Entrepreneurship development. Entrepreneurship in Kyrgyzstan has been considered to be an independent branch of economics for over ten years and is one of the most important targets for reforms directed on creation of an effectively functioning economic system or one of the components determining successful development of the state in general.

During the last few years, private sector of economics continued developing despite complications in domestic political situation although in a slower pace. Based on official assessment, private sector provides 86 percent of the GDP. It is exclusively the private sector that prevails in economics of agriculture and services making up over 90 percent of the total volume of production and services, and over 20 percent in industry.

Economic development. According to the Population Fund research results (chart 1) Kyrgyz economics is 59.9% free (moderately free economics starts from 60 percent and more). Freedom of entrepreneurship or regulation level is 61.4%. This index is lower than the average world one and trend has been unstable since 1998.

Chart 1

Based on the World Bank data, it is possible to open a business within 21 days. For reference, the figure is 26 days in regions, while in OECD states is 14.9 and world average index is 48 days. Based on this statistics there are not any serious obstacles for starting up a business. However there are significant problems with obtainment of licenses, permissions as well major challenges with closing down a business. Trade liberalization has brought its fruits. Trade freedom index is 71.4%, which is higher than world level with a stable trend for improvement. There are problems of non-tariff barriers, in particular: excises for import, additional regulation, limiting licensing and ineffective prone to corruption custom clearance mechanisms. For more information please see statistics prepared within the "Business Leading" project of the World Bank shown in the table 1. It provides a detailed description of an accessibility degree for leading business in Kyrgyzstan.

Table 1

Note: Business Leading Easiness index for 2006 was recalculated considering methodological revision and addition of data on three new states.

Prior to discussing barriers, it is worth paying attention to challenging issues caused by unfavorable physical and economic particular features:
• Small internal market.
• Remote geographical location (there is no access to sea ports).
• Relatively scarce mineral resources.

Main achievements:

• Introduction of private property for land
• Privatization (trade objects, service sphere, small and medium enterprises).
• Trade liberalization.
• Tax rate cuts. Last year income tax and profit tax rates came down from 20 to 10%, moreover, production businessmen importing equipment for production needs are freed from value added tax.
• Introduction of license system in service sphere and clothing manufacture.
• Reduction of licensing.
• Delegation of some state functions to a private sector.

Next economic reforms that took place on early stages of the transition period also contributed to development of entrepreneurship:

• Tough financial loan policy and lessening inflation rate;
• Reforms of state financial resources including suspension of direct budget subsidies;
• Creation of a two level bank system;
• Initial reforms of tax administration and custom bodies and system of licensing;
• Joining membership in the International Trade Organization in 1998.

Main achievements are already indicated and their positive aspects are obvious to everyone. Both business society and general public are well aware of them. Therefore, this analysis aims on drawing attention to unresolved issues in order to discuss reasons causing them and possible solutions. That will promote a more efficient understanding and perception of the existing activity.

Unresolved issues:

• High tax rates.
• Tax administration.
• Frequent and groundless inspections.
• Imperfection of legislature and its subordinate acts.
• Unstable and unpredictable entrepreneurship activity regulation policy.
• Reduction and improvement of licensing and permission procedures.
• Modernization of a custom clearance regime (decreasing time for custom clearance and other delays on the border).
• Closing down a business.
• Incomplete administrative reform.
• Corruption.
• Shadow economics.

To develop business, a series of priority measures including reduction of the following administrative barriers should be on of the main concern:

1. High tax burden. (High tax rates) Number of tax payments that are 2 times and almost 6 times higher than an average index of the region and of the world correspondingly. Tax burden is distributed extremely unfairly along the branches and business leading forms: today 60-80 percent of taxes come from 180-200 companies, while a number of officially functioning entrepreneurship entities is around 500 000, out of which 782 ones are medium size, 7689 - small size, and over 163 000 are individual and 300 000 farmer economies. Current state fiscal policy does not encourage companies to accumulate funds for investment purposes and for promoting production of a competitive product. Current Tax Law with its high tax rates significantly increases costs of domestic products and influences increases in price, general inflation rate as well as limits development of export. Unfortunately, current fiscal policy of Kyrgyzstan became a cause for prosperity of corruption in economics and shift of small and medium enterprises into "shadow economy".

This part of the World Bank research conducted within "Leading Business" project (table 2) provides information about taxes that should be paid or deducted from an average company in a given year. Administrative burden related to tax payment is also included.

Table 2

2. Tax administration. It is important to reform the tax administration providing for achievement of balance between rights of tax payers and tax institutions, reduction of corruption level in tax institutions and improvement effectiveness of domestic fiscal workers' activity. Reorganization of tax service activity should foresee the following:

• Optimization of organizational structure and functions;
• Introduction of modern information technologies;
• Exclusion of conditions for corruption cases in fiscal bodies by decreasing a number of contacts with tax payers through introduction of "one window" mechanism at registration of entities and submission of tax reports.
• Submission of tax reports via online communication channels;
• Decreasing number of tax inspections based on the evaluation of tax non-payment risks by active taxable entities;
• Optimization of work with large tax payers.

2. Frequent and unjustified inspections. Many of potential advantages of the market economy were not implemented because companies leading commercial activity were frequently exposed to numerous inspections and became subject to lots of claims from various bodies working on the inspection of the same aspect of the company's activity. Numerous and inconsistent tax instructions and rules constantly change. Contradictions of articles in the Tax Law creates opportunities for "rent-seeking" behavior model of tax inspectors, auditors and staff of tax policy

3. Imperfection of legislature and its subordinate acts. A newly developed draft of the Tax Law has been under consideration for over two years. Often sub-legislative acts contradict or duplicate each other. In general, Kyrgyz legislature corresponds to market economy as well as economic strategy set forward by the Kyrgyz Republic Government. However, the way it is implemented impedes development of market economy more than promotes it. The major flaw in practicing legislature is overly high interference of the state in private business and ignorance of laws.

4. Unstable and unpredictable entrepreneurship activity regulation policy. Low level of transparency in state decision making on legal and economic regulation issues influencing market environment and rights and interests of businessmen, on one hand, and complicated procedures of obtaining permissions and licenses and imperfect business tax administration, on another hand, impede leading economic activity and raise its costs. Serious obstacles emerge due to duplicated authorities of state bodies responsible for issuance of permission documents.

During the last years, a scope of paid services provided by the state structures has been constantly increasing. Basically, state power is leading its business providing paid services. Besides, state structures establish their own norms and monitor implementation of these norms. That leads to conflict of interests - civil servants will always develop laws providing for preservation of their control functions, thus justifying their existence. Therefore, a variety of tax departmental legal norms designed in the interest of state structures were passed and are still passed as state structures simultaneously serve as their authors of these projects, controlling agencies and institutions providing paid services. Registry of permission documents provided by the state management bodies lists over 136 permissions. De-facto amount of various tax departmental permission documents, sub licenses, information sheets and other similar documents is significantly larger, and a major part of them does not correspond to current legislature. Instructions crated by many different ministries and departments require improvement.

5. Reduction and improvement of license and permission procedures. Introduction of license order or its annulment on activity types can occur due to the following criteria:

• Protection of environment, property, life and health of citizens;
• State security interests;
• Implementation of state monopoly;
• Safeguarding legal order.

Introduction of license policy or new license requirements and conditions should not unjustifiably limit freedom of economic activity of entrepreneurship entities. Technical regulation field in the Kyrgyz Republic that makes up over 70% of state regulatory system is also considered by the business community as packed with absolutely unnecessary requirements. However, in this case, there are real actions on improvement of situation - since December 1st, 2004 Law of the Kyrgyz Republic "About basics of technical regulation in the Kyrgyz Republic" came into force. It foresaw a five year period for transition to technical norms and procedures in the form of laws. From December 1st, 2009 state requirements set by departments but not replaced by corresponding technical norms will be cut by a "guillotine"

6. Custom administration (modernization of custom regime: decreasing time of custom clearance and other delays on the border). Main objective of improvement of custom administration should be targeted on creation of the most favorable conditions for mobilization of foreign economic activity of Kyrgyz Republic companies and promoting significant flows of investment in the state economy.

Measures that will provide for increasing effectiveness and transparency of administration of custom fees assume:

• Revision towards easiness of custom procedures and checks on the border;
• Full automation of going through custom registration and control, other processes of information exchange, its accumulation and analysis as well as possibilities for online fill-in of import and export declarations;
• Ensuring transparency of custom services' activity through providing access to all necessary information for all stakeholders, development of partnership cooperation between the customs and business community as well as provision of easy and quick information exchange between customs services of the Kyrgyz Republic and its main trade partners.

The following measures are required for simplifying and speeding-up procedures of custom registration:

• Development and introduction of the preliminary notification mechanism, i.e. when information about certain goods consignment imported on the custom territory of Kyrgyzstan is received by the customs before actual arrival of these goods. This will decrease amount of time spent for custom registration;
• Introduction of "one window" principle for organization of a joint control on behalf of sub-departments responsible for radio control, veterinary, transportation (radiation, veterinary, sanitary and phytosanitary control) and other types of control being carried out in one place;
• Levy of custom fees and payments in strict accordance with requirements of the ITO Agreement about custom evaluation, according to which custom fees should be levied predominantly ad-valor based on the information provided in the invoice but not on the basis of basic or minimal prices established by the KR Government. That requires effective and efficient international information system of data exchange with custom services of the main trade partners of the Kyrgyz Republic as well as training the customs staff.

7. Closing down business

Regarding this issue we suggest the research of "Business Leading" for 2006 without commentaries (table 3) that is annually published within WB project. This part of the research considers short term and financial expenses related to bankruptcy procedures and offers measures of filling in gaps in legislature related to bankruptcy. Coefficient of debt collection expressed in cents per dollar received from a default company is also indicated.

Table 3

5. Incomplete administration reform. In the sphere of reorganization of ministries and administrative sub-departments by the KR Government for the last few years a significant step was made with the support of international organizations such as UNDP and TASIS. On the basis of functional analysis approach in the majority of ministries their functions and responsibilities have been reconsidered. Recommendations were given on elimination of unnecessary and duplicating functions. However, absence of the monitoring and evaluation system in the country did not allow for real implementation of these recommendations. De-facto, many conflicts of interests leading to corruption remained, especially in regulation sphere.

Horizontal functional analysis was carried out rather shallowly leading to irrational distribution of functions between ministries and sub departments and unfair distribution of human resources between state bodies and within them.

Analysis of functions of local state administrations and local self-government bodies was conducted only in pilot regions and its results did not receive adequate evaluation. Financial mechanisms allowing for implementation of functions delegated to self-government bodies were not thought through and developed.

One of the main reform goals of the state governance should be reorientation of functional objectives of state bodies and institutions from direct interference and participation in economic activity to market regulation and provision of public goods.

In addition, it is necessary to achieve a clear division of responsibilities between state government and self-government bodies in accordance with their goals and objectives as described in the legislature.

9. Corruption. Based on data of Business environment research and Enterprise Effectiveness (BEEPS) research conducted in 2006, 59 percent of companies have recognized corruption as a significant obstacle in commercial activity. This index is the highest in the region and reflects deterioration in comparison with the BEEPS research carried out in 2002. Moreover, based on assessment classification of corruption index in 2007 conducted by Transparency International (TI) international organization, the Kyrgyz Republic is on the 157th place out of 180 countries in the world. Corruption has covered many branches of activity.

To decrease degree of corruption occurrences in Kyrgyzstan, serious modernization of the legislative process is required. Considering that Kyrgyz Law tends to international unification and standards of its application, it is necessary to introduce obligatory anticorruption expertise of draft bills and existing sub legal acts. This would significantly decrease opportunities for corruption among army of civil servants. Expertise should identify corruption norms and block them on the stage of bill drafting.

It is not a secret that certain interest of the state Apparatus exists in presence of law violators. To support their selfish motifs, officials of different levels support sphere of illegal activity using bribes. As a result, state merges with the "shadow" economy.

Degree of quasi-state activity remains to be high and many "private" commercial companies are related to the highest officials thus creating a large unofficial state sector that brings revenue for officials in the form of a systematic income.

10. Shadow economy. Shadow economy that reaches 50% of the GDP (UNDP research) negatively influences tax and social base and leads to vicious circle of a mutual increase of a tax burden and shadow sector. Shadow economy creates unfair competition for registered companies and distorts official statistics that lead to ineffective decision making in economy policy.

Thus, shadow economy should not be perceived as an interim phenomenon. It will continue growing with the lack of economic growth accompanied by increase of employment and a more fair income distribution. Visible is also a role of justice increasing or decreasing shadow economy. There, where laws are not practiced, where entrepreneurs do not rely upon legal acts and justice protection of their property, they will work in the shadow sector with its established traditions and mechanisms as it is more profitable for them.

For legalizing shadow economy, it is necessary to develop and implement the following reforms, in particular:

• Creation of a favorable legal and business community through decreasing expenses on registration of business and increasing benefits from official registration;
• Adoption of laws that are recognized and that protect entrepreneurs and workers in the area of informal economy with a special focus on entrepreneurs' rights;
• Adoption of unified taxes, fair and simple from the administration point of view that will not provoke companies to leave legal business.

Final steps

Elimination of unjustified burden of inspections from entrepreneurs requires reduction of its amount and direction as well as improvement of their effectiveness. For this purpose, a Law "About procedure of conducting inspection of entrepreneurship objects" has been passed. This legislative act establishes an order of organizing inspections of the entrepreneurship objects on behalf of the authorized bodies, defines their mutual rights and responsibilities as well as protects rights of entrepreneurship entities from illegal interference in their activity.

Conclusion

In the near future mutual effort should be put in passing a new Tax Law that will provide for a consistent solution of many problems related to development of all business segments. New Edition should include the following:

• Need to simplify taxation;
• Application of lower tax rates and expansion of taxable source;
• Equalization of tax burden between different types of tax payers;
• Reduction of tax discounts and tax exemptions;
• Creation of equal conditions of taxation for domestic and foreign companies and individuals;
• Encouragement of conscientious tax payers.

Kubanychbek Omuraliev, an Independent Expert