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Mr. Prime Minister,
I decided to write this letter due to several circumstances, the economy of the country is in a difficult situation (in June it decreased with 0.8%); not only the government has not fully realized what is the reason for this, but they don’t have realized it at all; accordingly even Dreaming for improving this situation is difficult. All the outlooks that executive of legislative government (Parliamentary majority) representatives say in respect of recovering the economy is illusive in the best case scenario, and harmful for the economy in many cases.
The main problem that stopped Georgian economy is not “preliminarily collected taxes” (I will not stop here to prove how truthful this is) “squeezed business”, “the wrong economic policy of the previous government”, “unaccustomed to freedom or lazy Georgian business”, ”stopping the large business which were close to previous government” and others, as you and the member of your team claim to be. Not even the “suspension of infrastructural projects” is the reason for an economy to stop as claimed by several leaders of the National Movement, even though stopping/slowing down this kind of projects is an executed fact itself.
Economy is not digits and statistics. Economy is a mix of decisions made daily by separate citizens. To do something or not to do, risk or not to risk, foresee for a year, 1year, 5 years, 10 years or 3 days. Overall exactly this kind of decisions are reflected on the very economic indicator about which I am talking from parliamentary or other tribunes and which tend to deteriorate constantly.
The main problem which your government does not want to acknowledge and/or confess is the sense of instability. Because our or foreign citizens find it very hard to foresee what kind of political or economic environment will be in Georgia, they avoid investing, taking loans, starting/enlarging business and so on and so on. Moreover, some part of them is trying to move their equity to more stable environment, since the future in Georgia has become extremely unpredictable as a result of last year’s parliamentary elections. And if during several months from electing a new government we could have blamed this sense of instability on a new political reality (and which, using your terminology, was successfully done by the members of your government) today, after 10 months from the October elections, even talking about it is not serious.
I will try to give several examples which cause the sense of instability. It will not be a full list as it requires working for several weeks, but I hope it will make it possible to illustrate the essence of the problem.
One of the first decisions which new elected parliament made on the last years autumn session was removing the clause from the tax code which was considering decreasing the several taxes (income, dividend, and royalties) the arguments given by the majority were legitimate – it would have caused the reduction of budget incomes, yes it is true in a short term perspective, though in a long run perspective the reduction of taxes, (as it was planed) would have been a strong message for local as well as for foreign investors, that a new government continues the free market oriented economical policy. By removing this clause from the code we, the country have sent an absolutely opposite messages.
In Georgia the economic/tax environment can change with any political changes; 2. The investors which started business in Georgia no a long ago were and were expecting a tax decrease, were simply deceived by the government; 3. Any new, potential investor can be found in the same situation, as the government is not bothering itself by keeping their promises.
B. The discussion about the new labor code lasted for several month, the discussion was followed by the unappealing announcements as if we have a “slavery labor code”, “legal slavery”, etc, the entire “refinement” of the labor code was wrapped in a such way, as if it would have helped employing the citizens, which was probably very profitable for gaining the political dividends, but was detrimental for the country economy.
You, yourself were involved In this kind of populism, even though I am sure you have not even read, nether the old nor the new version of this labor code (not because you do not love reading, I simply doubt, you have time for it). You have taken into consideration the persistent advices of several “Europeans” to make a labor code more European and forgot that Brussels is not Moscow; we are not going towards the Europe to receive orders from Brussels as once we were receiving them from Moscow. Unlike the European countries keeping the competitiveness is vital for us, what did we get as a result?
1. A total frustration in business sector for several months, when existing or potential investors could not understand how their expenses for employees would increase; 2. After finishing the process, complicated employment and dismissal procedures therefore increased expenses for business. For you as for a businessman does the existing environment look more attractive or not? Do you or any member of your government honestly believe that in terms of the new labor code the condition of already hired employees has been improved?
C. The discussion concerning the prohibition of gambling was going on for several months. Even the issue was already initiated in parliament. We hear contradictory statements from the majority and other representatives of the government regarding this issue. Gambling prohibition means: 1. Thousands of lost jobs; 2. interrupting the investment process of hundreds and thousands of millions that could have potentially created new work places. 3. Decrease of budget income, which furthermore more questions the social promises that you have so generously give during the pre-election process. if the adults, Georgians as well as foreigners eagerly occupy themselves with this kind of games based on their free will and are ready for this type of expenditure, why does your parliamentary majority think that they have a right to ban them from this kind of actions? The result of this endless discussion are – the confused, existing or potential investors, who even today do not know whether it is worth expending their existing business, invest in already started projects or start the new one.
D) Parliament approved the law which prohibits selling the agricultural land to foreign individuals or to a foreign company. This prohibition will have a very concrete consequence: 1. there will be fewer investments in the country, the amount of the work places will be reduced as well as the budget income. 2. Foreigners which already own the land in Georgia will be in a constant fear that their property right will be threatened, therefore they will not think about new investments, development, etc. As a result we again get – less investments, less working places, less budget income; 3. This is a message to potential investors that the country turned away from the road which leads to a free economy and in the future we have to expect more and more restrictions and regulations – therefore, avoid investing in Georgia.
E) Due to the fact that, you have problems in budget income, you decided to look for the new sources of the income mobilization, this is clear, Georgia is not the first country and your government is not the first facing this such a challenge, the right outcome from this situation would have been moving towards the tax and budget reduction, but you chose multi-tested, and from my point of view unjustified way, decided to increase the excise payment on tobacco and alcohol products. No matter how much you talk about fighting the high blood pressure and heart diseases with this decision. The private sector received a concrete message – the government finds it hard to mobilize the tax income and in the future we have to expect worse actions in terms of tax environment. The same can be said in terms of tripling the fee on mineral waters, for you as for an experienced businessman, it will not be hard to foresee what kind of decisions will a business make after this kind of messages.
F) The bill which considers announcing moratorium on enforcement till the 1st of February of the next year was already submitted to Parliament. This means that the state will roughly interfere in relationships with private entities. Result: 1. Short term perspectives – lose gained by financial institutions; 2. Medium-term – citizens who have mortgages, in more severe situations as on the first place the financial institutions will try to get a compensation from them; 3. Long term perspectives – lost trust towards the Georgian government, firstly from financial institutions and from any, domestic or foreign economic players, which in the end, again will be expressed in less investments, less working places and less budget income.
The fact that you have openly opposed this initiative, after it was aproved by the parliament with two hearing, does not change the situation for good. One of the major differences between being in opposition and being in government is that economy slightly or even does not react at all on opposition’s statements, whereas an initiative/statement made by one government representative can cause an immediate damage, especially to such a sensitive economy as it is in Georgia.
G) I do not know how well are you tracking the parliamentary activities, but one of the significant, if not alarming tendencies which have been identified in a new parliamentary activities is a developing a new government bureaucracy. For example here will be a separate agency supervising the insurance services (previously this was under the responsibility of the National Bank) also a new supervisory Service is being established which will be controlling bonds (This function should also be deprived of the National Bank) a special fund of a state insurance is being created where a 1/3 of state tax will be accumulated, which approximately consists of 600 Million GEL (It is very interesting how the budget articles are financed, on which this 600 Million is spent?)and others. This is an unambiguous message to businessman, that the state is going towards creating a excess bureaucracy and taking an excess responsibilities. This consequently will bring us to a demand of raising a budget income and relevantly the growth of tax percentages. Result; 1. Reduced competitiveness of the country; 2. Deteriorated investment environment; 3. Fever new investments, and fewer work places.
H) When you or your ministers are visiting foreign countries and state that the leading positions of Georgia in various tarings were fake, regardless whom you are meeting, the government representatives or potential investors you are harming the Georgian economy. I understand that you are not an experienced politician, but seeing this link should not be hard, even for a newcomer. Any businessman would think the following; 1. If this is a false statement, today Georgia has a government which does not understand the meaning of this ratings and investing in Georgia is risky; 2. If this is a true statement it means that there has not been an attractive investment environment as it was shown by different ratings for years and making investments in Georgia is risky at least until the new government improves the situation. Under any case, today it is not worth investing money in Georgia.
I) the xenophobic attitude has significantly risen in the country, despite the fact that this, itself is a problem, it also reflects on relationship with investors. Individuals who have spent their own money to buy an agricultural land for planting and etc, are being insulted physically and verbally and have their crops destroyed. Nobody is punished for this moreover a news paper which is so well vaunted by you and pronounced to be “principal” by you simply does not issue even a single addition without stirring a xenophobic attitude towards Chinese, Indian, Iranian or other potential or existing investors. Not a long ago Georgia has unilaterally canceled a visa regime for citizens of Iran, by which the country has simply refused to receive investment and tourism from this country. This is also a significant message to an outer world to avoid investing in this country because; 1 they are not loved here, 2. They might have problems here. Nobody can make a journalist of “Assaval Dasavali” (news paper addition) to become more tolerable or get inside of basic principles economy, but when it is concerning the violation of property right of individuals, the government should not put their head in the sand, only because this individual are foreign citizens.
J) Very important problem is the politically unstable situation that is mainly created by persecution of the opponents and the selective justice (opponents are the members of the National Movement of course). You and the members of your team are in the constant denial of the above mentioned fact, but it is very simple to test whether the selective justice is used against the political opponents – all the deputies who have left the minority fractions for the majority or created the new fraction, they “turned out” to be extremely decent with the irreproachable past. As for the members of the minority, against them or their family members, relatives and friends, the criminal cases are processed. Exactly the same situation is in almost every local city council of the whole country. Hence, the criticism, that takes place from time to time in the western press and western political society against Georgia, it is the result of the given situation and not the fault of Giorgi Kalandadze. The given situation negatively affects the flow of the foreign investment that is the prerequisite of the growth of Georgian economy.
K) For any citizen who is more or less acquainted with the political situation, it has been clear from the very first day of your appointment in the government, that the person who holds such a high governmental position, which puts huge responsibility on him to deal with very difficult and painful issues, as the obligation to be regularly engaged with the representatives of the press, is not the alluring position for the person who has spend most of his life in the “closed regime”. Your endless statements about departing from your position, leaves the business sector in a very confused and tensed condition, where there is no possibility to foresee the future and leave them unable to make the long term investments. I think, you agree with me that this does not need long and deep analysis.
I am not able to enumerate the problems endlessly, but it will be enough to exhaust the Georgian alphabet. But, I think the picture is clear enough.
The feeling of instability is deepened by statements of the members of your government how to overcome the economic problems of the country and in general the ideas concerning it’s renaissance. I will try to teach upon each of them in short:
“This much land is cultivated and it is impossible not to influence the entire production of the country” – I few times have heard this and similar phrases from the members of your majority in Parliament or other means of media. Do you think, if government cultivating lands can increase economy and develop the country, there would be so many poor countries in the world today? Economy is not just delivering, there has to be demand as well. And demand in poor countries like ours, is on cheap products, including agricultural products.
Therefore, the problem is not cultivating land, but low competition – incapability to produce cheap products. To solve this problem, one needs time, urbanization and expanding farmers’ the land. Therefore, free cultivation of land can’t help economy – this can be social project, but not economical. (B) Your second initiative to enrich agricultural sector is cheap loans. Agricultural sector needs cheap money, as I have heard from media; you plan to subsidize part of percentage of the loan from financial institutions. Cheaper money, in general, leads to increasing the amount of credits. But in general, artificially blown balloons, burst very fast. The reason is very simple – business depended on artificially cheap money, need constant support with this cheap money, but no one is giving unlimited cheap money.
It doesn’t mean that all business created with similar money is meant to die, a little number of them can actually survive. But in general this will be a lost initiative (as I have heard, you plan to spend your own money), and its economical outcome for the country will equal zero. (C) “Russian market will open and we’ll survive” is one more myth, which has been highly advertised by your team for last 2 years. I don’t know how much you, yourself believe in this illusion, therefore I will try to explain, why this promise is unrealistic. The official web-site of Georgian statistics department has information on how much mineral water and alcoholic drinks have been exported from Georgia in different years.
If we look at this number, we’ll easily notice that in 2013, when Russian market opened, export of mineral water and alcoholic drinks equaled 104,435 liter, which gives us 76,331 USD. The same numbers in 2012 were: 127,353 Liter and 210,642 USD, therefore with the 22% export increase, we get 3 times more income. And this was when Russian market was entirely closed. Even if Russia lets Georgian products on its market, what would be income from there? Extra 50-100 million USD? And this will be significant incentive for 28 Billion-Gel economy? Any market is important, including Russian. But this can’t lead us to rising of Georgian economy. On the contrary, if we take into account past experience, this can be even dangerous.
Few days ago you have met so called experts, and after the meeting you have announced that from September you are going to prepare a strategic plan for an economic improvement. Deriving from the fact that the majority of these “experts” have been taking part in preparing a pre election plan, which as well involves an economic development plan, naturally I have few question;
1. Was the pre election economic development plan failed? 2. If it was failed, why are you still in cooperation with the”experts” that prepared the old plan? 3. Do not you think that stating such an idea will force business to be put standby and wait to see, what kind of a ”Development plan” the government will offer? Economic development does not need a plan; there can be a plan for budget expenditures. Economy needs freedom and a sense of stability – the two thing are being lost step by step for the past hew month, E) Recently there were made several announcements, from your team, that you are expecting an investment of 10 million USD in Georgian economy.
I have few questions regarding this issue (I think natural): 1. Where are you going to find such investors who were not putting money in Georgia when the economy was growing by 7-8 % annually, and will invest now, when economy is running towards recession? 2. Who can be these investors, who did not risk investing in Georgia when economy was relevantly free and will take such a rick now, when parliament does not miss a single session week without introducing new restrictions and developing new bureaucracy? 3. Why should a businessman be interested in investing in a country whose macro-economic parameters and international positions are predicted to deteriorate according the international organizations?
F) The most recent initiative announced by the government is a state start-up fund, as such projects are not funded by the banking sector. The idea is that the state invests in projects that are considered to be too risky for banks from other successful businesses (if there are any).
Does it make sense to assume that bureaucrats in the public sector are better equipped to conduct risk analysis than professional banks? And why does the government invest in projects that the highly competitive banking sector considers highly risky? Results are easy to predict--squandered millions of taxpayers and declining growth of the economy. To cut the long word short, I would like to take this opportunity to present to you several potential ideas for supporting growth of the national economy:
Start by admitting. Admitting mistakes is always good, regardless of who you are--the National Movement or the Prime Minister. Admit that the economic program of your team was absolutely worthless, as it was based on information provided by the above-mentioned “experts” and collected from the “Asaval-Dasavali” newspaper. Admit that you have not been able to detect elite corruption. It goes without saying that, upon detection of such phenomenon, results would have been reflected positively both on the economy and budgetary revenue, while what we are observing in front of us is the exact opposite. Admit that you have not been able to discover the person (or people) receiving interest from the rise of electricity and natural gas costs. Admit that you have failed to find monopolists, oligopolists and Carter arrangements on fuel and pharmaceutical markets, as no extraordinary changes have been detected there for over 10 months.
Admit that increasing rating of Georgia on an international level was an actual accomplishment, rather than a mere facade, and that such rating is crucial for attracting investment and economic growth. Admit that the state of the Georgian budget turned out to be exactly what it was publicly believed to be; and had the latter not been the case, you would not have been able to plan the 2013 budget as you did. Admit that denouncing evaluation of economic growth based on the number of transaction checks by your team was mere infantilism. Admit that the Dubai plan and talks about Georgia serving as a hub were in fact Gilauri’s plan (and that you merely replaced Singapore with Dubai, while the idea stays the same). Admit that in general, the economic policy of the previous government was mostly accurate and successful (naturally, you may argue that serious issues were at stake in terms of private property protection and that prosecutorial intervention in private business).
Stop making illusory, unrealistic and confusing promises. While this might be politically profitable, it also creates a sense of instability in the private sector, which, as you have accurately stated, is the primary drive of the economy. Your forecast for the first, second, third and fourth years to be good, better, even better, and absolutely amazing, respectively, is absolutely vague. In general, try to make statements of the Prime Minister less confusing and vague.
Try to stop making both strategic and tactical or operational plans for economic growth. The economy does not enjoy plans--it enjoys freedom. Therefore, the less you attempt to place economic growth in certain frames or give it a specific direction, the faster the pace of growth and the less the time, energy and money squandered will be.
Stop consulting people who are considered to be “experts” only because their image projected by the media. I understand that you have certain responsibilities with the people, as they openly supported your during the election campaign; however, I do not doubt you would be able to distract them with something other than the abovementioned topic. As for expert advice, try to consult people that actually facilitated significant economic growth of the country over the course of the past few years. These are the people that you must employ as your consultants instead of bringing them to the Prosecutor’s Office. Try to rise above personal issues and, I assure you, they would be more than willing to help you and advise you.
Try to effectively control your majority in the Parliament. Do not fear clichés such as “obedient majority." The ultimate point of having majority in a legislative branch is to have it stand for a common and understandable belief. This is particularly vital when it comes to initiatives directly influencing the economic environment. Contrary to the majority’s beliefs, whatever is happening today in the Parliament is not a democratic victory, but rather an utter chaos. Many European states could allow themselves the luxury of such chaos and be satisfied with 1-2% annual growth rate of the economy, but as Georgia is far from being where they stand, such status quo is lethal for us and we need rapid economic growth.
Choose greater freedom. Try to direct all your initiatives or those of your teammates towards greater freedom, rather than constant limitation, as observed over the course of the past 10 months. As a very wise man once stated, freedom is never lost at once, but rather step-by-step. With this step-by-step loss of freedom, the Georgian economy gradually seized its growth as well. This is my final word from my statement, although I am not entirely confident you are going to read it...
P.S. May you be interested in particular legislative initiatives towards economic recovery, I would be happy to communicate them with your Parliamentary Secretary, who in fact is already familiar with them.
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