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Will fiscal amnesty cure or spread the disease? - Op-ed by Kseniya Lvovsky, World Bank Country Manager to daily 'Shqip'

April 4, 2011

Op-ed by Kseniya Lvovsky, World Bank Country Manager Daily "Shqip"

“What do you think of fiscal amnesty?”  - is the most common question these days. This is not the first time I see governments using this tool.  Nor it is unusual to see intense public debate. Fiscal amnesty can be compared to a surgical intervention and evaluated using similar criteria. Surgery can never be easy or risk-free, but can still be opted for. Flawless execution is key. Has the balance minimized the risk of leaving cells that may spread the disease further while avoiding excessive removal of healthy matter?  Is the patient confident in the surgeon? The post-operation period is critical.  Will adequate monitoring, evaluation, and treatment follow the surgery to ensure successful recovery? Long-term prognosis and prevention are essential. Are root causes of the disease are being addressed, to avoid the need for yet another painful process in the future? How to improve incentives for healthy behavior?

In the situation of pro-long existence of a large informal economy, limited enforcement experience, and continued public tolerance of getting things done in informal ways, fiscal amnesty could be a catalyzing step towards a solution. If it is done once, executed well, and supported by other measures to deliver an effective package.   So, the focus is, rightly, on how it should be done to reduce and eventually eliminate the continuation of informal activities, tax evasion and other forms of non-compliance.

Three major issues will determine the outcome. First, full transparency and credibility in granting amnesty and applying exceptions will be critical, including review and, ideally, implementation by an independent group. The latter is not the same as having an equal number of members from both coalitions. Second, actions towards those who would not come “clean” during the amnesty period will be critical, too. There must be commitment and capacity to demonstrate and send a clear message that non-compliance with the legal framework is no longer acceptable. Even loud and strong, the message will only be respected if the actions are seen as fair, impartial, lawful and non-preferential for all “violators”.  The action should be swift as the delay will contribute to “moral hazard” (switching to the more familiar economist’s terminology), and the reappearance of the same old informal practices.  The other side of the coin is that those who are eligible and would come forward for amnesty should feel confident in the compact they are agreeing to.

Managing “moral hazard” - that is, a notion that ignoring the laws and obligations is more profitable, unlikely to be punished and will eventually be forgiven – must be given full attention. Several people mentioned they “feel stupid” for having paid diligently electricity bills all their lives while those who did not are simply getting away with it. Such sentiment should not be ignored. Thus, the third - related to the second and most important in the long-term – issue is to make the new cases of behavior that has been amnestied impossible at any sizable scale. It will not be enough to rely on monitoring, enforcement and punitive measures alone, as important as they are. There is a need for strong public-private partnership in nurturing an economic system in which people and businesses recognize that responsible behavior gives economic benefits. Like, for example, an ability to get a loan for commercial activity or a new home quicker and cheaper.  Or an opportunity to open a credit line and enjoy more convenient payment methods.  Or the “preferential customer” status given by a bank, utility, or another service provider, with a host of additional service privileges.  While this is mainly in the domain of the private sector, the government, together with civil society institutions, can play a facilitating role. Promoting mechanisms like credit history that differentiate and reward responsible behavior of companies and customers will help achieve the ultimate objective - a business culture in which financial responsibility and compliance are in private interest and are smart things to do.