized world.

Lee Kuan Yew

Lee Kuan Yew

Much of the success of Singapore is owed to one man: Lee Kuan Yew, a British-educated from the Singaporean-Chinese community. Lee is considered by many, such as Robert Kaplan (an influential geo-strategist), to have been an enlightened despot. This is because he ruled with a somewhat authoritarian-like style, but largely assured the rights and liberties of his citizens. Moreover, he was the mastermind behind Singapore’s strategy to foment foreign direct investment and open the economy to globalization, a very innovative idea for its time. Adding to the influx of foreign capital, was the heavy involvement of a large state in the economy. In its early days, Singapore had been plagued by a chronic housing shortage and a lack of access to education, leading the state to prioritise the building of public housing and investing in a good schooling system. This led Singapore to become a very attractive place for investors, as it was largely seen to possess a more orderly society than its neighbours.

This was the key for Singapore’s success: strong institutions that provided for the assurance of the rule of law.

These institutions give investors the confidence to make long term investments, since they do not need to worry about a sudden regime change or an oppressive and corrupt elite. All these factors combined provided for great stability, which soon paid off.

By the late 1970s and early 80s, Singapore was a manufacturing giant in South East Asia, becoming one of the first countries to become industrialized along with the other 3 “Asian Tigers”, in what was largely a rural Asia. These “Tigers” were characterized by experiencing rapid economic growth based on manufacturing. In the case of Singapore, this manufacturing boom was explained by the shipyard industry that created synergies with its important trade port and electronics manufacturing. Singapore was once the largest producer of hard disc drives.

Singapure Shipyard Industry

Singapure Shipyard Industry

However, increased competition from its neighbouring countries in terms of labour costs in the 90s largely caused this sector’s downfall, which meant Singapore was forced to change its economic backbone. An effort in which the country was arguably even more successful, since its rule of law, with the addition of tax and regulatory incentives, made it ideal for the establishment of financial services. Big banks, consultancy firms and insurance providers swiftly moved to the city that quickly became a hub for the service industry, capable of supplying the whole surrounding region.

Eco Building in Singapore

Eco Building in Singapore

Singapore is now mainly driven by the service sector, due to consistently being ranked as one of the easiest countries to do business in, and having a highly qualified workforce, a product of its strong education system.

It can even be argued that Singapore is trying to become an Asian Switzerland, as it has implemented policies that increase bank account secrecy, a move that could mean another influx of capital into the city-state.

Besides this, owing to the high concentration of capital and qualified workforce, the country invested more than a billion dollars in start-ups, meaning it is keeping up with its innovative agenda.

All these economic strategies have made Singapore one of the richest states, averaging a GDP per capita of 57,713 dollars.  Nonetheless, it is still a somewhat unequal country as well, ranking behind countries such as the UK and Japan in the Gini index, but still in a better position than the US. The city is also one of the most expensive places in which to own a car, because of government quotas and taxes that aim at reducing traffic congestion and CO2 emissions, while simultaneously incentivising public transportation.

In conclusion, Singapore is a country that managed to overcome a difficult neighbourhood, surrounded by hostile players, and a lack of important natural resources. It is an example of a country that was able to successfully manage its strengths in order to maximize of its economic potential. But also, one that was based on an orderly society that became a beacon of stability in a tumultuous region.  This order and rule of law was only possible due to a strong government headed by a highly competent individual, and the simple fact that it had a small population concentrated on a tiny piece of land that made it very manageable.


The Russian Way of Taxes

…and the future of tax collection worldwide

Russia’s Federal Tax Service, by the hand of the agency’s executive Mikhail Mishustin, has revolutionized the tax administration and developed a technology that will presumably be the future of tax collection worldwide. It consists in a digital and real-time system, which allows Russian officials to receive the data regarding every registered transaction that occurred in the country within 90 seconds after it took place.

The phenomena of ageing population is pressuring governments around the globe, as it is substantially enlarging the expenses with healthcare, social care and pensions. Alongside, the major tech enterprises have been discovering the way of shifting profits around the world and avoiding corporate taxes. In order to tackle these issues and raise funds to face increasing expenses and decreasing revenues in the sector of direct taxes, the Russians have decided to bet in the collection of indirect taxes, mainly in VAT.

Value Added Tax, VAT, is a broad consumption-based tax assessed on the value added to goods and services. This tax is now present in more than 165 countries and represents approximately 20 per cent of all global tax revenues per year.

But, in two main areas, VAT is subject of fraud: firstly, some traders don´t pay the taxes they owe on their sales and go missing, leaving authorities without collecting what legally belongs to them; secondly, customers collude with sellers to buy goods and services without receipt, with the purpose of avoiding VAT being charged to the final consumer.

Mikhail Mishustin

Mikhail Mishustin

To overcome fraud, or at least its majority, and prevent tax evasion and corruption, Russia developed and establish cutting-edge technology. Every retailer had to buy a new cash register, linked securely to the Federal Tax Service’s data centers, and was obliged to register every single transaction. The technology, through the use of Artificial Intelligence, is able to find patterns and spot businesses’ suspicious activity, for example if companies are registering less sales than expected because they are making cash transactions off the record, and even monitor the tax officials and their collection rates to detect corruption. This system also enables the government to control the number of sales and the prices of goods and services and provides national statistics, being inflation one of the most important.

However, there is still the wish to extend the system to the informal economy. Individuals just have to sign up to a smartphone app and what they owe will automatically be deducted from their bank accounts. Tax officials are, of course, relying in the fact that most people want to be clean and don´t want to get in trouble with the government. Even though “The Russian way of taxes” has all the advantages mentioned above, it is actually more directed to shopkeepers than to oligarchs, as corruption is still quite present in Russia’s society. Yet, this policy helped raising revenues significantly and also helped cleaning the system.

The leader of the global tax consulting at EY, Chris Sanger, says: “The benefits of technology for tax authorities in indirect taxes may well overweight the problems it brings in the direct tax system”.

Like Russia, there were many other countries that adopted the real-time data in tax collection, with the intention of reducing tax evasion and corruption. Portugal was one of those countries, an early starter. The shopkeepers’ cash registers are connected to the tax authorities’ systems too, but Portugal added other incentives. If consumers add their personal tax number to the electronic receipt, they can get a 15 per cent deduction on the VAT paid from their annual income tax assessment as well as becoming eligible to win a monthly lottery, which price is usually a brand-new luxury car. Through this incentive strategy, consumers are more likely to pay VAT and so ensure that retailers do the same.

Chris Sanger

Chris Sanger

Although many consider this is the future of tax collection worldwide, others believe that this will never be possible to implement in more mature democracies, due to the principles of privacy and data protection. The public is quite skeptical to accepted immensely intrusive state technology. OECD is trying to draw core standards at least for its state-members, aiming at securing data and preventing it from being misused.

For reflection purposes, it is feasible to leave the question: Will people actually be worried about their privacy and their personal information or, in another way, are they worthy to claim these rights when they share their private lives with the big tech companies?

Misleading Business Improvement

A 15% growth from June 2018 to June 2019 may seem like a great deal for any food retail chain. At least if you are not in Angola, where inflation is a big component of the economy. Although this indicator is now around 17%, it reached a peak of 42%, between 2016 and 2018, according to Trading Economics.

When compared to the Euro, the Kwanza (Angola’s currency) depreciated almost 40% in relation to the previous year. In 2018, one euro bought 290 Qwanzas, whereas nowadays it buys around 395.

Given this, a 15% rise in nominal terms does not reflect an excellent real growth, which may in fact even be negative.

Bearing this in mind, are these growth rates in Angola that bad? 

The Angolan Civil War

The Angolan Civil War

To answer this question correctly, one has to travel back in time. Angola was highly affected by two main wars: the war for independence from Portugal in the 1960s and 1970s, and the civil war, which ended in 2002. During almost four decades of political instability, Angola’s economy was stagnated, remaining one of the poorest countries in the world, despite its abundance in natural resources.

At the beginning of the 21st century, the government reformed and improved social and political institutions and Angola’s economy started growing fast. Although with high inequality and corruption, its GDP grew exponentially, and Angola became one of the fastest growing countries in the world. However, its prosperity depended strongly on oil exports revenues, which are very vulnerable to changes in the international oil prices.

During the European financial crisis, developed countries slowed down their demand for petroleum. Coincidentally, during that phase, new oil sources were discovered, so its supply increased without any international entity watching over. For these two reasons, the price of a barrel of crude in the international market decreased abruptly and Angola’s oil export revenues halved.

The overall balance of the country started decreasing a lot in 2012 and became negative in 2013, which means that Angola was losing reserves and borrowing from the rest of the world. This is translated into a negative current account and a surplus in the financial account.

Consequently, since the end of 2014, the country is experiencing a recession, dragging thousands of businesses into bankruptcy.

On the one hand, during a crisis, people who lived with less than 1 dollar per day do not lose a lot of purchasing power, because they already had none. Moreover, the richest 20% who, in this country, hold 50% of the income, do not struggle. As a matter of fact, their fortunes usually increase.

However, on the other hand, the picture is a little bit different for the middle class. As Angola used to be a Portuguese colony, this class is made up mostly by Portuguese people inhabiting there, who are the ones balancing the economy. When the crisis hit its peak, around 200 000 expatriates returned home, decreasing Angola’s domestic product. In 2015, around 60 thousand work posts were extinguished, the majority being related to construction and oil exploration. It represented not only a great loss to the government (less money earned in visas, taxes…), but also to the private sector (less money spent in leisure, shopping, rents…).

One cannot stress enough this last one, since a one-bedroom apartment rent was around 5 000 dollars per month and the resident had to pay for the entire year in January.

Moreover, the informal sector constitutes a huge part of Angola’s economy. This is usually closely tied with poverty, yet this sector did not shrink during the economic upturn in the first decade of the century. Actually, this sector became more productive and started to cover various activities: from water supply to transportation. Some developing countries are so used to these kinds of markets, that a sales boost is highly noticeable when the country improves. For the past few years, during the oil exportation crisis, the informal sector remained. These are bad news for the retail business, since food and beverages are easy products to trade informally. In 2018, 80% of existing soft drinks were sold in these markets. 

To sum up, it is accurate to argue that reaching the growth rates aforesaid is pretty good.

Porto de Luanda

Porto de Luanda

This is true, especially when almost all of the food sold in formal markets in Angola is imported and travels by sea for 3 long months, so companies have to predict the client’s necessities well in advance.

When there is a problem with transportation, supermarkets simply run out of stock and rely on the sales of non-perishable products. This would not be an issue if the government made serious inroads against corruption, providing local producers with financial support, given that the country is known for its fertile soils and rich raw materials.

Will this picture change? 

According to the Corruption Perceptions Index 2018, created by Transparency International, an organization dedicated only to public sector corruption, Angola is one of the worst countries regarding this matter. The country assumes place number 165 out of 180, where number 1 is the cleanest country (Denmark) and 180 is the most corrupt one (Somalia). The failure to control this problem is affecting all Angolan taxpayers, including businesses.

Boosting sales, even in nominal terms, is an excellent achievement in a country where the majority of the population lives in one of the following two scenarios:

either they do not have a roof to sleep under or they travel on a private airplane to spend their money elsewhere.



  • Trading Economics

  • World Bank

  • Transparency International

Wealth: to tax or not to tax?

There has been a topic marking all the debates throughout America in the past few weeks: the proposals of two Democratic candidates, Elizabeth Warren and Bernie Sanders, regarding a tax on wealth. Their proposals, coupled with all the recent articles and book releases about rising inequality all across the world, has been the hot topic on top of the table (better said, on top of the House).

Bernie Sanders and Elizabeth Warren

Bernie Sanders and Elizabeth Warren

A tax on wealth consists of a tax on the net wealth a person holds – that is, their assets minus their debts. Assets may include, for instance, bank deposits, real estate, financial securities, personal trusts, jewellery, or even a Picasso Painting. However, according to Bernie Sanders’ proposal, this tax would only be applied to people with a net worth value above $32 million, whereas candidate Warren would impose a tax on wealth only for values above $50 million.

They believe this is a much-needed source of revenue in order to ensure public health care for every American citizen. 

There have been many countries adopting similar forms of wealth taxes. However, according to records, most of these countries have already dampened its usage. Only three out of the twelve European governments that implemented this tax in the 1990s continue relying on its revenues.

Furthermore, the numbers regarding tax revenue are not encouraging. The country that collects the most revenue from a tax on wealth is Switzerland, where its wealth tax revenue amounts to 3.1% of GDP. The other two countries, Norway and Spain, show really modest values, ranging between 0.2 and 0.8 percent of GDP.

The reasons provided by these countries are based on the fact that it is too costly to implement such a tax policy, due to the difficulty in assessing and evaluating the stock of assets each person owns, from personal effects and durable goods to future pension rights. Besides this, the OECD found clear evidence of the tax evasion and avoidance that is expected following the implementation of such policy.

Additionally, studies based on past experiences showed that, as this tax is calculated based on the difference between assets and debt, people were encouraged to borrow and invest in exempted assets and in assets that were hard for the government to identify. Farms and small businesses, artwork and antiques, forests and non-profit organizations are all examples of assets exempted from a tax on wealth.

The concerns of Senator Warren and other policymakers regard the ‘concentration’ of wealth in a small number of individuals. But the truth is that their wealth is mainly dispersed across the economy in productive business assets and, looking just at billionaires, only 2 percent of their wealth is accounted for by their homes and personal assets, such as cars, jewellery, and artwork.

Greg Mankiw

Greg Mankiw

Economist Greg Mankiw suggested a model in which there were only capitalists and workers. His findings showed that people should support taxes on wages, but not on capital. The reason is that the supply of capital is elastic or responsive to taxation – not entirely realistic -, such that setting a tax equal to zero would generate increased savings and boost investment. Consequently, worker productivity and wages would rise and, in the long run, the after-tax wages of workers would be higher under this policy rather than under a policy of imposing taxes on capital. From an average workers’ point of view, it is beneficial for the wealthy to maximize their savings and reduce consumption.

Still, the question remains:

How can we have a tax system that does not penalize beneficial wealth accumulation but also distributes the tax burden equitably? How do we ensure that the rich pay a fair share of taxes while simultaneously not discouraging savings? 

Many have been the countries and cities, from Chile to Lebanon, appealing and begging for a more equal treatment and more egalitarian policies from their governments. For the sake of social harmony, tackling this issue is as urgent as it is to reach a consensus regarding climate change policies. However, wealth taxes may not be the right way to achieve the so-called general equilibrium.

Sem Título.jpg


  • Business Insider

  • National Public Radio

  • CATO Institute

China’s Grand Strategy: The Belt and Road Initiative

The acute awareness of a new world being knitted together has helped prompt plans for the future that will capitalise on and accelerate the changing patterns of economic and political power. Chief among these is the Belt and Road Initiative (BRI), President Xi’s signature economic and foreign policy, which uses the ancient Silk Roads and their success as a matrix for Chinese long-term plans for the future.

Since the project was announced in 2013, nearly $8 trillion have been promised to infrastructure investments, mainly in the form of loans to around 1,000 projects in 65 countries.

Some believe that the amount of money that will be ploughed into China’s neighbours and countries that are part of the BRI over sea – Maritime Silk Road – and land – Silk Road Economic Belt – will eventually multiply several times over to create an interlinked world of train lines, highways, deep water ports and airports that will enable trade links to grow even faster and stronger. In the meantime, the IMF issued a warning, in 2017, regarding the credit bubble, stating that the debt levels were not so much of a concern but rather a real danger.

China’s BRI was decided when the new leadership faced the combined pressure of the economic slowdown, US pivot to Asia and the deterioration of the relations with neighbouring countries after the 2008 Global Financial Crisis.

The continental economic belt focuses on the connectivity between China and Europe through Central Asia, and also between China, the Persian Gulf and the Mediterranean through Central and Western Asia. In addition, the maritime road aims to link China’s seaports to the South China Sea, the Indian Ocean and Europe.


The BRI’s five major goals are claimed to be: promoting policy coordination, facilitating connectivity, unlimited trade, financial integration and people-to-people bonds. The sectors in which the BRI has focused more time and effort are oil and gas, diversified industrial products and financial services, as shown in the chart below.

chinas belt and road priorities.pngchinas belt and road priorities.png

Dealing with the ‘new normal’

Serious challenges to the Chinese economy account for the most important drivers of the BRI. After the Global Financial Crisis and experiencing high-speed growth, the Chinese economy has slowed down since 2012 and entered the state of a ‘new normal’. China’s engine is cooling down, yet it continues to rack up one of the fastest rates of economic growth in the world. Given its enormous scale, this translates into substantial additions in absolute terms. In 2019, China added the equivalent of the entire Australian economy to its GDP. Nevertheless, the efficacy of China’s government stimulus has been waning.

Each renminbi of economic stimulus that the government pumped into the economy delivered less in actual GDP growth than in the past. The rise in ICOR (Incremental Capital-Output Ratio) – the amount of money the government needs to put in to yield a unit of growth – meant that economic stimulus was, in other words, getting more expensive.

china's gdp cooling.png

china credit squeeze.png

Two major problems that the Chinese economy carries, which can be partially solved by the trade generated from the BRI, are overcapacity and excessive foreign exchange reserves.

The problem of overcapacity is not only in labour-intensive traditional industries, such as steel and cement sectors, but also in the so-called high value-added emerging industries, including new energy sectors. Overcapacity has kept the growth rate down, which makes it urgent to find alternative oversea markets.

Excessive foreign exchange reserves were mostly caused by the large-scale stimulus package, as high as $586 billion, and further imbalance of the economy. The accumulation of excessive foreign reserves reflects worsening external imbalance, though it is also an upside factor to an emerging economy facing the risks of global adjustment. China’s foreign exchange reserve has rapidly increased to $4 trillion in recent years and about $1.4 trillion was invested in the purchase of US treasury bonds. Undoubtedly, this development is not sustainable and China’s economic leaders face severe political and economic pressure in tackling this issue.

In order to increase efficiency, China needs to find more exits for such large amounts of resources.

Studies made by Think Tanks such as the Asian Development Bank have shown that there is huge demand for infrastructure in Asian developing economies which is not largely met with existing multilateral and regional development financing institutions. It is believed that there is huge space for mutual cooperation between China and Asian economies on infrastructure investment, which is the reason why so many Asian developing countries have signed up for the two Chinese initiatives.

Debt vulnerability in BRI countries

As anticipated, BRI spans at least 65 countries with an announced investment as high as $8 trillion for a vast network of transportation, energy and telecommunications infrastructure connecting Europe, Africa and Asia. It is an infrastructure financing initiative for a large part of the global economy that will also serve key economic, foreign policy, and security objectives for the Chinese government.

Yet, important questions arise on sustainably financing the initiative within BRI countries and how the Chinese government will position itself on debt sustainability. Infrastructure financing, which often entails lending to sovereigns or the use of a sovereign guarantee, can create challenges for sovereign debt sustainability. When the creditor itself is a sovereign, or has official ties to a sovereign as China’s policy banks do, these challenges often affect the bilateral relationships between the two governments.

Even though China’s plan sounds like a brilliant idea to fix its own problems, it is not all sunshine and rainbows. There is a concern that debt problems will create an unfavourable degree of dependency on China as a creditor. Increasing debt, and China’s role in managing bilateral debt problems has already exacerbated internal and bilateral tensions in some BRI countries, such as Sri Lanka and Pakistan. Washington-based Center for Global Development raised serious concerns about 8 nations receiving BRI financing, namely Pakistan, Tajikistan, Maldives, Laos, Mongolia, Montenegro, Djibouti and Kyrgyzstan. These nations’ mounting debt to China puts their economies at risk of potential widespread default.


In Sri Lanka, citizens have regularly clashed with police over a new industrial zone surrounding Hambantota Port. Many argue that Chinese financing has led to a debt trap in Sri Lanka where the Hambantota Port project performed poorly once it was operationalised, operating at a loss. Consequently, on December 2017, the Sri Lanka Ports Authority renegotiated a deal with China Merchant Port Holdings (CM Ports), where CM Ports injected $1.1 billion for an 85% stake and a 99-year lease.

chinese investment in the china-pakistan economic corridor.png

In Pakistan, Chinese officials openly appealed to opposition politicians to embrace the construction of the China-Pakistan Economic Corridor (CPEC), which is BRI’s ‘flagship project’ to bolster ties between Beijing and Islamabad.

The CPEC is the only corridor that links China to one single country – Pakistan, comprising an important trade route to China, particularly because of the country’s location between China and its energy suppliers in Africa and the Middle East, enforcing China’s huge energy appetite.

Pakistan may have taken more than what it was expecting when it took China’s loans. The country’s Prime Minister is fighting to keep the economy afloat and some are worried that Pakistan’s debt to China may ultimately hurt those efforts. The total value of CPEC projects is currently estimated at $62 billion.

The Belt and Road Initiative is President’s Xi’s most ambitious foreign and economic policy initiative. Much of the recent discussion has concerned the geopolitical aspects of the initiative. There is little doubt that the overarching objective of the project is to help China’s neighbouring countries become more closely tied to Beijing. However, there are many concrete and economic objectives behind BRI that should not be obscured by a focus on strategy.

Additionally, the lack of political trust between China and some BRI countries, as well as instability and security threats in others, are considered obstacles which have to be taken deeply into account when designing an action plan.

Finally, despite ad hoc approaches to the treatment of debt problems, there are some signs that Chinese officials are moving toward greater policy coherence and discipline when it comes to avoiding unsustainable debt.