04 October, 2012

‘Independent’ boom in Georgia is likely

Nine years have elapsed since the rule of the powers that be who came to power with roses. Current elections will determine not only political but also economic future of the country.  Employment, economic progress, development of agriculture, overcoming of poverty and creation of best environment for business – it’s an incomplete list of promises that we’ve heard more than once from the ruling team for nine years. What have we got in reality and

what can be brought by current elections? We requested Davit Narmania, Executive Director of the Caucasian Institute of Socio-Economic Studies to assess it.

D.N. – The team that came to power after the ‘Rose Revolution’ made a rather ambitious declaration with regard to economic development and improvement of social condition of the country. What’s important, they had fairly high credentials on the part of the people. It means that they trusted the authorities who came after the ‘Rose Revolution’ and majority of them believed they’d tackle big part of acute social and economic problems. On the revolutionary wave, together with other reforms, the authorities began economic reforms as well. They included the tax reform enacted in 2004, tax code that was enforced since January 1, 2005 and due to which volume and rate of taxes was considerably reduced; procedures, issuance of licenses, registration of business and property, etc. were simplified. At the same time the authorities decided not only to see to the monopolies but to abolish their regulatory body represented by the antimonopoly service. This was based on the so-called libertarian economic approach, according to which interference of state in economy should be minimal.

2006-2007 were indeed marked with high economic growth; investors’ trust to the country increased as well. During these years the volume of investments was higher than before or after. In 2006 direct foreign investments made more than $1.5 billion and in 2007 – more than $ 2 billion. But by that time the antimonopoly service and the law somehow regulating these issues were already abolished.

The companies became free to negotiate with the authorities and become monopolists or oligopolists through the so-called cartel agreement. The result is obvious – in several sectors of economy, without much observation, one can find monopolist and oligopolist markets. They hike price simultaneously, have common policy of actions but at the same time are considered to be rivals. They are in deal with one another but nobody holds them responsible for it.

On the one hand, the authorities chose the policy of European integration and in 2006 signed the document of European Neighborhood Policy but in 2009 Georgia became an Eastern Partnership country. On the other hand, it was conducting the policy of ‘Singaporization’. These two are quite different directions and the country made a mistake when it didn’t discriminate clearly between them.

Q. – Transfer of former high officials into profitable businesses suspiciously coincided with price-rise on a number of important products.

A. – Monopoly and oligopoly are always connected with two things: increased prices and decreased service. When you have to buy products from one and the same company or the ones who are in collusion with one another and you have no other way out, the supplier takes the advantage, hikes price and worsens the quality. But the customer has no other choice. Oligopolistic situation in the patrol market –when one and the same day the price on petrol goes high identically- can serve as an example. The result of tandem of authorities and certain business circles is decisions of national regulatory commissions that aren’t liable to revision and according to which inadequately high tariffs are set. If we analyze the inflation indices of the last 7-8 years, despite the manipulations in methodology, general price-hike is rather high and it considerably decreased buying power of people.

According to global competitive capacity index, out of 144 countries Georgia holds 131st position; with respect to court efficiency, out of 144 countries Georgia is 95th. A natural question arises – where can business protect its rights? Many businesses refused to develop, many stopped activity. The pre-election slogan – free business from state pressure- is repercussion of it.

Q. – In case after the elections business is set free from state pressure, can we witness some kind of economic boom in Georgia only due to this?

A. – Economy of our country is interesting for investors in many respects. In case of considerable investments of course there is potential for development, provided the authorities ‘iron hand’ doesn’t interrupt it. Part of state property is still available; it can be sold and investor may show up and display interest in case of normal economic policy. For some neighbors we are considerable bridge and transit country and business and our country can gain certain profit. We as well have tourism of medium segment. There is basis for development. The post-election government should take upon a distinct path. Economy doesn’t favor doing one thing today and altering it tomorrow; economic policy must be orderly. This needs human and financial resources. I know that under the condition of current solvency it won’t be easy to increase the budget by ambitious volume in order to finance different obligations. For this reason it will be necessary to draw money from foreign sources in order to give stimulus to the country’s economy.

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