Opening Remarks of Kseniya Lvovsky, World Bank Country Manager in the final activity of the project: “Reducing informality and tax evasion through improved governance and transparency at the local government level”, financed by the World Bank and British Council through Development Marketplace Program for better governance and accountability.
Bilisht, March 2, 2012
- Acknowledgement and Thanks to participants.
- About a year ago, the British Council and the World Bank held a competition among civil society organizations to promote better governance. Out of 10 winning projects, I have been following this one with special attention, including a visit in November to the city of Korca to discuss early results and next steps. This project combines several features that are essential for Albania’s path towards becoming a developed country and a member of the EU.
- First, it tackles one of the key priorities of the National strategy for development and integration, which is also among the most challenging: reducing informal economy and strengthening the rule of law. Some estimates of about ten years ago put the size of informal activities in Albania at around 30% or 40% of GDP, depending on the definition. Significant progress has since been made, mainly at the central government level, as indicated by the reduction of the cash outside the bank ratio. Now, it is at 18% compared to above 30% in 2002. Yet, there is a lot of scope for improvement, and particularly at the local government level. Without further progress in this area, the state, municipalities, utilities, and other institutions that are dependent on taxes and fees, cannot improve their performance in delivering critical social services to the citizens that are expected from a European economy of the 21th century. Without progress in this area, the quality of goods and services provided by the private sector cannot be assured, including in such critical areas as food for schools and medical assistance for the sick.
- Second, this initiative comes from the local level, where most economic and social initiatives are supposed to emerge in a modern society. I find this particularly heartening. One of my observations about today’s Albania is that too often too much is expected from the central government while too little responsibility is assumed in practice by other vital economic actors – communities, businesses, user groups and local governments. Changing this attitude is fundamental for achieving the level of economic, social and political development that the country, rightly, aspires of. This small project is yet another indication that this major transformation is indeed happening.
- Third, it is a partnership between the regional development authority and tax department, municipal administration, and small businesses association. It is impossible to over-emphasize the importance of having the business community itself behind this type of action. It is impossible to over-estimate the impact of peer pressure on changing behaviors. Worldwide, there is a famous enforcement rule of 80-20: only when over 80% comply with a particular law or regulation voluntary, government through enforcement agencies can be effective in dealing with the remaining 20 % or less. When non-compliance is widespread, a strong civil society response, including public monitoring and disapproval of violations, is necessary for improved enforcement outcomes.
- This brings the forth element of success that we discussed at an earlier meeting in Korca, and on which I am keen to hear an update today. It is complementing the excellent partnership already created under the project by involving consumer associations and groups, like schools and community centers. After all, as long as consumers and citizens at large do not care whether a business is certified or not, whether it paid its taxes and electricity bills or not, it is difficult to convince a small enterprise with a tiny profit margin to be socially responsible when the competitors are not. After all, it is consumers and citizens who do not get roads paved, street lighting fixed, hospitals upgraded, drinking water treated, garbage collected, building repaired and schools heated, because informal businesses that use public infrastructure do not pay for maintaining it. For the achievements of the project not to be reversed and for its replication potential to be significant, consumers, civil society leaders and opinion makers should become part of the equation.
- Fifth, the national government is not off the hook – its role remains critical, albeit not exclusive. Several measures undertaken by the MoF and BoA, like processing payroll payments of public administration and utility fees through banks, and making tax payments online through bank accounts, have been instrumental in reducing informal economy. To keep the momentum, the government should step up enforcement, incentives, technological innovation and persuasion – and balance, target and use these tools more effectively. It can improve accountability and transparency in enforcement; it can strengthen the information, monitoring and reporting systems; and take greater advantage of new on-line technologies. Local governments in Albania are unusual in that the principal source of local taxes is a tax on small business. This is not a particularly cost effective means of raising revenue. Thus, the central government should continue working on broadening their tax base, like a recent effort to increase the yield from the building tax, and make sure it is done in a practical and sustainable manner.
- Going forward, the central government should work in stronger partnership with local authorities, businesses and communities. It can use more the power of public opinion – as most countries increasingly do. It can set performance indicators for reducing informality and collecting taxes at the municipal level, make them public, and find ways to recognize good performers. It can link financial assistance to municipalities to such performance. It can more proactively seek and support local initiatives like yours, and target both enforcement and incentive programs on the areas with such initiatives, so as to create and demonstrate best practice models that would inspire others to follow. It can do more to promote the culture of the rule of law, in addition to promulgating the legislation, including a transparent system for paying its own obligations to the private sector.
- That is why I felt it is so important to have the Ministry of Finance at the table today, and that is why I am very grateful to the Minister of Finance for agreeing to join us and update on on-going and planned initiatives.
- I look forward to the presentation of the final results, lessons, challenges, mistakes, accomplishments, and future plans - and to an open and frank discussion about what is next.
- Thank you.