Monday, June 29, 2009

More devaluation talk

Blogger Edward Hugh has yet again returned to the subject of devaluing the lat, something he notes has also been urged by former IMF chief economist and Harvard professor Kenneth Rogoff. Prof. Rogoff spoke at a traditional Swedish political shindig on the island of Gotland, known as Almedalsveckan. This has been a traditional forum for political and economic debate since the late 1960s and gets considerable attention in the Swedish and Nordic press. The Harvard economist said that Latvia should devalue as soon as possible, but probably wouldn't.
At this point, my view is that devaluation, while perhaps inevitable, would trigger a worst of two worlds scenario. Key elements of the public sector have already been gut-shot with both barrels by massive budget and salary cuts. More cuts are coming and, as I wrote in an earlier post, Latvia is unintentionally bumbling its way toward being not only a failed state, but a failed minarchy (a place where rag-tag remnants of a police and court system, a scattering of skeleton-staffed schools, and a largely black market health care system are all that remain of former state functions). Good minarchy, of course, is possible through a long-term, planned transition, but that is another story.
There is much speculation about where the lat would go if it were cut loose. Some say that a devaluation could be as bad as 50 % or more. The conservative variant is that the lat is allowed to float in a plus/minus 15 % corridor. Both scenarios would boost inflation , reduce imports and cripple the ability of enterprises to retool. Swedish banks would write off huge losses, turn distressed assets over to management companies that have already been formed, and declare (0r effectively continue) an indefinite lending moratorium. Many Latvian salaries would, effectively, fall to Third World levels (at 50 % devaluation, plus likely 2010 budget cuts, we could see teachers making under $150 a month). While the prospect of labor at devalued rates might attract some foreign investors, it will also be a great incentive for Latvians to emigrate to take any minimum wage job in any other "Old European" country. I met an American who has a small business teaching English. A few years ago, most of his students were taking English to deal with foreign customers and correspondence, or to study abroad for a year. Now more than half are taking English as preparation for emigration. In other words, the cheap skilled labor will be gone. As soon as the recovery starts elsewhere, thousands or tens of thousands will leave, making not only a choice of economic advantage, but also a choice of better governance (as I have written earlier)

Saturday, June 27, 2009

The ultimate clusterf**k?

Latvian media are reporting that because of administrative and reporting delays, so-called working pensioners who quit their jobs in June because of new laws cutting their pensions by 70 % will receive neither their salaries nor full pensions in July.
Apparently, this is the result of a combination of cut-off dates for preparing pension pay-out lists and reporting delays to the appropriate social services agencies. In some cases, the disparity (being treated as a 30 % pensioner when one has, in fact, quit work) may extend into August. In any case, a number of people who drew both a salary and a full pension they had earned legally earned until retirement age will be effectively destitute for several weeks this summer. Even the State Social Insurance Agency admits this will happen. Those with mistakenly reduced pensions will be compensated in August.
This is an event that adds insult to both the insult and injury of the 10 % pension cuts mandated for all pensioners as well as the 70 % cut for those still working. There is reason to regard pensions as entitlements equivalent to a personal property interest and the reductions amount to a confiscation (without compensation or recourse) of vested property rights.
It is something that further deteriorates the already badly shaken remnants of public trust in the Latvian government and the state as an institution. It will stimulate further tax evasion and recourse to non-state means of financing one's "retirement" (saving from an off-the-books salary, registering a young relative as working while the retired person, in fact, continues to work and collect a full pension). Under present circumstances, there is no "moral" reason to condemn any means by which people affected by these measures retaliate by ripping off the state. One can only say-- Right On!

Bumbling toward minarchy in Latvia

I have always been interested in libertarian politics and consider myself a libertarian on most issues -- decriminalizing drugs, legalizing gay marriage, striking victimless crimes from the law books, abolishing compulsory military service, etc. Broadly speaking, libertarians are divided into two camps -- minarchists, who favor a small, night watchman government, and anarchists, who prefer to let society self-organize without a state.
Without going into that debate, an interesting observation on the topic of this blog is that with the massive, rushed and hectic budget cuts that Latvia is undertaking, the country is, in fact, bumbling and stumbling in the worst possible scenario toward becoming a minarchy. When the LVL 1.5 billion are cut from the government budget over the three years 2009-2011, and when the real effect of the formal cuts on tax revenues (and tax evasion) take hold, it is likely that Latvia will be able to finance little more than a skeleton police force, a small professional military and some kind of court and criminal justice system. At least on paper.
The problem is that states, especially states with bloated bureaucracies and massive inefficiency in public administration such as Latvia, have created dependencies and reliance by the population that is very painful to cut and betray in the kind of series of short and desperate actions that the Latvian government is taking.
Employers have been compelled to pay social taxes on behalf of employees, among other things, for their pensions, and these pensions (some have argued, with considerable merit, that they are the vested private property of pensioners) are now being confiscated, all expectation of any benefit from the compulsory diversion of income has been shattered.
If Latvia were seriously moving toward minarchy, an essential step would be to cut social taxes and leave employees with more income to divert to private pension insurance schemes. Younger employees could have the option of spending some of their income to support sick or elderly parents or grandparents.
Since the government is, essentially, gutting the state health care system, it should also cut taxes to allow individuals to buy private health insurance and do nothing that would inhibit the rapid formation of private hospitals and other medical care facilities, where private insurers would pay most of the bills.
Education is another area that has been bulldozed by the government, making teaching the lowest legally paid "profession" in the country, assuming that one cannot be paid below the (reduced) minimum wage in the public sector. However, no steps have been taken to encourage the creation of private and cooperative schools and of "informal" education.
By late summer, it will become clear that the schools in Latvia will not open on September 1 (there may be a "stay-away" strike on the first day) and will be seriously depleted of teaching staff if they do open. So the issue of alternative, non-state education will be acute by fall. Creative solutions may have to be found, such as, perhaps, gathering pupils at library internet access points for instruction by internet video (rural children could be charged a small fee to watch lessons at private schools in Riga).
The police will also be severely affected by the cuts, with the result that the ability of the police to prevent and investigate crime will deteriorate, bribe-taking will increase and the police force will continue to lose its best and brightest to emigration and private sector work.
Little has been done to create an alternative system of private law enforcement by expanding the role of private security companies (perhaps allowing certain areas of the country to invite tenders for private law enforcement coverage).
In short, Latvia has unwittingly started on the path to minarchy, but has nothing resembling a transition plan, nor any substantial analysis of how this can be done. Indeed, the government is still projecting the illusion, to the public, that its current path of budget cutting will somehow lead to a system that still provides state-funded pensions, health care, education and law enforcement when, in fact it is (unintentionally) reducing these government entitlements and services to a completely inadequate and disfunctional level. The Latvian population will, over the next 18 months, be forced into the worst kind of minarchy. It remains to be seen if civil society can somehow improvise around this process.

Saturday, June 20, 2009

Latvian union rally June 18

Here is my video shot at the June 18 rally called by the Latvian Association of Free Trade Unions to protest the drastic budget cuts that will affect working pensioners (a 70 % pension cut), teachers (a 50 % salary cut) and ordinary pensioners (a 10 % cut).

Wednesday, June 17, 2009

Budget cuts and "futuricide"

I am personally not feeling the Latvian budget cuts, yet, because I work in the private sector, am healthy and completed my formal education many years ago. I can see some bad scenarios where the someone in the government decides that every ministry, every department and every Dog Welfare State Agency doesn't need their own subscriptions to LETA times dozens. Instead, the government makes one offer that cannot be refused to each news and information provider (we compete with Baltic News Service/BNS), for one megasubscription that costs, say 60% less than the sum of all previous subscriptions. And then we are f**ked...
But before than happens, I am thinking that my then 14-year old will have to go back to school on September 1 (his birthday is August 31), and the teaching profession in this country will have had its salaries slashed by 50 %, getting paid a reduced minimum wage and will face another likely 20 % or more cut just as the school year warms up and the government has to prepare its budget for 2010. I think the school may be empty on opening day.
To be fair, there are probably too many teachers for too few pupils in Latvia, and also too many small schools. What this would mean in a rational world is to make a skills/effectiveness assessment of all teachers and early-retire, train/upgrade or gently dismiss those who cannot be better utilized. It would mean having a nation-wide school bus network to bring pupils to magnet schools in almost any weather, also upgrading rural roads in the medium term. It would mean implementing online teaching to make the best of the best teachers... etc. etc.
Almost none of this is being done in Latvia. Instead, the government is creating an irresistable disincentive to remaining in any teaching job. Any young, able-bodied, English-skilled teacher would be a fool not to emigrate or, alternatively, to find any work that pays more than the sinking minimum wage. And that is very likely to happen if the economies of Western Europe pick up, as they will, ahead of Latvia.
Education is the basis for the competitiveness of any modern society, or any society, for that matter. We don't see too many remnants of societies that, say, didn't teach using the plow or the bronze axe from one generation to the next. Back in 15 000 BC, the tribe that cut back the piece of prime mammoth steak fed to the wise man who taught spear-throwing to the young didn't eat mammoth steak in the next generation. It was back to roots and berries and mushrooms, and when they had to save on paying the mushroom teaching medicine man with the best of crop berries -- well, the story about you can eat all mushrooms but some are eaten only once played out. The tribe that scrimped and saved on education, in effect, killed itself in its own future, committing futuricide.
Latvia, whatever its intentions, is effectively committing futuricide rather than rationally reforming its educational system. Instead, it simply won't have one, nor much of a future.

Budget cuts pass, more to come and is disaster accellerated?

The Latvian parliament, the Saeima, approved budget cuts of LVL 500 million (around USD 1 billion) on June 16, practically sparing no one in the general population of painful reductions of living standards. Hardest hit are pensioners and teachers. Working pensioners will see the pensions they earned in their working lives up to retirement age reduced by 70 %. Teachers' salaries will be slashed by almost half and they will be paid (per teaching load, most have more than one) barely over the reduced minimum wage for public sector employees. Other pensions will be slashed by 10 %, government employee salaries by yet another 20 %.
But that is only the beginning. Next year's government budget will also have to be cut by an estimated LVL 500 million, followed by another similar cut in 2011. In other words, one scenario is where there are further salary cuts and reduction of minimum wage, or there are massive lay-offs of public sector employees, something that has been partly avoided by across-the-board wage cuts.
It is reasonable to say that these estimated budget cuts are based on optimistic assumptions about tax revenues, not taking into account (although Minister of Finance Einars Repše seemed to say in a radio discussion show that tax base deterioration was taken into account) the impact of mass unemployment, reduced purchasing power (less VAT revenue), drastic falls in corporate tax revenues and rapid growth of the grey and black economies. People, seeing that the taxes they have paid up to now are either wasted or result in no entitlements (pensions, health care, education), will simply evade paying taxes as a waste of their rapidly declining income. Others (tens of thousands, if economies outside Latvia recover first) will become economic migrants, most never to return, thereby leaving the Latvian tax base.
I can see how the 2009 cuts were, somehow, pulled off, although I suspect, by September 1, I will have to start thinking about home-schooling my son, since the public education system in Latvia is being de-facto abolished. What I don't see is how the other cuts can be made on top of what has already been done. A public sector can be drastically slashed or abolished if the population, at the same time, is given a sufficient increase in purchasing power to afford private, competitive alternatives and such alternatives (modest cost private/cooperative/non-profit education) can be started and up and running as state-financed institutions wind down.
What is likely is that when the "real" figures on which the 2010 budget cuts must be based come out, the deficit (due to tax base deterioration and lower revenues) will have increased by several hundred millions and the downward spiral toward disaster and economic stagnation will continue and accellerate.
The Prime Minister Valdis Dombrovskis, on a morning TV show as I write, says that the EUR 1.2 billion in international loans will be entirely spent on keeping the government running, not a cent for economic stimulus. This will be left to the EU structural funds, caught in a bureaucratic log jam or used (hitherto) for such interesting projects as a laser show in Latgale, the rural eastern part of Latvia.

Sunday, June 14, 2009

The 4.8 % solution and fish with socks?

Pauls Raudseps, a senior commentator specializing in economic matters with Latvia’s leading daily Diena and I got into a discussion about whether Latvia could recover from its present economic crash. It started on a new Latvian television talk show and continued afterwards. Both on air and later, Pauls pointed to a 4.8 % rise in Latvia’s industrial production in April from March. His argument was that this was the beginning of a turnaround in the Latvian economy that would lead to the real start of an export-led economic recovery in six months.

Pauls also said that he believed Swedish economist Anders Åslund’ s prediction that East European economies (including Latvia?) would recover faster than the West, thereby precluding a scenario where recovery in the West leads to mass labor emigration (based on widespread and rational “no future” expectations) and permanent stagnation in Latvia.

I have looked at what I believe are the same statistics that Pauls uses. The April month-on-month rise seems mainly to have come from increased production of clothing (+14.6 %) pharmaceuticals (+ 11.6 %), and chemicals (+9.7 %). These are seasonally adjusted figures. In laymen’s terms, a mathematical formula has been applied to even out surges of certain kinds of production related to the seasons – wood is easier to harvest and process when the forests are dry and the access roads are clear, etc. The other statistical comparison is adjusted for working days (holidays on workdays, etc.) on a year-to-year (April 2009 compared to April 2008) basis, which showed production plummeting by 16.9 % from April 2008, and by 18.7 % when manufacturing alone is measured. So no glimmers of hope there.

The April statistics are not broken down proportionately, but there is a proportional breakdown of exports, which Pauls and others think should be the motor re-igniting the Latvia economy. I don't disagree-- in theory. These figures are disastrous. Exports are down 30.9 % from April, 2008 and have plummeted in all of the largest export groups. Food products, comprising 18.8 % of total exports, fell 6.8 %, forest industry exports (15.7 % of total) plunged 40.7 % and textiles (including clothing) at 5.5 % of the total were dowm 31.1 %. Only knitted goods, which include socks, I suppose, were up 0.9 %, while a fast rising export (except for re-exported fuels) was fish, up 16 % and just behind pharmaceuticals, up 19%.

The thing is that fresh, frozen and smoked fish comprise only 1.7 % of Latvia’ s exports, about the same as “socks”, at 1.8 %. Even the seemingly rising rocket of pharmaceuticals makes up 5.6 % of total exports. I also suspect that a large percentage of pharmaceutical exports are contract-manufactured pills made by Grindex and other companies for a market with relatively steady demand. Finally, in the month of April alone, on a working days adjusted basis, the production of textiles as a whole (a larger category than knitted goods), was down 59.8 % from the year before.

I find it hard to see how the 4.8 % uptick in industrial production and seeming higher exports of fish and socks (and pills) are serious indicators of an upturn and the green shoots of recovery. It still looks to me like the Latvian economy is crashing. The accelerants of the crash, such as rapidly diminishing domestic purchasing power, a total lack of affordable financing for new businesses (or any business), deflation and an uncertain tax environment (several contradictory plans in one day and tax hikes still looming on the horizon) and the certainty of increased workforce emigration at first opportunity, are all there. The massive cuts in public spending and the even harsher cuts we can expect i 2010 and 2011 will increase unemployment and further cut or "export" the purchasing power of Latvians (with only some showing up in national accounts as expatriate labor remittances).

At some point things will “bottom out” in a kind of prolonged stagnation for the better part of the next decade. It doesn’t look like there is more to hope for than that. Any hopes should be placed on how the flows of repatriated earnings from up to 500 000 Latvians working abroad by 2015 (my wild guess) will be spread in the local economy.

Saturday, June 13, 2009

A week or summer of unrest ahead?

This week, Latvia's parliament, the Saeima, will vote on approving the drastic LVL 500 million (USD 1 billion) budget cuts for 2009, that be followed by equal if not harsher cuts for 2010 and following years. Parliament will apparently be in session Monday, June 15 to conduct regular business and will resume an emergency session on June 16 to deal with the budget matters. The final vote may take place on June 17, a historically dark day when Soviet forces moved in to occupy Latvia in 1940. Just coincidence, but somehow ominous.
The budget cuts will go across the board, slashing government salaries by another 20 %, as well as reducing pensions by 10 %, but slashing the pensions of those still hold jobs (mainly out of economic necessity or because they enjoy their work and are able to do it) by 70 %. The proposed progressive income tax will not be implemented this year. One of drafts that popped up during a hectic and confusing Cabinet of Ministers meeting proposed starting the scale of higher (marginal?) tax rates at LVL 300 per month. This caused an uproar.
In short, the austerity package will have a massive direct and indirect impact on living standards and it is no surprise that the Free Trade Union Federation of Latvia has called for protest rallies in Riga and several other Latvian cities on June 18. It could be the largest public gathering since the pro-independence demonstrations of the late 1980s, where up to 250 000 people rallied on the 11th November Shoreline (11. novembra krastmala -- named differently back then?), a section of roadway between Riga's Old Town and the Daugava river. It will also have a considerable potential for degenerating into unrest, as happened with a political rally on January 13.
My prediction is that there will be some kind of violence -- stoning and attempted storming of public buildings, almost with the certainty "of an amen in church" (kā āmen baznīcā) as the Latvian saying goes. Needless to say, there is nothing that can be changed by this, but it will happen simply because many people feel desperate and angry. The unions most certainly don't want to provoke a riot, but they will not cancel their protests (even though they signed the austerity packages -- with reservations-- along with other representatives of society).
I don't think June 18 will be the tipping point -- probably there will be spontaneous gatherings on June 16 and 17. People will simply flock to the Saeima building in the Old Town, called by internet appeals, Twitter, SMS messages and, possibly, old-style leaflets, which I have not yet seen. I don't exclude the possibility that unrest could start on these dates and that the government could order the Saeima to be cordoned off by the police and military. This, of course, would create a no-win situation, since the spectacle of thousands of security forces blocking off the parliament of a democratic country in crisis would bring international media attention and an even larger and angrier local crowd. But to take minimal security measures, as happened on January 13, would put the Saeima (with parliamentarians and staff inside) at risk of unpredictable actions by a much larger crowd than the few hundreds or 1 000 that gathered on January 13. These actions could range from a non-violent siege of the building, letting no one out, to a repeat of the January stoning that could escalate to a storming and possible trashing of the entire building.
In any event, this may be the "hottest" week in Latvia since the late 1980s and 1991. Foreign media (and local reporters)covering these events should take precautions such as protective clothing (helmets, eye protection), gas masks, first aid supplies and provisions for emergency legal/consular assistance. Since any hostility is likely to be directed primarily at political targets, it should be safe to wear large (but removable) PRESS or TV emblems on clothing, so that security forces will at least know who they are hitting, gassing, shooting with rubber bullets or spraying with high-pressure water.
Whether the police force will actually use force for a sustained period against large (and, as is often the case when hooligans and streetfighters blend with gatherings) non-violent numbers of people remains to be seen. The police have been subject to some of the harshest budget cuts and may feel that they are more on the side of the demonstrators (there have been calls for police labor actions) than the government.
Minister of Finance Einars Repše, who admitted responsibility for delaying dealing with the budget cut for several months, has made one valid point -- that rioting "will not earn a single lat" and that the cost of broken windows will be borne by the already ravaged state budget. Moreover, mobs generally have n program, even if they reflect, in the specific context, a justifiable political anger. The only "alternative" that could be forced on the government by a state of endless unrest is to let the country default, something that may be even worse (though probably not fantastically worse) than the collapse of education, health care and other public services that will be triggered by the budget cuts.
As to what will happen after the dust settles and any broken glass is swept up and replaced -- I see the economic downward spiral accellerating. Wage deflation will reduce the tax base in tandem with what I see as microeconomically logical tax evasion (why give good money for non-existent, at best shambolic services?). As government revenues fall, next year's massive cuts will be even more massive. One also has to reckon with the fact that even if Latvia were populated by Swedes or Finns who pay all taxes with robotic regularity, the plunging GDP (probably 25 % this year) as well as the lack of company profits would suffice along to slash the tax base to where LVL 500 million in cuts in 2010 will be far too little.
I believe other European countries will recover ahead of Latvia, triggering a massive wave of semi-permanent emigration, taking away both the best and brightest and those barely bright enough to get the picture and leaving the country in economic stagnation for the next decade. The blame rests largely with a post-Soviet political elite who spent 20 years putting rent-seeking through state capture ahead of nation building on the opportunity of restored independence.

Wednesday, June 10, 2009

The unavoidable train wreck...

Some fine-tuning details of the plan to cut Latvia's government budget by LVL 500 million have emerged (additional cuts of this size will have to be undertaken in 2010 and 2011), but these do not really change the direction or speed of a country headed for a train wreck.
Supplementary pensions (LVL 0.70 per year worked) will be cut only for those who retired after 1996. Pensions over LVL 500 per month will be limited to that amount, with any sum in excess withheld as a compulsory loan to the government. Teacher's salaries will be cut to the minimum wage per "shift" or teaching load, though it is unclear whether the old minimum of LVL 180 or the new LVL 140 will apply. This, in effect, means the public education system will collapse -- the only question is how fast. Younger teachers interviewed on evening television indicated they would, at the first opportunity, quit their subsistence-paying jobs and emigrate.
An ongoing TV discussion (as I write) is discussing whether any plan or priorities exist as to what to do next -- apparently there is no plan or vision. Also, there appears to be no funding (other than substantial EU structural funds, that are log-jammed somewhere in the bureaucracy) to stimulate the economy at a time when virtually all macroeconomic indicators are in free fall. It appears that we have a situation where the budget deficit is feeding off most efforts to cut the budget deficit by impacting purchasing power, raising unemployment and further deteriorating the remaining shreds of trust in the government.
I think that is the fundamental problem -- no one trusts that the present political elite and the government can solve the problem. It is no surprise that in a telephone vote, more that 5200 callers say it is time to take to the streets (whatever than means -- although the January 13 riots were a hint). There is a near-total breakdown of the social contract -- at least along these lines. The CEO of my workplace, LETA, Una Klapkalne, whose previous work was in government raised this issue at a brainstorming session with Prime Minister Valdis Dombrovskis and other ministers present. She said that whatever plans were drawn up, whatever schemes were sketched, it was all against the background of massive mistrust of the government by society.
Even if the government and the Saeima (parliament) succeed in approving the budget cuts and get the next payments from the International Monetary Fund (IMF), the EU and other lenders, the funds will merely prevent a government default. It will not inject a single santim (1 LVL = 100 santims) into the collapsing real economy.
My scenario -- a temporary boost if the Saeima approves what, at this point, amounts to cutting the carotid artery of the public sector with a resulting impact on the economy, quickly followed by a realization that things will spiral out of control again very soon. The international credit will simply pump more blood into the spurting artery (and, given the inefficiency and corruption of the government and ruling elite, much of the huge sea of billions of "liters" of blood will be sucked by parasites). When this is obvious to the financial markets, pressure on the lat and the "big tail" of the Swedish krona that this little animal can wag -- will increase. The Bank of Latvia, which says it has the entire supply of lats backed by foreign reserves, will come closer and closer to literally buying every lat on the market to keep the peg (effectively Euro-izing the bank accounts of those domestic actors selling lats.) Interbank and domestic interest rates will soar past the present 22 % and short-term funds will rush in to grab some of the shrinking pool of lats (possibly causing a bizarre spectacle of a seemingly strong but actually dead-but-not-fallen-over little mouse Latvian lat alongside a wildly swinging lat-surrogate krona). When the mouse falls dead, it is anybody's guess what happens -- probably freefall for the lat, a frightening dive for the krona and tremors across the Baltic and Eastern Europe.

Tuesday, June 09, 2009

Post-election "surprise" -- another 500 million LVL cut

In a "surprise" move after Saturday' s municipal and European Parliament elections, the Latvian government announced that it would have to cut an additional LVL 500 million from the state budget and raise some taxes. Finance Minister Einars Repše said that, for all practical purposes, "nothing" had been done up to now to reduce government spending in line with the requirements of the International Monetary Fund (IMF) and other lenders.
The latest round of cuts proposed by the Finance Ministry crosses some "red lines"  by cutting pensions by 15 % and eliminating so called supplementary pension payments (for years worked). This, according to documents leaked to the daily newspaper Diena.
According to the Diena story and other media reports, the government is also proposing eliminating the minimal income tax deduction of LVL 90 per month and reducing the public sector minimum wage to LVL 140 (from the current LVL 180?). The austerity package would also raise the excise tax on beer and impose a capital gains tax as well as make the presently flat income tax progressive.
The cuts will almost certainly contribute to the drastic decline in purchasing power (retail sales have been plummeting, shopping centers have cut back opening hours) and will accellerate the wage-cut, tax revenue spiral (people with lower salaries pay lower taxes under ideal conditions and, in Latvia, many in the private sector will move into the gray economy paying little or no taxes on "unofficial" cash remuneration).
Raising taxes can only have a significant impact on state finances in a stable or growing economy, but Latvia's GDP appears to be heading for a decline of 18 - 25 % this year, with sharply rising unemployment (and the  drain on state funds this creates), so any tax changes will have no effect. With deflation setting in and property prices plummeting, it is hard to imagine how anyone could record a capital gain. This tax reform is several years too late. If a capital gains tax is adopted according to Western models, there should be a provision for offsetting losses, so that the next few years of near-depression and economic collapse should provide an opportunity for accumulating losses against future gains that may pick up again toward the middle or end of the next decade.