Giorgi Zhorzholiani, a member of parliament from the Georgian Dream coalition, recently held a news briefing in parliament to announce new self-government reforms that have been drawn up jointly by the parliamentary committee for regional policy and self-government, the ministry of regional development and infrastructure, and representatives from the non-governmental sector. As Zhorzholiani said: “the reform envisages granting the status of legal persons to those villages which currently lack that status. Moreover, villages will have their own property. In particular, forests, pastures and meadows within their borders will be handed over for the villages to use for an indefinite period of time. Village residents will hold meetings, elect the chairmen of villages and take part in decision-making processes.”
The active participation of citizens in issues of public administration is, in general, an integral component of democratic governance. Thus the enhancement of self-government and the drive towards de-centralization are welcome steps. But it is a matter of concern, to say the least, if the new self-government reforms mean exactly what was announced at the news briefing. Such reforms will not bring success.
The economic aspects of the reforms imply the phenomenon of collective ownership of common resources. Common resources include such goods which are “non-excludable” and “rivaled.” A non-excludable good is one that people cannot be excluded from using. For example, if an ocean were privately owned, the owner of the ocean would find it very difficult to control those fishermen who fish without paying a set fee for that privilege. Rivalry means that the consumption of a good by one person decreases the possibility of the use of that commodity by another. For example, when one person catches a fish, there are fewer fish for another person to catch.
In general, any member of society is a potential free rider: one who consumes goods but evades any fees. For example, if a private owner fails to control the ocean, a fisherman will not pay a fee for fishing on his own initiative. Consequently, if a private owner fails to receive revenues from a business, then that business will not be worth running. When something is not worth running in the private sector, the shared ownership of common resources gets considered. However, the result of collective ownership of common resources is a “tragedy of the commons.”
The reason for this is the difference between private and social stimuli. When goods are free, their excessive consumption by a free rider decreases their benefits to another person, thereby diminishing the amount of goods available for future consumption. One may cite many examples of this. For instance, only after elephants were put under private ownership in India did it become possible to save them from extinction. The same holds true for buffalos in the United States. Domestic animals (as well as domestic birds) are privately owned and one would never consider putting such resources into shared ownership because everyone would have to pay for their consumption.
Private ownership of common resources is thus a means of avoiding the tragedy of the commons, though private ownership is only reasonable if a commodity is excludable. Assuming that meadows, pastures, forests, lakes, et cetera, are excludable goods, these resources will be more efficiently redistributed in society if they are privately owned.
The notion that a private owner would destroy a forest is wrong because by this logic a private owner would destroy domestic animals too. The motivation to gain profit encourages a private owner to turn the forest into a renewable commodity – just as any farmer would do in the case of domestic animals. On the other hand, when common resources remain under collective ownership the likelihood of obtaining the opposite result is very high. Consequently, a question can be formed: is a forest, pasture, meadow or any similar resource an excludable good? In other words, will an entrepreneur be interested in owning it?
This question is closely linked to the issue of limited resources. When a resource is unlimited no one develops an interest in ownership because it can be used by everyone for free. For example, no one pays to breathe fresh air or to swim in the sea because these resources are sufficient to meet the needs of all. The situation is absolutely different when it comes to the use of a swimming pool. If the use of a swimming pool were free, it would be unable to accommodate all those wishing to swim and the swimming pool would be ruined.
Where resources are unlimited there is communism, with resources naturally falling under common ownership. However, communism itself is utopia; what is unlimited today will necessarily become limited tomorrow. If only one person uses a swimming pool its use by another person does not limit its benefits to the first person. In this case, the resource is non-rival. However, when the number of people using a swimming pool increases further, the resource becomes rivaled.
At a time when there were 30 million buffalos in the United States, the population consumed the resource without restriction – not realizing that the problem of extinction would eventually emerge. But when the number of buffalos fell to 100,000, the issue of ownership arose as a result of the limitedness of the resource. Thus, the limitedness of resources makes goods excludable as well as rivaled. Moreover, the issue of excludability is less topical in the 21st century because modern technologies allow entrepreneurs to protect and sell their goods and services better than in previous centuries. Thus a market society can deal with the issue of forests, meadows, pastures, et cetera, most efficiently, whilst the benefits from these resources will be the greatest and of the longest-term if they come under private and not common ownership.
This theory has many opponents who support their positions by citing examples of democratic and developed countries where common resources are placed under common ownership. Such neo-liberal theories are not popular in either Georgia or elsewhere in the world. We do not pursue the aim of proving that neo-liberalism is the only truth. We just want to say that the collective ownership of a common resource will most likely ensure a tragedy of the commons some day. How long that will take depends on how efficiently the state will administer a concrete sector of economy. I would not have emphasized the economic aspects of this issue had I not seen the imminent threat of a tragedy of the commons. The proposed self-government reforms will make processes impossible to administer and that will increase the likelihood of an imprudent use of resources by free riders.
By acquiring the status of a legal person a village is no longer only a settlement, but also becomes a self-government unit. It performs activities on behalf of the state and participates in public administration within the framework and strategy developed by the state. As a legal entity, a village will have a clearly defined function, like that any ministry, communications regulatory agency or antimonopoly service has. That function will be the administration of common goods and services. In short, a village, as a legal person, is by essence a self-government unit and the chairperson elected by villagers is an official like a governor or a mayor. A village, as a legal entity, will be responsible for the management of forests, meadows, pastures and other common resources. Presumably, each village will have their own borders delineated. The only restriction imposed on villages is that they will be unable to sell common resources.
How, as a legal person, will a village administer the common resources handed over to it for indefinite use? According to the principle of representative democracy, a village elects a chairperson and grants him/her administrative authority. The chairperson distributes the forests, meadows, pastures and other common resources falling within the borders of the village among the villagers for indefinite use with the assumption that the amount of common resources will not decrease over time. The transfer of resources for indefinite use likely implies the establishment of quotas for each household. Reaching agreement on quotas is a laborious process and, in my opinion, will be impossible because the disputes over the distribution of common resources between the villagers and the chairperson of a village will never end. However, this is not the main problem of the reforms.
Let’s assume that quotas are capable of being defined in every village that makes every resident happy so that there are no complaints. The problem that will then arise comes in observing these quotas. A key shortcoming of a collective agreement is that when a party violates that agreement without the other parties’ knowledge, the violator gains greater benefits than those who observe the agreement. The lower the possibility of such a breach being detected, the greater the temptation there is to secretly breach the agreement.
This phenomenon is well explained by game theory. For example, typical oligopolies, where a number of firms agree on a decreased volume of products and a monopolistic price, normally operate for only a short period because the firms participating in the agreement soon develop a desire to sell more products than is allowed by the quota at a monopolistic price in order to gain more profits; an action which would again create competition among the participating firms. It should be noted here that an oligopoly is voluntarily created by only a few firms because it would be impossible to achieve such an agreement between many firms.
The mechanism for the distribution of common resources involves every villager. Consequently, any agreement among them (if this can be achieved at all) would be more fragile than in the case of an oligopoly. The violation of the agreement in this instance, however, means competition between households in the distribution of common resources, which will lead to the excessive consumption of resources. Let’s also assume that no villager breaches the agreement on quotas.
How will compliance with the quotas be observed? A quota implies that a villager can use, for example, X cubic meters of forest, Y square meters of a pasture or meadow within the borders of a village for a certain period of time. How can all that be measured? Management does not involve planning alone. Management also involves organizing, monitoring and control, which a village cannot perform and hence, it cannot manage either. If a villager uses resources belonging to another village, how will this be discovered? Were this to occur, it would naturally create competition in the use of resources between villages.
Whilst the central government takes the approach not to interfere in self-government functions, the common resources of Georgia will be totally depleted. Even assuming that a village is capable of managing its property, as a legal entity, it would require something like its own police or border guard force. Thus, that a village will have its own property in the form of forests, pastures and meadows means that in the foreseeable future a village will have nothing. I think it is a mistake to decentralize the administration of common resources at the village-level and for local government in general. If private ownership of common resources is unacceptable, they must be administered by the central government in accordance with those rules which every Georgian citizen is bound by. Only in such a case will we be able to postpone the tragedy of the commons.
Opponents might accuse me of being against self-government. Quite the contrary, the more central functions delegated to the regions, the better voters’ demands are accommodated and the more interesting the country becomes. Powers and responsibilities must be distributed, thereby decreasing the risks of political instability.
A cornerstone of the self-government reforms must be the issue of the distribution of revenue. Real self-government cannot be built on subsidies. Distribution of revenue also implies a methodology of collecting taxes and the mobilization of revenues to local and central budgets. This is a rather painful topic and requires serious consideration. Without fiscal decentralization, no real self-government will exist. This issue does not seem to be on the agenda at all.
A state is a system which, amongst other things, must ensure the creation and delivery of public goods and services to every member of society. As noted above, public goods mean non-excludable and non-rival goods. Public goods are not uniform; each of them has various characteristics. In general, public goods are products or services of collective consumption, which means that each additional consumer does not increase the marginal cost of a good. Thus, a product will have the status of a public good until the number of its consumers becomes limited to the extent where each additional consumer creates zero social cost.
Consequently, the amount of consumption of a concrete public good is defined in advance. The group of consumers of a public good must correspond to the amount of consumption. Let’s go back to the example of a swimming pool and assume that a pool is in common ownership, serving a certain number of people. Each person pays a membership fee which is needed to cover the costs of the swimming pool. So long as each additional person using the pool does not diminish the benefits of the other people, the swimming pool is a service of collective use and everyone is happy. However, if the number of users increases to a point where the swimming pool becomes overcrowded, the users will face a problem. This problem can be temporarily solved by increasing the size of the swimming pool, but this will entail additional difficulties.
Similarly, in the event that a highway becomes overcrowded, one of solutions would be to add new lanes, but this would make the regulation of the entry and exit of the highway more complicated. Consequently, instead of constructing one gigantic highway or swimming pool, it is better to have several highways and swimming pools. Such a service would also be of better quality and be more cost effective. With regard to public goods, society creates various sizes of consumption groups. Consequently, whether concrete objectives must be performed on the level of central or local government depends on the specifics of the goods and the amount of consumption.
When the consumption of a product significantly exceeds the number of real consumers, excessive consumption occurs. Therefore, a good which is consumed by all of Georgia must be created by the central government; whereas a good consumed by a group of consumers within a self-government unit, must be created by the self-government unit. It is precisely from this standpoint that the issue of the centralization and decentralization of authority must be considered. Bearing this in mind, issues such as local roads, parks and town squares; communication and infrastructure projects; and sometimes certain areas of social policy (such as general education or primary healthcare) may be functions to be performed by local government.