Luxembourg having ranked third in the CIA's World Factbook in terms of GDP per capita, Tax Justice Network last week contemplated on its blog wherein Luxembourg's economic success lies. The activist organisation answered its own question about Luxembourg, this so-called "economic conundrum", with the usual spiel about secrecy jurisdictions.
Yet, the argumentation TJN uses to get to its facile secrecy jurisdiction conclusion bears consideration because it exposes a specific attitude as well as a number of preconceptions about Luxembourg as a banking and financial centre that many detractors share. And a lot of it has to do with size.
I should probably start with the initial factual error that triggered the TJN blog entry, by saying that Luxembourg's ranking in terms of GDP per capita is completely skewed. Not just in the CIA Factbook, but in any similar ranking. The truth is that more than 130,000 cross-border workers come to work in Luxembourg on a daily basis to contribute to our GDP. That is a lot of people for a country with a population of 500,000. When it comes to dividing the GDP by the population to establish the GDP per capita, however, these 130,000 people have disappeared. I'm pretty sure that quite a few countries would rank significantly higher if they suddenly dropped over a fifth of their population from such calculations.
TJN then references IMF foreign investment flow figures to establish that "Luxembourg attracts over three and a half million dollars of investment for each and every of its 497,538 inhabitants, and invests an almost identical sum overseas."
Now, dividing foreign direct investment flows by the number of citizens of a country may generate impressive figures, but an argument it ain't.
Indeed, Tax Justice Network seems to believe that investment flows, if they are not to be considered shady, should be proportionate to a country's number of citizens.
Consequently, the organisation surmises that the Luxembourg financial centre only exists for Luxembourg. This is of course utter nonsense. It's like saying that Wall Street only exists for the State of New York or that the City is only there for the citizens of London. Both London and New York are in fact financial hubs for their countries as well as for the rest of the world. Similarly, Luxembourg is an international financial centre within Europe. The country specialises in the distribution of cross-border financial services and products. The size of the population is completely irrelevant to this reality. Indeed, in an open global economy, why should or would Luxembourg limit itself to its modest domestic market?
Because it illustrates a common bias, the following paragraph is worth citing in its entirety: "So wherein lies Luxembourg's success? Not in steel, which has long since diminished in importance, nor in agriculture, which accounts for a mere 0.4 percent of GDP. According to national income stats, services (86 percent of GDP) provide the powerhouse to the domestic economy, with offshore financial services being the principal motor driving downstream activity in construction, retailing and hospitality services."
Reading this, I got the distinct impression that TJN believes the services industry to be somewhat less worthy as an economic activity than manufacturing or agriculture, that exporting banking and financial services is particularly objectionable as an economic activity, and that economic success is unmerited if 86% of a country's GDP is composed of services. Yet, just because Luxembourg's sources of iron ore have dried up, doesn't mean that the country should be condemned to cultivating potatoes and living on EU subsidies. Exporting services, and not just financial services, is how a small country with limited natural resources can play a significant international economic role. It is precisely how it adds value in a global economy. There is nothing reprehensible about this reality.
In its conclusion, TJN says that "it doesn't take an advanced degree in economics to come to the conclusion that while the IMF cross-border investment data might be accurate, it highlights a fascinating but unexplained story about the role of secrecy jurisdictions in global investment flows."
TJN is definitely right about one thing: you don't need an advanced degree in economics to come to this conclusion. In fact, all you need is a good dose of ignorance and a bit of imagination in interpreting figures so as to make them suit your conclusions.
Yet, the argumentation TJN uses to get to its facile secrecy jurisdiction conclusion bears consideration because it exposes a specific attitude as well as a number of preconceptions about Luxembourg as a banking and financial centre that many detractors share. And a lot of it has to do with size.
I should probably start with the initial factual error that triggered the TJN blog entry, by saying that Luxembourg's ranking in terms of GDP per capita is completely skewed. Not just in the CIA Factbook, but in any similar ranking. The truth is that more than 130,000 cross-border workers come to work in Luxembourg on a daily basis to contribute to our GDP. That is a lot of people for a country with a population of 500,000. When it comes to dividing the GDP by the population to establish the GDP per capita, however, these 130,000 people have disappeared. I'm pretty sure that quite a few countries would rank significantly higher if they suddenly dropped over a fifth of their population from such calculations.
TJN then references IMF foreign investment flow figures to establish that "Luxembourg attracts over three and a half million dollars of investment for each and every of its 497,538 inhabitants, and invests an almost identical sum overseas."
Now, dividing foreign direct investment flows by the number of citizens of a country may generate impressive figures, but an argument it ain't.
Indeed, Tax Justice Network seems to believe that investment flows, if they are not to be considered shady, should be proportionate to a country's number of citizens.
Consequently, the organisation surmises that the Luxembourg financial centre only exists for Luxembourg. This is of course utter nonsense. It's like saying that Wall Street only exists for the State of New York or that the City is only there for the citizens of London. Both London and New York are in fact financial hubs for their countries as well as for the rest of the world. Similarly, Luxembourg is an international financial centre within Europe. The country specialises in the distribution of cross-border financial services and products. The size of the population is completely irrelevant to this reality. Indeed, in an open global economy, why should or would Luxembourg limit itself to its modest domestic market?
Because it illustrates a common bias, the following paragraph is worth citing in its entirety: "So wherein lies Luxembourg's success? Not in steel, which has long since diminished in importance, nor in agriculture, which accounts for a mere 0.4 percent of GDP. According to national income stats, services (86 percent of GDP) provide the powerhouse to the domestic economy, with offshore financial services being the principal motor driving downstream activity in construction, retailing and hospitality services."
Reading this, I got the distinct impression that TJN believes the services industry to be somewhat less worthy as an economic activity than manufacturing or agriculture, that exporting banking and financial services is particularly objectionable as an economic activity, and that economic success is unmerited if 86% of a country's GDP is composed of services. Yet, just because Luxembourg's sources of iron ore have dried up, doesn't mean that the country should be condemned to cultivating potatoes and living on EU subsidies. Exporting services, and not just financial services, is how a small country with limited natural resources can play a significant international economic role. It is precisely how it adds value in a global economy. There is nothing reprehensible about this reality.
In its conclusion, TJN says that "it doesn't take an advanced degree in economics to come to the conclusion that while the IMF cross-border investment data might be accurate, it highlights a fascinating but unexplained story about the role of secrecy jurisdictions in global investment flows."
TJN is definitely right about one thing: you don't need an advanced degree in economics to come to this conclusion. In fact, all you need is a good dose of ignorance and a bit of imagination in interpreting figures so as to make them suit your conclusions.
