Risks and Challenges

enterprise-risk-management
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My friends who work on political analysis often chide me for attaching more importance to the economy than to politics. I, however, believe that economic results are behind any pure politics – aside from the ideas of fanatics or counteractions to such ideas. Furthermore, in contrast to some of my American colleagues, I think that ideological and moral arguments start later than pragmatic ones.

I continue to adhere to my opinion that at the end of the day economic issues will always remain. For example, no matter how much you inflate social costs for political aims, they still have serious economic limitations. The most politically “beneficial” or effective social security programs will necessarily enter deadlock when the size of the possible contributions from taxpayers lag behind political demands. The government will have no other option but to take heed of that and either slacken or altogether stop the “necessary” tempo of an increase in tax rates.

If the government still continues to increase the financing of social programs, even by taking on debts at the expense of future generations (which in any case will be paid by other future governments), it will come to face serious problems, such as: tax evasion (as is now the case in, for example, Germany), the impossibility of taking out loans (as is the case, for example, with Greece), the outflow of investments (as in France), and mass unemployment (as in Spain). Therefore, sooner or later, the government will inevitably have to consider whether it should continue such a policy or not.

Britain ultimately started the privatization process because it was impossible to continuously subsidize state enterprises. The Labor Party of New Zealand arrived at the conclusion that unless the government worked as a private enterprise it would be unable to create competitive production. This, primarily, meant the privatization of those state enterprises that were constantly unprofitable and ineffective, for example, the postal service, railways, airports and seaports of New Zealand. Despite its remoteness from other developed nations, New Zealand is now one of the most successful countries in the world in every sense.

Being put on a pragmatic path is much more important for poor countries. When politicians in such countries say that it is precisely because of such poverty that people need to be assisted, they do not take into account that poor countries experience a greater shortage of resources and that shifting these resources from the private sector towards the public sector, i.e. from efficient projects towards mere spending, is extremely damaging for those nations. Pursing such a course in such countries causes economic growth to halt altogether. To make it clearer for politicians – stopping economic growth means the creation of no new jobs, increased unemployment and decreased revenues to the budget. In short, it is clear that the main objective of the government is to find such a balance between the private and public sectors that will gear the economy and, accordingly, budget revenues towards high growth. However, politicians must not forget that it is the private sector alone that creates wealth in a country. There is only one resource needed for that (one which does not fall from heaven, but is paid by private persons) and pulling this resource towards the government means diminishing it for the private sector to use in development, investment, employment and the payment of taxes to the government.
Unfortunately, government projects aimed at satisfying the population with assistance do not represent the only risk and challenge to the economy. How risk factors affect economic development can be illustrated by a simple example:

The average speed of a car is 20 km per hour. It must cover 100 km in a maximum of six hours, which is feasible at that speed. After driving for two hours, the car faced an obstacle – a damaged road – which decreased its speed to 10 km/hour. In order to cover the remaining 60 km within four hours, the car needs to accelerate its speed by 5 km (i.e. to average 15 km per hour in the conditions of a bad road, which would correspond to 25 km per hour in the conditions of a good road). To make this happen, it will have to spend more effort and energy. Otherwise, at the existing speed, it will be late.

Two things are clear from this simplified example: 1) it is necessary to speed up, and 2) if this does not happen, the car will be late. The same holds true for politics: if you cannot reach the necessary speed, you will be late and the voters will show their preference for another. Even more, if decision makers do not understand how they should act in order not to be late, they may attempt to accelerate political processes at a higher speed and thus cause unrest and destabilization, which then causes them to face even more obstacles.
What are the risks and challenges that our country’s economy may face? What are those “bad roads” that impede the inflow of investments, the development of the economy, and the increase of revenues and employment? I will try to express my assumptions.

Firstly, business may come to face absolutely subjective obstacles resulting from the numerous mistakes of the government, a sense of instability and an orientation towards short-term effects. If the government takes ambiguous decisions and lacks a well-formulated pragmatic political vision, businesses will try to adjust to that – and in such a case, who knows what will happen? All governments make mistakes; this will not surprise anyone. But when these mistakes go beyond certain limits, investors prefer to hold back.

There are also objective obstacles that decision makers must take into account – pretending not to see anything will not do. These obstacles are the occupied territories and the threat coming from the occupant. No investor will overlook the fact that the tanks of the occupier stand close to the main arteries of the South Caucasus – the railways, highways, oil and gas pipelines.

The Caucasus region is, in general, tense. The extremely difficult situation existing among former friendly states is a risk factor not only in territorial terms. Despite the huge efforts undertaken in our region, we still need to work much harder in order to achieve the desired mutual understanding and cooperation. At the same time, we must keep in mind that international hotspots of instability, such as Syria and Iraq, are also located in the vicinity of our region. Security problems are further complicated by the fact that the country which occupies our territories has the power of veto in those international institutions where security issues can at least be discussed.

Security is the biggest challenge for our economy. To counteract a similar challenge, Israel, for example, is entirely militarized, regardless of the fact that numerous international lobbyist groups assist it, including financially. A country facing such security challenges might have armed forces three or four times stronger than Georgia and a defense budget 10 times larger. However, as I have said, public expenditure has its constraints, especially in poor countries.

Among the other challenges facing Georgia, one must consider the advantages of the global economic leaders. In some cases these advantages include the knowledge and advanced technologies that developed countries can harness to achieve success. In other cases, the advantages take the form of economies of scale, as is the case in China. There are various spheres which will prove very difficult to penetrate as they are already occupied by one country or another.

This situation even suggests a sort of formula concerning what one should not do; prompting need for greater consideration of the sort of economic policy that should be pursued. If the arguments given above are not sufficient, let me provide yet another simpler formula. Imagine that Georgia and Bulgaria have identical business environments – which of the two countries will an investor choose? The answer, of course, is Bulgaria. It is better protected (it is a NATO member state), it is part of a large common market, has unrestricted access to markets for goods and services and to education (the European Union). Bulgaria would clearly be viewed as more attractive.

In contrast, the existing tension in our region and the lack of cooperation will directly affect the economy. For example, any investor knows that Georgia is a small-size country with a small population that has low purchasing power. In this case, being “the best democracy in Europe” is not a big asset, even if this were achievable. Investors are interested in an open, predictable, transparent, business-friendly and stable environment. Unfortunately, democracy, as a rule, is not conducive to creating such an environment. China is not a democracy at all, but over the past 25 years it has been the world champion in terms of economic growth, which has not fallen below 10 percent. This is no longer a poor country; today one can hardly find any high-tech equipment that has been assembled elsewhere.

These are the challenges and risks that represent obstacles to our business. These are the obstacles of “the bad road,” whose resistance must be overcome by speeding up. Such acceleration can materialize only if more energy is supplied. This means leaving more resources at the disposal of the private sector, which must be achieved by a sharp decrease in taxes and the dismantling of all artificial obstacles, i.e. rescinding all regulations. This is what must be done in order to neutralize the “bad road” effect and increase our speed. Pinning hopes on our initial momentum means deceleration, which is made all the more rapid when you add additional obstacles yourself, as is happening now.

The government understands that assaulting business with regulations, as is the case now, may be unpopular. This cannot be neutralized by the actions of artificially encouraged populist speakers who try to keep the people living in an absolute illusion.

The government, therefore, found a simple solution. Not only did it tie everything to the requirements of the European Union, it went even further: to prove its allegiance to the European Commission, the Georgian government spares no efforts to report, with all the zeal of a young communist crowing over the success of a Soviet-era five year plan, that the plan for the regulation of the economy has been over-fulfilled. None of the politicians who now lobby for these regulations have even thought about the consequences of the regulations or have asked anyone to calculate what this will cost the Georgian economy, businesses and people. These calculations are not difficult to do: the cost of new bureaucracy, inspections, norms of regulation, bribes, penalties, licenses, et cetera. The cost of all this shall be paid by the Georgian people.

Fulfilling EU requirements is difficult; they have not in fact been totally fulfilled by its newest member states. Britain and even Germany have already raised the issue of the need to revise EU regulations. Therefore, I believe that the Georgian government’s invoking EU requirements is nothing more than an attempt to deceive its own people for the sake of reporting. Even more, had the EU really demanded the immediate introduction of its regulations, we must try to treat such demands pragmatically and offer cooperation in line with our possibilities and interests.

I mentioned Bulgaria above. This is one of the weakest economies in Europe, even though its fiscal and monetary systems are among the best in the world. On the other hand, Estonia, another country distinguished for its high fiscal and monetary discipline, has gone far ahead because it put all the EU regulations through a pragmatic filter. Bulgaria is one of the most corruption-prone countries in Europe and the situation there in terms of crime is also the most complicated in the EU; Estonia, in contrast, is one of the most successful EU countries by both of these components. It is certainly worth contemplating: why is that so?

No matter how much my political expert friends might disagree with me, I still believe that the reason for the failure of Georgia’s former government was its low speed that made it late.

The article was originally published on Tabula

Gia Jandieri