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«INFORMATION AS FACTOR OF THE POLITICAL ECONOMY OF BUSINESS ENVIRONMENT Inese Spica University of Latvia Introduction Problems of information are ...»

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Inese Spica

University of Latvia


Problems of information are central to understanding not only market economics but

also political economy. Information economics has alredy had a profound effect on

how we think about economic policy, and are likely to have an even greater influence

in the future. The business environment is, of course, more complicated than our simple – or even our more complicated models – would suggest.

The aim of this research is to study information influence on the political economy of

business environment. For the achievement of the aim there are promoted such tasks:

• to find out the point of the political economy of information,

• to carry out the analysis of the contemporary political economy of the Government of Latvia,

• to characterise business environment in Latvia and its political economy.

1.The political economy of information Information affects decision making in every context – not just inside firms and

households. Some aspects of what might called the political economy of information:

the role of information in political processes, in collective decision making.

For two hundred years, well before the economics of information became a subdiscipline with – in economics, Sweden had enacted legislation to increase transparency. There are asymmetries of information between those governing and those governed, and just as markets strives to overcome asymmetries of information in political processes can be limited and their consequences mitigated.(10) Information imperfections, and asymmetries of information, are pervasive in every aspect of life and society.

Not surprisingly, then, the “information rules of the game,” both for the economy and for political processes, can become a subject of intense political debate. The United States and the IMF argued strongly that lack of transparency was at the root of the 1997 financial crisis, and said that the East Asian countries had to become more transparent. The recognition that quantitative data concerning capital flows (outstanding loans) by the IMF and the US Treasury could have been taken as a concession of the inappropriateness of the competitive paradigm (in which prices convey all the relevant information); but the more appropriate way of viewing the debate was political, a point which became clear when it was noted that partial disclosures could be of only limited value, and could possibly be counterproductive, as capital would be induced to move through channels involving less disclosure, channels like off shore banking centers which were also less well regulated. When demands for transparency thus went beyond East Asia to Western hedge funds and offshore banking centers, suddenly the advocates of more transparency became less enthralled, and began praising the advantages of partial secrecy in enhancing incentives to gather information. The United States and US Treasury then opposed the OECD initiative to combat money laundering through greater transparency of off shore banking centers – these institutions served particular political and economic interests – until it became clear that terrorists might be using them to help finance their operations; at that point, the balance of American interests changed, and the US Treasury changed its position. (5) Political processes inevitably entail asymmetries of information: our political leaders are supposed to know more about threats to defense, about our economic situation, etc., than ordinary citizens. There has been a delegation of responsibility for day-today decision making, just as there is within a firm.(7) The problem is to provide incentives for those so entrusted to act on behalf of those who they are supposed to be serving – the standard principle agent problem.

Democracy – contestability in political processes – provides a check on abuses of the powers that come from delegation just as it does in economic processes; but just as we recognize that the take-over mechanism provides an imperfect check, so too we should recognize that the electoral process provides an imperfect check. Just as we recognize that current management has an incentive to increase asymmetries of information in order to enhance its market power, increase its discretion, so to in public life. And just as we recognize that disclosure requirements – greater transparency – and specific rules of the game (e.g. related to corporate governance) can affect the effectiveness of the take-over mechanism and the overall quality of corporate governance, so too the same factors can affect political contestabilty and the quality of public governance.(6) In the context of political processes, where “exit” options are limited, one needs to be particularly concerned about abuses. If a firm is mismanaged – if the managers attempt to enrich themselves at the expense of shareholders and customers and entrench themselves against competition, the damage is limited: customers at least can switch. But in political processes, those who see the quality of public services deteriorate cannot do so as easily. If all individuals were as mean spirited and selfish as economists have traditionally modeled them, matters would indeed be bleak: as I have put it elsewhere, ensuring the public good (public management) is itself a public good. But there is a wealth of evidence that the economists’ traditional model of the individual is too narrow – and that indeed intrinsic rewards, e.g. of public service, can be even more effective than extrinsic rewards, e.g. monetary compensation (which is not to say that compensation is not of some importance). This public spiritedness (even if blended with a modicum of self-interest) is manifested in a variety of civil society organizations, through which voluntarily individuals work collectively to advance their perception of the collective interests. (8) There are strong forces on the part of those in government to reduce transparency.

More transparency reduces their scope for action – it not only exposes mistakes, but also corruption (as the expression goes, sunshine is the strongest antiseptic).

Government officials may try to enhance their power, by trying to advance specious arguments for secrecy, and then saying, in effect, to justify their otherwise inexplicable or self-serving behavior, “trust me… if you only knew what I knew.” (9) There is a further rationale for secrecy: secrecy is an artificially created scarcity of information, and like most artificially created scarcities, it gives rise to rents, rents which in some countries are appropriated through outright corruption (selling information), but in others are part of a “gift exchange” in which reporters not only provide puff pieces praising the government official who has given the reporter privileged access to information, particularly in ways which are designed to enhance the officials influence and power, but distort news coverage. Without unbiased information, the effectiveness of the check that can be provided by the citizenry is limited; without good information, the contestability of the political processes can be undermined.

One of the lessons of the economics of information is that these problems cannot be fully resolved, but there are laws and institutions which can decidedly improve matters. Right-to-know laws, demanding transparency, have been part of governance in Sweden for two hundred years; they have become an important if imperfect check on government abuses in the United States over the past quarter century. In the last five years, there has become a growing international movement, with some countries, such as Thailand, going so far as to include them in their new Constitution.

Regrettably, these principles have yet to be endorsed by the international economic institutions.(10)

2.Contemporary political economy of the Government of Latvia Since the regaining of independence in 1991 all the governments of Latvia consistently implemented the transition to market economy and integration into NATO and the EU.

Latvia realizes a liberal foreign trade and foreign investment policy. The law guarantees protection of foreign investment, foreign nationals may freely repatriate their profits and capital, and equal terms are provided to domestic and foreign entrepreneurs.

The priorities declared by government are:

• sound and efficient public administration;

• full-fledged membership of Latvia in the decision-making processes of the NATO and the European Union;

• strong and independent judicial power, corruption and crime prevention;

• information society and knowledge-based economy;

• health quality of the society;

• integrated civic society, strong modern national identity;

• balanced development of Latvia’s regions, high-level employment.

To create preconditions for stable economic growth, the government supports stability of exchange rate of the national currency (LVL), low inflation and budget fiscal deficit at the level not above 3% of GDP. The medium-term aim – non-deficit budget. The current account deficit will be gradually brought down by fostering exports and by ensuring economic growth.

The government has already reduced and plans further reduction of tax burden on businesses. Starting with 2002 the corporate income tax is being gradually brought down from 25% to ultimately 15% (22% in 2002, 19% in 2003 and 15% in 2004) to attract more investment. The legislation stipulates certain corporate income tax exemptions, for example, to large (supported) investment projects as well as to the enterprises producing high technologies or software or operating in special economic zones; small businesses, etc.

Starting with January 1, 2003 it is planned to decrease social insurance contributions from 35.09% till 33.09% and starting with 2004 property tax rates will be brought down from 1.5% till 1% of the cadastral value of the respective property.(11) The government actively fights tax evasion. The priorities in this field are: fighting all kinds of smuggling, VAT fraud and eradication of the “envelope” salaries.

The law “On Establishment of the Anti-Corruption Authority and Fight Against Corruption” gained effect on May 1, 2002. The government has made the commitment to ensure efficient work of the anti-corruption authority by reinforcing its independence, granting bigger investigative authority and attracting international experts as well as wider involvement of the society in fighting corruption.

Procurement Supervision Bureau started to operate in 2002 having much wider authority to control purchases made by central and local governments. The government has promised to ensure complete transparency of state and municipal procurement orders by publishing all information about purchases, including the submitted offers, decisions of the evaluation commission, concluded contracts, their amendments and annexes.

To prevent overlapping and irrational use of resources it is planned to carry out audit of functions of public administration institutions, to transfer to “zero” state budget development principle — to verify usefulness and efficiency of utilisation of all budgetary resources and to eliminate wasteful employment of the budget resources.

Creation of a single system of remuneration in the state civil service has been started.

The government plans to consolidate the whole civil service and include all agencies subordinated to the Cabinet of Ministers in one system.

3.Business environment in Latvia and its political economy Targeted work at the improvement of business environment is carried out introducing requirements of acquis communautaire and implementing the Action Plan to Improve Business Environment.

The Action Plan has assisted to reach a considerable improvement of entrepreneurial environment by lessening administrative obstacles, streamlining tax administration, customs and border crossing procedures, providing wider access to information and better protection of investors. They refer to such areas as fighting corruption, state and municipal purchases, judicial powers and corporate law.

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