Technology, Globalisation and a Level Playing Field

Capital has become extremely movable thanks to technology and that ability to move at costs and speeds not imaginable 30 years ago has facilitated the ability of capital allocators to constantly seek the best return for that capital, limiting the ability of Governments to impose additional costs on that capital while labour remains less mobile and is therefore the recipient of such costs.

The speed at which companies are reallocating their capital and choosing the most efficient jurisdictions continues to increase and has become a subject of attention in the mainstream media.

Looking at the other production input -- labour -- the picture is completely different. Immigration restrictions as well as cultural and language barriers continue to exist today, and while the cost to move millions from one side to the planet to the other has collapsed to insignificant amounts, the cost of moving people in terms of money and time has improved but not to the same level.

Labour markets around the world continue to have significant differences. Wages, even adjusted by cost of living, continue to vastly differ across continents and even neighbour countries, being one of the variables promoting the movement of capital. Simply put, because it is cheaper and easier to move, capital has followed the most cost effective labour over the recent decades.

As more and more countries adopt democracy as their form of government, politicians need votes from the people who provide labour and find themselves competing with other countries for what has effectively become a global pool of capital to provide their voters with better jobs. That competition to attract capital has taken many forms, including legal, regulatory, and tax policies to ensure the most attractive environment for that capital.

While several Governments around the world have decided to limit their monetary policies through independent central banks or monetary unions, most have kept their fiscal policy, not relinquishing, unless forced to, their power to determine taxes and Government spending. As such, monetary policy becomes less of tool in the competition for capital while the fiscal policies become more relevant.

Regulatory competition has also been a driver and has lately become prisoner of the endless number of multilateral organizations that attempt to create a forced regulatory union across continents. We have witnessed the creation of several monetary unions and are currently witnessing the creation of regulatory unions mainly through the use of sanctions to impose policies created by the bigger economies across the world.

While I will not discuss here whether more regulation is better or worse as that in itself would be the subject of another lengthy article and my position is probably quite obvious, the point I make is that imposed regulation should be implemented across the globe in a way that does not create relative competitive advantages.

All the multilateral bodies are directly or indirectly controlled by the eight major economies of the world, which have clear differences, but in the aggregate they all have more in common than several other economies.

All these economies have relatively big territories, most have land borders, have large populations, and they have consequently all opted for systems of direct taxation and income tax despite the well-documented fact it is far from being the most efficient system of taxation. Somehow they have also ended up with relatively big Governments that detract from long-term growth potential.

Many of these countries advocate for increased transparency and regulation and, therefore, bigger Governments, on the false premise that some smaller countries do not measure up and need to put their “houses in order” despite the results their own systems ran by their own bureaucrats show.

In the particular area of transparency it is impossible not to think of a hidden agenda. While all of these eight economies voice a desire and commitment to increase transparency, the facts show a completely different picture, on some of them, that is not permeated to the public opinion. The proposals pushed by some of those big economies that have lagged in transparency seem to fall short in achieving the standards in place for many years in other economies, although they may satisfy a questionable hunger for public disclosure at the expense of individual privacy.

Whether in the area of transparency or any other regulatory development, regardless of what is the final standard adopted by the world, its implementation must be universal and coordinated to ensure artificial competitive advantages are not created. In the case of FATCA, a system was imposed in a way and a time frame that did not create competitive issues. Unfortunately, in other initiatives, the implementation process is much more difficult, and as capital has become highly-movable, any minor deviation from a levelled-playing field is likely to cause significant effects in several economies.