import levy cuts: governance gaps

Gaps in governance processes

In its country programme for 2005 to 2006, Asian Development Bank notes a range of problems in political commitment to good governance. Ironically, this includes ADB recording criticism of exemptions on tax and customs:

“Discussions with nonstate organizations, such as the Chamber of Commerce and a number of nongovernment organizations, revealed a community perception that several of the reform measures have unraveled due to continuing political instability: for example, the lax fiscal discipline in the 2002/03 budget, continuing tax and customs exemptions that were introduced as ‘transitional’ measures, the granting of new exemptions with inadequate consideration of the longer-term impact on government revenue, political intervention in operational public service management, and poor performance by public service managers.” (Asian Development Bank July 2003)

Emphasis added. Why should the public accept claims that even wider “exemptions” in the form of permanent cuts to nearly all import levies will benefit the country, where targeted small scale exemptions will not?

Government and MFEM have failed to follow good governance processes, their own legislation or even put forward a convincing case in support of import levy reforms. Nor have they acknowledged widespread concerns about trade liberalisation, much less offer credible counter arguments.

Instead we are meant to accept import levy reforms because, well, they have been around for a long time:

“Government made the decision during the financial reforms of the mid-90s to remove import levies, and this has been confirmed by successive governments.” (Cook Islands News 28th January 2006)

Is this the best reason MFEM can apply? Policy hanging around unused for a decade is no guarantee of quality. In fact, quite the opposite. It raises the question of ‘use-by-dates’. It is, at best, a less than convincing argument to state that import levy cuts should be accepted just because they have been on the programme since the 1990’s.

Unfortunately, it is not an argument that can be found in the budget policy statement or even the supplementary budget. Interestingly the Half Year Financial Update 2005-06 has this to say in December 2005:

“With Government’s recent decision to remove import levies on most goods from July 2006, it is expected that imports may increase moderately over the medium term, very likely expanding the trade deficit.”

Emphasis added, as is below.

“The decision in November 2005 to remove most import levies from 1 July 2006 will have an annual cost to revenue of around $6.3 million.”

However, at last, there does appear confirmation that the policy comes from somewhere far, far away, a long, long time ago:

“Taxation receipts in 2006-07 and future years will be significantly affected by the decision in November 2005 to remove most import levies with effect from 1 July 2006. This decision reflects a long-standing commitment by Government to remove levies and is consistent with obligations under the Pacific Island Countries Trade Agreement (PICTA).”

Most people would ask, what is PICTA? And why was PICTA not mentioned in MFEM ads?

Possibly because if the full implications of PICTA become known to the public there may be very deep concerns. PANG, the Pacific Network on Globalisation has this to say on PICTA’s MFN or Most Favoured Nations status:

Under PICTA, MFN obliges all parties to PICTA to treat each other no less favourably than any other signatory state. MFN is a fundamental  principle of the WTO, where it obliges all members to treat all suppliers of products and services equally, with no supplier (eg national company) enjoying favoured treatment compared with another/others. This means no special protection for local industries or service providers. Indeed, the related principle of `national treatment' is one which insists that there is no such thing. So no Pacific island government would be able to secure any kind of economic activity for nationals, or categories of nationals, except under the provisions for protecting developing industries, limited to 5 years (10 for LDCs).

Emphasis added. In other words, within a generation, government can close the doors on DIB because investment policies to protect locals will mean little or nothing.

Equally alarming is the following analysis from PANG about predictions of the supposed benefits of trade liberalisation efforts like PICTA:

“A 1999 FAO study on the impacts of implementing the GATT Uruguay Round in 16 developing countries, including Fiji, throws some sobering light on these predictions. It showed that food imports had risen much faster than exports, and that import surges in particular products (notably dairy products - especially milk powder - and meat products - mostly poultry) were a common experience. Competition from food imports had the effect of undermining local (food) production, driving smaller producers out of business, while reduced domestic support to farmers in line with trade liberalisation measures made it difficult for farmers interested in production for export to take advantage of expanded market access.”

“Given the known impacts of inferior food imports on the diets and health of Pacific Islanders, the probability of increased inflows of cheaper food imports under eventual free trade affecting food choices and nutritional health in the region is high.  A South Pacific Commission study in 2001 on the reasons behind food choices in Tonga found that while people preferred and recognised the higher nutritional value of fresh, local foods, they were eating larger amounts of imported foods, including fatty meats and simple carbohydrates.  Most preferred foods were eaten less often than the less preferred foods.  Bread, mutton flaps, imported chicken parts were among the least preferred and yet were among the most commonly eaten foods.  In the same way foods considered to be less healthy were consumed more often than foods considered to be healthier.  Low-fat traditional foods were perceived to be the most nutritious whereas imported simple carbohydrates were considered to be the least healthy.  The study found that the discrepancy between preference and actual consumption appeared to lie with price.  In Tonga, fish costs 15-50 % more than mutton flaps and chicken and in many areas is less easily purchased.  Bread and rice are cheaper and more accessible than taro.”

In other words, more imports, less local business, fewer jobs, and a fat, diseased poverty-stricken population.

None of these sorts of concerns are remotely acknowledged by MFEM or anyone else in government. Instead, someone in government appears to have come up with a vague promise from the mid-90s as a way of spin doctoring old policy to new voters, probably after realising at the last minute they needed to tick the ‘consultation’ box on some aid donor’s governance matrix.

Also not mentioned is the next bit in the Half Year Financial Update:

“It has been suggested that the removal of import levies will increase spending in the economy, thereby offsetting some of the loss in revenue. However, this is unlikely to be the case. Aggregate demand would only increase if government did not reduce its own expenditure. To ensure fiscal responsibility government expenditure would need to be reduced, and this would offset any increase in aggregate demand from higher consumer spending.”

In other words, one way or another, government will lose $6.3 million in revenues as a result of foreign policy no one here has been asked if they want, based on a decision made less than three months ago to proceed on policy that is a decade old.

Why should this be so? Such questions leave large gaps in good governance left unexplained. In particular, as matters of due process, MFEM has not

> publicly quantified exactly how much will be lost to government revenues, other than in a PDF document available to a small internet enabled elite.

> publicly quantified impact on sovereign ability to govern, either now or long term,

> released official advise to government,

> released any dedicated discussion paper for public consumption

> provided an avenue for public submissions to be made public,

> explored other avenues to further public debate,

> or explained how public input will be reflected in reforms.

In other words, what’s the point? Most importantly, MFEM has

> not properly followed its own budgeting processes,

> contradicted its own historic criticism of supplementary budgeting,

> used supplementary budgeting as a backdoor for import levy cuts.

It is not enough for budgeting to be done, in other words. Budgeting must also be seen, publicly, to be done.

Import levy cuts: short term suggestions
Import levy cuts: long term suggestions
Import levy cuts: conclusion
Import levy cuts: whole submission