Real work starts now for Latvia’s OECD goal

  • 2013-07-24
  • By Jekabs Jurdzs

APPLICATION ACCEPTED: The decision to start accession talks with Colombia and Latvia was made at the OECD annual Ministerial Council Meeting in Paris on May 30.

RIGA - Latvia took a big step towards joining the ‘rich countries’ club’ when it was officially invited, on May 30, to begin accession talks with the Organization of Economic Cooperation and Development (OECD). This is a big step for Latvia, as joining the OECD has been named as one of the top priorities by the Latvian government. “In terms of strategy, OECD membership falls within broader Latvian efforts to considerably improve its business environment and investment attractiveness,” said Latvian Prime Minister Valdis Dombrovskis.

The OECD currently has 34 members from around the world, with its most recent member, Estonia, attaining membership in late 2010. Alongside Latvia, Colombia has also been invited to enter accession talks and the Russian Federation is undergoing preliminary accession discussions.

The organization itself started out as the Organization for European Economic Cooperation (OEEC) in 1948 and was made up of European countries managing the U.S.-financed Marshall Plan and the reconstruction effort in post–WWII Europe. Soon however, it expanded outside Europe and attained the central goal of addressing issues of governance and policy in both the private and the public sectors: fostering economic growth and financial stability and even dealing with such matters as solving the problems of poverty.

Commentary on what are the next steps for joining, the prime minister added: “Currently, after having received the invitation to begin accession talks, we are expecting a roadmap from the OECD secretariat, hopefully by the end of 2013 which will outline further steps towards Latvia becoming a full-fledged OECD member.”

The process is not a short one, as the most optimistic date for Latvia becoming a fully-fledged OECD member is 2015. The OECD Director for Legal Affairs and Accession Coordinator Nicola Bonucci, who is in charge of the technical coordination of accession discussions with candidate countries, explained to The Baltic Times the process of accession: “The OECD accession process constitutes a 360-degree in-depth review of the candidate’s policies, in areas as varied as fiscal affairs, social policies, corporate governance, environment policy and waste management, public governance, financial markets and investment. The process will be conducted by between 20 to 25 OECD committees which will look into Latvia’s position on OECD legal instruments, as well as the coherence of its policies with those of OECD members, and may make recommendations for changes in legislation, policy or practice.”

He also stresses that it is much too early to identify all the issues which may arise during the accession reviews and that it is important to note that the accession process is designed to accompany the candidate country in shaping its own domestic agenda for reform by drawing on OECD standards and the experiences of OECD countries. In this way, the accession process can serve as an important catalyst for reform.

Thibault Normand, the advisor on foreign affairs to the prime minister of Latvia, discussed what subject areas have currently been prioritized from the government’s perspective. He says: “Although there are literally hundreds of criteria to be fulfilled to join the OECD, for Latvia the focus points have been set. The spheres that are prioritized in terms of requiring improvement and more convergence towards what the OECD would like to see are the matter of state ownership, which deals with corporate governance of state-owned enterprises (SOEs), and improving the integrity of the business sector, which mainly concerns progress in anti-fraud and anti-corruption measures and raising transparency in both the public and the private sectors.”

He goes on to give some examples of the initial progress the government has achieved in cooperation with the huge resources of the OECD. “Recently, we’ve put a lot of effort into improving the efficiency of public governance, for the sake of which a series of seminars were held with the aim of sharing the best practices and knowledge of the OECD and raise the efficiency of high-ranking public officials. But this is just one part of the large process of recommendations and knowledge-sharing, which have contributed to more and more discussions and decisions upon such important matters as whether there should be supervisory boards to SOEs and which kind of SOEs should the state involve itself in,” said Normand.

He also commented more specifically on the progress on SOE governance issues: “As an almost direct consequence of this we can see the decision to establish an SOE Governance Bureau that would deal with overseeing and raising transparency in the sphere, as well as reviewing and establishing clear grounds on which of the currently around 600 SOEs should the state be an owner of.”

As to the matter of reducing the level of fraud, corruption and improving transparency in the public sector and business environment, Inese Voika, one of the leading figures of “Delna” (Transparency International in Latvia) explains the situation in Latvia in relation to joining the OECD. In her talks with The Baltic Times she stated: “What the OECD will be and is already looking at is not so much whether there exists a perfectly sound business environment but, rather, whether the country in question can deal with corruption issues, existing and potential. It evaluates the policy, the legal framework, organizational capacity and other mechanisms in place to lessen corruption.”

She says that along these lines, Latvia has been doing quite well – there have been several high-profile cases brought to court in recent years; the political culture, which is an important aspect to fighting corruption, has somewhat improved and the Corruption Prevention and Combating Bureau (KNAB) of Latvia is known on the international level as a very capable institution with far-reaching jurisdiction, despite the pitfalls of internal disputes that have often plagued it. Of course, the work should continue in many spheres, such as more of a cultural improvement, by changing the attitude towards corruption, which concerns dealing with the feeling of impunity regarding it, which is shared by many.
Indeed, in the Transparency International 2011 National Integrity System Assessment, it states that some of the fundamental problems that contribute to increased corruption in Latvia, also in light of the recent economic crisis and fiscal consolidation, are high poverty, income inequality and unemployment rates, all of which for Latvia are among the worst figures in the EU.

What is more, this lack of a strong socio-economic foundation for creating a larger and more actively involved civil society should be viewed in the context of strong measures in both the perception and tolerance for corruption, which are also among the highest levels in the EU. The latter two, Voika suggests, might, despite some successes, at least be partially attributable to some well-known and very wealthy public figures having been prosecuted, but no sentences having been passed in courtroom processes that have lasted for years. She paints a vivid picture of public opinion on this matter, repeating the phrase: “Justice delayed is justice denied.”

From a government perspective Normand adds that a very important aspect in this is educating government officials to the risks of corruption, how to avoid and deal with it and open their eyes to the detrimental link between even small-scale corrupt activities and the large drop in business activity and welfare from them. “The effect of a municipal official not providing land to a large company, because he might be saving it for some other firm that has bribed him, perhaps, with a few thousand lats,” he says, “can be the forgone investment of several million lats and many very needed workplaces that will not be created in the region.”

There are additional benefits in joining the OECD. Morten Hansen, head of the Economics Department at the Stockholm School of Economics in Riga, says: “The OECD can be looked at as an organization of like-minded nations with certain policy preferences, a proactive stance on improving public governance and the business environment, but also, more generally, as sort of a ‘rich countries’ club. That is, of course, still keeping in mind the previous condition of certain policy preferences – we don’t see some powerful and wealthy nations in the OECD because of that very reason. Of course, we will hopefully see a lot of improvement in both the public and the private sector in the process of Latvia implementing the necessary reforms and changes to join the OECD, very similar, I would say, to the beneficial progress in many areas that undeniably took place in the run-up to membership in the EU in 2004.”

The most significant benefit, Hansen continues, is “probably the increased representation of Latvia in an organization that brings together many influential countries, both politically and in terms of the scale of their economies.”
The organization brings around its table 40 countries that account for 80 percent of world trade and investment.
Hansen mentions several other less tangible benefits, such as simply the prestige that comes along with member status, to other less-significant improvements. The last of which he mentions with a chuckle: “And, of course, from an economist’s perspective it would be nice to see Latvia’s macroeconomic data be available also in the OECD database.”
Prime Minister Dombrovskis has a similarly bright outlook on how joining the OECD would give Latvia a larger say and more representation among highly developed countries. He told The Baltic Times through his press secretary Martins Panke: “We look forward to the great forum of ideas that the OECD is, where leaders of the most developed countries discuss global issues, whereby opinions, policy advice and consensus are shaped. Being part of this forum/discussion is an opportunity for Latvia to increase its influence in global matters.”

And while it is beyond doubt that noteworthy progress in reform, in the process of applying, has been made, it is also clear that now the real test begins in how well Latvia performs. This will be a process that is neither easy, nor short. Latvia now needs to support its commitment to join with further improvements. Yet this is exactly why joining the OECD is such a beneficial step for Latvia: it brings with it a valuable motivator for change, feedback and pressure to drive reform, with the eventual joining of this “club of rich countries” sending a signal to the world’s economic and business stage that Latvia has made progress on its path to becoming a more developed, financially sound and macro-economically stable country.

Corporate Governance Guidelines for SOEs

The OECD is a unique forum where the governments of member countries - democracies - work together to address the economic, social and environmental challenges of globalization.
Corporate governance of state-owned enterprises is a major challenge in many economies. OECD Guidelines on Corporate Governance of State-Owned Enterprises fill an important gap in helping governments assess and improve the way they exercise ownership of these enterprises.

The Guidelines cover the following areas:

1. Ensuring an effective legal and regulatory framework for state-owned enterprises. The framework should ensure a level playing field where state-owned enterprises and private sector companies compete, to avoid market distortions.

2. The state acting as an owner. The state should act as an informed and active owner and establish a clear and consistent ownership policy, one of transparency and accountability.

3. Equitable treatment of shareholders.

4. Relations with stakeholders. State ownership should fully recognize responsibilities towards stakeholders.

5. Transparency and disclosure. High standards of transparency should be observed.

6. Responsibilities of the boards of state-owned enterprises. Boards should have the necessary authority, competencies and objectivity to carry out their function of strategic guidance and monitoring of management.