Also, and I apologize for nit-picking, I did want to comment on this paragraph:
--------quote----------
Conversely, it is not an accident that the most successful jurisdictions in the world had no natural resources. Hong Kong and Singapore both went from African-level poverty in 1960 to greater prosperity than the UK today (on a per caita basis), and both had no natural resources. Dubai’s rapid growth began largely after they realized they were running out of oil—their brilliant special economic zone strategy was deliberately developed as an economic development pathway so that they wouldn’t collapse after their oil ran out. Mauritius, the most economically successful African nation, now approaching the prosperity of the poorer European nations, is a small island with no natural resources. The Bahamas and Cayman Islands began to compete without having natural resources, and so forth. For all of these jurisdictions, it has been a blessing NOT to have natural resources because it drove them to develop some of the best business environments in the world.
--------end quote----------
There is a bit of a question of how well that model scales. The total population of the countries mentioned is 17.8M (of which Hong Kong is almost half of that number). The total population of Africa is 1.2 billion, so a very different size.
The ‘Mauritius route’ was famed as a channel used by foreign investments into India. Capital gains accruing to foreign investments coming through Mauritius were exempt in India due to the India-Mauritius DTAA. As a result, many foreign investors used to incorporate conduit companies in Mauritius and bring their money into India through the conduits. Between 2004 and 2014, about 39 percent of total Foreign Direct Investment into India was from Mauritius.
So you take your money out of India to another country, in this case Mauritius, then you bring it back into India and now it’s suddenly dressed up as foreign money, foreign investment. What’s the point of this disguise? Well, many countries try to attract foreign investment by providing all sorts of special incentives, tax breaks, tax holidays, and these aren’t offered to local investors. So domestic investors get away with dodging tax and exploiting rules that are not meant for them. And eventually this ends up harming the very government systems and public infrastructure that they are relying on to make their money and do business. And of course, another reason for the disguise is the good old fashioned money laundering, trying to clean dirty money.”
Whistleblower: “All these structures, or all these investments that were flowing into India through the Mauritius route were actually structured by Nishith Desai associates. Almost like, you know, I would say 99% of these investments were structured by Mr Nishith Desai and his firm Nishith Desai Associates.”
--------end quote----------
None of that is to deny that Mauritius has made good decisions in terms of development, and the reason I describe this as nit-picking is that you have to start somewhere, and it may turn out that Startup Cities are a good way to start. HOWEVER, it's also worth being clear that if we are looking to Mauritius as a model, it would be a good idea to NOT copy the strategy of drawing in capital by offering favorable tax treatment, which ends up creating a subsidy on the part of taxpayers from the larger country who pay more because they can not collect taxes on that money.
Edit: I mis-typed the difference in dividend tax rates between India and Mauritius, it should have been a max of 88% not 78%.
I also realized that another way to think about the question of scale is to imagine if London were a separate country from the rest of the UK -- in that case it would also look like a rich, small country (larger than Hong Kong and almost 3 times the population of Dubai) which was wealthy based on cultivating a business-friendly environment. But with London not being a separate country we can see that there is a natural concentration of, in this case, financial business, and even though the rest of the UK has the same laws and regulations, money remains concentrated.
Chinese SEZs were the least regulated sector of China and the world. The result was that average urban wages in China increased about 10x over the course of 30 years, with nearly a billion people benefiting. The fact that many places start (and may continue) as tax havens does not change the more fundamental reality that high quality business environments are essential for building prosperity. Denmark has one of the best business environments in the world. No one would claim they are a tax haven.
Thanks for your reply. I have some follow-up questions, but I also recognize that there are limitations to discussing this in blog comments and you're welcome to tell me to read your book (or point me to other articles or videos by you) if you get impatient with me.
That said, I think your statements above are correct but imply a stronger causal relationship than is warranted.
It's absolutely true that over the last 40 years China (and Singapore) have been extremely successful economic development stories and that free trade has been a big part of that. But that prompts the question about what factors are necessary to replicate that success. You highlight the Chinese SEZs, and that's something which has been widely emulated. According to this article https://www.bu.edu/gdp/2023/02/06/the-global-diffusion-of-special-economic-zones-evidence-from-ethiopia-and-vietnam/, "There are over 5,000 Special Economic Zones (SEZs) in the world."
The fact that they are so common is, by itself, a sign that they are useful but also a sign that they are not sufficient, by themselves. You need some theory of the conditions under which they succeed or fail.
My perspective may be influenced by the fact that NAFTA expanded the amount of duty-free production zones ( https://en.wikipedia.org/wiki/Maquiladora ), which did not lead to sustained economic growth in Mexico as supporters had hoped ( https://fred.stlouisfed.org/series/NYGDPPCAPKDMEX ), so know that the benefits can be over-promised, but that doesn't mean that they aren't the right solution for some problems.
Which, perhaps, brings us back to the question of tax havens. I agree, that it may be incidental to the primary point (and this article says that Mauritius is starting to shed it's image as a tax haven-- https://gfmag.com/economics-policy-regulation/mauritius-wooing-the-wealthy-and-adding-value/ ), but it had jumped out at me that several of the examples you used do have that reputation.
I do think that, if it is relevant, it is in two ways -- first the question I raised about scaling. There's only so much to be gained from being a tax haven, so it's going to have a greater impact on the economy of a small country than a large country.
But, second, I would think that part of the idea of Charter cities is to encourage experimentation -- an economic and political version of the spirit of "fail fast, fail often" but the example of Mauritius shows that isn't always simple -- if 39% of FDI for India was coming through Mauritius it means that if it were to fail that would have significant impacts abroad (and, I believe one reason that it took so long to amend the tax treaty was that there were significant financial interests in keeping it in place).
All of which is just to say, to some extent, that the world is complicated. I appreciate the OP, and think it offers an appealing vision. I'm curious and asking questions in part because I want to get a better sense of what ingredients you believe are important for success (or important to avoid).
I'm going to let Magatte respond here, she's much more knowledgable than I am! But I did want to understand: are you saying that you are not sure that the economic development that took place in other places (Hong Kong, and Taiwan, but also London, etc.) could be scaled to Africa? Because from what I can understand, many African countries are similar in population size to European countries, they just lack the political climate that encourages economic growth. (From what I understand?) It seems like Mauritius is trying to change that political roadblock, but that Charter Cities make it more instantly achievable?
I'm asking both the general question of how to scale (and noting that if you created charter cities that had the size and prosperity of Hong Kong, Singapore, Dubai, Mauritius, Bahamas, & Cayman Islands, and kept everything else the same, all of those together would have raised the prosperity of 1/70 Africans).
I'm also asking a specific question which is whether one challenge of scaling is that small, isolated, wealthy economies often achieve that, not by creating new economic activity but by figuring out ways to RELOCATE economic activity which would have happened otherwise.
So, the example of Mauritius (or the Cayman Islands) prompts the question that if rules are created which encourage people in India to move money to Mauritius and then, from there, back to India, that doesn't necessarily reflect any increase in investment to India (and has the cost of reducing Indian tax revenues), but it does make Mauritius slightly more wealthy if there is some money spent to maintain the footprint on the island.
[Edit] I should add, the point of mentioning London as an example is that there's going to be a mix of both new value being created by having a center of commerce as well as value being relocated. The UK, as a whole, is wealthier for having London than it would be without it -- but if you separated London out and looked at it as an independent unit it might give a misleading impression of how much value was created.
I imagine scaling an economy wouldn't be too different than it is elsewhere? Think of the US, for example. It's not like one city became Singapore and then spread it to the rest. The whole country gradually grew its economy. African countries can do the same (if they didn't have the bad laws). I don't know how the India thing affects Mauritius though.
I appreciate the call to look forward in a way that is more realistic than a comic book vision.
I'm curious; I have not been following news about Prospera closely, but it appears to be a deeply controversial project. Are you aware of plans for models of startup cities that avoid some of the political concerns (in particular, this article makes it sound like there's been a move away from the current model for investor-state dispute settlement (ISDS)): https://foreignpolicy.com/2024/01/24/honduras-zedes-us-prospera-world-bank-biden-castro/
That article is a doozy, a remarkable collection of mistakes. First, this is the opposite of the truth, “ Supporting an investment scheme, like the Honduran ZEDEs, that threatens human rights, enables corruption, undermines the rule of law, and is shielded from government regulation does the opposite of addressing those root causes.” Compared to Honduras as a whole, the ZEDEs have better human rights, less corruption, and better rule of law - much better. It is true that they are exempt from Honduran commercial regulations, but that is a positive feature. It is a nightmare to do business in Honduras (and even worse in most African nations). Second, ISDS is on balance a good and necessary arrangement. It used to be the case that countries routinely appropriated foreign corporations- which then discouraged FDI going forward, thus keeping poor nations poor. My favorite description of Singapore’s success is that at a time when most nations regarded multinationals as exploitative, Lee Kuan Yew said, “Come exploit us,” thus making Singapore rich as one of the world’s best business environments. The anti-capitalist authors of this piece seem to be unaware of these benefits (or actively deny them). Finally, see my interview with a Crawfish Rock resident, Virginia Mann, on just how extremely dishonest the Crawfish Rock story is here. I’ve looked into that one directly, visited Crawfish Rock, and watched the protests against their “leaders” who have outraged the community with their shenanigans.
Thanks; I know that you're much more of an expert in the area than I am, and I appreciate you sharing the interview (and that article is one-sided but nevertheless felt like one of the more informative I found)
Interesting look at the wealth of nations. Nice job!
Also, and I apologize for nit-picking, I did want to comment on this paragraph:
--------quote----------
Conversely, it is not an accident that the most successful jurisdictions in the world had no natural resources. Hong Kong and Singapore both went from African-level poverty in 1960 to greater prosperity than the UK today (on a per caita basis), and both had no natural resources. Dubai’s rapid growth began largely after they realized they were running out of oil—their brilliant special economic zone strategy was deliberately developed as an economic development pathway so that they wouldn’t collapse after their oil ran out. Mauritius, the most economically successful African nation, now approaching the prosperity of the poorer European nations, is a small island with no natural resources. The Bahamas and Cayman Islands began to compete without having natural resources, and so forth. For all of these jurisdictions, it has been a blessing NOT to have natural resources because it drove them to develop some of the best business environments in the world.
--------end quote----------
There is a bit of a question of how well that model scales. The total population of the countries mentioned is 17.8M (of which Hong Kong is almost half of that number). The total population of Africa is 1.2 billion, so a very different size.
In the case of Mauritius, I am not at all an expert, but part of their development has been serving as a tax haven for India. This article notes that, in some cases, taxes on dividend income is 88% lower if taxed as being paid in Mauritius rather than India which lead to: https://www.cnbctv18.com/views/how-the-misuse-of-indias-treaty-with-mauritius-is-leading-to-tax-revenue-loss-5344541.htm
--------quote----------
The ‘Mauritius route’ was famed as a channel used by foreign investments into India. Capital gains accruing to foreign investments coming through Mauritius were exempt in India due to the India-Mauritius DTAA. As a result, many foreign investors used to incorporate conduit companies in Mauritius and bring their money into India through the conduits. Between 2004 and 2014, about 39 percent of total Foreign Direct Investment into India was from Mauritius.
-------- end quote----------
This says much of that money was coming from India and was being transferred through Mauritius purely as a tax dodge: https://taxjustice.net/2023/02/01/tax-haven-mauritius/
--------quote----------
So you take your money out of India to another country, in this case Mauritius, then you bring it back into India and now it’s suddenly dressed up as foreign money, foreign investment. What’s the point of this disguise? Well, many countries try to attract foreign investment by providing all sorts of special incentives, tax breaks, tax holidays, and these aren’t offered to local investors. So domestic investors get away with dodging tax and exploiting rules that are not meant for them. And eventually this ends up harming the very government systems and public infrastructure that they are relying on to make their money and do business. And of course, another reason for the disguise is the good old fashioned money laundering, trying to clean dirty money.”
Whistleblower: “All these structures, or all these investments that were flowing into India through the Mauritius route were actually structured by Nishith Desai associates. Almost like, you know, I would say 99% of these investments were structured by Mr Nishith Desai and his firm Nishith Desai Associates.”
--------end quote----------
None of that is to deny that Mauritius has made good decisions in terms of development, and the reason I describe this as nit-picking is that you have to start somewhere, and it may turn out that Startup Cities are a good way to start. HOWEVER, it's also worth being clear that if we are looking to Mauritius as a model, it would be a good idea to NOT copy the strategy of drawing in capital by offering favorable tax treatment, which ends up creating a subsidy on the part of taxpayers from the larger country who pay more because they can not collect taxes on that money.
Edit: I mis-typed the difference in dividend tax rates between India and Mauritius, it should have been a max of 88% not 78%.
I also realized that another way to think about the question of scale is to imagine if London were a separate country from the rest of the UK -- in that case it would also look like a rich, small country (larger than Hong Kong and almost 3 times the population of Dubai) which was wealthy based on cultivating a business-friendly environment. But with London not being a separate country we can see that there is a natural concentration of, in this case, financial business, and even though the rest of the UK has the same laws and regulations, money remains concentrated.
Chinese SEZs were the least regulated sector of China and the world. The result was that average urban wages in China increased about 10x over the course of 30 years, with nearly a billion people benefiting. The fact that many places start (and may continue) as tax havens does not change the more fundamental reality that high quality business environments are essential for building prosperity. Denmark has one of the best business environments in the world. No one would claim they are a tax haven.
Thanks for your reply. I have some follow-up questions, but I also recognize that there are limitations to discussing this in blog comments and you're welcome to tell me to read your book (or point me to other articles or videos by you) if you get impatient with me.
That said, I think your statements above are correct but imply a stronger causal relationship than is warranted.
It's absolutely true that over the last 40 years China (and Singapore) have been extremely successful economic development stories and that free trade has been a big part of that. But that prompts the question about what factors are necessary to replicate that success. You highlight the Chinese SEZs, and that's something which has been widely emulated. According to this article https://www.bu.edu/gdp/2023/02/06/the-global-diffusion-of-special-economic-zones-evidence-from-ethiopia-and-vietnam/, "There are over 5,000 Special Economic Zones (SEZs) in the world."
The fact that they are so common is, by itself, a sign that they are useful but also a sign that they are not sufficient, by themselves. You need some theory of the conditions under which they succeed or fail.
My perspective may be influenced by the fact that NAFTA expanded the amount of duty-free production zones ( https://en.wikipedia.org/wiki/Maquiladora ), which did not lead to sustained economic growth in Mexico as supporters had hoped ( https://fred.stlouisfed.org/series/NYGDPPCAPKDMEX ), so know that the benefits can be over-promised, but that doesn't mean that they aren't the right solution for some problems.
Which, perhaps, brings us back to the question of tax havens. I agree, that it may be incidental to the primary point (and this article says that Mauritius is starting to shed it's image as a tax haven-- https://gfmag.com/economics-policy-regulation/mauritius-wooing-the-wealthy-and-adding-value/ ), but it had jumped out at me that several of the examples you used do have that reputation.
I do think that, if it is relevant, it is in two ways -- first the question I raised about scaling. There's only so much to be gained from being a tax haven, so it's going to have a greater impact on the economy of a small country than a large country.
But, second, I would think that part of the idea of Charter cities is to encourage experimentation -- an economic and political version of the spirit of "fail fast, fail often" but the example of Mauritius shows that isn't always simple -- if 39% of FDI for India was coming through Mauritius it means that if it were to fail that would have significant impacts abroad (and, I believe one reason that it took so long to amend the tax treaty was that there were significant financial interests in keeping it in place).
All of which is just to say, to some extent, that the world is complicated. I appreciate the OP, and think it offers an appealing vision. I'm curious and asking questions in part because I want to get a better sense of what ingredients you believe are important for success (or important to avoid).
I'm going to let Magatte respond here, she's much more knowledgable than I am! But I did want to understand: are you saying that you are not sure that the economic development that took place in other places (Hong Kong, and Taiwan, but also London, etc.) could be scaled to Africa? Because from what I can understand, many African countries are similar in population size to European countries, they just lack the political climate that encourages economic growth. (From what I understand?) It seems like Mauritius is trying to change that political roadblock, but that Charter Cities make it more instantly achievable?
I'm asking both the general question of how to scale (and noting that if you created charter cities that had the size and prosperity of Hong Kong, Singapore, Dubai, Mauritius, Bahamas, & Cayman Islands, and kept everything else the same, all of those together would have raised the prosperity of 1/70 Africans).
I'm also asking a specific question which is whether one challenge of scaling is that small, isolated, wealthy economies often achieve that, not by creating new economic activity but by figuring out ways to RELOCATE economic activity which would have happened otherwise.
So, the example of Mauritius (or the Cayman Islands) prompts the question that if rules are created which encourage people in India to move money to Mauritius and then, from there, back to India, that doesn't necessarily reflect any increase in investment to India (and has the cost of reducing Indian tax revenues), but it does make Mauritius slightly more wealthy if there is some money spent to maintain the footprint on the island.
[Edit] I should add, the point of mentioning London as an example is that there's going to be a mix of both new value being created by having a center of commerce as well as value being relocated. The UK, as a whole, is wealthier for having London than it would be without it -- but if you separated London out and looked at it as an independent unit it might give a misleading impression of how much value was created.
I imagine scaling an economy wouldn't be too different than it is elsewhere? Think of the US, for example. It's not like one city became Singapore and then spread it to the rest. The whole country gradually grew its economy. African countries can do the same (if they didn't have the bad laws). I don't know how the India thing affects Mauritius though.
I appreciate the call to look forward in a way that is more realistic than a comic book vision.
I'm curious; I have not been following news about Prospera closely, but it appears to be a deeply controversial project. Are you aware of plans for models of startup cities that avoid some of the political concerns (in particular, this article makes it sound like there's been a move away from the current model for investor-state dispute settlement (ISDS)): https://foreignpolicy.com/2024/01/24/honduras-zedes-us-prospera-world-bank-biden-castro/
That article is a doozy, a remarkable collection of mistakes. First, this is the opposite of the truth, “ Supporting an investment scheme, like the Honduran ZEDEs, that threatens human rights, enables corruption, undermines the rule of law, and is shielded from government regulation does the opposite of addressing those root causes.” Compared to Honduras as a whole, the ZEDEs have better human rights, less corruption, and better rule of law - much better. It is true that they are exempt from Honduran commercial regulations, but that is a positive feature. It is a nightmare to do business in Honduras (and even worse in most African nations). Second, ISDS is on balance a good and necessary arrangement. It used to be the case that countries routinely appropriated foreign corporations- which then discouraged FDI going forward, thus keeping poor nations poor. My favorite description of Singapore’s success is that at a time when most nations regarded multinationals as exploitative, Lee Kuan Yew said, “Come exploit us,” thus making Singapore rich as one of the world’s best business environments. The anti-capitalist authors of this piece seem to be unaware of these benefits (or actively deny them). Finally, see my interview with a Crawfish Rock resident, Virginia Mann, on just how extremely dishonest the Crawfish Rock story is here. I’ve looked into that one directly, visited Crawfish Rock, and watched the protests against their “leaders” who have outraged the community with their shenanigans.
https://youtu.be/Ai8lwc-FmMI?si=BRMqFiFx-dMqabE7
Thanks; I know that you're much more of an expert in the area than I am, and I appreciate you sharing the interview (and that article is one-sided but nevertheless felt like one of the more informative I found)
I was specifically curious about the ISDS portion of the story because I do think some form of dispute resolution is important (and it's likely that whatever mechanism exists will attract some criticism), but it did concern me to see that there's been an organized withdrawal from the existing treaties (that story links to this: https://www.project-syndicate.org/commentary/developing-countries-should-follow-europe-and-exit-investment-treaties-by-andr-s-arauz-and-guillaume-long-2023-05 which is interesting and still, obviously, written from a certain point of view).
Thanks again.