Latvian Employers' Confederation President Vitalijs Gavrilovs

We fought for three years to develop a sustainable development strategy, so that the government knew where it is heading the state in five years and more. However, now they are simply acting unaware of what will come out of their activities, Latvian Employers’ Confederation (LEC) President Vitālijs Gavrilovs told in an interview to the business news portal BNN.

Neither does Gavrilovs agree to the chaotic management of the state and tax rises, because he believes the shadow economy is a great threat and proposes promoting innovative science-oriented economy. Similarly, he also explains the optimal population the Latvian economy can take is four million people.

How has the LEC helped all the businessmen during the recent years?

Since we represent businessmen under the LEC, our main task is to have maximum effect on those making the business environment rules. We need to collaborate to have a say. The classical model is the government and trade unions collaborate. Up to 2009 our key negotiations partner was the Welfare Minister, which weakened our positions,  because this post cannot have an actual impact on the real players – Finance, Economy and Agriculture Ministers. We are righteous to demand even a particular minister’s resignation. To have a say it was important that the Prime Minister is the Co-Chair of the National Tripartite Council. Valdis Dombrovskis is the first Prime Minister to agree to that. In order to talk him into this we grew in «critical mass» by joining our claims with the ones also expressed by the Latvian Free Trade Union, Latvian Chamber of Commerce and Industry, the Latvian Association of Local Governments and Latvian Academy of Sciences.

Businessmen show quality performance, because their management system is based on actual business models. While the government disregarded our valuable proposals during the drafting process of 2011 state budget, because they follow other considerations. Real business structures have strategical aims, but our government has not succeeded in defining them for the past 20 years. Businessmen plan on a medium-term, which is something the government lacks. Unfortunately, neither have we managed to achieve that they implement quality state management, as in Estonia and Lithuania. Similarly, also this year we urged the government fast, active and responsible actions to recover the business environment. We draft specific programmes of what steps the government should take, instead of vague plans. The government must not constantly owe someone without introducing structural reforms and spending money that has not been earned – 2.5 million lats daily. I am ready to sacrifice my time to see results from the part of the government. I am interested not in their looks or excuses, but actual actions.

What is that you do not approve of in the policy of the government?

It is that we cannot say they make up a team. Their team is very weak and they are bad at responding to economic processes. They really do lack leaders and competence. If the Saeima sees some ministers cannot manage their sectors, they should simply be dismissed. All the movements are chaotic just like in the Brown’s theory… Neither are there any medium-term macro-economic scenarios. It is something the National Reform Council was also discussing. It is real danger that the government does not try to do away with obstacles to acquire the European Structural Funds and does not base its activities on quality management approach in every step they take. Once we even appealed to the President of Latvia Valdis Zatlers to assess 2009 budget drafting process, providing bigger GDP drop than the forecast 18%. Tax revenue fell 24% back then. If the VAT and the tax burden were reduced, the shadow economy would not overtake a certain number of businessmen. We must look into the eyes of politicians to see what internal barriers they have not to meet businessmmen’s logical requirements and listen to good suggestions. The current political culture does not allow them to follow our ideas.

How many businessmen are currently avoiding taxes?

This topic can be discussed under the umbrella term – shadow economy. Data shows it is from 24% to 30%. However, when we met with the Saeima in 2010, it was difficult for us to prove the proportion, because they decided the shadow economy does not exceed 16%. We should not follow everything international analysts say. We must see what tax revenue each particular sector brings. Foreign Investors Council compared the State Revenue Service data with the actual fuel consumption in Latvia. It turned out there is a 210 million lats gap. So if the government does not aim at recovering 50 million lats and more from the shadow sector, it is hardly possible to achieve anything.

What did you suggest doing?

We fought for three years to develop a sustainable development strategy, but the government and the Saeima are still not approving it. Why? It would serve for them to see where they are heading the state in five years and more. The necessary resources should be listed below the strategical points. Currently, the government is acting unaware of what will turn out of all of this. Since we could not have a say from the inside, we will have an impact on Dombrovskis government from the outside, namely, through Brussels.

First of all, they will have to present the medium-term macro-economic scenario for three years to the European Union in April, after having consulted with us beforehand. The quality of the homework is a question, given the lack of leaderism. Secondly, they are to draft a document «Latvian economy’s macro-structural challenges or obstacles» with specific measures taken by each ministry. Thirdly, they need to prepare the target program for «Europe 2020». Fourthly, what will be the political directions to ensure long-term compliance with the programmes?

The Coalition Council half paralyzes the work of the government, it limits the potential of the executive force. None of the ministers can precisely define the situation in their sectors. The government must have a vision of how big the GDP per capita should be in 2020 and 2030, because it would create grounds for growth and reduce unemployment. If the government did «smart regulation», professional officials would be able to meet time limits and show tangible results. 55 billion euro are allocated for eight countries of the Baltic Sea region to develop infrastructure. How much of this will Latvia manage to acquire? Before all three Baltic states prime ministers attend the Baltic Sea Council, they must agree upon the key business priorities and the most important projects. They should see where there is room for collaboration. For example, Latvia and Denmark are responsible for energy security, thus we could develop as renewable energy development center. Lithuania is responsible for transport connections, we must cooperate with them in Rail Baltic project worth 620 million euro. Estonia answers for arranging the domestic EU market.

What do you think of 2011 budget consolidation measures with taxes raised in the middle of the year?

We say it is exactly poor management. We should not be passive regarding what they do in the government. We are trying to have a say, so that the performance is at least a little better. Despite the state has avoided bankruptcy, it is crucial to maintain social peace. 2010 tax revenue collection lagged behind 7%, the GDP dropped slightly as well, while we – talented businessmen – reported the fourth most rapid EU’s export climb with 4.1 billion. The government is taking reckless decisions without assessing the possible consequences of them. There were 34 amendments on taxes and more than 40 other changes, officials virtually lacked time to introduce them. There should be at least a year for a new decision to come into effect, so that officials respond to that and get ready.

We know the key sectors already – timber industry, food processing, chemicals and pharmaceuticals, as well as transit and logistics. Services – finances, education, tourism and health care – should not be neglected either. If you are talented, you can speculate with currency exchange rates or food bourse price. There is huge potential of clever people in Latvia, but they will announce themselves only after there are strong strategical leaders heading the state. If the domestic consumption makes up 80% of the economic activities, it should be boosted, not limited. That would be smart management.

Why is there no investors inflow?

Because the government has not strategic investment projects, unlike Lithuania with 10 projects worth billions of euro.

Are you happy about the government’s intention not to raise the basic taxes and increase the untaxed minimum for the employed?

The average turnover of our businessmen dropped from 570 000 euro down to 370 000 euro in a couple of years, while the profit fell from 25 000 euro a year down to 6 000 euro, followed by a zero or even negative balance. We realized it would be completely pointless to raise taxes even further, given the difficult economic situation. How can taxes be raised up to the average EU level if our GDP per capita is 8 000 euro, while in EU – 25 000 euro? The tax rates differ only 8%. I, as a businessman, perceive challenges as a chance, not a problem. We are closer to the actual situation, so the government should hear us out. The Cabinet of Ministers should prove the bureaucrats from Brussels that Latvia is a small state with poor resources, so we need to be attractive with low taxes. Our government allots only 0.6% for creating an innovative science-oriented economy. But is expensive – we would need at least 3% of GDP. Thanks to the micro-enterprise programme, there are 31 businessmen per 1 000 population in Latvia, while the proportion amounts to 54 in the EU and 85 in the USA.

Will there still be people capable of working if the retirement age is raised?

This will hit employers considerably, because it is tied to the demographic situation. Moreover, it will not be possible in all professions. Work force motivation and reproduction are issues to be solved on EU level, because Latvia is looking for short, instead of long-term solutions. The optimal population the Latvian economy can take is four million people. There about 2.3 million people in Latvia. Thus the future growth strategy, children and family benefits, education and health care should be arranged in a way to double the population.