levy reforms: for fatter and poorer?

OPINION

MFEM notes the origins of the “import levy reforms” as dating back to the mid-90s. This is when government and the country went through an economic crisis, and thousands lost their jobs, including 1,500 public servants. It is also when donors introduced a number of foreign personnel to key positions within MFEM as part of aid.

Input from these advisers adhered mostly to deregulatory, free market liberalisms frequently expressed, if rarely implemented, in many first world countries around the globe.

Central to free market policies are low or no levies.

Such policies were under attack then and remain the subject of critical comment today. As much bigger economies struggle with liberalising their own trade, pressure has come on small countries to join world trade efforts to help legitimise these efforts. It is noteworthy that Tonga was hailed as the surely symbolic 150th member of the World Trade Organisation. WTO chief Pascal Lamy said the approval of Tonga’s membership by the global body’s ministerial conference was:

“truly significant and welcome”. Adding a new player, however small, would make the WTO more representative, Lamy told the conference. Tonga’s delegation cautioned that their country would only be able to meet the obligations of WTO membership if the liberalisation this entails matches “our capacity to deliver.” (Agence France Presse 15th December 2005)

“Capacity to deliver” is the issue that MFEM must address with regards to import levy cuts.

How much will we lose?

Import levies total $14.6 million of the current budget or about one fifth of all government receipts (schedule 7 ROBOC 2005-06).

It was not clear exactly from the supplementary budget or MFEM’s invitation to submit comment how much of this would disappear if import levy reforms result in cuts to levies. However, import figures for 2004, when we imported $114 million, show the following percentages:

Minerals, Fuels etc 8%
Machines, transport and equipment 23%
Beverages & Tobacco 4%

This gives a rough figure of about 35% of all imports that would remain under levies, meaning a reduction of about 65% in government income from import levies. In the current financial year, this equates to levy income shrinking to about $5.1 million.

In other words, roughly two thirds of $14.6 million or about $9.5 million might disappear from government revenues, about one seventh of total revenues, not counting aid.

This is a significant impact on the sovereign affairs of the nation and its ability to govern itself. Can we afford these cuts?

It is difficult to say for sure because government frequently, as in this case, goes outside its own legislative processes. In doing so, it avoids public examination. The public, knowing little, can contribute less.

Import levy reform: gaps in due process

“Import levy reforms” cannot, as a phrase, be found in the budget policy statement for 2005-06.

This indicates this activity will not be implemented until the new budget for 2006-07 with comment being sought now to finalise policy for the budget policy statement in March next month.

Such a timeframe leaves scant opportunity for any other governance processes, such as inputs from consultation, transparency and accountability.

From the MFEM advertisement it appears such inputs will barely be taken notice of anyway: “Implementation of this decision to remove import duties on all items … is underway.”

MFEM appears to have circumvented the spirit if not the letter of the law including under section 10 of the MFEM Act which states:

“10. Economic and financial policy - The Government shall specify in a statement the economic and financial policy that will determine the decisions the Government will make in all of its economic and financial dealings, and disciplines that it will adhere to, and will lay that statement, or an update of that statement, before Parliament at the same time as, or prior to, the time it publishes a budget policy statement pursuant to section 11 of this Act. The statement shall include all significant economic and financial policies including policies affecting the key variables stated in sections 18 and 19 of this Act.”

Emphasis added. If the removal of one seventh of all government revenues is not significant then what is?

Support for the argument that government is failing to adhere to its own budgeting processes can be found in further examination of the budget policy statement for 2005-06.

Table B.1 on page 23 of the BPS projects a clear and steady growth in operating expenditures, from $76.9 million in the last financial year, to $77.8 million in the current financial year, $81.6 million in the next financial year and $85.8m the year after that (2007-08).

Nowhere is there any indication in a reduction of government revenues. Clearly, government is acting outside of its own budget processes.

Or is it? MFEM has previously criticised usage of supplementary budgets but now appears to be using the same method to introduce cuts to import levies. Under supplementary budget, MFEM predicts a lessening of operating revenue of $3.1 million. There does not reflect full losses from import levy reforms, representing instead net losses after including other gains.

Why now? Government claims to have had the import levy reforms on the books since the mid-90s, making the question even more relevant, not less. For its part, the Asian Development Bank mentions levy cuts as far back as July 2006, in its Country Programme and Strategy Update:

“Government revenue will also decrease in the short and medium term as a result of decisions relating to the removal of levies on imported goods…”

ADB does not mention when those decisions were made. So why are import levy reforms being snuck into a supplementary budget at short notice now, rather than introduced properly a year or two ago? For what purpose? Or, perhaps more accurately, in whose favour?

This and previous governments have already shown themselves willing to amend significant areas of law and otherwise interfere politically in specific programmes and projects. Not beyond the realms of possibility it is for politicians and officials inside government to seek a massive reduction in import levies prior to a major construction project. The new police headquarters, perhaps. Or maybe Tim Tepaki’s new hotels. While not spelling out specific projects, regional institutions like the Asian Development Bank note governance concerns:

“…it is generally acknowledged that there have been breaches of these legislative provisions in the last few years, particularly regarding ministerial intervention in departmental operational management and lack of compliance with legislative requirements on public service appointments.”  

Potential for corruption is obvious. It is far from clear that the $4 million courthouse was built to full value. Nor is there any guarantee that the $3.5 million police headquarters will either, such as following any quantitative surveys, at least not to any independent sources. Just how, for example, did the Chinese get permission to install toilets without any s-bends? Why were these not picked up in the planning stages, or corrected by building inspectors during the construction phase, or remedied during the sign-off afterwards? Corruption does not necessarily mean money going in back pockets. It can also mean a system so weakened by political interference that it no longer operates to its legal including constitutional potentials.

It is noted here that the current administration includes political interests who, in 2000, saw fit to remove freshly passed legislation that required all political parties to publicly declare all financial sources. Who is funding our politicians and what are they paying for?

For these and other reasons, this submission will also be cc’d to the Audit Office and the media.

Will it work?

Government’s apparent haste to push through levy cuts may have nothing to do with corruption.

They appear likely to be pushed through with the best of intentions.

Many Cook Islanders, such as those building their own houses, may benefit. Other positive outcomes may be numerous. Cook Islands News quotes Deputy Prime Minister Dr Terepai Maoate as saying that the planned phasing out of import levies is government’s first planned project:
“which will make goods cheaper and keep more money for business to  reinvest ... we’re confident that it will boost the economy and be a win-win for everyone.” (Cook Islands News Thursday 19th January 2006)

Other benefits may include a lessening of state administrative costs, although this too might be a question of degree considering that items like cars, beer and ciggies still have to be counted.

Will cutting import levies work? Will it result in a “win-win” situation for “everyone”?

Giving the private sector an additional $10 million to play with may “boost the economy” but exactly which part? In the past, when government was encouraged by the private sector to allow open shipping, for example, importers promised that significant savings would be passed on to consumers.

Later, when it was pointed out by the media that prices continued to rise, importers said that shipping charges were only a small part of total import costs. In other words, no savings for consumers.

Could this happen again?

Historically, increased economic activity has produced uncertain returns for consumers.

In 1984, for example, personal income taxes returned 18% of all government revenues. By 2004, personal income taxes returned 24% of all government revenues, a near 50 per cent increase in 20 years.

Impressive. However migration continues to be a problem with long-term calls by MFEM for labour and, now, migration surveys to be conducted ignored by successive governments. Anecdotal evidence concerns costs of living as a leading factor for migration. Minimum wages are $4 an hour, barely enough for a loaf of bread.

Why this apparent contradiction?

Again, given the lack of proper due process within government, it is hard to tell. It could be, however, that gaps between rich and poor are getting wider, as elsewhere.
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.

Short term suggestions

There are clear short-term impacts on the budget and the ability of the country to govern itself.

Government could defer any import levy reforms to the 2007-08 financial year, using the next financial year as an introduction to consultative, transparent and accountable steps towards any such reforms. This would contribute to economic and fiscal stability and predictable governance; increasing public confidence that proper due process is being followed.

Income from the delayed reforms could be directed towards a more strategic approach:

> conduct an independent social impact assessment into import levy reforms and other PICTA related policies, including the environmental impacts, such as from cheap imports, and the vulnerability or otherwise of the national position with regards to world trade liberalisation efforts,

> labour surveys, as suggested by MFEM and others,

> migration surveys, as suggested by MFEM and others,

> tourism surveys, including visitor satisfaction and sustainability,

> media surveys, including possible reintroduction of a state broadcaster with robust statutory independence provisions as per the BBC to improve public access to state information and levels of public debate.

> begin seeking long-term solutions to continued failures in proper due process of  governance efforts.

Long term suggestions

As previously suggested to parliament, government needs to separate itself from the process of reform.

It is a clear conflict of interest for government to draft new policy and then set parameters of consultation on new policy as well as decide what feedback, if any, should be reflected in changes to draft policy.

It is also suggested here that Government could establish:

> a Permanent Commission of Reform or Good Governance Commission that develops policy initiatives like import levy reforms as well as referendum based initiatives, examining them for impact on the public, while providing independent and simple language advice to the public,

> a new statutorily recognised National Development Council as the most effective means of sustainable consultation on this and all future policy and significant fiscal matters,

> new laws recognising the role of such bodies in the proper due process of drafting new laws and changes to existing laws.

> new laws empowering the head of state to move beyond purely ceremonial functions and allow new laws and changes to laws to be deferred or rejected where they do no follow proper due process as outlined above.

Conclusion

Government must stop introducing last-minute policy, or pushing it through without proper consultation.

Significantly reducing state revenue at the behest of foreign economic ideologies and powerful importers with uncertain levels of influence over politicians is no way to improve public confidence.

MFEM acknowledges cutting import levies results in lower revenues and also admits that:

“It will be a major challenge to limit overall government expenditure while increasing expenditure on core government services. There is considerable evidence that the education and health sectors are key drivers of economic and human development, and a strong case can be made for increasing funding. Issues relating in part to funding in these areas have recently attracted significant public comment.” (Half year financial update 2005-06)

Emphasis added. In seeking to cut import levies without subjecting such a policy to good governance and proper due process including consultation, transparency and accountability, government risks sacrificing human development in favour of a small percentage who benefit most from economic development.

Nor is it enough for government to cut $6-10 million in public monies using a much-overlooked supplementary budget. Or with a few lines of scattered commentary in a narrowly circulated half year update and expect informed public debate. Then write one newspaper article and slap in a few ads two months later and expect learned public submissions within two weeks.

Such tactics could well prompt yet another crisis of confidence in government over its perceived arrogance, lack of responsiveness to public concerns and bulldozer tactics when it comes to favoured policy.

Or it could be an opportunity.

Government could reengage with the public through a series of robust measures along the lines of those suggested above.