Analytics, Book review, EU – Baltic States, Latvia, Modern EU
International Internet Magazine. Baltic States news & analytics
Saturday, 05.10.2024, 23:28
Corporate regulation in Latvia: OECD’s approach
The first OECD report after Latvia joined this orgainisation
(in mid-2016) appeared already in the fall of 2017. That was a profound
analysis of Latvian socio-economic problems with very valuable recommendations
for perspective growth and progress in Latvian development.
See more in our magazine’s publication – “OECD’s economic survey for Latvia: better
policies for better lives” (04.10.2017). In: http://www.baltic-course.com/eng/analytics/?doc=133804&ins_print.
Generally, the OECD’s main “products” represent officially
published and distributed economic reports (global, regional or national in
orientation), statistical databases, analyses and forecasts on the outlook for
economic growth in the OECD’s member states and around the world. A group of skillful
experts provide analyses and make reports on national social-economic growth
with additional policy’s recommendations.
This time the OECD report*) was devoted to the Latvian
business regulation and administration. Acknowledging progress in Latvian legal
sector (often referring to “justice sector”, which is not the same) by
implementing socio-economic reforms, authors underlined that reforms “provided
more business-friendly administration in the country”. Authors call the process
“effective access to justice” adding in the introduction that this “phenomena”
has been regarded world-wide as an important condition for growth, investment
and tackling inequality. Perfect observation, though the authors mix up
justice, rule of law and business regulation, as part of the legal sector; some
notes on this follow below.
*) OECD (2018), Access
to Justice for Business and Inclusive Growth in Latvia, OECD
Publishing, Paris,- 158 pp. In: https://doi.org/10.1787/9789264303416-en.
The report is available at: https://read.oecd-ilibrary.org/governance/access-to-justice-for-business-and-inclusive-growth-in-latvia_9789264303416-en#page4
According to the report, “Latvia is taking an innovative,
user-centered approach” in improving national legal and justice services
(p.11). In fact, the report is restricted to commercial legislation, while
showing administrative regulations with their impact on business activity. In
the conclusion, the report provides recommendations for Latvian authorities to
modernise business law system towards favoring corporate activity and inclusive
growth.
The report starts with assessment and recommendations
(covering 20 pages out of 158) on various Latvian legal system aspects,
including commercial law, formal requirements for doing business, dispute
resolution services and administrative reforms needed.
First chapter provides an overview (on 10 pages) of the
country’s legal system and governance covering corporate access to justice as
well as businesses’ “legal needs” (pp.28-29)., while describing “balancing user
perspectives with public needs” (?!). Corresponding recommendations include:
legislative amendments to include modern forms of business. In this regard,
there are as well two suggestions on “doing business in the age of technology”,
including “integrative approach”, reducing formalities and electronic solutions
(p.13).
Second chapter –“responding to business needs” (pp. 33-58) –
makes specific attention to Latvian commercial law and administrative
simplification; there is only one suggestion here is reducing frequent changes
in legislation.
Chapter three seeks to combine administrative and commercial
issues in business operation with a view of making business more efficient. In
“shaping business friendly governance”, there are three recommendations: a)
“integrative access to justice” (!); b) business policy coordination, and c)
advising business before sanctions (consult-first-approach).
The report shows that among main obstacles to business
activities are: tax rates and tax legislation, frequent changes in laws and
“competing with the shadow economy” (p.41).
Finally, chapter four is about measuring administrative
costs in corporate activities (pp. 130-141). Here the recommendation is to
apply qualitative assessments (so-called Standard Cost Model) to measure
administrative burdens. Besides, provision of e-services is necessary to
streamline administrative procedures (p. 15).
The report underlines that administrative costs for an
individual merchant amount to € 369 and takes 4,6 days to complete
registration; in 2016 the costs were € 222,5 (p. 131).
There are in total 20 recommendations in the report
(pp.17-19); some final ones are connected to “access to a sound court system”, emphasizing
“specialized court proceedings” and more active introduction of alternative
dispute resolution (p.16).
In the category “ease
of doing business”, Latvian entrepreneurs seem quite good among the states
around the Baltic Sea area: leaders are Denmark and Sweden (with scores of 3
and 10 correspondingly), Estonia -12, Finland -13, Lithuania -16 and Latvia
-19. Even Germany is with 20 point, Poland –with 27 and Russia with 35.
Competing analysis: “explaining Latvian business”
This report of over 150 pages “competes” with another fact-based
analysis, i.e. World Bank’s 14th edition of “Doing Business”, the
latest was revealed in February 2018. See:
https://datacatalog.worldbank.org/dataset/doing-business.
As to “ease of doing business”, see: https://data.worldbank.org/indicator/IC.BUS.EASE.XQ?view=map
“Doing business” analysis by the WB Group has shown both
pluses and minuses of the Latvian corporate structures; full report of 312 pp.
can be seen below. The 2018 edition is devoted to “reforming management &
governance to create jobs”. Full WB report: http://www.doingbusiness.org/~/media/WBG/DoingBusiness/Documents/Annual-Reports/English/DB2018-Full-Report.pdf
Quite notable that in “doing business” the WB group this
time concentrated on the following important issues: Starting a Business (transparency
of information at business registries), Dealing with Construction Permits (Private sector participation
in construction regulation), Registering
Property (Using information to curb corruption) and Resolving Insolvency (The challenges of successfully
implementing insolvency reforms).
Justice vs. “law & order” in business
Both for the readers of our magazine and –probably- for the
national authorities, some additional comments are necessary.
- First of all, justice
and business have been for centuries almost contradictory issues: suffice it to
say that in the British English business (synonym to undertaking) is an
activity “with a view to profit”. The ways the profit is acquired is up to the
business law “to decide”. Without such legal restrictions businesses would
destroy all socio-economic fabric.
- Second, only
recently developed economies started to include in business culture corporate
social responsibility’s (CSR) principles, which are still a voluntary
connotation.
See more: https://www.businessnewsdaily.com/4679-corporate-social-responsibility.html
Still, it is government regulations, i.e. legal rules that are
“governing” corporate activities, from starting a company to bankruptcy.
It has been so for centuries: business laws have been always
“sticks & carrots” for corporate activities. For example, on his painting “Justitia”
by Maarten van Heemskerk (1556), “Justitia” carries
some symbolic items: a sword, scales and a blindfold.
According to the
utilitarian theory, justice requires the “maximization” and distribution of the
total/national welfare (i.e., in simple terms, by the GDP’s size) across all
individuals/residents in a country. Justice is the concept of some cardinal
virtues, of which the national legal system and the EU values are the integral
parts.
According to
ancient thinkers, justice is ultimately derived from and held by God; e.g.
following the Bible the “law was created by God to require the Israelites to
live by and apply His standards of justice”. Needless to say that neither of
these ideas came to life…
However, it is
the national legal system (or simply “law & order”) that raises important and complex issues concerning
equality, fairness, and justice. Although, “all are equal
before the law”, the belief in equality before the law (called legal
egalitarianism) hides dramatic inequality, which is clearly seen in the Latvian
social realities.
In theory, “legal
equality” remains blind to social inequality: the same law applies to all who
might have disproportional wishes and desires (with harmful effects on the
least fortunate).
Classical liberalism and modern “regulated liberalism” advocate
civil liberties under the rule of law with an emphasis on economic freedom.
Equality before the law is one of the basic principles of “modern capitalism”, with
a lot of state-regulation efforts, turning it into the “managed capitalism”.
- Third, institutional aspects:
administrative systems are required to “instantiate ideals of justice”. These
institutions may be justified by their approximate instantiation of justice, or
they may be deeply unjust when compared with ideal standards. Justice is an
ideal the world fails to live up to, sometimes due to deliberate opposition to
justice despite understanding, which could be disastrous. The question of “institutional
justice” raises other important issues, such as legitimacy, procedure, codification
and interpretation, etc.
- Forth, “the
rule of law” is the "authority and influence of law in society, especially
when viewed as a constraint on individual and institutional behavior; (hence)
the principle whereby all members of a society (including those in government)
are considered equally subject to publicly disclosed legal codes and
processes". It is important to underline that the “rule of law”,
generally, refers to an optimally functioning socio- political system and not
to any specific legal rule. The rule of law implies that every person is
subject to the law, including people who are lawmakers, law enforcement
officials, and judges. In this sense, it stands in contrast to an autocracy, dictatorship,
or oligarchy where the rulers are held above the law. Lack of
the rule of law can be found in both democracies and dictatorships, for example
because of neglect or ignorance of the law, and the rule of law is more apt to
decay if a government has insufficient corrective mechanisms for restoring it. References
to: https://en.wikipedia.org/wiki/Rule_of_law.
In France and Germany the concepts of rule of law (Etat
de droit and Rechtsstaat, respectively) are analogous
to the principles of constitutional supremacy and protection of fundamental
rights from public authorities (see public law), particularly the legislature. France
was one of the early pioneers of the ideas of the rule of law; the German
interpretation is more "rigid" but similar to that of France and the
United Kingdom.
- Fifth, the “rule
of law” is especially important as an “influence tool” on the economic
development in developing and transitional countries. To date, the term
"rule of law" has been used primarily in the English-speaking
countries (with a common law system), and it is not yet fully clarified in
civil-law countries, which is the case in Latvia. Probably with the advent of
Brexit, differences between the common law and civil law systems/countries will
not be so vital but being critically important for doing business across the
borders and for inherent links between the rule of law and business/economic
activities.
- Sixth, the “rule
of law” primarily connotes protection of property rights; thus economist F. A.
Hayek analyzing the rule of law to benefit trade proposed that under
the rule of law, individuals would be able to make wise investments and future
plans with some confidence in a successful return on investment. He stated: “under
the rule of law the government is prevented from stultifying individual efforts
by ad hoc action. Within the known rules of the game the
individual is free to pursue his personal ends and desires, certain that the
powers of government will not be used deliberately to frustrate his efforts”. Studies
have shown that weak rule of law (for example, discretionary regulatory
enforcement) discourages investment; economists have found, for example, that a
rise in discretionary regulatory enforcement caused US firms to abandon
international investments. References to: https://en.wikipedia.org/wiki/Rule_of_law
- Seventh, expert
teams in OECD do understand all the pressing items in Latvian and other Baltic
States’ business issues. For example, recent analysis for Lithuania is called “corporate
governance”. See:
https://read.oecd-ilibrary.org/governance/corporate-governance-in-lithuania_9789264302617-en#page1
In the Lithuanian’s analysis, OECD put correctly -dealing
with “corporate issues”- attention to such aspects as economic development,
business and capital market, corporate ownership and management, as well as
state owned enterprises (SOEs). The latter is important both for Latvian and
Lithuania; there have been 128 SOEs and 5 listed subsidiaries in Lithuania in
2015: their numbers are reducing: in February 2018 there were “just” 60 SOEs
due to mergers. The SOEs sector is the two states often “direct” corporate
activity: e.g. in Lithuania they occupy significant market share in energy with
electricity & gas (capitalization of over € 2 billion); transport, mainly
railways with capitalization of about € 2 billion; industry and forestry (over
€ 1 billion capitalization), etc.
See above mentioned “Corporate governance for Lithuania”
report, p. 52.
In the conclusion it has to be noted that the OECD report
and consequent recommendations are based on Latvian information received in
2014 (?!) with updates from 2017. An online survey among businesses in Latvia
was carried out in 2017, with a final update in March 2018. “Effective legal
and justice services to citizens and businesses” can foster inclusive growth,
postulate report’s authors. Some recommendations are definitely there for all
those interested.