Opinion
Worse than predicted
By Vivid writer: Andrew Taylor
The Boc government's attempts at handling the challenges of the global financial crisis have summarily failed, says Andrew Taylor, and the worst hit sector of its policies has been small and medium-sized enterprises
Posted: 15/10/2009
Unlike most governments who have adopted reflationary tactics of pumping public money into the economy and, in some cases, printing more money, Romania has done just the opposite.
So what is the government response to this recession? Unlike most governments who have adopted reflationary tactics of pumping public money into the economy and, in some cases, printing more money, Romania has done just the opposite. It imposed a minimum profit tax, made a complete mess of reorganising public sector pay and recently set the Garda Financiara loose on the country's struggling companies.
The minimum profit tax has two parts to it. First, all companies, irrespective of how much profit or loss they generate are required to pay a minimum level of profit tax. Second, the amount due is linked to the previous year's payments. This is not only unethical and unfair - a profit tax on no profit - it is plain stupid. In the midst of the world's worst recession since the 1930s we ask companies to pay taxes based upon profit earned during one of the country's biggest boom years! In practice what is happening is that small companies are seeking dissolution to avoid the problem, or are being pushed over the edge by it. Once over the edge the owners of kiosks, small shops, and market stalls will join the unemployment lines and require financial support from the government. The exact opposite of Thatcher's 1980s reforms in the UK, this has the effect of reducing independence and enterprise and increases dependence and inertia. Brilliant!
The reorganisation of public sector pay is a disgrace. Rather than have an honest debate about the problem and work out as equitable a solution as possible the government chooses to take on the most educated and powerful groups in the country. A 60 per cent pay cut proposal for judges in a country already in trouble with the EU for corruption and judicial reform is not clever by anyone's standards. A judicial strike was not just predictable and understandable - it was inevitable and completely unavoidable. If the government pushes ahead with its plans we will in all probability face a general strike across the public sector by Christmas, and worse still, it will be popularly supported.
It is not possible to provide any scientifically substantiated case for the role that the tax inspectors are taking in delivering greater revenues for the government. However, the experience of business people does indicate a growing propensity to fine for the tiniest excuse and an increasing willingness to ask for bribes, as alternatives to larger fines. A culture where tax inspectors define their role, in an outdated and Byzantine accounting system, as to seek error, punish and fine, is hardly likely to assist the SME sector to compete its way out of recession. The result is that entrepreneurs are becoming disheartened and giving up. This is a disaster for the country's future.
A first year economics student could tell you how counterproductive any one of these strategies is likely to be on the public purse. The government is blatantly trying to trade economic competitiveness for possible political capital. Whilst the SME sector of the economy is being torn asunder the effect upon political capital has proven equally disastrous. Whilst trying to play a win-lose game with the private sector, the government, all too predictably, is creating a lose-lose situation. At a recent meeting with senior judges Basescu was made to look ridiculous and out of his depth, to the point that he resorted to sarcastic personal abuse in front of television cameras. This is the most incompetent government since 1989, which is no small achievement. I underestimated it; I never thought it could be less competent than the Constantinescu governments, but I am sorry to say that I was wrong.
The reason for such foolishness is the borrowing from the IMF, which essentially gives the government two options: reduce expenditure or increase revenues. Ignoring all economic logic it has chosen to try to protect its political capital, by initially not imposing public spending cuts and trying to raise revenue. Later, it bungled salary and personnel cuts so badly as to render politically and economically costly strikes inevitable.
Just as with 1978, when the UK went cap in hand to the IMF, revenue raising is destroying competitiveness, undermining civil society and fostering a culture of dishonesty, whilst not working and merely postponing the inevitable cuts. Whatever we think about the Thatcher reforms, they were focussed upon delivering enterprise, independence, social mobility and entrepreneurship as a cultural ethic. The social price was often high, but there was a sense of focus and, measured by the these objectives, her governments were successful.
It is hard to see any sunshine on the horizon as Romania remains a year behind Western Europe in its economic trajectory. Thus rather than edging out of recession, it is in fact still sinking in. A winter of discontent awaits as the public sector opposes cuts, the private sector is squeezed and the grey economy balloons. With an election looming we are faced with politicians lacking experience, vision or ideology who collect together in parties, which in truth are no more than tribal gatherings of the various self-interested elite clans that continue to control and share the wealth of this country between them. For Romanians and for those who have lived here for some time, this might all sound terribly familiar.
Andrew Taylor runs Connect-CEE, an outdoor management training company.
Be one of the first to comment on this article