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BELGIUM'S ECONOMICS.
Term Paper ID:24575
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Essay Subject:
Examines fiscal conditions in 1980s-1990s. Debt, growth, role of govt., interest rates, deficit, foreign direct investment possibilities, imports & exports, future.... More...
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15 Pages / 3375 Words
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Paper Abstract:
Examines fiscal conditions in 1980s-1990s. Debt, growth, role of govt., interest rates, deficit, foreign direct investment possibilities, imports & exports, future.
Paper Introduction:
Introduction
Located in the heart of Europe and the site of the European Union's major offices, Belgium offers an attractive destination for goods and services throughout the world. The nation has built its economy with a strong emphasis on foreign trade and investment, and prides itself on having few impediments to foreign business. Prior to the formation of the European Union in 1992, Belgium and Luxembourg formed their own economic union with a shared currency (the Belgium franc was linked to the German mark in 1990). A country which is often mistaken as being simply a smaller version of France, Belgium has overcome severe public debt and a lackluster economy in recent years to emerge as a leading European market. This research examines the country's financial performance over the past ten years, and considers the outlook for foreign invest
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In this way, the countryis likely to see continued low inflation rates as the rest of the worldalso sees low inflation, although its unemployment figures may remain highin line with Europe's as a whole. 1 2). Theupturn was driven by a surge in exports, but plans put in place by thegovernment were expected to prevent a deterioration in wage-priceperformance. A flat tax rate exists for corporations, but manufacturing and servicecorporations' taxable income under 13 million francs is taxed at a reducedrate. OECD Economic Outlook, pp. The only employment restriction is that the center employ, withinBelgium, at least ten employees within two years from the beginning of itsactivities. The economic upturn that Belgium saw in 1994 did not last, however.The economy performed poorly in 1995 when activity slowed and the GDPincreased by just under two percent. After a failed takeover attempt by Italianentrepreneur Carlo De Benedetti, SGB was acquired by Suez of France. Washington, DC: U.S.Department of State. Thetwo regions have developed nearly entirely separately in terms ofbureaucracies and day-to-day operations; Brussels, which is French-speaking, is yet a third, smaller region surrounded by Flanders. The nation had a current account surplus of 1.8 percent of GDPcoupled with a low inflation rate and strong competitiveness in theinternational market. 48). 7). Some improvement in unemployment figures wereattributed to a shift of older workers to special programs, which meantthat they were no longer included in traditional measures of unemployment.Wage-cost performance was strong in 1996, although a wage freeze put inplace until the end of 1996 helped this situation. Tigner, B. (1997). Any form of incorporation may be chosen, thoughthe basic type of public limited liability company is usually the mostsuitable for the subsidiary of a foreign company. OECD Economic Outlook, pp. When energy and food prices were not included in inflationmeasures, inflation rose to 3.9 percent ("Belgium," 1992, p. Private consumption lost some of its strength as well, despite an increasein personal income, as there was an increase in the transfer payments fromthe government and the postponement of large tax refunds from 199 to 1991. Given theimportance of trade and investment, Belgium generally discouragesprotectionism and actively encourages foreign investment. A reducedrate of six percent is applied to basic necessities, with an intermediaterate of 12 percent on some commodities. All of these innovations within the Belgian infrastructure and taxclimate suggest that companies which are participating in the hightechnology sector should consider having European operations in Belgium.There are strong tax reasons for doing this, and the government isemphasizing the high technology sector in its plans and programs. No specific rules apply tominimum employment or turnover, in contrast with such rules forcoordination centers. The programs that the government has putinto place should help the nation see continued growth in GDP, although itcan be expected that unless economic conditions change significantly,growth will not exceed the two to three percent level. The High Council for Finance has calculated that in order to maintain abudget deficit of three percent of GDP in 1997, another round of cuts willbe required for the 1997 budget, and additional funds will be needed toreduce the cumulative debt burden, most of which will presumably come fromnew privatization. Belgian nationals are not required to ownpart of the equity of the enterprise, and the repatriation of capital andprofits is unrestricted. Seafood also remained astrong market, with per capita seafood consumption increasing from 36pounds to 37.4 pounds ("Belgium: A Period," 1989, 21). The government is expected to focus on introducing anextra generalized social security contribution, increasing excise taxes andeliminating tax benefits for families with children (Country CommercialGuide, 1997, p. The newly established distribution center may operate as a branchof a foreign company or a Belgian subsidiary. (1997). Between1988 and 1989, the nation saw a 1 percent reduction in the number ofunemployed, and a low inflation rate of only 1.2 percent. (1989, August 28). Foreign interests may enterinto joint ventures and partnerships on the same basis as domestic parties,except for certain professions such as doctors, lawyers, and architects.Most companies are required to report price changes to the Ministry ofEconomic Affairs. The government has also fostered both import/export tradeas well as foreign direct investment. Thisresearch examines the country's financial performance over the past tenyears, and considers the outlook for foreign investment and exports in thefuture. (1997, June). By 1992, the GDP growth rate had fallen to 1.5 percent, and theBelgian economy saw weaker performance after five years of rapid expansion. Belgium. The economic situation worsened considerably during 1993 with weaknessin nearly all segments of domestic demand. Salary costs and financingexpenses are disregarded when determining the amount of expenses to whichthe percentage is applied. Both the federal and regional governments actively encourage foreigninvestment (with the completion of Belgian constitutional reform, mostforeign investment questions are handled by the individual regions). The growth of import goodsdecreased in volume terms, but exports also stagnated, resulting in lostmarket shares which are difficult to recover. Tax deductions are given for depreciation and interestpayments (Country Commercial Guide, 1997, p. New tax incentives, similar to those for distribution centers, wereannounced for service centers by the Minister of Finance and Foreign Tradein mid-1996. percent ("Belgium," 1993," p. Belgian companies long ago developed experience indealing with foreigners and export markets, and most of its citizens aremulti-lingual. Internet: http://www.ib.fgov.be/gtour/eco.html. Certain restrictive rules apply to all investors. Demand components of GDP were all on an upwardtrend at this time and private consumption was moving steadily upward, aswell. Monetary conditions during 1995 were steady, with the Belgian francmaintaining a rate slightly higher than the Deutschemark, and with interestrates declining in line with the Bundesbank's strategy. Belgium. 57). 22). Unemployment increased for the first timesince 1984, and the deficit increased for the first time in several yearsas a percentage of GDP. Consumergoods were attractive opportunities so long as the Belgium franc remainedhigh relative to the currencies in question ("Belgium: Seven Sectors,"1988, p. The major sectors that accounted for the bulk of Belgium's imports in1988 were computer hardware (estimated value $932 million); computersoftware (estimated value $762 million); telecommunications equipment;medical equipment (estimated value $2 million); agricultural products(estimated value $447 million); and seafood (estimated value $336 million)("Belgium: Seven Sectors," 1988, p. 95). Belgium. 3 percent to 4 .79percent depending on total number of employees and their jobs. OECD Economic Outlook, pp. Unemployment improved slightly,decreasing to 9.4 percent, and inflation remained low at just over twopercent, possibly the result of an increase in the value-added tax from2 .5 percent to 21 percent ("Belgium," 1996, p. Anenterprise qualifying under this scheme must employ between 2 and 2 people and have its entire operation within the development zone("Alternative Structures," 1997, n.p.). SBG controlled Belgium'slargest bank; GBL controlled the second largest. 47). Foreign Direct Investment Belgium has traditionally maintained an open economy, highly dependenton imported inputs and international trade for its economic strength.Since World War II, foreign investment has played a vital part in theBelgian economy, providing much technology and employment. Coordination centers are also exempt from realestate taxes, withholding taxes on dividends, withholding taxes oninterest, and registration taxes. The nation has built its economy with astrong emphasis on foreign trade and investment, and prides itself onhaving few impediments to foreign business. 57). Conclusion There are few nations in the world that are as friendly and invitingboth to foreign direct investment and imports/exports as Belgium. Belgium. Belgium. Coordination centers serve companies of an international group and canperform various financial and other services such as financing, leasing,netting, re-invoicing and factoring, as well as administrative and supportservices. Other payments by employers includesocial security contributions which range from 33. The market specialized in government bonds andcorporate debt (Tigner, 199 , p. Taxable income is defined asoperating profits, inventory valuation, capital gains, and exchangedifferences. Two holding companies (SBG and GBL) dominated theBelgium economy in the late 198 s and 199 . Inflation edged upward to2.9 percent; when energy and food are not included in the measure, itremained steady at just under 4. Unemployment and the public debt remained significantconcerns in 1994, however. However, the government had not yet succeeded insubstantially reducing its budget deficit, which remained at 8.3 percent ofGDP for 1988 with a total cumulative debt of 13 percent of GDP. During the ten-year period, recognized coordinationcenters are taxed on notional income calculated as between eight and 12percent of a center's incurred expenses. Because Belgium is highly dependent on imports/exports and foreigninvestment, it was better prepared than some of its neighbors for the 1992European Union. Internet: http://www.ib.fgov.be/gtour/legal.html. The governmentmoved to reduce the general government deficit to three percent of GDP bymid-1996 and announced that it was ready to take additional correctiveaction if the economic situation warranted. (1988, July 4). Despite the tumultuousten years leading up to 1996, the nation remains heavily dependent on itsimport and export partners ("Belgium Economics," 1997, n.p.). In the late 198 s, the manufacturing sector provided the mostattractive export opportunities for foreign companies; high-technology wasonly beginning to make inroads in Belgium in terms of exports. The main objective of the Belgian government has been to attain abudget deficit of three percent of GDP by the end of 1997, one of the fivecriteria for membership in the first-tier group of the European MonetaryUnion (EMU), as prescribed in the Maastrict treaty. Foreign employees of a recognizedcoordination center do not need a work permit or professional card inBelgium. OECD Economic Outlook, pp. The government is making a special effort in order to attractcall centers which represent a new source of foreign investment. Belgium: Time of reckoning. At least half ofthe growth in GDP seen in 1994 is attributable to the foreign balance,which emphasizes the amount of influence and level of importance thatforeign trade has within the Belgian economy. Exports measured 63 percent of the nation's GDP while importswere equivalent to 56 percent of the nation's GDP. High technology investments in depressed areas of the country areeligible for a ten year tax holiday and certain exemptions concerning thepersonal income taxation of their foreign executives. By 199 , the cumulative debt had fallen to 125 percent of GDP, but thepublic sector was still heavily overburdened, the result of absorbing manyjobs during the 197 s as the government fought unemployment in the country. Corporations are taxed on income at a standard rate of 39 percent(increased by a 3 percent surcharge up to 4 .17 percent) and a reduced rateranging from 29 percent to 37 percent depending on income; the effectivecorporate tax rate equals about 28 percent. Belgian and foreigninvestors alike must obtain special permission to open department stores,provide transportation, produce and sell certain food items, cut and polishdiamonds, and sell firearms and ammunition. This tendency toward small companies hasboth advantages and disadvantages for the country. Brussels: Ministry of Economic Affairs ofBelgium. Qualifying service centers must beestablished as Belgian resident companies. 2 -21. Fiscal policy also reflectedthe government's desire to boost economic performance. 22-24. Belgium itself exported products which generally had a poordemand throughout the world (furniture, textiles and steel) and did nothave a strong presence in consumer electronics, data processing or officeequipment ("Belgium," 1989, p. Exports ofgoods and services totaled $483.7 billion while imports totaled $171billion. 92-93. Brussels: Ministry of Economic Affairs ofBelgium. Setting up. They can be established as branches offoreign companies or as Belgian stockholding companies and can be locatedanywhere in Belgium. On the other hand, companies may lack the financial resourcesnecessary to prosper in high technology fields that may require significantcapital investment. market. The country historically hasfostered growth in small to medium sized companies (in 1989, only fourBelgian companies were listed on the Forbes International 5 ; Switzerland,with half of Belgium's population, had three times as many companieslisted) (Tigner, 199 , p. While exports to Germany expanded during the early 199 s, exports to otherEuropean partners declined. Belgium: Seven sectors are seen as the best targets for suppliers inthe tenth largest U.S. However, the results of these changes are often thatthe same people are simply in different positions within the government.In this way, the government has seen a long period of continuity despitethe numerous changes. Privatization effortscontinued and were measured in the range of one percent of GDP ("Belgium,"1996, p. Long-term interestrates increased (also following the German rates), but interest rates ingeneral were moving in a downward direction. Foreigncorporations in Belgium account for approximately one third of the top3,1 corporations. 22-23. Introduction Located in the heart of Europe and the site of the European Union'smajor offices, Belgium offers an attractive destination for goods andservices throughout the world. Inflation declined to 2.8 percent due to lowerenergy prices. 22). Thegovernment continues to have a high level of debt relative to its GDP, andcumulative debt in particular, is troublesome, but the government has alsoput into place programs which are designed to boost the nation's economicstrength and help ensure its prosperity. Qualifying distribution centers can realizesignificant tax savings ("Alternative Structures," 1997, n.p.). In 199 , government departments and state-owned industries employed morethan one-fifth of the work force, one of the highest levels in Europe(Tigner, 199 , p. The mid-198 s were characterized by a lackluster economy in Belgium,but the country began to recover by 1988, a trend which continued into1989. SBG exerted influence onthe nonferrous metals sector, cement, engineering, chemicals, and insuranceindustries. The dependence on external markets also means that Belgium is somewhatinsulated from severe shocks in any one market while its fate is also tiedto that of the international economy as a whole. The policies enacted by the government and the global economicsituation conspired to help boost the economy in 1996, although theeconomic expansion slowed somewhat during the latter part of 1996. At this point, however, companies considering doing business inBelgium must carefully take into account other European locations aspossible alternatives, and whether the steps taken by the Belgiangovernment (outlined below) provide sufficient incentive. GBL's influence extended primarily toward finance andinvestment services. In May 1996, the federal government decided on a package ofadditional spending cuts and new revenues to keep the 1996 budget on track. Attractiveness of the Country as a Market Recent activities by the government to ensure strong economicperformance and the overall advantageous location of Belgium relative tokey European markets make this an attractive country in which to dobusiness. The Belgian economy recovered from its 1993 recession fairly quickly,posting strong performance in 1994 when GDP grew by 2.25 percent. Both groups share control of the nation's threeprivate utility companies. Atthis point also, the Brussels stock market was inactive, as it has beenhistorically, the result of tight government regulation combined withcorporate conservatism. Belgium. Principal sources of foreign investment in Belgiuminclude Germany, France, the Netherlands and the United States (CountryCommercial Guide, 1997, p. Real growth in GDP increased by 2.2 percent in 1989 following 2.2percent growth in 1988, performance which exceeded analysts' expectationsby a full percentage point. Brussels: Ministry of EconomicAffairs of Belgium. Because of this, companies often consider whatcan be sold "through" Belgium as well as what can be sold "to" Belgium. 1 1-1 2. Prior to 1992, the European Community Commissionissued a number of warnings to Belgium for failure to comply with EC law,but the infractions pointed to the largest divisive point about Belgium:while the nation welcomes and houses individuals from around the world, itis sharply divided with regard to its own Flemish and French heritage. 22). With respect to authorized activities, the centermust be a purely operational, non-decision making entity, and its role mustbe understood as one of a mere "interface" between customers of the companyand the companies of the group, or between companies of the groupthemselves. GDP slowed to less than onepercent growth and eventually posted a loss for the year; unemploymentcontinued to rise, reaching 1 .3 percent. (1994, December). For 1996, the federalbudget projected a deficit of 2.8 percent of GDP. 92). 56). In 1989, computer hardware and software remained attractive markets,as did telecommunications and medical equipment (the nation was in theprocess of updating its telecommunications to a digital network).Biotechnology began to emerge in 1989 and 199 as a strong area for growth,coupled with the sporting goods and leisure equipment market (estimated at$95 million) and the automotive aftermarket. 9 ). The nation has a long history of working well withforeigners and of attracting investment and participation in its economy.By modernizing its infrastructure, including its telecommunications system,and by putting into place programs designed to attract foreign funds, thecountry helped ease its transition into the modern European market. Internet: http://www.ib.fgov.be/gtour/legal4.html. Belgian tax authorities have also established a special tax programapplicable to Belgian distribution centers of foreign multinationalenterprises who meet certain conditions. A country which is often mistaken as being simply a smallerversion of France, Belgium has overcome severe public debt and a lacklustereconomy in recent years to emerge as a leading European market. The tax ondividends is 25.75 percent and 13.39 percent for interest payments and forroyalties ("Setting Up," 1997, n.p.). Investmentprospects were good for both domestic and international investors ascapacity utilization was estimated at 85 percent (meaning that the nationwould need additional investment in order to increase its capacity)("Belgium: A Period," 1989, p. On the one hand,companies are able to keep production runs short and offer fast turnaroundtimes. (1997). Overview of Belgium's Political and Economic Systems Like Italy, Belgium has changed government numerous times since theend of World War II. (1992, June). The GDP for 1996 measured $268.2 billion, with $169.3 billion ofprivate consumption and $39 billion in domestic consumption. Belgium's principle trading partners are Germany (2 .6 percent of 1996exports, 19.9 percent of 1996 imports); France (17.8 percent of 1996exports, 15.3 percent of 1996 imports); the Netherlands (13.3 percent of1996 exports, 18.5 percent of 1996 imports); and the United Kingdom (9percent of 1996 exports and 9.2 percent of 1996 imports) ("BelgiumEconomics," 1997, n.p.). Business America, pp. The total budgetdeficit in 1995 (federal, regional plus social security) amounted to 4.5percent of GDP, slightly below the EU average. 56-59. (1997). Outlook Over the past ten years, the Belgian economy has gone through tworecessions but has recovered from both of these fairly quickly. Business America, pp. The social securitybudget and the regions/communities are expected to add a further .2percent of GDP to the deficit, allowing Belgium to meet the Maastrictcriteria. 81-83. A value added tax (VAT) is charged on the sale of all goods andservices within Belgium; the standard VAT rate is 21 percent. Coordination centers are granted special taxstatus for a period of ten years. Business fixed investment stopped its declinein 1994, but did not post an increase during that time. Despite the good foreign investment climate, some analysts haverecently noted several continuing concerns: the tendency for tax rates tovary as Belgium seeks to reduce its public sector deficit; apparentlyarbitrary definitions and interpretations by tax authorities; overly longperiods before spouses of foreign executives can receive residence visas;and difficulties in coordinating the sometimes conflicting requirements offederal, regional, and local authorities. Country Commercial Guide: Belgium. Inflation fell to 1.3percent in 1996 despite higher prices on imports as the Belgian francdepreciated ("Belgium," 1997, p. Belgium: A period of moderate but stable growth seems in store.(1989, February 13). Smaller companies and Belgium companies in particular can also bevulnerable to takeovers. InternationalManagement, pp. High technologyinvestment is specifically defined to include advanced data processing,software technology, micro electronics including electronics, officeautomation, robotics, telecommunications and bio-engineering. 81). The generallylow inflation rate and the strong support of investment and import/exportactivities make Belgium a strong location, however. 1 1). A center consists of affiliated companies maintaining at least a2 percent direct or indirect participation in one or more other companiesunder common agreement. Infrastructure. Toqualify for the advantages of the new service center status, a number ofconditions under the "corporate structure," the "intra group condition" andthe "authorized activities" must be met. 2 ). Imports were up, exports were down(due in part to competitive pressures from European neighbors), andeconomic conditions were not promising. Many companies find that Belgium is a good locationfor their regional distribution networks because of the country's centrallocation, excellent transportation facilities and telecommunications("Infrastructure," 1997, n.p.). The current account surplusin 1994 increased to 5.75 percent of GDP ("Belgium," 1994, p. (1993, June). Business America, pp. No performance requirements are applicable to foreigninvestors, nor does it appear likely that the government will establishsuch requirements ("Alternative Structures," 1997, n.p.). Belgium hasalso put in place programs designed to boost its own infrastructureperformance, with particular attention paid to high technology and finance. Productswhich are exported into Belgium are frequently re-exported both with andwithout value being added. (1997). (199 , April). OECD Economic Outlook, pp. 95-96. Internet: http://www.ib.fgov.be/gtour/infra.html. Recognized Belgian distributioncenters pay taxes on a fixed percentage (five percent) of their operatingcosts. Because Belgium itself is a relatively small market compared to itsneighbors (Germany, France and Britain), it has long depended on trade forits economic strength. References Alternative Structures. 9 -91. Because of this, Belgium should remain a relatively strong performer inthe European economy. (1996, June). Brussels: Ministry of Economic Affairs ofBelgium. Prior to the formation of theEuropean Union in 1992, Belgium and Luxembourg formed their own economicunion with a shared currency (the Belgium franc was linked to the Germanmark in 199 ). The definition of servicecenters only includes intragroup service centers. Interested parties willbe able to obtain a tax ruling on transfer pricing before the establishmentof the service center. Anyforeign company wishing to engage in trade or manufacture in Belgium canset up a subsidiary or branch. Thenation's central location and good infrastructure, in addition to itshistorical practice of reselling goods from Belgium, all suggest that itwould be an attractive location for a high technology company. Foreignand domestic investors are treated in the same way, and the nation's recentcreation of various "zones" and "centers" can be expected to bring inadditional investors and participants in the nation's economy. At this point, the nation's primary trading partners were based inEurope and Belgium's exports to Spain and Portugal grew by 4 percent inthe late 198 s; the nations GDP was earned primarily from exports (69percent) with most of the exports (6 percent) headed for other Europeannations. Imports and Exports Belgium is, and has been, highly dependent on foreign trade with oneof the highest historic export-to-production ratios in Europe. There are 36 recognized coordination centers in Belgium, manyof them American owned ("Alternative Structures," 1997, n.p.). RealGDP growth increased by more than two percent in 1996, but unemploymentrates remained high. Belgium Economics.
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