> Wsifran Chise Blog - Tax Law and Economics - wsifranchise.info http://wsifranchise.info en j.d.maaskant@law.leidenuniv.nl Copyright 2017 2017-03-23T13:38:00+00:00 Social assistance benefits have declined in many OECD countries - wsifranchise.info http://wsifranchise.info/articles/social-assistance-benefits-have-declined-in-many-oecd-countries http://wsifranchise.info/articles/social-assistance-benefits-have-declined-in-many-oecd-countries#When:14:57:00Z To compare the development of social assistance benefits across countries and over time we have constructed a new indicator, the net minimum income benefit replacement rate. We give some explanations for the decline of these rates. ]]>

Academic literature on international comparisons of social policy has focused on programmes such as unemployment benefits and old age pensions. In contrast, social assistance benefits have received considerably less attention. This is remarkable given the importance of social assistance and minimum income benefit schemes. For many households in Europe and other OECD countries these benefits provide an important safeguard against low income and poverty. This is even more the case since unemployment rates started to increase as a result of the financial crisis. The question is then, why have social assistance benefits received so little scholarly attention? One possible answer to this question is that there has been a lack of indicators that can be used for international comparisons. 

Minimum income benefit replacement rates

In order to compare the development of social assistance benefits across countries and over time we have constructed a new indicator, the net minimum income benefit replacement rate, for 33 countries for the period 1990-2009 (Wang and Van Vliet, 2016a; Wang and Van Vliet, 2016b). This replacement rate is defined as the ratio of net minimum income benefits to the net average wage. To calculate the net minimum income benefit replacement rate we used data from the Social Assistance and Minimum Income Protection Dataset (Nelson, 2013) and followed the same procedure used by Van Vliet and Caminada (2012) for the calculation of net unemployment benefit replacement rates. Hence the replacement rates for social assistance and unemployment benefits are fairly comparable.       

Figure 1 shows the developments of replacement rates for 26 countries between 1990 and 2006. Here we present averages of the replacement rates for three household types: single person households, lone parent households with two children, and two parent households with two children. We took the average income from work.

Interestingly there is considerable variation in replacement rates across countries. In 2009 the highest replacement rates can be found in Luxembourg, Italy and Denmark. The countries with the lowest replacement rates are the United States and Estonia.

When we look at developments between 1990 and 2009 replacement rates decreased in the majority of countries. The largest decreases can be found in the Czech Republic, Slovakia and Sweden. Compared to these decreases the increases in the countries where the replacement rates increased are rather small.

 

Drivers of policy change

A first explanation for the decline of minimum income benefit replacement rates that one might think of is the financial crisis. During the financial crisis many governments adopted austerity measures in order to reduce budget deficits. However the fact that the bulk of these measures were taken after 2009 leads us to the conclusion that we must think of other explanations for the developments between 1990 and 2009. Of course one could think of numerous economic and political factors which vary from country to country and from year to year, but here we aim to sketch some more structural explanations.

A classical explanation for lower social protection levels in the political economy literature is globalisation. Increased imports and exports of commodities and financial flows which are becoming more international may trigger a form of competition between governments on tax rates and social contributions. In order to provide attractive conditions for firms, governments reduce taxes and social contributions, resulting in smaller budgets for welfare state programmes. As economic globalisation has progressed substantially between 1990 and 2009 – think of (amongst others) the establishment of the European Single Market, several rounds of enlargements of the European Union, and the upsurge of Chinese trade – this could be one of the factors that has contributed to lower social assistance benefits.

A second explanation for the decline of minimum income benefits relative to wages is the budgetary pressure stemming from the ageing of the population. With larger proportions of older people, public expenditures on old-age pensions and healthcare increases. This might result in smaller government budgets for other welfare state programmes, such as social assistance benefits. Hence this crowding-out effect could be an explanation for the decline in minimum income benefits.             

A third explanation for declining replacement rates is the growing attention given to activation. At a high level of abstraction, welfare state programmes can be classified into ‘passive’ and ‘active’ programmes. Passive programmes can be understood as programmes that entitle people to benefits, whereas active programmes are aimed at citizen participation in the labour market. So, for example, unemployment benefits and social assistance benefits are passive programmes, whereas labour market training and employment services are active labour market policies. In the period 1990-2009 there has been a lot of attention given to activation policies. Supported by several advices, reports and coordination initiatives from the OECD and the European Commission, activation has obtained a prominent place on the policy agenda in many countries. An increase in expenditures on activation policies might put pressure on budgets for passive policies. Hence this crowding-out effect might be an explanation for the decline of minimum income benefit replacement rates.

Research agenda

The tentative explanations for the developments in minimum income benefits described above need to be scrutinized. This forms an interesting research agenda for the coming years, as comparative welfare state literature has not paid much attention to the drivers of changes in minimum income benefits. Studies should be focused on the different elements of benefit packages (social assistance benefits, child supplements, housing benefits), the various systems of indexation and other institutional characteristics such as eligibility conditions, work requirements and benefit sanctions. In order to understand the dynamics of minimum income benefits both explorative quantitative analyses and in-depth case-studies are needed. For now we have shown that in many OECD countries minimum income benefit levels have relatively declined over the past decades. This is a noteworthy observation in itself, as a widening gap between the levels of minimum income benefits and wages contributes to increasing income inequality.

References

Nelson, K. (2013) Social Assistance and EU Poverty Thresholds 1990-2008. Are European Welfare Systems Providing Just and Fair Protection Against Low Income? European Sociological Review 29(2): 386-401.

Van Vliet, O., and K. Caminada (2012) Unemployment Replacement Rates Dataset among 34 Welfare States 1971-2009: An Update, Extension and Modification of Scruggs’ Welfare State Entitlements Data Set.  NEUJOBS Special Report no. 2.

Van Vliet, O., and C. Wang (2015) Social investment and poverty reduction: A comparative analysis across 15 European countries. Journal of Social Policy 44(3): 611-638.

Wang, J., and O. van Vliet (2014) Social assistance and minimum income benefits: Benefit levels, replacement rates and policies across 33 countries, 1990-2009. Department of Economics Research Memorandum no. 2014.04. Leiden: Leiden University.

Wang, J., and O. van Vliet (2016a) Social assistance and minimum income benefits: Benefit levels, replacement rates and policies across 26 OECD countries, 1990-2009. European Journal of Social Security 18(4): 333-555.    

Wang, J., and O. van Vliet (2016b) Social Assistance and Minimum Income Levels and Replacement Rates Dataset. Leiden University.

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Tax Law and Economics, 2016-12-20T14:57:00+00:00
Science and Practice: living apart (but in the future more) together? - wsifranchise.info http://wsifranchise.info/articles/science-and-practice-living-apart-but-in-the-future-more-together http://wsifranchise.info/articles/science-and-practice-living-apart-but-in-the-future-more-together#When:09:38:00Z The digital or virtual revolution is creating many new opportunities and threats for science when it comes to incorporating practical knowledge, especially in cases with an information-evolution-complexity perspective.]]>

There are differences between science and practice. Scientific knowledge contains specific characteristics: it is true justified belief. But know-how - as practical and tacit knowledge is sometimes called - is tested and (if successful) useful or valuable too. Both use trial and error; a method of falsification. However science is based on methodology; it is a method of compressing data (such as e = mc2). Modern science emerged from practice and experimentation: “The most wonderful discovery made by scientists is science itself” (Jacob Bronowski). After this “discovery”, science and practice both went their own way. However, although it is sometimes asserted that scientists operate in an ivory tower, science is embedded in society: “There is nothing so practical as a good theory” (Kurt Lewin). Government policy nowadays is aimed at bridging the differences by way of valorisation: to push science to a more useful/valuable and economic driven research agenda (as if we are able to predict the kind of knowledge that is useful in the future).

But maybe the boundaries between science and practice will be less sharp in the digital and virtual revolution. This does not imply that we should remove the barriers between know-why and know-how, but that the differences will become more blurred. This is reminiscent of the early days of the scientific revolution (for a nice introduction in Dutch: “Kleine geschiedenis van de wetenschap”, Rienk Vermij). These renewed dense exchanges between science and practice open the doors to new opportunities and threats.

In the early days of the scientific revolution, practice and science were not clearly separated. Lots of experimentation and trial and error occurred. The microscope and telescope (both created by practitioners/entrepreneurs – van Leeuwenhoek and Lipperhey) revealed the inner world of creatures and the outer world of the universe. These technological devices opened the “Book of nature”. These dense interactions between science and practice seem to have diminished in the nineteenth and twentieth century but, as already stated, the connection between them could be restored again if new technologies create opportunities to open the “Book of complexity” introduced in the nineteenth en twentieth century by Darwin, Einstein, Gödel, Bohr and Heisenberg.

In the digital age the boundaries between science and practice will become more fluid because we can manipulate, share and incorporate information and knowledge much more easily. “When information is carried by things – it goes where the things go and no further. But once everyone is connected electronically, information can travel by itself.” (Evans and Wuster, 1997). Due to the triumph of bits, people can specialise, (re)use and (re)combine other information/knowledge in extreme ways. When experimentation, modification and innovation is successful it is more easily noticed, transferred, and incorporated in other directions/applications (increasing the number of citations, or the impact factor, reinforcing future citations). Digital hobbyists are usually very focussed, and extremely specialised. In the modular digital age it will be easier to accomodate their findings in science, thus creating new methods/technologies for troubleshooting. These new ways of scientifically using practical data generating or data compressing technologies resemble the influence of the new technologies of Van Leeuwenhoek and Lipperhey in the seventeenth century. They open up new ways of creating data for testing theories or finding solutions for data in search of a theory (just like Johannes Kepler compressed the data of Tycho Brahe); and finally to a better and deeper understanding of the complexity of life.

New research methods are and will be used: data mining, mapping, simulating, designing, creating, combining, collecting, and disclosing. This requires a more artistic and creative perspective, a context of discovery, versus the classic, conservative, methodological perspective in the context of justification. Lots of scientists nowadays use the general public to generate problems, ideas, interpret pictures, language and maps (e.g. “mapsinthecrowd”), or to collect data in this so-called citizen or networked science. Scientists can create artificial societies, just like gamers do. A group of video gamers recently published an article in the Journal of Molecular Biology about RNA molecules. They used a serious game (Eterna) that gamers use to solve scientific problems (De Volkskrant, 25 February 2016). Another example is an article in the Geoscientific Instrumentation methods and data system – I can imagine that you have never heard about this journal, neither had I. A hobbyist developed a special device with sensors to collect data about water temperature designed to measure water flows (De Volkskrant, 1 March 2016).

Digitalisation makes disclosure easier – internet is the modern Gutenberg - the public can participate not only in collecting data, but also in recombining data. Via open source platforms and apps the public can participate in research easily, with low costs and barriers. Scientific knowledge chains with strong and weak (practical) ties will self-organise in a legal and political institutional framework, just like value chains in the business ecology.

Of course there are downsides to this developing digital knowledge landscape. Data mining can create an explosion of meaningless correlations. It could even undermine the standard pillars of empirical science with assumed normal distributions. Maybe statistical tools applied to these ‘normal’ situations do not apply because of power laws. Besides, data can be manipulated. How to distinguish between facts, figures, fakes, fiction and myths? What are the checks and balances for monitoring and governing data and for generating data with public assistance? Who stores and has access to the data and may use it – for what reasons (even for making a profit)? Should data be disclosed for reproduction? How to cope with personnel data? Universities try to introduce data management protocols – partly because of scandals in the past - to cope with these problems.

This blog is no plea for removing barriers between science and practice; however the difference will become more blurred. It is also not a plea for market driven research – it is rather silly to assume that we already know what is useful. It is no plea for abolishing monodisciplinary research; specialisation is very important, but integrating it too. It is a plea for considering and imagining the consequences of this flux (scientific) knowledge world. After all: “The true sign of intelligence is not knowledge but imagination”. (Albert Einstein).

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Tax Law and Economics, 2016-12-09T09:38:00+00:00
Has business lost the battle for TTIP? - wsifranchise.info http://wsifranchise.info/articles/has-business-lost-the-battle-for-ttip http://wsifranchise.info/articles/has-business-lost-the-battle-for-ttip#When:12:16:05Z With German minister of Economic Affairs Gabriel and French president Hollande declaring failure of the negotiations between the US and the EU on TTIP, which would further integrate their economies, official enthusiasm for the deal has also disappeared.]]>

By eliminating non-tariff barriers and establishing common rules and standards, the Transatlantic Trade and Investment Partnership (TTIP) would create a more business-friendly environment. This would benefit firms, but also result in more choice, better products and lower prices for consumers

Opposition to TTIP has been particularly major in Europe, where numerous non-governmental organisations have railed against it. The common denominator in that opposition was the concern that countries would no longer be able to regulate trade to protect the environment and the health of their population and would have to succumb to corporate interests.

From Top to Bottom

Ironically, the differences in regulation between countries often serve to illustrate the so-called “race to the bottom” argument by similar groups that oppose TTIP. Firms, in that argument, invest in the country with lowest regulatory standards to cut business costs, forcing other countries to lower their standards too. A common standard would eliminate that possibility. But opponents of TTIP fear that, through further integration, TTIP would introduce the lowest (common) standards in different economic sectors. In health and safety issues for example, the lower American standards would prevail, while in the financial markets the lower European standards would dominate. It is conceivable, however, that there could also be a “race to the top” where firms would adjust their processes to the highest standards. Examples of both races can be found in studies on the effects of globalisation. [to top] [to bottom]

Global, local or in between?

Accepting the reality of increasing economic interdependencies between countries, through both trade and investments, it makes sense to have basic common rules and regulations to prevent countries being played out against each other and to reduce the costs of doing business. The global trade regime in this respect has greatly benefited from a set of agreements under the auspices of the World Trade Organization. This has been greatly successful in reducing import tariffs around the world, but it has proven difficult to advance the agreements to include rules and regulations regarding services, investments, property rights and others.

The US and EU started negotiating TTIP in 2013 among other things to help pave the way for setting global standards to strengthen the multilateral trading system. Being the largest global trading blocks, with extensive economic relations, they had a particular interest in an agreement that included regulatory mechanisms to free up trade in both goods and services and facilitate investment in their areas.

One strike, but not out?

Firms have a significant interest in the design of the rules and are lobbying to advance their case. Non-governmental organisations are doing the same thing, but in a more vocative way. They are afraid that TTIP will not only result in a race to the bottom, but will also limit the options of nations to rein in firms, i.e. favour business interests over those of (democratically elected) governments. They prefer no Partnership and currently find Gabriel and Hollande on their side. But that brings back the possibility that firms will play out states against each other. With or without legal agreements on how to behave, firms will operate in an international, global environment, which can currently only be influenced by nation states and their agreements.

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Tax Law and Economics, 2016-09-06T12:16:05+00:00
Trends in social assistance and income polarization in an international perspective - wsifranchise.info http://wsifranchise.info/articles/trends-in-social-assistance-and-income-polarization-in-an-international-per http://wsifranchise.info/articles/trends-in-social-assistance-and-income-polarization-in-an-international-per#When:10:58:54Z Social assistance benefits have seen major developments in many countries over the last decades. Our research explores the benefit developments, their determinants and the impact of the benefit changes on income polarization.]]>

Social assistance and minimum income benefits are public transfers that aim to help households obtain an adequate standard of living. The benefits are generally means-tested and non-contributory. Social assistance and minimum income benefit schemes function either as a last resort safety net or as the principle instrument for delivering social protection (Immervoll, 2009; Immervoll et al., 2015). In the new millennium there have been major developments in minimum income benefit schemes. The benefit developments are subject to country and time-specific socio-economic challenges, political developments and institutions.

Based on quantitative and qualitative analyses, our study suggests that the real minimum income benefit levels increased in many OECD countries whilst minimum income replacement rates declined on average. The increased benefit levels reflect policy changes while the declined replacement rates do not reflect benefit cuts but larger wage increases. The empirical evidence in our study shows that globalisation and soaring levels of unemployment have triggered social assistance and minimum income benefit reforms.

In addition to the factors that may have had an adverse impact on minimum income benefit levels, the introduction of the Lisbon Strategy could have had positive effects on the benefit levels of national social assistance schemes. Introduced in 2000, the Lisbon Strategy set a number of objectives for the fight against poverty and social exclusion. In this respect, social assistance has been considered an essential safety net for the most vulnerable groups (European Council, 2000a). Furthermore, in 2005 the Lisbon Strategy was revised. The Lisbon Strategy 2005 is a refined version of the Lisbon Strategy 2000 that defines the roles of the Commission, the Council and the Member States more clearly. Also, the objectives of the strategy were narrowed. Since then, the Lisbon Strategy has been more closely associated with social assistance benefits.

Social assistance and other social benefits may influence income distribution. For instance, over the last few decades the distribution of market income (labour income and capital income) has become more unequal (e.g. Immervoll and Richardson, 2011; OECD, 2008, 2011, 2015a; Thewissen et al., 2013; Thewissen and Van Vliet, 2014). However, much of the rise in market income inequality has been offset by taxes and social benefits, including social assistance benefits and pensions (Wang et al., 2014). In the subsequent analyses in this thesis, we focus on an income polarisation indicator. Income polarisation is an interesting additional social indicator for analysing income distribution across countries and over time as it captures the phenomenon of ‘clustering around extreme poles’. Both income inequality and income polarisation capture the change in the middle of the income distribution. However, income polarisation is different from income inequality. Income polarisation describes to what extent a society is segregated into groups (Gradín, 2000), or the phenomenon of a ‘divided society’. The basic idea of the income polarisation indicator is to capture the potential instability in a given distribution. The results suggest that income polarisation is stable in European countries and Europe as a whole. Especially, tax-benefit systems are essential in reducing initial market income polarisation. 

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Tax Law and Economics, 2016-08-29T10:58:54+00:00
Pre-pack in Dutch Insolvency Law: Costs & Benefits for Share- and Debtholders, Employees and Society - wsifranchise.info http://wsifranchise.info/articles/pre-pack-in-dutch-insolvency-law http://wsifranchise.info/articles/pre-pack-in-dutch-insolvency-law#When:06:00:10Z A new tool has been added to Dutch Insolvency Law: the pre-pack. This modernisation of insolvency law has been criticised and disputed. Is the pre-pack a step forwards or backwards?]]>

Recently the Dutch House of Representatives (“Tweede Kamer”) adopted a bill that introduced the pre-pack in the Netherlands (Wetsvoorstel “Continuïteit Ondernemingen I”,  or “WCO I”) – with an important amendment to the original proposal: employee representatives can influence the procedure. Some view this as a modernisation of the old insolvency law that dates from 1893. But in fact the old insolvency law could also be labelled as very modern. Especially in this age of digitalisation and acceleration it is a wonderful method for selecting value-destroying firms. It is not abnormal that firms fail, it is the essence of a restless and relentless capitalism. Rather than giving insolvent firms the benefit of the doubt, I have strong doubts about the (nett) benefits of this new arrangement.

This assessment is based on the essence of capitalism, what are its main forces? And what is the function of a firm? Capitalism is (and was) about experimenting and finding new ways of combining and splitting knowledge (the mother resource that can be referred to with a more general concept: Dawkins’ meme). An economy is a coordinated system of distributed knowledge. Capitalism is about using and creating knowledge. A successful company bundles and unbundles different resources, but other firms also pull these resources. Even when it is successful and solvent, a firm is continuously exposed to ‘pulling’ activities on its knowledge by other firms that are trying to substitute, bypass, copy, imitate, extract, steal, buy, use, transmit or transform it. Reallocation of resources when solvent is not a strange thing, for an insolvent/bankrupt firm it is not strange either. To realise the ‘meme potential’ these resources should move freely to the best (attractive) use and cluster, awaiting to be appropriated (e.g. copied) by other combinations, or “die”. These resources should be (re)allocated freely in markets. Memes self-organise in value chains with many links – it is a kind of a complex adaptive system - called the business ecology. The firm is therefore only a temporary shell/vehicle around clustered resources - a tiny fraction within the value chain. Firm value and viability are the outcome of an uncertain and complex process; they cannot be known in advance. The firm – as a shell of the resources - is not always a source of success, it can also be the source of failure. Bankruptcies are a sign of the strength of the economy because resources are freed from their (value destroying) yoke. The pre-pack procedure interferes with this picture in assuming that Insolvency Practitioners (IPs) can estimate the value and viability of a company, it is subjective and arbitrary, it distorts competition and interferes in markets, creates the wrong incentives, prohibits the free allocation of resources to alternative applications because they stick to their present employment, and probably keeps alive businesses that should have been dissolved. These are all disadvantages. What are the benefits of the pre-pack? Keeping (parts of) the insolvent firm intact as a going concern. I think the benefits are rather limited – because insolvent firms in general have low value-creating potential. Besides, these benefits are reaped by the wrong stakeholders. Shareholders/connected parties – who usually receive nothing when a company is bankrupt in the old procedure – can buy the assets at a bargain price. Shareholders can misuse the pre-pack and play with other people’s money. This can be detrimental to debtholders, employees, competitors and even societies.

The pre-pack is an ‘efficient selling mechanism’ that keeps (part of ) the insolvent firm intact. Firms in financial distress can, prior to a possible bankruptcy, negotiate behind the scenes – not in public, but under hand – with potential takeover candidates. This process is guided by the intended IP. Once agreement has been reached the firm is declared bankrupt and the assets sold immediately to this bidder. The company restarts with a clean slate, having been stripped of its debts and employees. This looks like creating a situation of insider trading (pre-knowledge) on the stock market, the very thing that governments try to fight and conquer. The end justifies the means: “downsizing” the number of potential bidders. But what about the end or the puropose of the secret negotiations?

The underlying idea of the pre-pack is that keeping the firm intact – as a going concern – reduces the chance of value losses. The going concern value is assumed to be higher than the liquidation value. If bankruptcy is (publicly) announced stakeholders withdraw their cooperation and leave the company. When the company disintegrates, its value (and level of employment) will decline like a melting ice cube. The Dutch debt recovery rate figure (the percentage of debt that is paid out of the proceedings of the assets of a bankrupt firm) are very low. Also the number of bankrupt companies that make a restart is very low. The often-drawn conclusion is that bankruptcies cause a loss of value. But I think it is the other way around. Why do companies become bankrupt? Because they do not create value. Why do they not restart? Because they are not viable. Value and viability are the key words in the European Insolvency Recommendation (2014), however they remain undefined. That is the essence of capitalism. Bankruptcy is a method that selects poorly performing firms. Viability and value assessment is best done by markets, not by secret negotiations. The valuable resources probably already left the company; the value has already declined. The old insolvency law is a rather objective procedure: not paying your debt means you are out of business. This creates an equal, level playing field. The pre-pack method introduces subjectivity and is arbitrary. It is a myth that insolvent companies are in principle viable and value creating. It possible that IP’s give these firms the benefit of the doubt. With a little creativity and fantasy there are always arguments to keep a firm alive. Restarted firms have a high chance of (insolvency) recidivism. Restarts stimulate old ways of production because resources stick to their business. The procedure interferes with the free allocation of resources.

The Dutch Council of State (2015) expressed serious objections to this insolvency modification. It concluded that viability and value are unknown. The Graham Review (2010) concluded that “it is common, where there is a connected sale, for the purchase price to match the valuation figure”. Companies that have performed well and have adapted to their circumstances can sometimes be surprised by restarted (formerly insolvent) competitors with a clean slate. This distorts competition because shareholders/connected parties can continue their business with a new downsized business facilitated by the pre-pack.

The amendment of introducing labour representatives will slow down the negotiations and enhance both the group of insiders and the probability of leakage of information. The labour representatives will be focussed on employment rather than creating a viable business model.

The pre-pack method fails to recognise the role of markets and firms in our capitalist system. Value and viability are the outcome of a complex and uncertain process. Only markets can solve this problem, not an omniscient IP. Because of the doubts about the benefits and costs involved, I have strong doubts myself about the (nett) benefit of the pre-pack.

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Tax Law and Economics, 2016-07-15T06:00:10+00:00
Associating with Ukraine: Just free trade or unjust policy? - wsifranchise.info http://wsifranchise.info/articles/associating-with-ukraine-just-free-trade-or-unjust-policy http://wsifranchise.info/articles/associating-with-ukraine-just-free-trade-or-unjust-policy#When:15:50:36Z On April 6 the Dutch will vote on the EU Ukraine Association Agreement. Opponents have promised to turn the referendum into a vote against the transfer of sovereignty to the EU. But what exactly is the Association Agreement about?]]>

To allow for more popular involvement, the Dutch parliament, in 2015, voted for the possibility of a – non-binding –referendum. The first attempt at direct involvement will be on April 6 and concerns the Association Agreement between the EU and Ukraine. The initiators of the referendum are opposed to the transfer of authority from the Dutch to the European level. They want a public debate on these issues and are using the possibility of a referendum to force a debate on the direction of the EU.

As always, voters may choose how they will vote and for whatever reason. Not many people will actually read the 486 articles, 179 pages long Agreement, let alone fully understand the precise legal meaning of what it says.

Associating in free trade

The EU is clear in its intentions with the Association Agreement. It aims “to promote gradual rapprochement between the Parties based on common values and close and privileged links, and increasing Ukraine's association with EU policies and participation in programs and agencies” (art. 1.2(a)) and to “establish conditions for enhanced economic and trade relations leading towards Ukraine's gradual integration in the EU Internal Market, including by setting up a Deep and Comprehensive Free Trade Area (…) and to support Ukrainian efforts to complete the transition into a functioning market economy by means of, inter alia, the progressive approximation of its legislation to that of the Union” (art.1.2(d)). The core of the Association Agreement lies in creating an extended free trade agreement (FTA), which is the lightest form of economic integration. The signatories will abandon import tariffs and possibly non-trade barriers, but remain independent in their agreements with other countries or trading blocks. The EU and Ukraine agree to establish such an FTA over  a transitional period of 10 years (art. 25). The EU Ukraine Association Agreement extends the FTA to other areas of economic integration that are important to the EU, most notably the free movement of capital and services (the free movement of persons is not in the Agreement.) Furthermore, the agreement mentions  cooperation in the field of economic sectors and macro-economics.

How much does it cost?

Most of the burden in the Agreement falls on Ukraine, which has to adjust its rules and regulations to the EU standards. To achieve this, it will receive appropriate administrative and financial support from the EU. In its budget, the European Commission has pledged a sum of 3 billion euros in the coming years (2015-2020) to finance this support, which amounts to 1 € per European per year. A further 8 billion euros will be made available to Ukraine in loans from the European Investment Bank and the European Bank for Reconstruction and Development. Although economic analysis usually gives positive income outcomes from economic integration, it is hard to predict an accurate reward from the Association Agreement with Ukraine for the European economy.

Keeping the eye on the prize

The EU has 20 Association Agreements with other countries, as far away as Chile, and more are in the making. From that perspective the one with Ukraine is standard practice for the EU. But the Dutch referendum makes this one special. A ‘yes’ or ‘no’ on the Association Agreement between the EU and Ukraine may therefore very well become a vote pro or contra the European integration. If the Dutch members of parliament, who voted in favour of the Association Agreement, want a positive outcome to the referendum (and the debate), they would be well advised to provide a well-argued position in this case.

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Tax Law and Economics, 2016-01-26T15:50:36+00:00
V&D and the arbitrariness of rescuing businesses - wsifranchise.info http://wsifranchise.info/articles/vd-and-the-arbitrariness-of-rescuing-businesses http://wsifranchise.info/articles/vd-and-the-arbitrariness-of-rescuing-businesses#When:03:00:39Z Why do communities/governments support banks and football clubs but not V&D? Similarities exist between these cases. Comparison shows the arbitrariness of supporting (insolvent) businesses directly or indirectly.]]>

The essence of business life is the quest for value. A business can only survive if it creates, delivers and captures value. Generating value is the outcome of an uncertain process. Businesses that do not create value ultimately fail and are liquidated or sold. In principle the market selects value-creating firms to continue their business, but sometimes authorities facilitate failed businesses to recover. This is done directly – support by way of injecting cash – or indirectly - via business rescue supportive insolvency regulations. This policy increases the subjectivity and arbitrariness of facilitating insolvent businesses to recover. The question runs deeper and is more fundamental: what is the purpose of aiding insolvent businesses? Comparing department store group V&D with the ABNAMRO bank and football clubs turns up remarkable correspondence indicating various reactions to insolvent businesses. 

Peter De Waard (column in De Volkskrant 29 December) compares the V&D insolvency with the ABNAMRO case. The Dutch government nationalised ABNAMRO (but not DSB) because of the dangers of the financial sector becoming contaminated. Considering the complex connections between financial institutions, a chain reaction – a financial meltdown – was possible. This could have paralysed the real economy with severe effects for growth and employment. 

How harmful is the collapse of V&D for our society and cities? It could be disruptive for city centres and affect the attractiveness of other retail stores – a city centre melt down? Many high streets will empty and pauperise, ripping out the heart of these cities. They will become less attractive for other shops and visitors; a downward spiral which cannot be stopped easily. This will have consequences for the 10,000 employees and 1,800 suppliers of V&D – another chain reaction? According to De Waard V&D could be labelled a “system warehouse” because of economic, infrastructural, social and security reasons. Isn’t V&D too big to fail? Minister Kamp of Social Affairs proclaimed to do everything to keep V&D alive, but of course he cannot take action because of state aid problems. 

Another comparison can be made between V&D and football clubs. The ultimate goal of a football club is the number one positon in the premier league or, even better, to win the Champions trophy. Football clubs cannot score by making a profit; they can only “score with goals” and their rank in the competition. In most cases communities have a stake in their football club’s stadium. A report by KPMG in 2003 concludes that communities are the “twelfth player”. If a football club goes bankrupt, its stadium becomes somewhat useless (see for other problems with football clubs my 2010 article in Economisch Statistische Berichten, in Dutch). A lot of football clubs have ‘sugar daddies’ – like the Chinese Hui Wang at FC Den Haag. They incidentally invest a lot of money, but influence the policy of football clubs and demand sportive success. Usually expenses increase structurally. So football clubs run into financial troubles again and again, “L'histoire se répète”. Financial support of a football club is justified on the grounds that a city “needs” the football club; it influences the “wellbeing” of the city – the football club promotes the city. Because of problems with state aid, a lot of constructions emerge that emphasise the infrastructural character of the football club. But as with ABNAMRO the origin is the same: Football clubs do not create (enough) value.

Because of the local city-bound character of football clubs this also corresponds to V&D which has 62 branches dispersed throughout cities and towns in the Netherlands. It attracts 100 million visitors a year! – a kind of forum or platform that draws people in. (The Dutch premier league attracted 5.7 million visitors during the 2014/2015 competition). Like FC Den Haag, V&D has had a capital investor and owner since 2010: Sun Capital Partners. Sun Capital invested 170 million euro in V&D but in December 2015 withdraw their support because of poor performance ascribed to warm weather conditions. 

V&D was founded by Willem Vroom and Anton Dreesman in 1887. Their strategy was revolutionary at the time: to sell for low but fixed prices. During its lifetime V&D has belonged to different groups (e.g. Vendex and KBB). Its business history reveals a fascinating perspective of the complexity of doing business. Although they did not change their formula, V&D managed to survive – under different umbrellas. In the last twenty years (!) V&D has never realized a profit. They could compensate the losses with the profits from La Place, its successful restaurant chain. This was detrimental for the development of La Place. Immediate emotional reactions followed after the demise of V&D. The major of Haarlem stated that “he cannot imagine a city without V&D; it would be a severe loss to the city. Other economic activities would be severely hampered. V&D Haarlem attracts 1.7 million visitors who also promote other economic city-bound activities. The city ‘needs’ V&D. If we can contribute to keeping V&D alive, we will not hesitate to do so. However it is not for us to decide”. This harps back to ancient times when cities were highly specialised in goods such as beer, herring, or drapery and were usually subsidised by local authorities, or the VOC which was monopolised by the Dutch State. 

Of course the cases do not match 100%, but there are similarities in the origin and the consequences of failure and the way authorities are involved or have responded. This raises the fundamental question: what is (or should be) the purpose of insolvency proceedings? Usually support is based on emotions and fears. We are inclined to believe that businesses are or should be successful, prosper, grow and survive. However businesses have a limited lifetime. In principle authorities can save every firm, directly or indirectly. It can always be asserted/justified that a business is viable, valuable, needed or necessary. However the government should not select viable firms; the market can do that. Many connections exist in the economy -  it can be considered a complex business ecology. Governments should not add complexity, but should try to reduce complexity with simple rules. Arbitrary state aid (directly through financing and indirectly through new business rescue regulations) to insolvent businesses adds complexity. 

These comparisons show that state support is arbitrary. Aiding insolvent businesses is subjective, arbitrary, complex, distorts competition and can be detrimental to healthy firms.

I used a range of press sources from various newspapers and, shame on me, Wikipedia for the historical overview of V&D.

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Tax Law and Economics, 2016-01-26T03:00:39+00:00
Ponzi scheme: The Dutch Supreme Court on the special duty of care of banks towards third parties - wsifranchise.info http://wsifranchise.info/articles/ponzi-scheme-the-dutch-supreme-court-on-the-special-duty-of-care-of-banks-t http://wsifranchise.info/articles/ponzi-scheme-the-dutch-supreme-court-on-the-special-duty-of-care-of-banks-t#When:08:15:42Z On 27 November 2015 the Dutch Supreme Court delivered its judgment in an interesting case concerning a Ponzi scheme. It ruled that the bank where the swindler held his accounts had a special duty of care towards the investors, who were third parties.]]>

The Italian American Charles Ponzi (1882-1949) became famous for his ingenious way of supposedly providing investment services and making good money out of it. The ‘trick’ was to promise investors a very high return and then, instead of actually investing their money, paying out using the incoming funds contributed by subsequent investors. Although this ‘Ponzi scheme’ was named after Charles Ponzi, this fraudulent activity has a longer history. Montague Tipp, a character in Dickens’ novel Martin Chuzzlewit (1844) already ran a similar scheme.
Recently, a Ponzi scheme again became world news through the fraudulent activities of Bernard Madoff. Our small country has also produced a similar swindler: Mr. Van den Berg. In 2006 a Dutch court sentenced Van den Berg to a term of imprisonment of five years for (among other things) committing fraud.

Van den Berg, who did not  have a licence to provide investment services, received money from around 1,440 investors. In the beginning, he did actually invest the investors’ money, but later on he ran the (for him) profitable Ponzi scheme. The investors suffered severe losses.
Apart from Van den Berg and the subsequently aggrieved investors, another party at the scene was Fortis Bank (now ABN AMRO Bank), the bank where Van den Berg held two accounts on which he received most of the payments from the investors. A foundation which represents the interests of the aggrieved investors (Stichting Belangenbehartiging Gedupeerde Beleggers Van den Berg) took legal action against the bank. The key question in this recent case, which came to trial before the Dutch Supreme Court (HR 27 November 2015, ECLI:NL:HR:2015:3399),was whether the bank had acted wrongfully towards the investors by breaching its duty of care.

The Dutch Supreme Court has held in the past that due to their function in society, banks have a special duty of care not only towards their clients, but also – under certain circumstances – towards third parties (HR 23 December 2005, ECLI:NL:HR:2005:AU3713, Safe Haven).  In the case of 27 November 2015, the Supreme Court ruled that the duty of care also entails that the bank should have protected the investors as third parties against their own rashness and lack of skill. The ‘specific’ circumstances in this case are i.a. that Van den Berg was a private account holder and that there was an unusual number of transactions on his account.

A breach of the special duty of care towards third parties is not often assumed by the Dutch Supreme Court. This makes the case, particularly in view of the specific facts concerning the Ponzi scheme, exceptional  and interesting.

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Private Law, Tax Law and Economics, 2015-12-07T08:15:42+00:00
Growing apart: Causes and consequences of rising income inequality in rich countries - wsifranchise.info http://wsifranchise.info/articles/growing-apart-causes-and-consequences-of-rising-income-inequality-in-rich-c http://wsifranchise.info/articles/growing-apart-causes-and-consequences-of-rising-income-inequality-in-rich-c#When:05:49:02Z Obama calls it the “defining challenge of our time”. Head of IMF Lagarde says it casts “a dark shadow … across the global economy”. Income inequality went up considerably in most rich countries. How can we explain this & what are possible consequences?]]>

The benefits of economic growth over the past few decades have not been shared equally among households in developed countries. My dissertation addresses determinants and political and economic consequences of income inequality and social policy development in affluent countries. I will defend my dissertation called “Growing apart: The comparative political economy of income inequality and social policy development in affluent countries’ on the 29th of September 2015 at the Academiegebouw of Leiden University.

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Tax Law and Economics, 2015-09-29T05:49:02+00:00
European Monetary Union and insolvency - wsifranchise.info http://wsifranchise.info/articles/european-monetary-union-and-insolvency http://wsifranchise.info/articles/european-monetary-union-and-insolvency#When:08:54:28Z What’s the relationship between the European Monetary Union and insolvency? That question recently came up.]]>

What’s the relationship between the European Monetary Union and insolvency? That question recently came up. In the last week of June, the German Bar Association’s Section on Insolvency Law and Restructuring had organised a conference (4th European Insolvency & Restructuring Congress) in collaboration with Conseil National des Administrateurs Judiciares et des Mandataires Judiciaires (CNAJMJ, the French Insolvency Practitioners Association, in Brussels). The keynote speaker on behalf of Ms Michou (Director General of the DG Justice of the European Commission), addressed – evidently – the European Commission’s challenges in the area of business restructuring and insolvency. He referred to a ‘Five Presidents’ Report’ and its importance for the future of insolvency law. The What? The speaker meant the ‘Five Presidents Report – plans to strengthen Economic and Monetary Union’ as of 1 July 2015. The report was published on 22 June 2015. See http://www.eubusiness.com/topics/finance/5-presidents/. The number (5) discloses the specific persons, i.e. the EU Institutions’ five Presidents, being European Commission President Jean-Claude Juncker, together with the President of the Euro Summit, Donald Tusk, the President of the Eurogroup, Jeroen Dijsselbloem, the President of the European Central Bank, Mario Draghi, and the President of the European Parliament, Martin Schulz. They revealed ambitious plans on how to deepen the Economic and Monetary Union (EMU) as of 1 July 2015 and how to complete this by 2025 at the latest. They are not shy about comparing their plan to the Jacques Delors plans in 1985 to create one Single Market (on the basis of the Single European Act) and following its working method. The five presidents, in putting their vision for the future of EMU into reality, have put forward concrete measures to be implemented in three stages:
1. (or ‘Deepening by Doing’, set for 1 July 2015 – 30 June 2017): using existing instruments and the current Treaties to boost competitiveness and structural convergence, achieving responsible fiscal policies at national and euro area level, completing the Financial Union and enhancing democratic accountability;
2 (or ‘Completing EMU’): more far-reaching actions will be launched to make the convergence process more binding, through for example a set of commonly agreed benchmarks for convergence which would be of a legal nature, as well as a euro area treasury;
3. the final stage (at the latest by 2025): once all the steps are fully in place, ‘… a deep and genuine EMU would provide a stable and prosperous place for all citizens of the EU Member States that share the single currency, attractive for other EU Member States to join if they are ready to do so’.
To prepare the transition from Stage 1 to Stage 2, the Commission will present a White Paper in Spring 2017 outlining the next steps needed, including legal measures to complete EMU in Stage 2.
The Five disclose that some of the actions need to be front-loaded already in the coming years, such as introducing a European Deposit Insurance Scheme (EDIS), others go further as regards sharing sovereignty among the Member States that have the euro as their currency, such as creating a future euro area treasury: ‘This is part of the Five Presidents’ vision according to which the focus needs to move beyond rules to institutions in order to guarantee a rock-solid and transparent architecture of EMU’, which is regarded as being incomplete: ‘Divergence across the euro area is significant and the crisis of recent years has further highlighted existing shortcomings. It is clear that with 18 million unemployed and many within our societies exposed to risks of social exclusion, a lot more needs to be done to turn the euro area – the world’s second largest economy – into a rock-solid architecture. We need a lasting, fair and democratically legitimate basis for the future which contributes to more growth, jobs and prosperity for all citizens.’
From the Report it can be taken that the Five Presidents are aiming for a true Capital Markets Union (CMU), which requires improvements, some of which can only be achieved through legislation, such as: ‘… simplification of prospectus requirements; a revived EU market for high quality securitisation; greater harmonisation of accounting and auditing practices; as well as addressing the most important bottlenecks preventing the integration of capital markets in areas like insolvency law, company law, property rights and as regards the legal enforceability of cross-border claims.’
This is the only reference to insolvency in the Report, and we already knew that this topic – the national insolvency frameworks, more specifically – is seen as an obstacle to creating a CMU. See my blog at www.bobwessels.nl, at 2015-03-doc8. With the EU Financial Collateral Directive in place, the EU Insolvency Regulation (Recast) coming into effect in June 2017 and the March 2014 Recommendation for harmonisation on a new approach to business failure and insolvency in process, it is not easy to understand which areas will be on the minds of the (merry) Five. I would put my cards on (i) European standards for voting (and cram down) on a restructuring plan, (ii) a better transparency and accountability in pre-pack types of sales, (iii) a more uniform treatment of directors liability, (iv) more uniform standards to combat debtor’s fraud (including harmonised criteria for the treatment of detrimental (or ‘paulian’) actions), (v) measures to influence the rock-solid position of security rights holders, and (vi) build more trust in the European rescue practice by a more robust harmonised system for professional rules for Insolvency Office Holders. The planning is 10 years, so we’ll just wait and see.

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Tax Law and Economics, 2015-07-09T08:54:28+00:00