Economy

Hitting the Snooze Button Again

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Employment is a source of stability, security, self-realization and often a matter of personal survival. Consequently, the new political manifesto of the United National Movement ruling party – “More Benefit to People” – envisages creating new jobs through direct foreign investments, increased tourism and new infrastructure development projects such as the construction of fifteen new hydropower plants and five-thousand kilometers of new motor roads.

After the Rose Revolution, during the period between 2005 and 2011, the number of people employed decreased by 80,400, according to the National Statistics Office of Georgia. During that same period, the population of Georgia increased by 147,700.

The ruling party plan anticipates that foreign investments totaling four-billion USD will flow into the country during the next four years, creating some 80,000 new jobs. During that same 2012-2016 period, the ruling party promises that an additional 140,000 new jobs will open up in the tourist sector; 13,000 new workers will be hired to construct hydropower plants; and 40,000 more laborers will have jobs building new roads.

By increasing demand for concrete projects in concrete sectors, the ruling party intends to stimulate the private sector. It recognizes that the global financial crisis has slowed the country’s economic growth and that private sector demand alone is insufficient to reach a high employment level. The ruling party thus plans to create all those new jobs by initiating new government projects for the private sector to implement.

Regardless of the level of employment demand generated by the public sector, the business community is highly unlikely to step in and meet that demand if it is not sure about the underlying rationality. No matter how much we may wish to increase employment rolls, it is difficult to imagine any business that would employ thousands of people just to dig holes for the sole purpose of filling those holes up again. It does not take an astute business mind to figure out that such tasks lack any sound business rationale.

The government therefore will have to meet its own artificially inflated employment demands and expectations by increasing public-sector employment and, with it, public spending.

Obviously, there is not an infinite amount of money in government coffers. To employ one individual, the government has to tax another. That can be done directly through increased individual taxation or indirectly by increasing debt and running the risk of inflation. In either case, the government most severely harms individuals already employed who have secured jobs owing to their own initiative and skill. It is those employed taxpayers who will have to pay from their own pockets for the salaries of newly hired workers.

Despite the high economic risk with no guarantee of sustainable employment, the government is gambling that jobs created to meet its artificial demand will not drive more productive jobs from the market.

By making the private sector dependent on the government, the government is limiting its room to maneuver. If the public sector swells the employment rolls, it could cost the Georgian government a high social price in the event of economic crisis.

Employment was also a centerpiece of the ruling party 2008-2012 program. Similar to the “More Benefit to People” approach, the earlier program instituted in 2008 promised to increase employment through large-scale infrastructure projects and private investment. By the time the global economic crisis caused national economic growth to slow to 3.9 percent, many of those government promises still remained unfulfilled.

The 2008-2012 program also envisaged that foreign investments – an anticipated ten-billion dollars’ worth – would create about 200,000 new jobs in Georgia. Official statistics show a different outcome: Compared to 2008, foreign investments in 2011 fell by more than 400,000 USD while only 62,300 new workers were added to the labor market.

The global financial crisis has made clear that Georgia must strive not only to attract foreign investment, but also to alleviate over-dependency on foreign investment. That balance is necessary if Georgia wants to sustain strong economic growth and a higher employment rate in the next ten years.

The 2008-2010 government program contained a strong prerequisite: Back then, the Georgian government promised voters that they would not only see increased employment but that they would also be able to accumulate savings from their incomes. The government intended to accomplish that by cutting the income tax rate to fifteen percent. Later, the government postponed delivering on that promise and then abandoned that promise altogether.

High living costs automatically mean little savings. Savings are largely conditioned on further investment and future economic growth. When no savings are available, liabilities have to be financed by foreign direct investments or by assuming debt. In both cases, dependence on foreign capital increases risks to the country’s economic stability during periods of global crisis.

Official data show a gradual decrease in savings since 2004. Even with strong economic growth in 2006 and 2007, domestic savings fell by six to seven percent. And that was at a time when the increase in income was higher than the GDP growth rate. According to the World Development Index, Georgia’s savings during that period was at the level of low-income countries. Analysis of statistical data shows that costs back then were financed with foreign direct investments, which translated into quite a high budget deficit.

For individual taxpayers, good economic results mean having more money in their pockets. One of the most effective ways of doing that is to lower the income tax rate. The government’s 2008 promise to cut the income tax rate to fifteen percent was a well-calculated and correct step on the part of the ruling party.

In contrast to that earlier approach, the new 2012-2016 program contains some ill-advised initiatives. One of them is establishing a new Ministry of Employment employing thirty people to go door-to-door collecting information about employment-related issues such as: which professions are experiencing the greatest shortage of jobs; which professions are most in demand in Georgia; and what type of retraining is needed to reallocate human resources appropriately within those professions. The Employment Ministry is also tracking which people are happy being self-employed and which want to find new jobs.

Before the new Employment Ministry was established, the collection of that type of information was the responsibility of the National Statistics Office of Georgia. According to the National Statistics Office, the 2011 unemployment rate decreased by 1.4% compared to the 2008 rate.

In breaking down the number of people who are unemployed, employed and self-employed, the National Statistics Office used internationally recognized definitions of those terms. In Georgia, however, the majority of the population has a different understanding of what is meant by such terms. Most Georgians consider themselves employed only when they are employed by “someone.” The most popular “someone” in Georgia is the state. Another large segment of the population still regards itself as “unemployed” – even though income derived from self-employment is much higher than it would be as hired employees. In 2011, self-employed individuals comprised 61.9% of all people employed in Georgia.

Yet another new 2012-2016 program initiative – the issuance of vouchers in the amount of 1,000 GEL to all workers who want to be retrained during the next four years – is also unlikely to brighten the employment picture. People may just become lazy and decide they’d rather wait for that money than get out of bed and go out and find jobs. Moreover, in an economy stimulated largely by the public sector, there is a high chance that retraining will be in skills not in high demand in the private sector.

Surveys conducted by such research institutes as the Heritage Foundation and Brookings Institution show that government interventions in the labor market kill individual motivation to find jobs and results in increased unemployment.

The main goal of any employment initiative should not just be the creation of jobs; it should be the creation of jobs which will be productive and economically viable for the long term. If it were otherwise, it would be virtually impossible to curb unemployment. For example, unemployment could be easily curbed if the government were to ban certain technologies. Say, banning travel by car would create millions of new jobs in the sphere of distribution because people would have to distribute products on foot. In that case, newly created jobs would largely exceed the number of jobs lost due to the ban on cars. But would that increase our economic wellbeing or make us richer? Of course it wouldn’t. Quite the contrary, that approach would worsen everyone’s living standards.

It is interesting that neither the population nor opposition political parties task the ruling party with any mandate of ensuring a free market economy necessary for job creation. When opposition parties criticize the ruling party for its spending policy, they tend to encourage a more populist government policy. But whenever the ruling party has failed to deliver on its promise of cutting the income tax rate, opposition parties have not shown much concern.

The latest employment initiatives put forth by the ruling party demonstrate that it is focused on fixing short-term problems without taking into account longer-term results. In reality, the correct economic calculation requires improving conditions not only for the unemployed, but for all members of society – and not only for the short-term, but for the longer-term as well.

This article first appeared in Tabula Georgian Issue # 114, published 17 September 2012.

 

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