Freeing Business – the Overriding Task for the Government

A speech delivered to a press conference held by LFMI on June 15, 1999 to present the results of a third survey of macroeconomic variables in Lithuania
Every time we present the results of the survey of macroeconomic variables, we are asked one and the same question: What government actions do your survey results hint at? So let me speak about government actions.
When we discuss the growth of GDP, we should keep it in mind that the government is not a GOSPLAN, ordering companies around and dictating what and how much is to be produced. In this respect the government has very limited capacities to directly affect the growth of the economy. On the other hand, it is the state that shapes the business environment and thus opportunities for productive activity.
After the Russian crisis, the government of Lithuania blew hot and cold estimating the fate of GDP growth and sending ambiguous signals to market participants. As a result, companies which did not pin their hopes on government largesse but chose to come to grips with their problems have managed to get by. Those which are still waiting for handouts from the government are delaying action, thus adding to the deceleration of economic growth.
Another important factor affecting the business climate is the regulatory system. Business liberalisation, which the current administration has pledged to pursue, is, no doubt, the surest path to economic growth. Take unemployment as an example. As the survey results show, unemployment is expected to continue to grow. Last year LFMI analysed labour market regulations and concluded that they injure both employers and employees. Complex procedures for dismissals and compensations, the mandatory minimum wage and fixed working hours do not allow people to freely pursue employment. Such regulatory constraints are particularly damaging for the labour market in underdeveloped regions with a high level of unemployment.
Agriculture is yet another cause for concern. This domain also abounds with examples of government-imposed regulations which bring back disproportions of the past and reduce opportunities for alternative business activities in rural areas. Legal persons are not allowed to purchase non-agricultural land. Changing the designation of land from agricultural to non-agricultural is close to impossible, thus impeding transformation and development. The mandatory minimum wage strikes hardest at underdeveloped regions and young people who are thus denied entry-level jobs. If employment is to be promoted and economic growth advanced, the aim should be to remove these constraints.
When presenting the results of the previous survey, we noted that GDP would not grow as fast as the official statistics predicted. We highlighted the need to trim the overly optimistic budget estimation and urged the government to take all necessary steps to avoid a mechanical, ad hoc reduction of the budget. An in-depth analysis of government expenditures was needed to determine which of the functions should be minimised and which should be foregone altogether.
Today people are being threatened with budget cuts. But if properly implemented, they would not injure people. Quite the opposite. They would unleash opportunities for private initiative. Surely, it is not too late as yet to tie the budget reform to a revision of state functions and business deregulation in general.
The survey participants and we at LFMI think that the litas would remain stable and the exchange rate would not change in the short term. To ensure this, however, the government should curtail public borrowing and reconsider its investment programme, given that government liabilities, both domestic and foreign, are covered with the same reserves as the litas. The backing system in Lithuania is credible enough; it only requires that the government properly manage its cash flows.
As we all know, the Bank of Lithuania plans to peg the litas to a basket of euro and the US dollar. There is hope that the replacement will take place fairly soon. Some enterprises and experts believe that this will be prompted by the expectations that euro will continue to drop against the US dollar. Before the euro was introduced, LFMI had predicted precisely the same course of events. Today, however, we should be aware that, if euro falls below the greenback, the drowsy pro-socialist governments in Europe will be likely to take measures that will lead to an artificial maintenance of euro. So a faster reorientation towards euro may turn out well for some businesses, but if euro appreciates against the US dollar, the litas will continue to gain strength.
The results of our surveys show that profitability of Lithuanian companies is shrinking. This, to my understanding, is one outcome of government interference in business affairs. On the other hand, the trend is toward an increase in reinvested profits. This is a much welcome development, as it means that investments are being made by those who know how to make money. Such investments are always more effective than government injections commanded from the corridors of power.
However, there is a whole range of statutory issues which represent a drag on investment. The rules of deducting investment from taxable income are vague and non-transparent. They have changed several times this year, leaving investment plans and accounting thereof in a muddle.
Equally damaging is the law on joint stock companies which rules that firms which do not pay dividends (which is quite natural if a company wants to invest) may not pay bonuses, give to charity or make other payments out of profit. All these constraints, I am afraid, do not fit into the framework of free and unfettered business.
In the present survey we have looked for the first time at the share of non-banking loans in the credit market. According to the experts polled, non-banking loans account for a total of one-fifth of credits in Lithuania. These loans are very important as they come from business partners and parent companies. They help enterprises solve their problems without resorting to solicitation of government aid. In a situation when companies are in bad shape and cannot borrow from banks, non-bank lending provides a good opportunity to make decisions regarding further business development.
But, the Lithuanian law does not allow companies to borrow from non-banking institutions. In addition to that, a recent decision to tax interest payable abroad also strikes hardest at non-banking loans. (Luckily, the government of Lithuania was convinced to revoke taxing of interest payable to banking institutions.) All this means that one-fifth of credits extended to Lithuanian companies is almost outside law and subject to a particularly unfavourable tax treatment.
To conclude, the results of the survey show that people do have confidence in the present government. So if it keeps the promise to free business and to remove regulatory constraints, people will take delight in creating wealth and prosperity. Figures, no doubt, will reflect the same.