The Four Horsemen of the Renaissance

Four great ideas that should happen but – sadly – probably won’t


#1: Hike taxes on oil now

Last week, President Obama proposed a USD 10 additional tax on every barrel of oil (the idea is “dead on arrival” given the Republican controlled congress). Oil prices are very low and the president wants to lead on climate change mitigation. This is a very sound idea for anyone serious about weaning the world off oil and its damaging environmental effects. Even if you do not believe in the need to mitigate climate change, or even the science behind it, this would still be a sound measure environmentally for simply reducing the smog that emanates from burning oil – consisting of the carbon monoxide, nitrogen oxide, sulphur dioxide, and hydrocarbons created by the workings of the internal combustion engine. Such smogs cause headaches, breathing problems, and cancer – so we clearly would be much better off without them. It is odd to MM that US and other politicians spend such great effort fighting about the issue of climate change, when actually you don’t even need to “go there” to make the slam-dunk argument for the merits of clean energy over oil and coal.

Oil is on its back right now: an additional tax right now would be a great way to “kick it when it’s down” and thereby prevent currently mothballed oil exploration and production investments from ever seeing the light of day. The US economy is doing okay even with oil laid low, and was doing okay in 2014 with oil at USD 100, so it isn’t a good enough argument to say that the US can’t afford such a tax. Consumers can afford to pay more for their gasoline (or get on their bikes to slim down – how good would that be for “quantitively eased” American waistlines!), and the shift in demand towards much cleaner electric vehicles would accelerate. If the US led on this issue, it isn’t so difficult to imagine the EU also further raising its already much higher petrol taxes too. Countries that are taxing oil (a sunset industry) to the max will be helping their chances to be industry leaders in clean tech (a dynamic growth industry): a wise trade if there ever was one.

And as regards Vietnam: Just under ten years ago, crude oil was about a fifth of Vietnam’s exports and peaked at a fifth of government revenues in 2012, but that’s all changed now. It accounts for only about 5% of government revenues at present, and just 2% of exports. Raising taxes on oil would admittedly probably be an injudicious stretch for a less developed country like Vietnam right now. However, it should be focused on becoming a clean tech economy, using the advantage of underdevelopment to leapfrog the dirty technologies of the 20th century to the greatest extent possible.

In January, Vietnam’s average petrol pump price was around USD 0.76 per litre, between the US’s USD 0.58 and the world average of USD 0.97. Something of the order of 14 cents of the US figure is tax in one form or the other, so Vietnam is actually taxing petrol at a somewhat higher level than the US, net-net, not subsidising it.

Coal and oil account for just over 40% of total Vietnam final energy demand, compared to c. 60% for Japan and c. 80% for China. So Vietnam’s not doing too badly here, relatively. Transport accounts for roughly a quarter of greenhouse gas emissions in Vietnam, a similar ratio to the US. [Sources for data: World Bank, World Resources Institute, US Environmental Protection Agency,]


#2: Tax multinational corporations on [country sales x average global pre-tax profit margin]

In January the British government belatedly got Google to cough up GBP 130m in ten years’ worth of back corporation taxes, a deal justifiably widely derided, since this sum implies probably a low single digit percentage tax rate on the company’s UK profits over the period. With multinationals having such a large presence in the modern world, the hundred year old central principle of corporate taxation – that taxes are paid on profits earned in a given jurisdiction – is no longer fit for purpose. Rather than wasting great time and expense drafting complicated new rules in order to try to crack down on multinationals’ complicated tax avoidance strategies, it is time for a simple, universal new approach: corporate tax becomes a tax based on sales revenue in the given country. Profits in each jurisdiction could be imputed with reference to the company’s global pre-tax profit margin, and the tax calculated as a percentage of these imputed profits, so that the amount of tax paid was linked to global profits made. The US and EU could jointly implement this together, leaving the rest of the world to fall into line with the new system over time. Countries would decide their own percentage rate for the tax on the imputed profits of companies. This idea would be a move towards greater tax justice and towards fairer competition: both are very important causes for most citizens’ perceptions of a fair and just society, and both have been neglected in recent decades. This neglect has been one important reason for the rising popularity of extremist or anti-establishment politicians in both the EU and US.

And as regards Vietnam: Corporation tax accounts for roughly 45% of Vietnamese government revenues (the latter are c. 20% of GDP), in three roughly equal chunks from SOEs, Vietnamese private businesses, and foreign businesses. Transfer pricing to minimise taxes has been practiced by many foreign companies in Vietnam, so moving to the system recommended above would likely benefit Vietnamese tax receipts. Export shipments from Vietnam would count towards a given multinational’s country sales total for Vietnam.


#3: Ban all state-owned enterprises from buying private businesses

February has brought the announcement of the largest ever foreign takeover by a Chinese firm: state-owned ChemChina buying Switzerland’s Syngenta. It is curious to MM that most people agree that state owned enterprises are a bad idea in the vast majority of cases, yet some of those same people do not seem to mind a foreign SOE buying a successful private business in a given country. On the basis simply of SOEs being a bad idea in general, the authorities in Bern and/or Washington should block the USD 43bn bid. If on top of that somebody wants to question the wisdom of letting dictator Xi Jinping ultimately control the formulae for American genetically modified crops and sophisticated pesticides, fair enough – it seems a pretty sensible question to think carefully about.

And as regards Vietnam: Certain Vietnamese SOEs and state-owned banks have invested abroad, but MM can’t think of any actual foreign takeovers by such businesses. Most SOE expansion inside Vietnam has been organic rather than by M&A. Vietnamese SOEs are still gobbling up more than 40% of total system credit; this is very bad for the country, particularly for the locally-owned private sector, and is the worst single blemish to the overall Vietnam investment case.


#4: Improve QE by directing it in useful ways, eg Syrian refugee camps

Various commentary including by us has pointed out that central bank quantitative easing has tended to increase income and wealth inequality in society. Some have proposed the radical-sounding idea that QE funds, rather than simply going towards buying government bonds, should instead be focused directly on needed things, for example infrastructure or cheques in the mail for poorer people. Such ideas could threaten the very good principle of central bank independence from politicians, but this could be solved through careful delineation of responsibilities: if the central bank deems the creation of more money desirable for the fulfilment of its 2% (or whatever) inflation mandate, it alone decides this; but the governing politicians are allowed to decide where this money is directed. So here is the way it currently should be directed: to Syrian refugee camps in Turkey, Jordan, and if practical Syria itself. The goal would be to build urban infrastructure in such areas and to give grants and loans to new businesses there that created sustainable jobs. This would be the best way to meaningfully help Syria’s refugees, and to help stop the heavy flow of refugees into the EU that is causing so much difficulty there and worryingly adding to the appeal of ugly nativist politicians. Is this a crackpot idea from a bleeding-heart socialist who has no idea of realpolitik? Well, no, we’ve done far greater things before – one such was called the Marshall Plan, and it worked jolly well. The recent London conference that amassed USD 11bn of commitments for Syrian refugees was very good, but Mario Draghi’s EUR 60bn per month bazooka is far more impressive. There are almost five million displaced Syrians in the region: so every USD 10bn is only USD 2000 per head. Big money is badly needed.

And as regards Vietnam: This issue isn’t so relevant to Vietnam, since there is no sensible scope for QE-type measures there. Although Vietnamese inflation is currently under 1%, this is a welcome break from its inflationary past, and any hint of QE from the State Bank of Vietnam would blow away that institution’s hard-won recent credibility gains. Nor does the state budget offer any new pots of money for good causes, since the budget deficit has consistently averaged a hefty 5-6% of GDP in recent years, a figure that best go down rather than up.


Mekong Man

Re China: Heard in the Rex Hotel coffee lounge

[A worldly Vietnamese tycoon and his underling sit drinking their coffee]


Wow, China’s going down the plug hole and seems to be dragging the rest of the world with it. Is its influence really that great?

Well, China as of last year is the world’s largest economy on an underlying “purchasing power parity” basis, and a huge trading nation too. Its influence is therefore large on every country, including Vietnam. If China experiences some kind of economic crisis or recession, the effect on Vietnam and most everybody else will be negative.

But wait – I haven’t heard about an actual Chinese recession or crisis…is that what’s happening?

We’re operating in the dark, here…we don’t know…and that’s a big part of the problem. Crises – as we all know from recent experience – can sneak up on you even in open societies with good-quality information flow. But in China’s case, we can’t trust the officially-supplied data, and there isn’t so much of the unofficial stuff. This starts right from the top piece of data everybody always wants to know and talk about: GDP growth. The Chinese government says it’s at 6.5% or 7%, but plenty of intelligent observers, piecing together bits of bottom-up data, think it’s really more like 2-4%. That’s a big difference.

But that’s not a recession…

Right, recession seems unlikely. But economies are dynamic beasts with many rapidly moving feedback loops that can quickly build like a snowball rolling down a hill, and of crucial importance in such scenarios is what happens to confidence. And confidence might be all the more vulnerable if the official data looks dodgy, or if the state’s leaders look inept.

Wait a minute…inept leaders? People often say that in the bars of Saigon (even in Hanoi too) about our leaders, but China’s leaders are revered worldwide as being smart and very competent.

That’s what’s suddenly changed in the last six months. The hopeless communication by the central bank over the new renminbi regime, the stop-start signals on fiscal reflationary measures, and most of all the laughable interventions in the stock market – from the “national team” with its “target” index level to circuit breakers and bans on selling. These have suddenly made Beijing’s economic technocrats look like flailing fools. Even our Vietnamese honchos have the wisdom not to try to “manage” the stock market !

Okay, so let’s say China really does collapse to zero growth for a year or two. How’s it going to affect all of us in Vietnam?

Let’s see here…[pause, puts down cafe sua da to count fingers on right hand]…in five ways. One, on our own GDP growth indirectly, via the reverberations globally from slowing China. Two, our growth directly: 8% of our GDP is exports to China, probably ones that would hold up pretty well, mind, but still there could be some softness here. Three, if the yuan falls further, so will the dong – maybe by less, but still at least most of the way down. At heart we’re a substitute for China in export manufacturing, so our relative costs matter a lot. Four, the “cost of capital” – as those tedious CFA analysts I have to meet all the time call it – will rise in emerging markets including Vietnam – that’s both for equity and debt. A higher cost of capital means slower investing and a negative effect on growth. Five, our stock market will find it that much harder to go up – I’m assuming here that the Chinese ones are pretty bad under this scenario. This is bad in itself but also carries with it a negative feedback loop on sentiment – and my wealth !

So if China’s screwed, we’re screwed too ! Shall we switch to whisky, boss ? – this is getting depressing ! And those Chinese dictators, facing a mess at home, will probably be all the more aggressive in the East Sea, to giddy their pissed off populace along !

Well, on the last point, that’s an astute observation…but thankfully the quiet whispers are that the American camp will win in our coming party congress, which means we’re building a pretty good international bulwark against an aggressive China. Sure, we’ve long ago lost both the Paracels and the Spratlys – but it’s about time we educate our people to grow up and forget about those stupid rocks anyway !

All right, so – forgetting about the rocks and taking the important stuff – are we screwed ?

Cheer up, boy, it’s not that bad. You see, life is a relative game, and tycoons, pension funds, and everybody else all have to put their money somewhere. And this is where we in Vietnam shine out like a beacon, compared to most other places. Sorry for the coming speech, try to pay attention. We shine because:-

First, unlike most of our Asian peers, we are a massive net importer from China – our imports from there equal a whopping 25% of our GDP, versus only the 8% we export to them. If China’s stressed, they’ll be very keen to keep selling that stuff to us, and maybe more cheaply too. And as I said before, the stuff we export to them is mostly soft commodities with low income elasticity of demand.

Second, we have been experiencing eight straight years of high FDI – including during the western financial crisis in 2008-09 – and this trend seems to be a very robust one. USD14.5bn in the year just gone, on a c. USD200bn economy, is a lot ! Vietnam has kept its status as the key “China + 1” destination, and our policy makers have done a good job of being hospitable to this constituent. We are still coming from a low base: for example, Chinese textile exports still dwarf ours by many times. Also, we are more a seller of final products to end markets in the developed world, than we are to Chinese consumers. And all these free trade agreements we’ve signed, whilst not necessarily having suddenly visible impact, are of profound long term importance for keeping our FDI boom intact for many years to come.

Third, overseas Vietnamese remittances, at USD12.5bn last year, have – like FDI – been both big and reliably growing. This is a great source of strength for Vietnam and makes for a contrasting narrative with China, where the talk is of accelerating capital flight – exacerbated when you arrest too many of your businessmen !

Fourth, Vietnam’s overall low economic base. Put simply, as one of the economies bringing up the rear of the Asian train, Vietnam has less to lose.

Finally, fifth, back to that old word “confidence”. If China has some struggles, isn’t it more likely to put a spring in our Vietnamese step than it is to depress us? Hey, it’s 6:30pm….shall we move on to a cheerful whisky to celebrate our luck in being in the right place at the right time ?

Em Oi !


Mekong Man