28 threats. In this respect the experience of the European Union is highly instructive. As governments have strengthened mechanisms of international cooperation and have built up an impressive institutional machinery for the resolution of disputes and conflicts, they have also seen less of a need for sustaining high defense spending. Military expenditures in relation to GDP have been on a downward trend for the past two decades in every single EU member, sometimes substantially so. While some of this downward shift may reflect the end of the Cold War, it surely also points toward the virtually nil likelihood of armed conflict between EU member states. Less money allocated to military expenditures means, other things being equal, more money available for productivity-enhancing aims.<sup>18</sup>

# **_Better tax systems_**

There is also much that could be done in terms of tax reform and there is considerable value in the sorts of recommendations routinely issued by the IMF to its member countries as part of the Article IV consultation process. In particular, the broadening of the tax base to allow in some cases reductions in tax rates, improving incentives to work, simplifying the tax regime to boost compliance, reducing taxes on international trade and more closely aligning the tax system to the emerging demands of environmental protection.

One important consequence of rationalizing expenditures and improving the efficiency of the tax system is that it improves the nature of the difficult tradeoff which governments face now and will continue to face for the foreseeable future: how to provide sufficient stimulus to economic activity to sustain the recovery, to alleviate poverty, to preserve the capacity to respond to critical needs as they emerge in an uncertain world, while at the same time maintaining the confidence of markets that governments are solvent, that fiscal positions are sustainable. The more energetically are governments perceived to be aware of future fiscal risks and are seen to be implementing ambitious corrective policies, the higher the probability that markets will be willing to rollover maturing debts and ensure a smooth transition to lower debt levels. Unfortunately, the reverse is equally true. Dithering or political stalemate—particularly in those countries with debt levels already in excess of 100 percent of GDP, including, most prominently, the United States—could bring about higher risk premia, increase rollover risk, a much longer period of weak economic activity. Beyond tax reform measures and a thorough examination of expenditure priorities, governments can also move to introduce reforms affecting other markets, intended mainly to enhance the efficiency of resource allocation.

The indicators put out by the World Bank’s _Doing Business Report_ provide, for instance, a useful benchmark for the removal of barriers to business creation and entrepreneurship. The OECD has also developed a useful set of market regulation indicators to assess the extent to which the regulatory framework promotes or slows down competition. These indicators include measures of interference with the workings of the price system, the

> 18 There are legitimate questions as to whether in the EU this process may have gone too far, undermining the ability of the Union to project military power in the world in defense of justice or in instances where collaborative multilateral interventions may be necessary to avoid massive violations of human rights, genocide and so on.