Lazika

Lazika: Opportunity and Challenge

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“We have decided to build a big city between Anaklia and Kulevi and to call it Lazika,” President of Georgia Mikheil Saakashvili informed us with characteristic zeal last December and promised that half a million people would live in that new city in a mere ten years’ time. That news captured the attention of almost everyone. As a U.S. National Democratic Institute (NDI) survey conducted this February shows, eighty-four percent of Georgian citizens have already heard about Lazika. How many people have heard about Lazika is one thing and what they have heard is yet another. In addition to the name, location and projected population of the new city, we know that construction of a “House of Justice” will soon start there and that, over the next four years, this project will cost the state budget GEL 200 million, allocated in GEL 50-million annual installments. Common sense tells us that amount is a mere drop in the ocean for a project of the scale contemplated by Saakashvili. The government, however, assures us that the remaining funds will come from private investors. Why investors would rush to build Lazika, especially in the midst of an ongoing world economic crisis, remains a mystery.

The Georgian government has not answered an all-too-obvious question: “Why build a new city when old ones are unattended?” We also do not know from where – or why – that half-million populace will come in ten years’ time when, for example, it took Chicago forty-seven years to attain that population level. Yet, the NDI survey shows that what we do know about Lazika is assessed positively by fifty-nine percent of the population.

A public discussion of the concept of Lazika was held in early April at an international conference organized by the Free University of Tbilisi and the Georgian Ministry of Justice. One of the participants in that event was Mark Klugmann, a former speechwriter for Presidents Ronald Reagan and George H. W. Bush and a presidential advisor on Central America. Today, he is an independent political consultant in Latin America. Mark Klugmann shared with Tabula his opinions about the concept of new cities:

I had an interview with the correspondent from The New York Times a couple of days ago and I realized that, when she was asking about building a new city, she was thinking of a construction project, about the concrete and steel. I respect people who think that way, but there’s a different way of thinking about the new city. And that’s to think about it as a jurisdiction that is understood under the regime of law, economics, administration and politics; that creates safety, transparency, rule of law, opportunity that is a magnet. When Ronald Reagan spoke of America as “a shining city on a hill,” this wasn’t about the concrete and steel. It was about the place that was a magnet, a place that represented values because of the ideas and the institutions that existed there.

A new city must be an attractive place to invest, to live and to work. It must grow through private investment and entrepreneurial activity. I think it fundamentally has to be developed through private investment if we want a new city to be a new motor for economic development and not an additional burden on limited resources of the state. If you don’t have that, then you have Brazil or Astana [Kazakhstan], where the government builds the city because they haven’t got the values and the institutions to attract people who want to contribute and build. A city must be built by the people; it must be able to attract people who want to build things. Only in this way will it be alive.

In the case of Lazika, creating a special economic zone alone will not be enough. Look, there are areas in Georgia today with zero tax and their number is growing. Moreover, I think that the economic transformation of Georgia – which has been given such recognition by the World Bank, by the Index of Economic Freedom, by the competitiveness indicators, by so many measures – is very strong, but I think further changes in those indicators would provide very small benefit. You need something new, something different.

Moreover, the reality is that there are many places in the world where you can invest at zero tax, but the total amount of investments that go into the areas with zero tax is rather small. Where most of the investment actually goes is into places that have a very strong and transparent administration of justice, an efficient government and political stability. Without these elements, large investments cannot be attracted. It is therefore important to create such a jurisdiction where an investor will have a strong feeling of stability in judicial and economic, as well as administrative and political, factors.

Georgia has made substantial progress in liberalizing its economy through reforms and by improving public administration. In this regard, Lazika is in a favorable start-up condition. As concerns the judicial aspect, additional guarantees will be required here.

I think in the legal element, even though Georgia has made very important improvements and has a legal system better than what you find in many places in the world, the real issue for an investor is, “Is it familiar?” Do they understand it; do they have confidence in it; do they need to start and learn it all over; and do they believe that, if they were in a dispute with government, they would be on an equal basis inside that system? Therefore, those willing to invest in Lazika should be able to solve legal disputes within a system that is familiar to and trusted by them.

Such a model exists - Dubai. Its founders wanted that city to become an international financial center. But who would put a lot of money at risk in such a country, where one had no guarantee that, in case of a disagreement with a powerful local person, one would be treated on an equal level? So, they, in Dubai, created a new court and hired former judges from Britain and Hong Kong who throughout their careers had gained prestige for their honesty and integrity and the way in which they had conducted themselves both outside and inside the courtroom and in hundreds of cases over the course of decades. Moreover, in settling disputes, they apply British law because that is familiar and convenient and efficient for business circles.

When a really large contract is drawn with a major corporation, the contract always establishes that the jurisdiction will be in international courts. The contract always says this will be defined by international arbitration in the International Chamber of Commerce in Paris or by arbitration in London. The problem is what happens to those companies that are not huge. What happens to

those that are medium sized, which are not foreign, not international?

By outsourcing the administration of justice to a credible external source, everyone gets treated equally – no one has an advantage. For a British judge, an influential citizen and an ordinary citizen of Georgia are more equal than for a local judge.

Consequently, a decisive factor in the case of Lazika is how much you will succeed in persuading investors. The enemy of investments is the lack of certainty. Investors are even willing to accept risk, if they know what the risk is. But if they don’t know what the risk level is, if they are uncertain whether one day the government will capture and take away their assets – which happens in many countries in the world – that’s the sort of risk that prevents investors from having confidence.

Today, a new Twenty-First Century city project is being implemented in Honduras. Guatemala is in the phase of mulling it over. Nothing of the kind exists in your region. So there is the opportunity for Lazika to be the first.

Implementation of a Twenty-First Century city project is better to start from scratch. Transformation of existing cities is more difficult. The majority of old cities and all streets in Europe were designed without existence of cars. Tbilisi has beautiful buildings, but they were designed at some point without electricity so it had to be added later on. Construction of a new city has many advantages because it can be designed with the most modern technology.

An important factor also is that uninhabited land has a very low value compared to the real estate of existing cities. When investing capital in such a project, there is the chance to have an extraordinary high return on investment with proper urbanization, but that may take twenty or thirty years.

If Lazika becomes a Twenty-First Century city, it will become a competitor of Dubai. But, for many people, Dubai has its weaknesses – it’s a difficult climate, it’s outside European culture. Your location is much more advantageous in this regard.

There is a link between the level of urbanization and that of economic progress. The numbers that have been given by, I think, a World Bank report is that countries that have achieved USD 10,000 per year in per capita income are also the countries that have a sixty-five percent urbanization rate. Georgia’s corresponding indicator is about fifty percent – half the country is urban. So, together with the process of economic growth and increasing income per capita, there is the process of urbanization.

That process of urbanization is accompanied with problems as well. It is a problem if the migration of people is all in this city because you create issues of disproportionate development when all development is concentrated in one major capital city. It was explained that, under the Soviet regime, in order to have an opera house and underground subway, a stadium of fifty thousand, even for the

quantities of government vehicles that the officials would be using for themselves, it was necessary to have more than one million in population. That’s why cities were artificially swelled to receive funding for those facilities.

That may explain the disproportionately higher population of Tbilisi compared with other cities throughout Georgia. The Soviet model created artificial incentives and models for overdevelopment in the size of Tbilisi and the underdevelopment of second and third and other cities. Generally, there is a normal distribution of normative size of cities. If you look around the world, the mathematical relativeness to the size of the largest city, and the second largest city, and the third largest city, and the fourth largest city, there’s a normal relationship. But not in Georgia. In Georgia, it’s as if the second largest city has had its population and development consumed by Tbilisi.

Another factor of importance is Lazika’s proximity to the occupation line. International economic interest will make that territory more protected. In the long term, it may have an effect on your neighbor as Hong Kong had on all of China. There was an overall fear that China would crush free Hong Kong, but that’s not what happened. What actually happened is that Hong Kong, by its example, transformed China. Authorities said, “What Hong Kong is doing works, and what we are doing does not.” So they took the small land adjacent to Hong Kong called Shenzhen, where, by Chinese standards, very few people lived. In fact, that population has grown from one-hundred thousand to over ten million. And because that project was successful, additional special economic zones were created across the whole of China.

So I look at Lazika, and I would ask a much larger question: “Will this be an inspiration that could influence all of Russia in the same way that Hong Kong was an inspiration and influenced all of China?” I think that this is likely.

That is why it is important that Lazika is not understood as a construction project, but is understood as the creation of an attractive jurisdiction. We should think of creating a jurisdiction that’s defined by administration of justice, by economic policies, by an administration that is strong under rule of law and a political stability which investors will trust.

I worked with President Reagan, I was one of his speechwriters, and I was involved in some other policy topics. I went to visit a statue of Ronald Reagan here in the city of Tbilisi. I think it is very beautiful, and I think it is an extraordinary statue. It’s very different from many public monuments, where an important leader will usually be shown standing showing off his authority or power. Instead, what you see there is a statue of a man of human size, he’s sitting down, he’s relaxed, and he’s satisfied. And what I see in that statue, well, he’s saying, “I like what I see when I look at Georgia.” And I think Lazika is the new challenge and the new opportunity – creating a new city. And I think one of the most enthusiastic supporters of it would be President Reagan.

When Reagan was president, every year he would sign a proclamation declaring “captive nations” – places like Georgia, Baltic States, Ukraine inside the Soviet Union, or Warsaw Pact states like Poland or Hungary inside the Soviet Bloc. The sophisticated academic experts in important universities said, “Oh, this is very bad that President Reagan is doing this because he’s not being realistic. He’s a man who’s living in the past because Georgia since 1921 has not been an independent state.”

What they didn’t understand was special about Ronald Reagan – he was living in the future. They were trapped by a very temporary reality in the face of the Soviet Union, and what Reagan saw was that that wasn’t permanent, that the future was where captive nations would be free. And it was that vision that permitted him very early in his administration to say that communism is not going to last and will wind up in the garbage bin of history, and the captive nations will be free.

This article first appeared in Tabula Georgian Issue #96, published 16 April 2012.

 

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