The Role of the State in the XXI Century
We have entered the XXI century, but we still live in states of the XX century design. What things should be different?...
Free and fair elections became practice in Latvian parliamentary democracy. Political landscape in the country is pluralistic and diverse. However, this freedom applies only to Latvian citizens. Around 12% of residents who still do not have citizenship have limited access to political life, which mostly hits the large Russian ethnic minority. They are not able to vote or run on elections at any level. After turbulent beginning of 2016 and change of Prime Minister, government remained stable by the mid-2017. Local elections were held on 4th of June 2017 with a turnout of a little bit over 50%. Most of the incumbent representatives remained on their posts after elections, including mayor of Riga, capital of Latvia. A result of the change in the country`s electoral regulation was a
cut of state funding for ruling liberal-conservative Unity party due to their overspending during the last parliamentary elections.
Once upon a time very influential unconstitutional veto players in Latvia - wealthy oligarchs - largely lost their power to undermine democracy and rule of law in the country. Therefore, today there are no challenges to elected representatives to effectively govern the country. Mechanisms established to deal with corruption in Latvia are showing progress, however the disputes among the leadership of KNAB – Corruption Prevention and Combating Bureau - were damaging for the country’s image and efforts. KNAB started several criminal investigations against officials, including Minister of Healthcare, for abuse of office.
Freedom and independence of journalists and media outlets in Latvia is at a high level. Printing, broadcast and online media outlets are offering a wide range of views. However, some legislative restrictions, like criminalization of libel or most recent adopted amendments that criminalize nonviolent acts against the state, bound this freedom and indirectly influence journalist independence. National Electronic Mass Media Council (NEMMC) requested from the police to find a leaker of secret information to a journalist, regarding future members of the board of Latvian Television. This body was often target of accusations of being politicized, due to the fact that the Parliament appoints its members. NEMMC banned broadcasting of Rossiya RTR for six months, on the ground of inciting
hatred and sharing partisan information, until October 2016. Following the example of Estonia, Latvia too is preparing to launch a national television channel in Russian language, as a response to the Russian media influence in the country.
The organization European Justice has assessed in 2016 that Latvia had an independent judiciary. Many other reports suggested that this independence was only partially respected. Portal GAN warns at a moderate risk of corruption in courts, besides highlighting problems of their inefficiency and politicization. Domestic arbitration and voluntary mediation, introduced in 2015, have eased the proceedings in commercial cases, thus increasing efficiency. European Commission has noted progress along the judicial reforms as of 2015. Selective measures to improve conditions in overcrowded prisons (e.g. new programs, following experience from Norway, of re-socialization of drug addicts and prevention of drug abuse in prisons) were applied during
2016. Freedom House enumerated the changes to the Criminal Code, demographic factors and the construction of a new, more modern prison (to be completed in 2018) as factors that were or would be contributing to the lessening of the overcrowding problem.
Improvements regarding corruption in Latvia are small and slow yet steady, thus promising on the long run. Transparency International, in its Corruption Perceptions Index 2016, put Latvia to share the place 44 (with Georgia), among 176 monitored countries. Attempts to catch up with the neighboring Lithuania and if possible also Estonia are visible, e.g. through more cooperation between law enforcement agencies and whistle-blower NGOs in curbing cross-border corruption. A few organizations (e.g. GAN in 2015, or Bertelsmann in 2016) noted that more had to be done regarding high-level, rather than petty corruption. Recent examples, put by Freedom House or other monitors, indicated to a liberal analyst that lobbying by special interest
groups and/or excessive presence of state in the economy were important catalysts of some forms of high level corruption. On the positive side, the public mood is decisively turning against graft, while the election of the head of the main anti-corruption body KNAB (itself not much trusted) was understood as a serious task in October 2016. None of the 10 candidates was chosen. Among them also the incumbent was rejected, thus forced to subsequently resign. In March 2017, the Government approved the long-awaited, fiercely debated and often amended draft law on protection of whistleblowers and re-sent it to Parliament.
Human rights in Latvia are decently protected in some, while they increasingly lag behind EU`s average standards in other fields. For instance, freedom of religion is kept up to the highest EU standards. Gender pay gap has been smaller than in comparable countries and lower than EU average. CSOs enjoy a considerable freedom and opportunities for their activities. Academic freedom is upheld. On the negative side, populism is in the rise and with it xenophobia, homophobia, hate speech or other manifestations of closed society. Freedom House noted in 2017 that “coinciding with Donald Trump’s election in the United States in November” 2016 “anti-globalization and anti-Muslim views became more common and stronger.” Issue of
citizenship is still unresolved. In December 2016, Council of Europe criticized the position of Latvian government. Namely, ex-Soviet citizens without Latvian citizenship, mainly Russian-speakers, make 11% of the population. Their children cannot automatically get citizenship status either. Besides, CoE advocated more action to further narrow gender equality gap and protect women, children and LGBTI persons. As for the latter, transnational gay rights organization ILGA has named Latvia, together with Poland and Lithuania, as the worst places in the entire EU for LGBTs to live in. However, FNF`s own research, in the framework of the Human Rights Index, showed that Cyprus was the worst in the EU regarding LGBT equality as evaluated from a liberal perspective, followed by mutually equal Latvia, Poland, Romania and Slovakia.
Private property in Latvia is overall secure. Expropriation of private property is limited to extraordinary cases of public interest, and even in those cases market-value compensation is determined, which can be challenged in court. Judicial independence is not always upheld, and court partiality is not fully attested since similar cases can face different rulings. Legal procedures are usually long, in violation of the standard of reasonable time for court proceedings, leading to high numbers of backlog cases. At the same time, public procurement process is not perceived as fully fair and transparent, giving advantage to ‘’preferred’’ contractors. There are no restrictions on possession of real property for foreign nationals, but non-EU nationals cannot legally own land
although it can be leased for a period of up to 99 years. However, new amendments to the law on privatization in rural areas lifted some (necessary professional education in the field and a certain income arising from agriculture activities) but introduced new barriers (a registration certificate in Latvia and Latvian language requirements) for foreign nationals. Property registration is quick and inexpensive.There are no significant obstacles to foreign investment, apart from several industries considered as strategic (aviation, auditing, media, defense etc.) In 2017, the government introduced new regulations that made government approval necessary for transfer of significant ownership share in energy and media outlets, due to defense concerns over Russia’s involvement in the national politics.
As in other Baltic states, government is frugal as compared to other EU countries. Total government expenditure stood at 37% of GDP in 2016, with a small deficit of 0,4% of GDP. Government debt remained stable below 35% of GDP. Weak external position, due to a slowdown among trade partners, as well as prevailing geopolitical tensions, led to a decrease in economic growth, below 2% of GDP in 2016, but it is expected to pick up. The authorities recently proposed a tax reform, with the aim of lowering taxation on below-average wages through broad tax exemptions, and introducing higher marginal tax rates, as well as changes in corporate income tax. This reform is envisaged to provide more incentive to work and investments, and to decrease the high rate of shadow economy in
the country, which may have fiscal consequences. Legally, there are six joint companies that cannot be privatized, in sectors of energy and mining, transportation, postal services and forestry. The number of SOEs in the country is not high - the state fully owns 69 companies, but there are many more where it is a minority shareholder. Total employment in SOE sector exceeds 6% of the total employment. Some of these companies, such as the national air carrier Air Baltic, could pose significant fiscal risks to public finances. However, private companies are able to compete with SOEs on the market under same terms and conditions. Latvia became a fully fledged OECD member in July 2016, which was expected to increase accountability and management practices of SOEs in the country, through implementation of OECD rules in this area. Corporate income tax is set at 15%, while the standard and preferential rate of VAT are 21% and 12% respectively. However, the overall tax wedge on labour is high, due to high social contributions (11% of the gross wage on behalf of the employee, and 24% on behalf of the employer) and flat personal income tax of 23%.
Regulatory environment in Latvia is overall business friendly. Starting a new business is easy and inexpensive, and the minimum paid in capital is just 1 euro. Getting electricity is relatively easy but expensive (and prolonged due to public tenders of the utility for independent contractors), and obtaining a construction permit is also an efficient and low cost procedure. Getting credit has been made easier by introducing a private credit bureau, which is to eliminate information asymmetries. Tax compliance, which had been considered complicated, has recently been streamlined through improvement in the online filing system for corporate income tax and VAT. Low number of annual payments and efficient post filing procedures further give strength to the tax regulations. However,
partisan treatment by government officials and corruption in some cases still remain as obstacles to a better business environment. Labour regulations are mostly flexible, without restriction on working hours, and with fixed term contracts length of 60 months. However, there are retraining or reassignment obligation of the employer for the workers prior to redundancy and severance pay increases with the years in tenure, making jobs more secure for seasoned workers, but also making them less employable. The minimum wage is set very high (and there are plans for its increase, as a part of the tax reform), relative to the average wage, which can have negative employment prospects for long term unemployed and those with the lowest qualifications. The new Start-up Law, producing significant waivers on this business community, is envisaged to attract new investors in this area.
Freedom of international trade is generally respected in Latvia, which imposes tariff and non-tariff trade barriers in accordance with the common EU trade policy. Therefore, tariffs are overall low (4.2% for Most Favoured Nation MFN), and mainly focused on agriculture (11.1% MFN). International trade is also of great importance for the Latvian economy, as in other Baltic states, due to its transport hub status. Border and documentary compliance is efficient, posing little burden on trade, with only 4 documents necessary both for import or export procedures. The international trade integration has also been fuelled by introduction of the euro as the national currency, eliminating foreign exchange risk costs. However, non-tariff trade barriers still pose hurdles to imports, mostly
in the field of certifications and quality standards. Good public transportation infrastructure enhances international trade, by lowering freight costs. While ports and road network are well developed, railroad is not, and Latvia is connected by rail only with its neighboring ex-Soviet countries, which poses restraints on future trade development. Main Latvian trade partners are other EU countries.