Economy

Wishful Thinking

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“Pennies don't fall from heaven, they have to be earned here on earth.”

Margaret Thatcher

 

W hat we have been hearing from politicians and government-affiliated experts of late exactly matches the notion of "wishful thinking", a term first introduced by American economist Randall Holcombe.

As President Ronald Reagan once famously quipped, “[p]olitics is the second oldest profession. I have learned that it bears a striking resemblance to the first.” The attempts of politicians to offer people a host of emotionally loaded ideas in order to increase and strengthen their own powers are not new either. I, as an economist, see it as my function to disperse those emotions and show the real situation.

A good example of such an emotional idea is the provision of health care by the state. This idea is presented in such a way as to make everyone believe that they will be unable to take care of their own health without the involvement of the state. Many believe that healthcare is the responsibility and obligation of the state (a caring father). People even say that ideally the state should finance everything and make any treatment free. However, those who fell ill during the Soviet period will remember full well the quality free treatment could be.

Let those who still stubbornly believe that the caring father can be responsible for everything try and eat poor quality food or jump out of a fifth floor window. They will soon find out that healthcare is still their responsibility. No one can better take care of our health than ourselves. We may hire health experts, but here again our responsibility is key – in correctly selecting those experts.

Can the state instead act as the expert and assume sole responsibility for our health? No, this precisely is wishful thinking. A state monopoly on healthcare is not possible. First, it annuls our freedom of choice and second, the government expert would not be tracked by an immediate rival capable of detecting errors in its activities and informing us about these. That is of the utmost importance. We cannot abandon our health to the fate of political competition for four years (until the next parliamentary election) – it will simply be too late. Competition in the private market is both much stronger and faster.

The establishment of a state monopoly in the healthcare sector will have dire consequences: 1) we will inevitably move towards illegal forms of payments in order to get better or faster treatment; 2) prices will inevitably rise because hospitals will have no other option but to create corrupt-lobbying groups, which will contribute to a significant increase in public spending in this sphere. Economic growth will slow and unemployment will increase.

The idea of reviving agriculture through a billion lari fund is also far from reality. Any farmer knows that they can always deal with production, their main concern is how and where to sell their produce. That’s why they always demand the state buys out their produce. Farmers also know perfectly well that the state cannot buy everything – if it buys, for example, grapes why should it not also buy chairs or tables. Farmers are similarly well aware of risks – bad harvests, natural disasters, cheaper products from rivals, lack of revenues, and, finally, the key problem – the small size of their parcels of land. How real these risks are, will soon be revealed as a result of the activities of those Indian and Chinese farmers who have arrived in Georgia. However, the mere fact that neither the banks are hurrying to finance agribusinesses nor insurance companies are rushing to provide coverage clearly shows that these risks are real.

By the way, those rumors that the Indians and Chinese will buy up all the land is yet another myth: first, everyone treasures land and second, if the demand for land increases, so will its price, which will cause demand to decrease. If the price of land in Georgia reaches that of India, the purchase of land in Georgia will become unreasonable. As regards prohibiting the sale of land to foreigners, such laws only operate in undeveloped countries; the ranks of which we are not in a hurry to join (or are we?).

One also hears talk about the necessity of direct subsidization of agricultural production – “as it is in the West (you like the West, don’t you?).” There are two major problems with this. First, we are not as rich as the West and second, the export of our products at an artificially decreased price means having our poor population finance consumers from richer countries in order for them to purchase our products at cheaper prices. Subsidies are a form of political perversion which very often degrades into bribery.

I have written a lot about the labor code and do not intend to go into detail here. Suffice it to say, it puts investors, employers and employees, let alone the unemployed, in a difficult situation.

Recently, the American company Goodyear decided to pull out of France (and, in so doing, left hundreds of people unemployed) because of its strict labor legislation and the impudence of French trade unions. Yet another scandalous piece of news was reported the other day concerning the arrest of the leader of most powerful teachers’ union in Mexico on charges of embezzling trade union funds. That is what an excessive preoccupation with labor legislation may bring about; many naïve people want to protect workers’ rights, but may in fact get the opposite result.

Pinning hopes on the state in the area of food safety is also naïve, to say the least. In this area, as in many other spheres, politicians face a serious dilemma with opponents calling upon the state to assume responsibility. The result that follows is more power going into the hands of bureaucracy; politicians employing their relatives as inspectors; and bribery and lobbying from large companies seeking to have regulations tailored toward their needs. All this would happen instead of companies trying to prove the superiority and safety of their products by engaging in fair competition. Those who naively demand that someone trading in butter substitutes should be obliged to indicate that it is not real butter on their product’s packaging are actually lobbying for both an increase in bureaucratic functions and the number of inspectors, things that make life more expensive and increase the risk of corruption.

One can often hear from entrepreneurs, spellbound by the propaganda of politicians and experts (including international experts), that the gravest problems in Georgia are high prices and the unavailability of financial resources. The majority of them turn a blind eye to those factors which can easily raise the price of loan resources: inflation and deflation, the budget deficit, the fast growth of public and social costs, an unstable economic policy, political and security risks, the small size of market and other factors. Given such risks, it is impossible to decrease interest rates in one fell swoop, even in the event of large inflows of cheap financial resources. Everyone needs cheap resources and should they become easy to obtain, it would be equally easy to take them abroad where the risks are lower. Were this not so, our businessmen would easily obtain those loans from cheaper markets, but as soon as anyone tries to take a loan out in the United States or Switzerland they will encounter the strictest requirements and, with a high degree of likelihood, more expensive services and resources.

Availability is considered a popular goal in the sphere of education too. In reality, politicians and those bureaucrats of the education sector know perfectly well that today Georgia lacks both the financial and human resources to offer education of a competitive quality. Non-competitive education, however, cannot improve this situation.

The difference between the private and public sectors is seen most vividly in the education sector – the state will deem its objective to have been achieved if it releases more products (graduation diplomas), whereas the private sector will deem that to have been done if it sells more products (the successful employment of graduates). Even though the majority of students have already understood this difference, a segment of politicians still assume that releasing more diplomas will bring certain relief to some students and give popularity to the politicians.

Some politicians also believe that science must be financed as it is in rich countries. This looks very much like the idea of subsidizing export commodities. There are also calls to increase the assistance given to young researchers in order to help American or European scientific institutions obtain cheap intellectual resources: in other words, to export our intellect at the expense of our poor population (!).

Yet another popular topic among politicians is the fight against monopolies. They want to portray monopolists, and entrepreneurs in general, as the source of all evil. One can hear voices demanding the regulation of deals on prices or the division of the market among entrepreneurs. They even say that this is what the European Union or the people demand. The relevant Georgian legislation has already been subjected to the requirements of Euro-bureaucracy and complaints no longer exist. As regards the people, here we face a familiar problem – the effects of propaganda. People normally react to such issues simply – they decrease consumption of those commodities which they consider expensive and increase consumption when prices fall.

It is clear what the result of state regulation of prices will be: artificially swollen demand. Another “invisible” result of anti-monopoly regulations is the guaranteed existence of monopolies and the total distortion of market processes in the segment regulated. In Georgia, as it is abroad, the most monopolized/concentrated sectors are those which are regulated.

Recently, the government promoted an unprecedented step in this regard concerning the centralization of public procurements. Public procurements are already characterized by a high likelihood of monopolization and, if this centralization becomes a rule, it will automatically lead to the strengthening of one company, turning it into a solid monopoly which can be beaten by neither the market nor new competitors and only by large-scale corruption or a change of government.

The regulation of areas such as food safety is also considered to be a very significant obligation of the state. The most popular aspect of this regulation is the inscription of packaging with information in Georgian. This will most probably be followed by the creation of a pool of inspectors who will inspect whether or not that information is correct. The inspection of the food production process and the reinstatement of inspections on borders will then become obligatory… What will all this bring about? Higher food prices and an increase in corruption.

It is not difficult to notice that over recent years the quality of many services and products has significantly improved. Listing the various reasons for that would take a lot of time, but everyone probably understands the main reason: the increase in revenues. Consequently, before deciding on greater involvement of state bureaucracy, the initiators of this idea must substantiate that the consumption of better food products depends more on the successful activity of bureaucracy than it does on the personal responsibility of people and their capacity to purchase better and safer products.

Not wishing to tire readers with such examples, I will now get to the main point. Will increased regulation improve or worsen the business environment? Will it complicate or simplify the economic activity of ordinary people? I believe, and this has been proven by international experience, that if the above noted, or other similar, approaches get reflected in law the situation will worsen. For example, the most significant problem that remains in our economic space is the lack of protection of private property. I understand that this problem is one of generations and requires more time to be eliminated (almost every post-communist country faces similar problems). The above cited calls for the increased involvement of the state in the economy will become serious factors restricting ownership rights. That will lead to a situation where pressure on businesses will be legalized(!), while every abuse of power in regard to private property by the previous government was considered a violation of law. For example, previously, if you wanted to start an unlicensed activity but were impeded by someone, that was considered illegal. However, if this activity now becomes licensed, you will be impeded by the letter of the law.

Restriction of monopolies is a serious attack on private property, just as is restricting those employers wanting to stop paying for labor they do not like. The confiscation of private property for public interests may be subject to new rules that will legalize the seizure of property by the government.

Let’s double-check how real these opinions may be against various international surveys, such as the Index of Economic Freedom and the Ease of Doing Business Index.

For example, Georgia’s 42nd place in the Economic Freedom of the World survey of the Fraser Institute may sharply deteriorate in three out of its five components:

- Size of Government: mainly because of the sharp increase in state assistance and subsidies.

- International Trade: because of any attempt to “protect” the Georgian market.

- Regulation: because of complicating the Labor Code for employers as well as the introduction of other regulations such as those on competition and food safety.

Georgia’s ranking will also deteriorate in the Index of Economic Freedom created by the Heritage Foundation and the Wall Street Journal (on which Georgia is currently ranked 21st in the world). Those changes that have already been declared as priorities will significantly affect the following components at least:

- Business Freedom,

- Labor Freedom, and

- Trade Freedom

Two more components of the same ranking, Investment Freedom and Property Rights, will probably also worsen due to a ban on the sale of land to foreigners.

Business freedom, which is one of components of the famous World Bank Ease of Doing Business Index, will be restricted if the procedure for issuing construction permits is complicated. Other components of this index which may also worsen are:

- Starting a business (for example, in the food product supply sphere if broader food safety regulations are introduced).

- Registering property (for example, if prohibitions and restrictions on the sale of immovable property and land to foreigners are imposed).

- Trading across borders (if border controls are tightened in, for example, the food product sector).

Such changes may downgrade Georgia’s position by several ranks. What might that mean? One result could be the reluctance of investors to invest in Georgia. The Ease of Doing Business Index (which currently rates Georgia 9th in the world) clearly shows a direct correlation between the activity of investors and the degree of regulation of businesses in countries (see the figure below).

The fact that in recent years there has been no boom of investments in Georgia can be explained, amongst other facts, by regional political and security risks. It is therefore even more important to maintain and improve the business environment that these surveys reflect.

The picture is similar according to the Index of Economic Freedom. The standard of living in a country with higher economic freedom is better than it is in unfree countries. More importantly, these countries became rich under the very conditions of greater economic freedom and thereafter, as their economic freedom decreased, many of them entered stagnation. This can be clearly seen in many EU countries today.

Looking at all these surveys, an observant person will easily see that the top 50 places are quite competitive and the slightest change can easily alter a country’s ranking; moreover, it normally takes significantly longer to increasing a ranking than it does to downgrade it.

The improvement of the investment climate and greater economic freedom are conditions which depend on national decisions; they are less susceptible to political tensions or global economic developments. A country with favorable investment conditions is interesting during times of global economic success, but even more interesting during economically difficult periods.

There are also unfree rich countries whose wealth entirely depends on oil resources. Other countries have improved their economic freedom indices but remain lower income countries. Georgia, thank God, is not rich with oil and therefore must have a maximally pragmatic policy for attracting cheap and long-term resources. Thoughtless statements, vague opinions and political tension make it difficult for investors to make decisions and encourage them to direct their resources towards other countries that have simpler and clearer conditions.

 

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