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Flat Tax Book with Simulation for Croatia
In the midst of a national debate for tax reform in Croatia, a relevant book "The Case for the Flat Tax in Croatia" (Flat Tax - Kako provesti poreznu reformu i potaknuti gospodarski rast?) co-authored by Natasha Srdoc, MBA and Joel Anand Samy, co-founders of Adriatic Institute and The International Leaders Summit on Economic Growth provides an easy-to-read tax reform guide book for Croatia and includes Croatia's first ever flat tax simulation. The Croatian version of the book was published by Zagreb based IBS.


Combating Corruption: A Policy Tool Kit

By John D. Sullivan, Executive Director, CIPE

Brief Introduction: In May 2006, Dr. John D. Sullivan delivered a keynote address at Adriatic Institute's Third Annual International Leaders Summit on Economic Growth (ILS) in Zagreb, Croatia and participated on a strategic panel on reforms at the ILS Economic Roundtable with Slovenia'sPrime Minister Janez Jansa in Ljubljana.

Corruption is much the way Mark Twain once described the weather: "Everybody talks about the weather but nobody does anything about it." The list of recommendations below provides policymakers with tools that they can implement right away. We at CIPE must give credit for many of the recommendations to the work of our partner organizations, the Center for Economic Development (Slovakia) and the Center for the Study of Democracy (Bulgaria).



Demand Side Recommendations

In thinking about how the demand for corrupt payments can be restricted, one of the key elements is to restrict the opportunity for such demands or requests to be made. I am not suggesting that efforts to eliminate opportunities for corruption should be considered as an alternative for enforcement mechanisms or police actions. Rather, elimination of opportunities for corruption combined with tough enforcement is the most appropriate combination of responses.

  1. Establish sound procurement codes that require open bidding and tenders to act as a preventative on corruption. Require all such bids to be open to public scrutiny. Transparency International and the European Bank for Reconstruction and Development have each advanced model procurement systems along these lines. Attached to this paper is a copy of Brazil??s procurement systems reform that demonstrates that such efforts can be put into place even in developing and transitional countries.
    International financial institutions should begin making procurement reform a condition of adherence to many of the international organizations, such as OSCE. EBRD and others can work to utilize their lending programs to advance procurement reforms.
    The Internet could be used to promote anti-corruption measures. For example, having government tenders and decisions on the winning bids posted on the World-Wide Web for all to see reduces the opportunities for special deals.

  2. A related idea is to require third party monitoring on large procurements funded through the multilateral development banks or other foreign assistance instruments. Essentially, this would require recipient governments to agree to name third party firms to monitor and report on construction of dams, procurements of goods and services, and other large ticked items. The third party monitor would not only conduct audits to verify that no suspicious payments were made but would also monitor building materials, quality of services and goods, and other contractual obligations to ensure that all deliverables are up to code. The US Congress is currently considering legislation to this effect.

  3. Another worthy idea would be to require independent audits, on at least a selective basis, as a condition for receiving loans or development grants. The precedent for this action was set with the audit of the Russian Central Bank taken out in the wake of the corruption allegations made regarding the Central Bank??s handling of IMF loans. Such audits could be directed both at loans and procurement processes thus providing an incentive to adopt sound procurement systems.

  4. Legal reform and simplification is becoming a key aspect of removing barriers to business. As noted in my testimony, one key aspect is to simply reconcile overlapping and duplicative laws and regulations. When government officials have a large amount of discretion to decided which laws or regulations apply in given situations, they have a great opportunity to extract compensation for a beneficial decision. One immediate step that can be taken is to recommend formation of a process of judicial review by which independent commissions of judges have authority to reconcile or strike down such inconsistencies. Ecuador has initiated such as system.

  5. Private sector associations and think tanks could create an inventory of legal barriers and duplicative regulations that need to be changed on a priority basis. The light of international exposure may help to force change.

  6. Each of the transitional economies has large and, in many cases, growing informal or gray economies. These exist because of the large number of conflicting laws and regulations that make it impossible for even the best of companies to legally comply while small and medium sized firms simply can??t cope. Independent research in Ukraine, for example, has demonstrated that some firms may have as much as 78 inspections per year. Efforts to simplify these regulations have proven to be very difficult due to resistance from the executive branch agencies, lack of expertise in rewriting legislation, and the like. One approach, used in both the United States and in developing countries, is to create a small business exception. That is to simply pass a law that stipulates that firms with less than a certain number of employees (from 10 to 100 depending on local circumstances) are exempt from certain regulatory requirements.

  7. Taxes in transitional economies constitute a serious problem as well--a problem that gets worse the further east one goes. Obviously all business people in all countries complain about the tax burden but in the CEE and NIS regions it is exceptionally difficult, especially in the area of labor and local government taxes. Again, the concept that comes to mind is to create different standards and rate schedules for small and medium sized companies. By reducing the tax burden, one automatically eliminates the opportunity for bribes and side payments. In addition, increasing tax compliance sets higher standards throughout the country.

  8. Finally, paying civil servants a living wage that is competitive with private sector salaries is another way to reduce the demand for extra-payments.

Supply Side Recommendations

Efforts to restrict the supply of bribes and other forms of corruption can also be very beneficial. Again, the approach that CIPE would recommend is to focus on the elimination of the underlying causes and opportunities for making such payments. As noted in my testimony, promotion of corporate governance standards along with efforts like the OECD antibribery convention are extremely important in this context.

  1. Economic journalism training is an essential aspect of any effort to prevent bribery or to reduce the supply of bribes. An independent media made up of journalists equipped with the tools of analysis to detect fraud or corruption, especially in privatization programs and in government procurement, can be a major deterrent to corruption.

  2. Involving think tanks, business associations, and other nongovernmental organizations in the process is essential to building public understanding of the costs of corruption and the demand for change. A number of CIPE-sponsored programs have taken this path, including the Coalition 2000 campaign of the Center for the Study of Democracy (Bulgaria) and the programs of the Center for Economic Development (Slovakia).

  3. The OECD's antibribery convention is one of the soundest measures taken recently to reduce corruption, even though several developed countries have not yet implemented domestic enabling legislation. Having gained widespread acceptance of that convention, it is time to return to the negotiating table and remove one of the gaping loopholes -  the exclusion of foreign subsidiaries of multinational corporations. Parent companies should be held accountable for actions of foreign subsidiaries, and should be held accountable within the parent company's home country. This is in keeping with the US Foreign Corrupt Practices Act and is an essential element of any antibribery regime.

  4. Significant efforts need to be made to finalize the best possible set of Internationally Accepted Accounting Standards as can be realistically completed in the short term. Once these are set, efforts should immediately begin to negotiate even better standards. See the recent article by David Morris and G.M. Ward of PriceWaterhouseCoopers on "One Global Corporate Reporting Standard." For more resources on this issue see the International Federation of Accountants' web page ??

  5. The OECD's statement on Corporate Governance ( is a good start at developing international standards for good governance. Such standards are a key part of ensuring that all corporate transactions are transparent and in full compliance with accepted international standards. We should expect that OECD member governments would seek to implement them in their home countries, which would have a direct impact on the corporate community. In this respect, the principles are a very useful companion to the OECD antibribery convention.

  6. We can and should strengthen the general guidelines contained in the existing OECD document by seeking a second round of negotiations. More explicit standards should be set out in the following areas at a minimum:

      • Countries should be required to establish independent share registries. All too often, newly privatized or partially privatized firms dilute stock or simply fail to register shares purchased through foreign direct investments.
      • Standards for transparency and reporting of the sales of underlying assets need to be spelled out along with enforcement mechanisms and procedures by which investors can seek to recover damages.
      • The discussion of stakeholder participation in the OECD guidelines needs to be balanced by discussion of conflict of interest and insider trading issues. Standards or guidelines are needed in both areas.
      • Internationally accepted accounting standards should be explicitly recommended. (Also see above regarding developing such standards.)
      • Internal company audit functions and the inclusion of outside directors on audit committees needs to be made explicit.

  7. Promote freedom of information/access to information laws for governmental information subject to privacy protection considerations.

  8. Promotion of clear and transparent rules on conflict of interest for the public sector. In many countries throughout the region, it is still possible for government officials, (or their children, spouses, or lawyers) to hold additional paying positions in private or state firms, or to accept consulting fees etc. from private firms. At a minimum, such relationships should be disclosed and the officials bared from making decisions affecting those firms. As a corollary, efforts should be made to limit officials' ability to leave office and move into high paying positions in firms doing business with the ministries or agencies that they served.

  9. Clear guidelines should be issued requiring disclosure and setting forth standards by which governmental agencies may award subsides, quotas, and exemptions from fines.

  10. The OECD should work to promote the establishment of Ombudsman's offices and Independent Auditing Agencies (similar to the US GAO).