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New initiatives of chief of state

The ambition of the chief of state to resolve the main problems of the Republic of Moldova — modernisation of economy and the Transnistrian conflict — by the end of his presidential mandate, the next two years, is understandable. Normally, the “bold initiatives” in these fields have also very important collateral goals — to ensure the perpetuation of governing of “generators of initiatives” by modulating some favourable electoral expectations. In this regard, choosing appropriate moments to launch initiatives and ensure propaganda is an indispensable element for an eventual electoral success.

Thus, on April 10, 2007 President Vladimir Voronin launched an initiative on “liberalisation of economy” via a) modification of the income taxation system; b) legalisation of capital; and c) fiscal amnesty. These proposals will have a significant impact, with realistic estimates being possible after the Parliament debates the draft amendments to this legislation. The interest for the new presidential initiatives will reach the peak and the regret for ceasing the live broadcasting of Parliament’s sittings will deepen.

At the same time, reports on new approaches of settlement of the Transnistrian conflict, confirmed by foreign analytical^[1] media are released in parallel with initiatives on “liberalisation of economy”. Thus, unprecedented actions are planned and they will have an essential element of start: organisation of early parliamentary elections on both banks of the Dniester River this autumn. Although details are not made public, it is axiomatically considered that only a compromise accepted by the Russian Federation: Republic of Moldova and Transnistria — equal sides of a militarily neutral federation/confederation with a status guaranteed by Russia — may contribute to the conflict resolution.

Of course, the approach of the chief of state is logical, being based on tight interdependence between capacity of modernisation of national economy and settlement of the Transnistrian conflict. The achievement of the first goal requires an internal political stability and predictable external prospects, but the unsettled Transnistrian conflict undermines it. The accomplishment of the second goal requires economic attractiveness of Moldova for businesses and citizens from the separatist region, but this is difficult when Russia supports Transnistria on one hand and Moldova is facing trade embargoes on the other hand.

It is very hard to find the necessary ring and break the vicious circle described above and the appropriate sequence of further actions to resolve the problems of the Republic of Moldova. It requires the coordination of actions at national and international levels. Indeed, the things are reverse — the actions of Moldovan authorities are based on surprising national and international factors of influence and this thing undermines the confidence for the weak capacity of resolving these problems.

Truly, the number of plans on settlement of the Transnistrian conflict is close to two figures, we know many plans: several of the OSCE, several of Russia, Ukraine, Belgium, symmetrical, asymmetrical, consensual domestic plans, etc. There were many plans on modernisation and liberalisation of economy, and the latest plan was original — “three in one”. One cannot say that this multitude of plans does not have an impact. It has, but it fails to resolve the problems and clarify the distance till the wanted resolution, with every plan being a step toward a mirage.

Given these facts, the new presidential proposals, besides the usual effects of such initiatives, will become objects of analysis on impact by business environment, experts, opposition and main foreign partners of Moldova. The internal stability, which is important for achieving the expected goals, will depend on reactions of the opposition. The further financial support for Moldova will depend on reactions of international financial institutions. Finally, the risks that governors may assume, given the ratio of forces in Moldovan-Russian bilateral relations, will depend on reactions of the European Union and the United States toward the new initiatives on settlement of the Transnistrian conflict.

But some findings and explanations related to the initiatives on “revolutionary liberalisation of economy” are needed.

Findings regarding what preceded the new “revolutionary liberalisation”

It is not the first time when the chief of state indicates the need of “liberalising the economy” to the Parliament and Government. He made public the first initiative of this kind at the sitting that the closed the summer session of the Parliament in July 2001, five months after the absolute victory of the Party of Communists (PC) at the February elections. Then the proposal of “liberalisation” had “Chinese characteristics” so that not to clearly contradict the political and electoral programmes of PC, and it was launched shortly after the visit of President Jiang Zemin to Chisinau. The argument of economic success of China did not leave room to PC members to resist to the “Chinese model”. Later, the “liberalisation” option developed toward other models — Cypriot/Baltic. This was established after five years at the sitting that closed the summer session of the Parliament in July 2006. Positive evolutions have been achieved meantime: a) reduction of the income tax from 32 percent down to 15 percent; b) achievement of a partial “guillotine” of normative acts that do not comply with legislation; c) registration of businesses with “one-stop-shop”, etc.

By presenting the modified version of “liberalisation” to parliamentarians in July 2006, the chief of state called more than once on parliamentarians, particularly on the major faction of PC, not to be afraid of “liberalisation”. The April 10 initiatives were introduced as a concretisation of the July 2006 proposals, with the latter deserving to be recalled at least in brief:

• The accelerated modernisation must become the key goal of the Republic of Moldova, which may be achieved easier by using “own sources” only;
• The modernisation must be achieved by using the particularities that advantage the competitive potential of Moldova — it is located in the centre of Europe;
• The E.U. and CIS markets must become free markets for Moldova as a premise for a double commercial asymmetry with the E.U. and CIS;
• The “experience of other countries, which were not afraid of extending at maximum the freedoms for domestic and foreign companies, must be taken over”;
• The Republic of Moldova must “take over the functions that the Baltic States and Cyprus had before the accession to the E.U. as bridgehead for circulation of operative capitals between the West and the former East”;
• “The reasonable taxation of non-residents must be ensured for their presence in our country and activity developed in this territory”;
• “The legislation on free economic zones must be modified, offering preferential conditions for attraction of foreign investments in newest technologies and production of new principle… At least one strong technical park in the field of information technologies and electronic trade must be created”;
• “We must develop the infrastructure and, first of all, the roads and modern telecommunications”RO.

The chief of state noted among positive premises of implementation of his initiatives that Moldova has “a set of agreements on avoidance of double taxation and mutual protection of investments, a well-structured banking, an efficient and transparent business registration system.” In addition, he outlined that the “political stability in Moldova” is actually the key premise.

Although the July 2006 proposals faced much scepticism, they were applauded for political reasons. They were interpreted as a positive signal because the leader of a communist party which holds the absolute power speaks about the necessity of liberal reforms. There was a corresponding irony, raising questions like: a) It would be opportune for the Party of Communists to change its name during implementation of own liberal initiatives, in order to reflect the new liberal course, isn’t it? 2) Does Moldova need 5–6 liberal parties if the Party of Communists is capable to do what is needed and the liberal parties cannot do it?

Comparing the April 10 initiatives of the chief of state with the 2006 proposals, we may observe that the first are rather aimed to create some premises needed to achieve what was said in 2006, if the latter were not forgotten. However, the way the last initiatives were launched raises a series of bewilderments.

Puzzles

1) President Voronin himself said in the past two years on different occasions that the “political stability” factor is essential for “modernisation of the country and liberalisation of economy.” However, the launching of his recent initiatives is synchronised with talks on eventual dissolution of the Parliament and this fact means the start of a period of political uncertainty in absence of some very clear parameters for a lasting resolution of the Transnistrian conflict. In addition, the synchronisation of the economic modernisation of country and the settlement of the Transnistrian conflict presumes the coordination of efforts with the Tiraspol administration, given the immense discrepancies between economic, record, taxation and welfare systems. The synchronisation without coordination with opposition and Transnistrian authorities produces big confusions. Or, on the contrary, it may be speculated that there is an obscure coordination;

2) The way the chief of state tabled his initiatives at the Government’s sitting revealed that their elaboration was not coordinated with the Executive. The commentaries delivered by Premier Tarlev to mass media immediately after the chief of state launched his initiatives at the cabinet sitting that the “Executive will carefully study them”^[2] show that the Government was surprised. Comments and statements delivered by ministers regarding the unconditional support for the presidential initiatives made the impression that they accept being “condemned” to do what they are not ready to do for the time being. Indeed, the Government (ministries) and Parliament (competent parliamentary commissions) were told to quickly give green light to the presidential proposals, so that the Parliament approve them within ten days after presentation;

3) The puzzle is exponentially growing if we recall that the chief of state launched a strategic initiative in late 2006 — the elaboration of the National Development Programme of the Republic of Moldova. This initiative was needed and welcome to ensure coherence in implementing the provisions of hundreds of normative acts and official documents with status of strategies, concepts, plans, etc. In this regard, the Government adopted the Action Plan on elaboration of the 2008–2011 National Development Programme of the Republic of Moldova on December 28, 2006. The first version of this project should be finished by April 1, 2007. The new fundamental initiatives of the chief of state came on April 10, after the electoral campaign for general local elections has started. Experts who worked on the National Development Programme could not take it into consideration. It will be probably necessary to revise their work and to readapt it to the new circumstances;

4) The initiative of the chief of state was not coordinated with community of businessmen, which is actually the target group to support the direct effects of presidential proposals. Curiously, a business forum themed “State and Business Environment in Moldova” held under the aegis of the economic council of prime minister, the Ministry of Environment, the National Association of Manufacturers, the Foreign Investors Association, the Business Development Association and the Club of Businessmen Timpul took place only one week before President Voronin launched the new initiatives. Taking part in the forum was the presidential adviser for economic affairs, Oleg Reidman, and Minister of Economy and Commerce Igor Dodon, who identified the following main problems of Moldovan economyRU: inequality of economic agents working as limited societies and on basis of entrepreneurial patent; big size of smuggling and volume of counterfeited products; limited state control on economic agents that dominate the domestic market; weak competitive capacity of Moldovan products compared with foreign goods. They did not make any allusion regarding the preparation of presidential initiatives. However, it would be very opportune to debate the eventual effects of the new presidential initiatives on the set of gravest problems identified at the forum;

5) In contrast with surprising the Government and business environment, economic experts affirm that the presidential initiatives were coordinated somehow with representations of international financial organisations in Moldova: “What seemed to be a quasi-total surprise at the first sight was actually a well-worked action. Close sources claim that Moldovan authorities intended to launch these initiatives in February, but the IMF opposed the intention to introduce the zero quotas on reinvested benefit and tax amnesty.” But the opposition was helpless. Anyway, representatives of the World Bank and IMF will have to tell their opinions about President Voronin’s initiatives and modalities of making very important economic decisions.

The facts invoked above actually reveal the wish to surprise the Government, business environment and the temptation to produce political sensations, being typical to Presidency when it works out and launches various initiatives. Indeed, most of initiatives are imposed decisions. The wanted effect is to consolidate the exclusive authority of the chief of state. This practice was followed in the past six years — all initiatives in most diverse fields of economic, social, political life with a minimal resonance “must” come from the chief of state only. The contrast with other public institutions is astonishing. For example, Premier Vasile Tarlev, who runs this office for six years like the chief of state, did not launch any memorable initiative of own resonance and he did not even pledge to debate any presidential initiative in a “creative” way. The prime minister may launch only initiatives on “exemplary arrangement of cemeteries,” which is a very important action but rests with competence of local administrations.

The “Moldovan model” is wrong in terms of standards and practices for making decisions.

First reactions of political forces and business environment

The first reactions revealed the major interest for the new initiatives. On one hand, a cohort of businessmen praised the presidential initiatives in propagandistic programmes organised to unconditionally and eulogistically support them. On the other hand, it was fairly said that the proposal seeking the “change of the income taxation system” may have a positive impact, with the other two measures being estimated prudently and with many doubts.

1) Proposal on modification of the income taxation system by establishing a zero tax for reinvested revenue and a 15-percent tax on dividends is welcomed by everybody: politicians, including from opposition; businesspersons; experts, except for those from other countries who are reticent so far. Collections to the state budget rose by approximately 23 percent in 2006, while the share of income tax for individuals and businesses in the state budget was about 5 percent. This comparison speaks eloquently about structural distortions of Moldovan economy. Under these circumstances, testing the 0-percent tax on reinvested revenue seems to be absolutely natural. Budgetary losses would be insignificant if the structure of budgetary incomes does not actually change.

In addition, the Moldovan legislation stipulates measures such as fiscal vacation. “Economic agents with a medium annual number of 19 employees and annual revenue from sales, services of 3 million lei ($1 ~ 13 Lei), regardless of their legal form of organisation and kind of activity, hold the right to be exempted from income tax for three fiscal periods.”^[3] The subtext of support chorus of representatives of big and prosperous companies for presidential initiatives in propagandistic programmes seems to be revealed here. One of the big problems mentioned by minister of economy at the recent forum themed State and Business Environment in Moldova is “the limited state control on economic agents that dominate the domestic market.” Truly, why they should not plead for withdrawal of the problem identified by minister of economy from agenda?

It is worth to note that authorities do not hide their inspiration from the Estonian taxation modelRU.

	Tax on reinvested income of enterprises	Tax on dividends	VAT	Tax for individuals	Social tax	Unemployment tax
Estonia-2000	0%	35%	18%	26%	33%	0,5%
Moldova-2007	0%	15%	20%	20%	35%	-

Although the table^[4] reveals similar approaches of stimulating reinvestments, the taxation of dividends is much bigger in Estonia. Instead, the motivation of businesses not to pay salaries in envelopes actually coincides. However, experts consider that “the very big contribution to social welfare rather than the income tax makes economic agents pay the money in envelopes in Moldova. The Value-Added Tax is high.”^[5]

As regards the attraction of foreign investors, they have also demanded at least three things to arrive in Moldova: a relatively developed infrastructure, an independent justice, a clear and stable economic legislation.

2) The proposal seeking the legalisation of capital from July 1, 2007 to January 1, 2009 through voluntary declaration of money and assets follows the same goal “to improve the investment climate” by “encouraging individuals and businesses (citizens of Moldova) to legalise their capitals, paying a 5-percent legalisation tax from declared value of the service.” This approach of the problem raised much interest and many questions.

Firstly, there are not many estimates to indicate the volume of the “illegal capital” of Moldovan citizens and enterprises and their sources. Such a clarification would be necessary to compare the Moldovan model of “legalisation of capital” with other models. For example, the legalisation of capitals in Russia and Kazakhstan made sense because it was necessary to bring them back and invest them legally after being withdrawn from these countries. Russia has made many attempts of this kind, with the last one being launched by President Vladimir Putin in 2002 but it did not have an end so far. There were diverse sources of illegalised capital in Russia and Kazakhstan, but the main ones are linked to immense exports of raw materials and energy agents, privatisation of economic assets via fraudulent schemes. Talks about such sources of illegal capital in Moldova are irrelevant. According to the report presented by President Voronin at the April 10 governmental sitting, concerns of Moldovan authorities are linked to the fact that “(real estate, land, etc.) assets of legal entities are registered at a lower value than their market cost… Transactions with assets are registered at low prices… Moldovans working in other countries do not declare the incomes (remittances) they earn abroad.”

If these are the main concerns, the remedies against them must be called adequately — legalisation of assets, not legalisation of capitals. In addition, if these are real estate and land assets, they have a particularity — they cannot be hidden from eyes of people, particularly from eyes of state control bodies. The solution to such re-evaluation at real prices is stipulated by legislation for quite a long time and it must be applied in an adequate manner.

The intention to “legalise” remittances is a null and dangerous idea even for the ruling party. Estimates show that 400,000–500,000 Moldovans are permanently working abroad. The same estimates show that their annual remittances count for approximately one billion dollars,^[6] it means that a Moldovan season worker sends approximately 2,000–2,500 dollars a year and most of this money is spent for current consumption and he may introduce it in Moldova absolutely legally without declaring it. And then should these citizens legalise this money on a 5-percent tax after the “revolutionary liberal reforms” have been launched?

It is really interesting that the “revolutionary liberal reform” could not limit to the formula “three in one” but it may have a very interesting extension — introduction of obligation to declare the incomes when buying objects that cost more than a certain amount. This possibility is suggested by the stopped 2006 presidential initiative on modification of Article 46 (3) of Constitution, which says that “the estate obtained legally cannot be confiscated. The licit nature is presumed.” The segment of electorate made of relatives of the approximately 400,000 season workers may get “angry” for such presumed intentions and it may vote in an untraditional manner.

Instead, economic experts consider that the presidential proposals will not trouble owners of capitals in offshore zones very much. The capitals from offshore zones may return to Moldova under various pseudonyms and there are lots of schemes and technologies in this regard. In addition, it should be noted that the chief of state initiated regulations on the 15-percent “offshore tax” in 2004, which “residents of Moldova, subjects of taxation should pay to the state budget before transferring the funds in Moldovan lei at the official exchange rate of the National Bank”. The offshore tax should be “included in general and administrative expenditures and should be deduced from the taxable revenue for determination of obligations regarding the income tax in the generally established manner.” If the “offshore tax is not paid to the state budget in the due time, it is taken from subjects of taxation by imposing them to pay a fine stipulated by the Tax Code. Also, the violation of the mode of issuing and reporting the offshore tax should be sanctioned.” However, President Voronin did not promulgate the adopted law, invoking the “danger of higher prices of oil products and other imported products, damage of interests of present and potential investors, appearance of some contradictions with international treaties on avoidance of double taxation signed by Moldova, etc.”

In this context, the estimation of capitals from offshore zones invested in Moldova and other data on their circulation here raise interest.

3) the proposal on “tax amnesty” seeks: a) the annulment of all fiscal debts of economic agents raised before January 1, 2007; b) annulment of fines/penalties for delays; c) withdrawal of sequesters from assets of economic agents. It also seeks to ban the control of fiscal bodies on these documents before the deadline for annulment and the rise of sanctions for failure to pay taxes and duties starting 2007.

This proposal has produced the most controversial reactions of opposition political leaders, experts and some businessmen. The reaction of international financial organisations, for which maintaining the macroeconomic stability (maintenance of a budgetary deficit below 0.5 percent of GDP, inflation below 10 percent, etc.) prevails on other details, is unknown. However, the chairman of the parliamentary commission for economy, budget and finance, Nicolae Bondarciuc, member of the PC faction, assures that “international financial organisation have given green light to this initiative.”^[7] At the same time, economic experts stress that “the fiscal amnesty and the zero tax are not part of commitments toward international financial institutions, particularly toward the International Monetary Fund.”^[8] They noted that the “fiscal amnesty has a moral hazard.” It means that all economic agents who respected the fiscal legislation and paid the taxes in the due time see a possibility of avoiding payment. This creates some perverse moments for those who got used to pay. They could think so: why should I pay if a fiscal amnesty is coming and I give my money for nothing^[9]."

Truly, why not to apply the existing and generally accepted tools toward those incapable to administrate their business efficiently — for example, the law on bankruptcy; why to discriminate those who honoured their obligations?

Credibility toward initiatives

A number of businesspersons, experts and opposition political leaders have remarked that the success of presidential initiatives depends much on their credibility. A very strong scepticism comes from former high-ranking dignitaries who are now in opposition. However, their notices are based on strong arguments. Thus, parliamentarian Dumitru Braghis, former prime minister from December 1999 to April 2001, wonders — why to introduce the 0-percent tax for all businesses inclusively the banks, which have super incomes in any case? Are these private interests of ruling elites? At the same time, the former deputy prime minister for real sector of economy in that period, Deputy Valeriu Cosarciuc considers that “those around the acting governance will benefit of legalisation of capital because they are the only persons who could work illegally and avoid paying taxes. Those who provided with various goods and capitals need now ways to legalise them. All others who worked legally and who did not warm the acting governance have been passed through the sieve of the SIS and CCCEC.”^[10]

The support of citizens for initiatives should correlate with the trust rating of President Voronin. According to surveys, this rating is on the significant decline, though it is much higher than the ratings of other politicians. In this case, the general confidence must not be mixed up with the trust of the target group — businessmen and owners of illegalised capitals, which will bear the main effects of these initiatives.

Knowing that not all promises of the chief of state are possible is another important factor. Sometimes promises are forgotten, other times they are reformulated depending on conjuncture and eventual achievement of other interests. Thus, the chief of state proposed the modernisation of PC in May 2002, but the party was not modernised so far. The main documents — political programme and status of PC — did not change; the practices of making internal decisions and decisions of public institutions occupied by PC members did not essentially change, with the way of launching the recent initiatives being a proof. The joining of PC to the United European Left in January 2007 cannot inspire must confidence for the sincere option for an authentic “liberalisation”. The latest public stances of PC leaders show that the liberalisation is seen in the limits of the new Leninist economic policy (NEP). What may be the confidence for intention of sincere promotion of liberal values, when all know what followed the NEP, in spite of the argument that the times have irreversibly changed.

Even more, the official documents of PC oblige the leadership of this party to call “for instauration of socialism in republic, with the final goal to build the communism and to base its activity on Marxist-Leninist doctrine.” Citizens perceive the discrepancy between formal goals and promoted policies. According to surveys, the rating of those who believe that the PC is capable to help the country get rid of the crisis has declined by approximately 20 percent since the modernisation of the PC was declared till December 2006. The table below reveals that promises made before elections help increasing the trust rating, the way it happened before the March 2005 parliamentary elections. That’s why it is considered that the new presidential initiatives have strong electoral connotations when the confidence is clearly on the decline.

Definitively, is the failure of President Voronin to modernise his own party a factor of trust that he will manage to modernise the whole society? Propagandistic pirouettes and sophisms based on quotas by Hernando de Soto and George Soros about nature of capital presented as the support of these persons for the initiatives of President Voronin are not enough to convince that a communist party is capable of a “liberal revolution”. On the contrary, the modality of making decisions on “revolutionary liberalisation” is very relevant in this respect.

A persuasion campaign, not propaganda will be needed to make holders of informal capitals believe the good intentions, and it must show positive cases, reveal the evolution of fates of capitals amnestied and invested with a potential benefit. But this would be also insufficient like calls of the chief of state upon businessmen “to open a new page” in relations between authorities and business. The old pages should close for this purpose. In this regard, “the public opinion shall be informed about evolution of criminal cases on management of some state-run economic agents: Air Moldova Company, S.A. Franzeluta, S.A. Aroma, S.A. Farmaco, and others.” Credibility for the new initiatives would grow if the number of positive examples of elucidating previous cases of resonance, which the domestic mass media has reported to public, is higher but nothing is actually known about their settlement. Also, those who legalised their capitals shall not be persecuted.

Conclusions

1. The immediate effect of the new economic initiatives of the chief of state is propagandistic, overshadowing the estimation of eventual positive and negative effects of their implementation. The conclusion results from statements that the eventual capitalisation of assets in Moldova following the presidential proposals will allow its withdrawal from the shameful register — “the poorest country in Europe.” This approach may be efficient for electoral purposes, but it is counterproductive for modernisation of economy. For example, praising the formula “three in one” — that means three concomitant actions for a “liberal revolution” — does not take into account the fact that sometimes it is better for actions to have a well-chosen sequence, so that some of them to prepare the premises for an efficient implementation of further actions;

2. The way the initiatives were launched reveals that the process of making economic decisions is still unsatisfactory. This is rather a negative signal for foreign partners of Moldova;

3. The economic effects of presidential initiatives will be positive rather than negative. However, they shall not be overrated. The capacity of attracting investments in Moldova will be weaker than of the countries that served as reference points for acting Moldovan authorities (Baltic States/Cyprus). Emigration of labour force; quality of labour force from country; undeveloped infrastructure; unsettled Transnistrian conflict; blocking of regional transit ways; credibility of governors; high corruption rate, etc., are factors which will reduce the positive effects expected from presidential initiatives.

4. Political effects of presidential initiatives shall be positive. The proper initiatives and the modality of presenting them will produce political debates with an unimaginable scope in society, this being a very positive thing for Moldova. This would help maintaining on agenda the need of modernising the country, the party system in general and the ruling party in particular;

5. The moral aspect of formal argumentations in favour of new presidential initiatives is doubtful. The proposed fiscal amnesty will rather contribute to undermining the financial discipline of those who badly manage their business, disfavouring and discouraging the professionals. It will be probably necessary to combat these expectations through coercive measures. It is significant in this regard that the CCCEC is refraining from commenting the initiatives and the effects of their implementation. In addition, in moral terms there is no difference of principle between raising an income on account of speculations based on difference of real and nominal values of goods and obtaining political/electoral dividends from conscious use of a name that does not correspond to promoted policies by a political force which calls for new relations. If the true goal of PC is to “build the communism”, it is extremely suspicious that it may be achieved through a “liberal revolution”. This may make sense for the only goal of identification of “liberal elements” which will be annihilated later. Nobody can believe this, so the discrepancy that produces such conclusions shall be remedied.

6. Any governance is not ready to recognise its mistakes but instead it tends to exaggerate its accomplishments. Launching the new initiatives, the acting governance must be aware that they may be easily reckoned. Concrete effects of the new presidential initiatives shall be calculated before the 2009 ordinary parliamentary elections, if early elections do not take place — how many individuals and businesses applied for legalisation of capital; what volume of capital was legalised; what was the economic effect; did these measure help Moldova get rid of the shameful status of “the poorest country in Europe”; did the governance press the holders of “capitals-remittances” in order to improve the statistics on these initiatives, etc.

 

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