What do Monaco, Liechtenstein, and Luxembourg have in common? I am sure that you can hardly wait for the answer, but we need to discuss a few fundamentals of economics first.
Barely a day goes by without news of the gross domestic product, or GDP. We are told that our national debt now exceeds our GDP. But what does GDP really mean?
Economists argue about the merits of numerous definitions, but generally, GDP is a measure of how much a country produces in goods and services in a year. Studies by the C.I.A., the International Monetary Fund, and the World Bank for the year 2011 all ranked the U.S. with the highest GDP. China came second, but with only half the GDP of the U.S. Japan, Germany, France, Brazil, United Kingdom, Italy, Russia, and India completed the top 10.
You would expect that large countries would have a higher GDP than smaller countries because they would have more people working to produce goods and services. You would also expect that the more efficient countries would have a higher GDP than less efficient countries. So which countries are most productive and which countries work hardest? “GDP per capita” adjusts for population and is a measure of the living standard of a country.
When you look at GDP per capita, the ranking changes dramatically. The U.S. drops to 19th, Japan to 21st, and Germany to 23rd. China does not even make the top 50. Norway, however, moves to fourth with a GDP per capita about twice that of the U.S. Though Garrison Keillor might attribute Norway’s productivity to the Lutheran work ethic and consumption of lutefisk, the truth is more mundane. Norway is the world’s second-largest exporter of natural gas, supplying much of Western Europe’s oil and gas. The Norwegian government has established a fund to invest the government’s share of the oil and gas revenue, which is valued at over $500 billion.
“GDP per hour worked” is a measure of the labor productivity of an economy. It is affected by the percentage of the total population that is employed and how many hours they work annually. Those statistics vary greatly among countries. The average worker in Singapore and in South Korea works about 2,400 hours per year. The corresponding number in the U.S. is 1,730, and in Germany and Norway it’s 1,390.
The GDP per hour worked is also affected by the percentage of the total population that is employed. In 2010, that percentage was 45 percent in the U.S., 50 percent in Germany, 53 percent in Norway, and over 60 percent in Singapore. When you look at GDP per hour worked, Norway leads with $77, the U.S. is fourth at $59, Germany is eighth at $53 and Japan is 21st at $40.
So what is it that Monaco, Liechtenstein, and Luxembourg have in common? They are all small countries “ruled” by a royal family. Monaco is a constitutional principality ruled by Prince Albert II, the son of the late Grace Kelly. Liechtenstein is ruled by Prince Hans-Adam, who was granted more power than any other European monarch by a popular referendum in 2003. The Grand Duchy of Luxembourg has existed since the Middle Ages.
But this column is about finance and business, not history and geography. So what do these three small, constitutional monarchies have in common economically? They are listed as the top three countries in GDP per capita in the world. What obscure organizations produced such a strange list? The C.I.A. and the World Bank.
Monaco has no income tax and a low business tax. It has become a tax haven for foreign companies, which account for about 75 percent of the GDP. It has the highest income per capita in the world and no unemployment.
Liechtenstein specializes in financial services for foreign entities. It has low taxes, loose rules governing incorporation and corporate governance, and strict bank secrecy laws. It is the registered location for over 70,000 companies, many of which hold controlling interests in real businesses elsewhere in the world.
Luxembourg completes the trio of countries with low taxes, bank secrecy, and loose corporate governance. It is home to over 150 banks and 9,000 holding companies with total assets of about $1 trillion.
So when pundits talk about GDP, they are not simply talking about factory workers producing cars or farmers producing food. GDP also includes services such as banking or information technology. In the case of Monaco, Liechtenstein and Luxembourg, GDP consists largely of financial and banking services provided to individuals and corporations who would rather not pay taxes at the rates prevalent in their home country or be subject to the pesky rules and scrutiny where they actually do business. There may not be anything illegal about this – and it is certainly a boon to those three small countries – but what financial benefit it provides to the countries where the real businesses are based is another question.