Economic growth

What the Government Should Do to Recover Economic Growth

Gia Jandieri
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Having an economic policy firmly focused on rapid economic growth is vital for Georgia. This is a fact that has been repeatedly declared. In order to achieve such growth, we must counterbalance all existing economic and political risks with the greatest possible economic freedoms. At the same time, it is necessary to create a sense that this policy is a long term arrangement and that it will not be changed by anyone, regardless of which government or political ideology they align themselves with.

Any survey on the economic success of Western countries shows that the period when those countries had fast growth coincided with the times when they had very low tax rates, small public expenditures and unregulated business environments. Over the past several decades, the economy of Europe has been growing at a much lower rate – with some countries showing no growth, whilst others seeing a drastic decline in their growth rates. For illustration of this, see the tables and figure below:

Table 1. GDP, Western Europe (1990 international; billion USD)

Year 1 1000 1500 1820 1870 1913 1950 1973 2003
Billion USD 14 11 44 160 368 902 1,396 4,097 7,857

 

Table 2. GDP per capita, Western Europe (1990 international; USD)

Year 1000 1500 1820 1870 1913 1950 1973 2003 

GDP per
capita (USD)

$ 576  $ 427 $ 771  $ 1.202  $1.960  $ 3,475  $ 4,758  $11,417  $19,912 

 

 Table 3. Average annual GDP growth per capita, Western Europe (%)

Year 1-1000 1000-1500 1500-1820 1820-1870 1870-1913 1913-1950 1950-1973 1973-2003
Growth % -0,03 0,12 0,14 0,98 1,33 0,76 4,05 1,85

 

Source of tables and figure: Deepak Lal, Poverty and Progress, Cato Institute, 2013; pages 10-11; 13-14.

Whether we look at it through a political or scientific lens, or through the eyes of the ordinary citizen, we are all concerned about one thing – how fast we can catch up with Europe and other highly developed economies.

The situation in terms of arithmetic is quite simple. Consider a simple school math assignment about two cars driving along, one someway behind the other. The task is to figure out how fast the second car needs to drive in order to catch up with the first. Obviously, if both cars were to drive at an equal speed, the lagging car will never catch up with the one ahead. The same holds true for the economy. If the growth rate is low, it will be difficult to catch up with the advanced economies.

This simple issue is well illustrated in the table below:

This table shows (with the assumption of a constant 2% EU growth rate) that:

  • In the event of a continuous annual growth at 2% on average, Georgia will still be a rather poor country 50 years from now;
  • In the event of 5% growth, Georgia will be able to reach the current mid-European level within 40 years, but even within 50 years from now will still only be at the half point of the mid-European level of that time;
  • At 7% growth, we will reach the current mid-European level within 30 years, but will require an additional 45 years to achieve the mid-European level of that time in the future;
  • A 10% growth rate will enable us to be at the current European level within 22 years and to draw even with the European level of that time within 28 years;
  • An annual 12% growth rate will ensure Georgia with living conditions of the current European level within 18 years and we will even outstrip the European level within a mere 23 years.

In the form of a chart, this looks like the one provided above (for only the first 20 years).

This simple calculation cannot help but change the attitudes of people towards the policy through which we are trying to improve economic conditions. The key, however, is to realize how this can be achieved. Some think that such growth is possible on the account of international assistance, and there certainly exists evidence of some nations having achieved significant growth in recent times by means of international support and resources. Greece can be cited as one such example. However, this country has become a "victim" of such assistance and is now speedily moving backwards towards stagnation and poverty.

In contrast to that, is the experience of Singapore, which was a poorer country than Georgia just some 40 years ago, but through expanding and maximizing economic freedom it became one of richest countries in the world and is now successfully dealing with the problems created as a result of the global crisis. Singapore is the acknowledged world leader in terms of freedom of business. Everyone trades on its financial markets, regardless of whether they like the degree of democracy in the country or not.

But let's go back to Georgia; today I still believe, just as I did 15 years ago, that economic growth can be ensured through broader economic freedom. This means:

  • Low tax rates and small public expenditures. In my opinion, the policy of cutting tax rates must be continued, which will allow resources to be left in more efficient hands. This will help the economy create higher turnovers which, in turn, will facilitate the creation of new businesses and jobs. The government will also obtain more resources.
  • Strict fiscal discipline. This is crucial. The budget deficit must be eliminated and the tendency of borrowing debts (including, invisible debts) suspended.
  • Strict, long-term monetary discipline. This must be installed because monetary instability harms the country no less severely than political instability, and in fact often becomes a source of the latter.
  • The protection of private property. An atmosphere for ensuring the protection of property must be created. The former government's illegal and unfortunate practice of infringing private property rights has been replaced by the legal practice of such infringements through, for example, the amendments adopted to the Labor Code which actually restricts employers (the owners of resources) from taking decisions for themselves about which labor resources to purchase.
  • A greater deregulation of the economy. In general, state regulation is an impediment to economic growth. There are both visible expenditures – for example, the maintenance of those government institutions needed to execute regulations – and, at the same time, invisible expenditures – for example, the private costs related to the observance of regulations, time, legal counsel, and those activities required for the implementation of regulations. Any regulation is a restriction on property. For example, price controls and restrictions undermine the right of owners to choose their own resources and decide how to spend them.
  • Freedom of trade. Georgia instantly needs to stop the protectionist rhetoric and become a friendly neighbor and partner. It must buy those products that are expensive for it to produce compared to others and produce those products which it can manufacture cheaper than others. This will save serious resources which can then be channeled towards more efficient business projects. We will also greatly benefit from a benevolent trade policy.

The implementation of such a policy will increase our economic freedoms, attract investors and accelerate economic growth. Proceeding from that said above, the practical steps that can be undertaken are:

1. An immediate decrease in the income tax rate, as was planned under the Tax Code, and even further reductions with the target of achieving a 10% rate of income tax within five years. This will necessarily stimulate the higher turnover and legalization of the economy, as happened during the reforms implemented in 2005.

  • A decrease in value added tax by 1% per year until it falls to 8% and becomes the best indicator across Europe.
  • An annual decrease in the profit tax rate by 1% over the next five years.
  • The return to the 2008 plan envisaging the annulment of tax on financial profit.
  • The confinement of tax administration measures within the boundaries of the constitutionally allowed protection of private property. No one shall be allowed to launch inspection of a company without a court order, unless an enterprise gives their consent to such an inspection. The court must explicitly indicate the grounds for and terms of such inspections as well as the boundaries of restricting a company's activity.
  • Tax disputes must again be settled by a private arbitrage.
  • Making any activities of officers of the tax authorities or any other law enforcement agencies that impede business activity punishable under law.
  • Placing the burden of proof on the tax administration and other law enforcement agencies, and not the businesses.

2. An instant termination of the budget deficit policy and a decrease in the size of public expenditures to 20% against the Gross Domestic Product (GDP) within the next five years.

  • A decrease in foreign and domestic debt service costs in the budget, within a limit of 0.5% each.
  • Restriction of the government's capacity to borrow new debts to a limit of 5% of GDP per year and, in terms of total debt, to within the limit of 25% of GDP. Votes from two-thirds of parliament must be required to approve any new borrowing, whilst three-fourths of parliament must agree to override these limits.
  • Prohibition on the establishment of such state programs which will cause an increase in debt.

3. Establishment of a monetary council or dollarization by introducing the freedom of payment means within five years.

4. Abolition of all customs duties and other restrictions, allowing consumers to buy products at cheaper prices and use the freed up resources for the production of more competitive goods.

5. Reinstatement of the old Labor Code in a more liberalized form; to revise and abolish all those acts regulating economic activity that restrict the use of private property.

6. Restriction of state participation in the economy, including in the construction and use of infrastructure assets. It is of crucial importance to minimize the distribution functions of the state and to constitutionally establish the process of introducing new state projects.

  • Immediately scrapping subsidies. Every sector of the economy and each company or individual must prove its competitiveness. Subsidies are the greatest threat restricting competition. Subsidizing is a way heavier burden for citizens of underdeveloped countries than for rich countries and it delivers the heaviest blow to the economy.

7. Creation of competition through competition alone. The interference of the state impedes competition to a greater extent than it helps it. In an open and deregulated economy, with no official restrictions on entry to the market, competition will achieve its optimal level. The government must ensure that every special privilege that has been issued heretofore be suspended, and should further prohibit the issuance of new privileges in future.

8. Continuation of fast privatization. The transfer of lands, enterprises and assets into private hands will give a new spur to economic growth. Any restriction on the use of property must be abolished, including on the use of land and the natural resources therein.

  • Abolishment of any restriction on the purchase and use of property by foreign citizens.
  • A ten-fold cut in the number of state-owned enterprises. The government shall substantiate why it needs to own property, doing so by publishing an annual report on the use and maintenance of that property.
  • A parallel performance of state functions by private persons/organizations, which will ensure the improvement of competition and a decrease in costs. All those state functions which can be performed by the private sector instead must be abolished step by step and privatized.
  • The announcement of a moratorium on the seizure of private property for social or state needs for a period of 20 years.

9. Limiting the increase in the financing of social projects. People must be left with the possibility of assisting their relatives and close friends themselves by means of those resources that they will retain as a result of a decrease in taxes. The increase in the costs of social programs must always be twice as low as the economic growth rate.

10. The state must not assume such liabilities – especially, of a social nature – which will become impossible to cover and abolish. These liabilities represent a very heavy burden for the economy and impede its growth. To this end, it is necessary to halt all those policies and initiatives that are directed towards the establishment of state funds.

  • The state policy must be directed towards raising the responsibility of people and lowering the responsibility of government. It is impossible for the government to deal with education, healthcare and other personal matters of people without the personal participation and responsibility of those very people, without ensuring them with freedom of choice.

 

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