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Discord among authorities and domestic producers
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For domestic producers “Produced in Moldova” exhibition opened on February 10 was a good opportunity to complain about deficient laws, high taxes, tight competition with foreign importers, and not less important bureaucracy; rather than show off their products, the great majority of which have been presented earlier anyway. New products were indeed presented, however all of them are nothing but a shallow recollection of a once prosperous industry. The industry was ruined not by the collapse of the soviet empire, as Communists like to think, but rather by the incapacity of Moldovan reformers to seize the moment and set the country on the course of reforms, as well as by the fact that Moldovan political elite, instead of building long-lasting partnerships with business, set itself in a policeman position.
Albeit Commerce and Industry Chamber and National Association of Producers had hoped to show the potential of Moldovan industry, in the end the only thing this event did show was that national producers and Government were still on different sides of the battlefield and that they still had very few in common.
It’s easy to criticise the state for its incoherent policies, however there is plenty room for criticising the businessmen as well. For a start, they want the state to protect them from unwanted international competition, by taking protectionist measures, which is quite a task especially since Moldova joined WTO. On the other hand, many industrialists still refuse to acknowledge their obligation to reward the protectionism the state had granted them, by paying taxes. What’s also strange is that great many businessmen ranted about the high fines levied for non-compliance with the law, rather than about high taxes. This reasoning is inherent to the soviet-time style of making money, when the businessmen contribute towards social welfare by building overly sumptuous villas.
In its turn, Government seeks to keep economy under control. To cite just the pressure wielded on the foreign investors, or the Communist Party electoral program, reading “the end goal of the Communist Party is for the state to take over the means of production and establish a socialist economic system”. Cosmetic measures undertaken by the Government to show business community that “country leadership is on their side” cannot possibly handle the toughest challenge Moldovan economy is facing — shadow economy. According to a recent UNDP report, shadow economy in Moldova accounts for 50% of GDP. Businessmen and Government alike agree that it’s their shared responsibility. The former, used to the state merciless, does not dare to go in the open. The state, wrongly assuming that high taxes mean higher revenues, refuses to cut taxes, which for more than a decade now are the highest among the transition countries.
For instance Hungary and Poland due to join EU soon, lure investors by low income taxes of up to 20%. Having said that, what “carrots” does Moldova have to lure foreign capital? The recent reformatory law package passed by the Slovakian Parliament reduced the income tax to 19%. A single taxation quota is used in Estonia, Latvia, Lithuania, Russia (13% income tax and no social payments), and Ukraine as well, whereas Baltic countries make their “fiscal offer” even more attractive by further cutting the taxation basis. Those regional tendencies to reduce the fiscal burden would most likely affect Republic of Moldova in terms of attractiveness to investments, unless the country comes with a competitive advantage.
Taxes in the region are well bellow those in Moldova. Therefore, Government would have to take a raft of measures to preserve its economic competitiveness. For some political reasons, Government’s fiscal strategy overlooked the “investment magnet” that works so well in Central and Eastern Europe. Too much of a fiscal burden is similar to a too high interest rate, when it affects the balance sheet of indebted companies. A slight drop in the corporate income tax from 25% to 22%, as provided for in the 2004 budget, is not enough to decrease the number of businesses in “shadow”. Although apparently they understand this, authorities refrain from taking the path of fiscal reform for fear to loose the meagre revenues they currently collect and that are necessary to fund the populist social policies promised by the ruling party during the electoral campaign.
Going back to the event that determined me to put down some thoughts about the state of Moldovan business, I should acknowledge that the problems raised by the business community are already know, i.e. obligatory inspection before expedition (in the eyes of many stymieing Moldovan business), high energy costs included in the final product price, pressure wielded by the bureaucrats and excessive state control. Some of the aforesaid problems have already become inherent, especially when it comes to high energy cost. The latter is due not only to obsolete equipment and distribution networks, but also to worn out production lines and technology — common feature of the great majority of businesses present at the exhibition. This has lead to a paradox — the share of energy consumed by Moldovan industry in the growth industrial product is one of the highest in Europe, whereas the share of energy consumed by the citizens is the lowest in Europe.
Exhibition was held under the auspices of Prime Minister Tarlev, who also heads the National Producers’ Association. Probably Tarlev’s unspoken message at the reunion was “I used to be a businessmen myself, so I do know business problems far too well”. What’s striking is that although Tarlev comes from business community, his former fellow colleagues agree that the tensions between state and producers have never been higher. Business’ response to the governmental interventions in economy was quick: in January the revenues to state budget dropped sharply as compared to last year.
Although, high taxes were in the spotlight throughout the entire exhibition, in a recent interview to “Economic Overview” the Chief of State Fiscal Inspection stated that the Fiscal Code in force at the moment was the best possible option. Therefore, my dear businessmen mind your own business, as the fiscal revolution has been adjourned!