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5 Economic Lessons for the US From Europe's Smallest Principality

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The US (and other countries) should take a cue from Monaco and begin focusing on these economic drivers.

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As the European crisis drags on and finance ministers around the world debate how to cut spending, balance budgets, reduce deficits and whether to raise taxes, it might be helpful to take a look at how the economy of Monaco has developed and prevailed during the past few crisis-riddled years.

Monaco, with a population of 35,427, boasts some interesting economic statistics. The principality has zero percent unemployment, a capital surplus equal to roughly five times its annual GDP -- which, by the way, is the world's highest per capita -- a diversified economy in which no industry amounts to over 20% of the overall economy, and no income taxes. Monaco does have a corporate tax structure, and charges a value-added tax (VAT) on goods and services, so it is incorrect to say that it is a tax-free zone.

Nonetheless, the tiny country, which covers about two square miles, attracts entrepreneurs and established business better than most. I just visited Monaco, where I attended the Ernst & Young World Entrepreneur Forum. While there, I had a chance to meet dozens of business leaders, including Jim McCann, Founder and CEO of 1-800-Flowers.com, Inc. (NASDAQ:FLWS), and Avi Sashi, who is in charge of Nike, Inc.'s (NYSE:NKE) new media ventures, including Nike Plus. During my discussions, many of us agreed that Monaco does a better job at being business friendly and leveraging its resources than most countries.

Although Monaco boasts some of the most expensive real estate in the world, the principality ensures that there are plenty of open spaces and parks, thereby making it a very attractive tourist destination. The industry accounts for just over 17% of the country's GDP. By ensuring that its economy doesn't overly rely on any one industry, the principality has reduced the risk to its economy. Banking and the travel industry add about the same percentage to the principality's economy.

Most significantly, the Monegasque (Monaco nationals) understand that wealthy people will spend and invest money if encouraged to do so; they also understand that ever increasing income tax rates are counterproductive.

So, what lessons can the United States and other countries learn from Monaco?
  • Diversify industry and economy. The US is too reliant on consumers; we are particularly dependent on domestic consumption.
  • Develop a strong infrastructure. Our bridges are crumbling, our roads are deteriorating, and our airports are rapidly aging.
  • Develop a strong immigration policy. Monaco is represented by 125 nationalities. We must focus on attracting foreigners who will be long-lasting and active contributors to our GDP and society.
  • Recognize that raising taxes is not a solution to all fiscal problems. There are more intelligent ways to raise revenues.
  • Focus on education. The International University of Monaco is a specialized business school focused on developing tomorrow's business leaders

As the US economy continues on its road to recovery, and while we still have the chance, it behooves us to take a look around the world and see what the most successful and wealthy nations are doing. We are a country with many natural resources, a giant geographic area, an entrepreneurial spirit that is unrivaled, and some of the best schools in the world. If a small principality that nearly went bankrupt and had to "sell" nearly 90% of its territory two centuries ago can survive and thrive as Monaco has, I say, let's take a look at what they've done and see if we replicate some of that magic.

Full disclosure: The author is a friend of the Consulate General of Monaco, who is also the director of the Tourism Board.

Follow Oliver Pursche on Twitter: @opursche, and see Gary Goldberg Financial Services for more.
No positions in stocks mentioned.
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