Global Trends

Here Comes The Zone

BELGIUM—Enterprise-zone legislation proposed by Reps. Jack Kemp and Robert Garcia may be stalled in the United States, but in Belgium, the government has been empowered to create six enterprise zones. Within these zones—each of 120 acres—the burdens of tax and government regulation of production will be considerably reduced. Most notably, the corporate tax on profits, dividends, interest, and landed property will be suspended for 10 years. And requests for government permits will have to be answered within four weeks.

The idea of enterprise zones has existed in some form since Roman days. Since the founding of the free port of Hamburg in 1880, however, virtually no zones were created in Europe until 1958, when the Irish government created an industrial free zone near Shannon.

In the Irish zone, companies manufacturing for export were given a 20-year holiday from the corporate tax; their employees were freed of the income tax; and customs duties were not imposed on goods for re-export. The Shannon model was so successful that some 23 non-European countries subsequently imitated it.

It was only in 1981 that another European nation, Great Britain, took up the idea again. In that year, the British created 11 enterprise zones and added another 13 the following year. A year later, the Socialist government of France promised to present a bill to parliament to make Marseilles an industrial free port, and in Belgium, the Enterprise Zone Act was published. By 1983, the West German province of Lower Saxony was studying the possibility of establishing a free port and enterprise zone; Communist Hungary had established an enterprise zone for joint ventures between foreign and domestic companies; and Turkey, Yugoslavia, and Tunisia were planning their own enterprise zones.

Belgium's Enterprise Zone Act, providing for six enterprise zones of 120 acres each by mid-1983, was a fine example of how the idea could work. Among its provisions were:

• abolition of seven different taxes on companies, including a 45 percent tax on profits and a 20 percent withholding tax on dividends and interest;
• reduction of government bureaucracy so that investors in the zones would have to deal with only one government agency for obtaining all their state permits;
• reduction of government regulation, including abolition of work permits for foreign managers and researchers, exemption for these employees from the nation's social security law, and freedom for companies to decide whether to hire trainees; and
• the opportunity for companies to seek contractual guarantees from the government that enterprise-zone concessions would not be eliminated.

It was sound legislation to begin with—but the Belgian government made the mistake of submitting it for comment to the European Economic Community, even though the Eurocrats' jurisdiction in the matter was highly questionable, at best. They gutted some of the best features of the legislation by restricting its benefits to companies active in high technology and with fewer than 200 employees. They also made the Belgian government give up its plan for an enterprise zone in Brussels, indicating that zones should be created only in distressed areas. The plan now exists in its scaled-down version.

The British enterprise zones are in some ways more modest than the Belgian plans. For example, while companies in the British zones pay no taxes, they must provide "redundancy pay" (unemployment compensation); and the national government reimburses local governments for lost tax revenues. But the British government made the wise decision of ignoring the EEC bureaucracy. Also, Sir Geoffrey Howe has announced plans for instituting free ports in Britain.

It is clear that enterprise zones are a firm fixture in the European economic terrain. They promise to bring in their wake the prosperity that freer markets provide, if the designs of governmental bureaucrats can be thwarted.

—Michael van Notten

Courting Risk-Takers

EUROPE—Last spring, France's Socialist government hurriedly amended a law—which permitted only institutions to manage venture-capital funds—to allow the formation of venture-capital partnerships like those in America. Since passage of the new law, at least 11 groups have requested permission to manage such funds. In addition, a stock market for small companies, the Second Marche (something like the US over-the-counter market), was formed in February 1983 and now trades shares in 36 companies. And about $100 million in venture capital has already been committed in France, Fortune recently reported.

Venture capitalism also is on the rise in the United Kingdom. There, the risk-money action has mounted to about $200 million. London's over-the-counter-like Unlisted Securities Market—operating only since 1980—now trades shares in about 150 companies. (Since 1979, British taxpayers have been permitted to write off against their personal income tax $7,500 worth of investments in unlisted companies.) Moreover, several American-based venture groups have recently set up shop in the island nation, and even the otherwise staid universities are getting into the entrepreneurial act—Cambridge's al-ready-affluent Trinity College, for example, has developed a high-tech industrial park, from which the college now derives 8 percent of its income.

As in France, Sweden's Socialist government also is trying to nurture the Swedish entrepreneur. In November 1982 the Swedes started up an over-the-counter-like market, which now trades shares in about 15 companies. (But in typical Swedish style, the government has gotten into the risk-money business itself, having established a $ 15-million venture fund, although it is reportedly not as politically exploited as might be expected.)

All these fledging venture-capitalist efforts—both government and private-are aimed at cashing in on the fruit of entrepreneurs. The private venture capitalists, of course, want to realize big returns on their investments, while the governments hope that a surge of entrepreneurialism will revitalize their ailing national economies. The governments are particularly hopeful that entrepreneurial citizens will emulate their American counterparts and produce the high-growth, high-tech firms that have issued from small beginnings (such as Apple Computer and Atari).

A 1982 US government study documented the value of venture capitalism to the US economy. After five years of operation, 72 firms that had started up with $209 million in venture capital had sales of $6 billion, produced $450 million in taxes, created 130,000 jobs, and boosted exports by $900 million. Those results, even socialists can't ignore.

Reducing the Weight of the State

EUROPE—Italy's Socialist prime minister, Bettino Craxi, has proposed abolishing government disability and retirement payments for people above certain income levels. Portugal is quickly denationalizing its state industries. Sweden's Social Democratic prime minister, Olof Palme, introduced a budget reducing real wages by 4 percent. Other leaders in Belgium, Britain, Denmark, Greece, the Netherlands, and West Germany are similarly urging austerity budgets and spending cutbacks, along with reductions of state enterprises.

The problem common to all these nations is their oversize public sector and welfare programs. The fiscal burden threatens to stifle the Europeans' recovery from the recent world recession. In Denmark, for example—where taxes consume more than half of the nation's income—40 percent of this year's budget must be financed with borrowed money, thus choking off private investment. Belgium's government deficit equals 13 percent of the nation's GNP—in the United States, by comparison, the figure is 6.5 percent—and Italy's deficit, 15 percent of the country's GNP. Greek Finance Minister Gerassimos Arsenis, quoted in a December New York Times report, said, "The road to Socialism no longer passes through the welfare-statism of the 1950's and 60's. Today Socialist goals require restructuring the economy, improving competitiveness."

Perhaps the most aggressive reforms may come in the Netherlands, where the government's deficit approaches 12 percent of GNP. Prime Minister Ruud Lubbers was recently quoted in Business Week as having said that the nation is returning "from the welfare state to the free-market economy." Lubbers proposes to cut unemployment and disability rolls by 10 percent, terminate 11,000 government jobs, reduce minimum-wage levels, and lower the corporate income-tax rate from 48 to 40 percent. Also included in the Christian Democrat-Conservative government's supply-side approach is the intention to reduce regulation in general, such as relaxing stringent rules governing plant closures and layoffs.

Other nations' notable moves to contain the welfare state include Margaret Thatcher's cutting 8,000 jobs from Britain's National Health Service, the first such cuts in 30 years, and Craxi's proposal to shrink Italy's social programs by $6.3 billion next year as well as to remove more than 30,000 workers from money-losing state-owned industries. Spain's Socialist government is now admitting foreign banks and is promoting part-time labor. Helmut Kohl, chancellor of West Germany, has tightened up unemployment and disability benefits, limited civil-servant wage increases to 2 percent in 1984, and put a 1.5 percent cap on state-pension increases.

Whether or not the various reforms are enough to brake the plunge of the European states' economies, the lesson to be heeded on this side of the Atlantic is an old one: there ain't no such thing as a free lunch.