Saturday, 26 June 2010

Of Life

Of life,

We all hang in separate branches,

Yet share the same old tree,

Differentiated products in equal-sized batches

Of the assembly line that led me to thee.

A fresh crisp grasp of reality,

Consummates the experience into a wonderful memory,

The omnipresence of a Mother’s love

Ignored by the desire of illusory celebrity.

The magic of the World turns life into prose,

A book we once hastily opened,

But must sometime reluctantly close.

The symphony of voices,

The mosaic of faces,

Is the museum of life

A collection of worthwhile chases?

A verse in Life is empty,

Without a hand to hold.

The paper on which life’s poetry is written,

Once invaluable, is now regrettably being sold.

Saturday, 19 June 2010

Developing Harmonious Policies

In furtherance of Cameron's "Big Society" (meaning yet to be precisely defined), I have developed (with the kind help of my brother) a preliminary blueprint for policy development in Britain.

The axis illustrates the time/resources and time pressures inherent to any extraneous and inernal policy environments. In these circumstances, policy makers should strive to achieve harmony in policy development that encompasses a balance between the State, the private sector and civil society. More than a mere equilibirum must be achieved. The real goal must be "harmony" - not only amongst these three branches of society, but also in a way that is compatible with Nature. This would maximize chances to generate societal value that engages all sectors of the socio-economic paradigm without compromising the well-being of our environment.

Sunday, 13 June 2010

Welfare Benefits, Taxes and Entrepreneurship: An economic paradox?

Is the size of the state sector as measured by taxes and/or expenditures related to entrepreneurship?

I've been thinking about these issues for some time now and I've decided to address some of them in this post.


Entrepreneurship is the new management paradigm (Timmons and Spinneli, 2009). It could also be described as an emerging economic one, too. Indeed, productive entrepreneurship is an essential factor of the economic performance of a country, and hence cross-country differences in the degree of productive entrepreneurial activity are likely candidates for explaining part of observed cross-country differences in economic performance (Davidsson and Hendrekson, 2001). As Minniti and Lévesque (2008) argue, entrepreneurship is increasingly seen as a vital force in economic development. However, there has been little room for the entrepreneurial element in theoretical mainstream economics (Baumol, 1993; Kirchhoff, 1994; Kirzner, 1997).

Entrepreneurs contribute to economic growth through generating, disseminating and applying innovative ideas; increasing competition and providing diversity among firms; enhancing economic efficiency and productivity (Audretsch and Thurik 2004). They are also an important engine for job creation, being responsible for anything from one-third to 70% of job creation in the economy (Kirchhoff 1994). Entrepreneurship has therefore a significant role to play in the economic drivers of a country. Consequently, it affects the entrepreneur’s relationship with the economy by way of taxation and expenditure as both a contributor to taxation but also a victim of it. Indeed, this post will argue that taxation and the welfare state’s expenditures has a negative impact on entrepreneurial activities in the economy. The logic is that the bigger the state/welfare sector, the more inhibited entrepreneurial culture will be in the economy.

The post is divided in two parts. Part 1 will consider the definition of entrepreneurship. This will lay the foundation for Part 2 which will consider (i) the effect of taxation on entrepreneurship and (ii) the effect of state expenditure on entrepreneurship.

Part 1: Entrepreneurship: Definitional Aspects

Entrepreneurship is a way of thinking, reasoning and acting that is opportunity obsessed, holistic in approach, and leadership balanced for the purpose of value creation and capture (Timmons and Spinneli, 2009). Arguably, entrepreneurship results in the creation, enhancement, realization, and renewal of value, not just for owners, but for all participants and stakeholders. Entrepreneurship can occur – and fail to occur – in firms that are old and new; small and large; fast and slow growing; in the private, not-for-profit, and public sectors; in all geographic points; and in all stages of a nation’s development, regardless of politics (Timmons and Spinneli, 2009, p.101).

Thus, in order for an activity to be defined as entrepreneurial it needs to be novel at least in some sense, but whether it is novel because it applies new knowledge or uses existing knowledge in new ways does not matter (Henreksson, 2005). However, as Glancey and McQuaid (2000) argue, entrepreneurship is invariably defined narrowly and it cannot be said to capture the wide-ranging and complex functions suggested outside mainstream economics.

Part 2: Relationship between Entrepreneurship and State Sector

The role of the state sector has long been perceived with suspicion by many privatisation advocates. Under the new economic paradigm, the entrepreneurship advocates may echo such sentiments as well. This part will consider the relationship between entrepreneurship and the state sector through two lenses: taxation and expenditures.

(i) Taxation Effect

Estrin et al (2009) argue that one of the three institutional dimensions which are likely to influence high-growth expectations entrepreneurship is the scale of the state as captured by the fiscal dimension. The primary issue with taxation is that it inhibits the accumulation of the necessary liquidity or capital to invest in a start-up entrepreneurial activity. For instance, a high tax rate on wage income makes it difficult to save a substantial portion of income that can subsequently be used for equity financing (Davidsson and Hendrekson, 2001) in the creation of a new venture.

Albeit focusing on the Swedish experience, Hendrekson (2001;2005) attempts to explain why the quantitative effect of a certain individual or firm specific factor may vary across institutional setups. One important prerequisite for the emergence of a great deal of entrepreneurship and the existence of a sizable number of high growth firms is that key industries and sectors of the economy are available for entrepreneurial exploitation (Davidsson and Hendrekson, 2001, p.17). For instance, several features of the pre-90’s Swedish tax system disfavoured smaller less capital-intensive firms and discouraged entrepreneurship and family ownership in favour of institutional forms of ownership. During an extended period of time there were extreme differences in taxation for different sources of finance and owner categories. Indeed, debt was the most favoured and new share issues the most disfavoured and households/individuals were taxed substantially more heavily than other owner categories (Davidsson and Hendrekson, 2001).

Thus, taxation regulations benefiting debt financing vis-a-vis to equity financing and institutional ownership relative to individual ownership systematically favoured large, real capital intensive, publicly traded and well-established firms (Davidsson and Hendrekson, 2001). Arguably this is detrimental to the entrepreneurial process as the availability of equity financing is critical for both start-ups and the expansion of existing firms (Holtz-Eakin, Joulfaian and Rosen, 1994).

In order to analyze how the tax system affects entrepreneurial behaviour it is not sufficient to focus on the taxation of individual owners of firms. To a large extent the return on entrepreneurial effort is taxed as wage income. Indeed, a large part of the income accruing from closely held companies has to be paid out as wage income. Furthermore, a great deal of the entrepreneurial function is carried out by employees without an ownership stake in the firm (Davidsson and Henrekson,, 2001). Consequently, a true entrepreneurial culture requires intrapreneurship. This is likely to demand a great deal of flexibility in the choice of remunerative schemes such as “high-powered incentives” (Stevenson, 1985) including stock-option scheme (Davidsson and Henrekson, 2001). However, in some jurisdictions, such as Sweden, the of use of stock options to encourage entrepreneurial behaviour among employees is highly penalized by the tax system, since gains on options are taxed as wage income when the stock options are tied to employment in the firm (Davidsson and Henrekson, 2001). There, the taxation of entrepreneurial income (including stock options) continues to be high, the steep rate of labour taxation reduces the rate of return on human capital investment and the scope for entrepreneurial expansion of household-related services, and the labour market remains highly regulated (Ibid). High taxation on Venture Capitalist firms also constrains the entrepreneurial process. From such a tax incidence it follows that the government’s relationship (fiscal-wise) with entrepreneurship is in a sense negative. However this does not imply that the government should give support to individual entrepreneurs, “since they do not have the competence to pick winners” (Saxenian, 1996).

If taxation of entrepreneurial income is made no more severe than taxation of interest income and business income of portfolio investors, this will strengthen the incentive for entrepreneurship or expansion of operations when this is socially profitable. Likewise, a high rate of labour taxation is, in many instances, likely to be an impediment to entrepreneurial activity, especially in the household-related service sector (Davidsson and Henrekson, 2001). Research by Henreksson (2005) demonstrates the extraordinary extent to which the Swedish tax system favoured, and still favours, institutional ownership and discouraged direct household ownership of firms, which is a prerequisite for entrepreneurial firms, at least in the early phase of their life cycle.

(ii) Welfare state effect (expenditures)

Lindbeck (1988) defines the term ”welfare state” as the entity responsible for the array of publicly financed provision or subsidization of personal services, notably for health, education, child care and care of the elderly, and for social-security systems, transfers and subsidies. The architects behind the build-up of the welfare state scarcely considered that it would have detrimental effects on the entrepreneurial function (Henreksson, 2005). The expansion of the welfare state was a salient feature of almost all industrialized countries, in particular during the 1960s and 1970s (Castles 1998).

In general, studies of the impact on economic performance of a large welfare state find that the overall effect of public programs is to give rise to harmful economic disincentive effects (Agell 1996). Indeed, productivity is partially the product of the accumulation of investments by private firms (or not-for-profits) in the economy. However, public expenditures and taxation that deter such investments by creating marginal tax and benefit wedges, or that reduce incentives to save and accumulate capital in other ways, reduce growth (Henrekson, 2005). But what exactly are these expenditure provisions?

For instance, welfare state provisions such as unemployment benefit remove a number of savings motives for the individual. As long as unemployment insurance, income-dependent pensions and sick-leave benefits, higher education and highly subsidized health and care services are provided by the government, most of the essential savings motives for the average person disappear. There are numerous research results suggesting that such disincentives to savings and individual wealth accumulation are likely to lower the propensity to entrepreneurship (Henrkesson, 2005). Low private savings also exacerbate the inherent problem caused by asymmetric information, since wealth-constrained would-be entrepreneurs are unable to signal forcibly to outside investors by means of making sizeable equity infusions of their own (Henreksson, 2005) or even obtain debt finance from say a bank.

Due to the de facto monopolization by the public sector of the production of many income-elastic services vast areas of the economy have remained unexploited as sources of commercial growth. In particular in the health sector, it is easy to imagine how a different organizational mode could have provided a basis for the emergence of new high-growth firms (Henreksson, 2005).

Indeed, a large percentage of all work, most notably household work, is performed outside the market. Cross-country comparisons of industry-level employment also point to considerable scope for substitution of certain economic activities between the market and nonmarket sectors (Davis and Henrekson 2005). For Sweden, studies indicate that more time is spent on production in the household than in the market. According to the 1997 Service Sector Taxation Report (SOU 1997:17), 7 billion hours were devoted to household work in 1993, while production of goods and public and private services accounted for only 5.9 billion hours. Henrekson (2005) demonstrate that relative employment in the US is considerably greater in household-related services when compared to Sweden, such as repair of durable goods, hotel and restaurant, retail sales, laundry and household work. The Swedish experience may again illustrate how taxation has a detrimental effect on entrepreneurship. Indeed, one could ask why Sweden does not show a similar trend in creating start-ups/entrepreneurial businesses in the household sector. A fundamental reason emanates from high rates of personal taxation. Personal taxes raise the full price of goods and services. For many goods (e.g., high-tech products like computers), a high price may cause the consumer to forego a purchase, or to buy a lower quality version of the good. Consequently, high rates of taxation of labour tend to make it more profitable to shift a large share of the service production to the informal economy, in particular into the “do-it-yourself” sector. As a result, the emergence of a large, efficient service sector competing successfully with unpaid work is less likely in a large welfare state than in countries with lower rates of labour taxation (Henreksson, 2005). This means that tangible opportunities for entrepreneurial business development become less accessible. In other words, higher rates of personal taxation discourage the market provision of goods and services that substitute closely for home-produced services, which reduces the incidence of entrepreneurial activity in the household area.

The literature (Storey 1994) draws a distinction between two types of entrepreneurship: “necessity based” and “opportunity based”. The former is when the entrepreneur is pushed into the venture because he has no other alternative i.e. to survive. The latter form is when the individual is pulled into the opportunity. In the labour market, the “social safety nets” affect what is considered a reasonable wage, the unions’ wage claims, and the kinds of businesses that entrepreneurs are willing to invest in and commence (Henreksson, 2005). To the extent that social safety nets in welfare states push up reservation wages, they affect both types of entrepreneurship. They discourage necessity-based entrepreneurship by providing an alternative source of income at a reasonable level and they curb opportunity-based entrepreneurship by pushing up reservation wages so that many activities that are (initially) low-productivity activities are largely barred from entrepreneurial exploitation, since entrepreneurs have low incentives to start businesses that presuppose wages below the level guaranteed by the ultimate safety net.

(iii) Further remarks

The aforementioned analysis suggests that a larger state sector will militate against entrepreneurial activity. Taxes and welfare provisions may affect entrepreneurial entry via their direct impact on expected returns to entrepreneurial activity and its opportunity cost (Estrin et al, 2009). High and increasing marginal level of taxes may weaken incentives for entrepreneurship by reducing potential gains. Moreover, a burdensome tax system (Aidis and Mickiewicz 2006), and one that works against capital income and benefits debt financing when compared to to equity financing (Davidsson and Henrekson 2002), has been identified as restraining firm growth (Estrin, 2009).

Furthermore, in synthesis, it is argued that high levels of welfare support provide alternative sources of income and may therefore reduce the net expected return to entrepreneurship. As a preliminary conclusion this therefore implies that entrepreneurial activity may be inversely related to the size of the state sector (Estrin, 2009, p.7). However, one must consider that expenditure in education and infrastructure are essential to enable entrepreneurs to carry on their businesses. Therefore, it is arguable that the size of the state sector is selectively inversely related to entrepreneurship activity.


This post has considered whether the state sector as measured by taxation and expenditure is related to entrepreneurship. The immediate response to that inquiry is to be answered in the positive. Both high taxation and expenditure are signs of a large state sector such as welfare states found in the economies of Sweden and, to a certain extent, England. Both high taxation and high expenditure by the state (i.e. unemployment benefits) translates into inhibited entrepreneurial behaviour by individuals and thus undermines entrepreneurship in the economy.

It is important both to extend the economic arenas in which competent entrepreneurs can thrive, and to improve the institutions and rules of the game determining the incentive structure for entrepreneurs (Hendrekson, 2001). A continued almost exclusive reliance on taxation for the financing of key services like education, health care (such as the NHS), child care and care of the elderly can, for the reasons explored in this post be expected to become increasingly problematic (Henreksson, 2005) not only for the state’s ability to control its finances but also in its ability to craft an economy that breeds and nourishes entrepreneurships. There seems to be some room for a welfare state to reform itself in ways that promote entrepreneurship, while the core of the welfare model remains intact. However, a vibrant entrepreneurial culture and the set of institutions that underpins such a culture are very remotely related to the welfare state culture and its institutions, perhaps they are even negatively related (Henreksson, 2005).

Tuesday, 1 June 2010

Enter The Israeli Pirates

"Its 3.30 AM. The waves caress the hull of the ship as I doze off in my cabin. The sun has not yet sun greeted the sky but the moon, having pulled an all nighter - and thus quite tired -, prepares to exit its solitary nocturnal adventure. Enter the whales and dolphins. Everything feels right...when suddenly, BAM! A group of armed men storm our ship, wake us up and, by threatening lethal force, demand control of the ship. The captain is held at gun point. I fear for my life. In the chaotic chain of events that followed, 9 crew members were killed."

I know what you may be thinking. And no, the above narrative is not a depiction of what happened on board the Mavi Marmara, the Turkish ship carrying aid to Gaza on May 31 2010. It could have been, but that was not my intention.

My depiction concerns maritime piracy. Piratical acts usually involve the boarding of a ship with the intent to dispossess the crew from the ship or of property found therein. In legal terms, it would be far fetched to characterise Israel's conduct as piratical.

However, a closer alternative analysis suggests otherwise. The Mavi Marmara incident occurred about 40 miles (64 km) out to sea, in international waters. International waters is an area that is vulnerable to a number of piratical acts. Pirates board the ship with weapons and seize the ship through the use force. Although the exact facts have not yet been established with regards to the Mavi incident, it is apparent that the flotilla heading to Gaza did not pose any threat to the Israeli State. The ships were, afterall, intended to deliver aid to Gaza.

There can be no doubt that the flotilla's actions were an act of human solidarity. By boarding the ships in international waters, Israel's conduct constituted a deprivation of the activists' good faith attempt to assist others in need, and figuratively to disagree with the blockade imposed by Israel. To this end, Israeli forces dispossessed the freedom of speech of the activists and humanitarian workers - their freedom to disagree with Israel's conscious deprivation of aid to people living in Gaza.

Some would argue that such acts merit greater stigma from the international community than the piratical seizure of a cargo ship for financial benefit. It is therefore contended that what Israel did was worse than an act of piracy as it deprived not only the people of the ship of their political freedom but also an entire population's basic necessities.

A note on the legal position of the incident: The UN Charter on the Law of the Sea (UNCLOS) stipulates that only if a vessel is suspected to be transporting weapons, or weapons of mass destruction, can it be boarded in international waters. Otherwise the permission of the ship's flag carrying nation must be sought. The charter allows for naval blockades, but the effect of the blockade on civilians must be proportionate to the effect on the military element for the blockade to be legally enforceable. A ship trying to breach a blockade can be boarded and force may be used to stop it as long as it is "necessary and proportionate". Clearly the blockade here was grossly disproportionate.

Perhaps these events demonstrates the natural limitations of international law. By continuing our parallel comparison with piratical acts, the analysis of piracy at sea helps general legal scholarship to understand the perplexity of the international legal order. Indeed, as Professor Kontorovich put it “the abject failure of the international response to piracy is a cautionary tale about the limits of international law.” In the same vein, I anxiously await the international community's response to the Mevi incident. Will it also be characterised as an abject failure?

What happened on board the Mavi Marmara highlights the inherent socio-political and religious tensions interwoven in Isreali-Palestinian relations. Such tensions will not be resolved by a single solution - the synergy of many tools will be required to resolve the hostility between both States. However, it appears that, once again, Israeli foreign policy has gone too far. Let the drafters of their policies be respectfully reminded that they are not above international law, nor are they superior to humankind's conscience.