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A blog about economics in the South Caucasus.

Harmonize, but do not Harm!

The “do no harm” (primum non nocere) principle is well known to students of medical schools. It is one of the most fundamental maxims in medicine, as formulated, for example, in the Epidemics book of the Hippocratic Collection:

“The physician must ... have two special objects in view with regard to disease, namely, to do good or to do no harm".

Doctors are taught that medical interventions are not risk-free. Thus, when facing a “problem” one should consider whether to use a particular procedure (e.g. surgery or chemical treatment) or do NOTHING.

Not surprisingly, this very principle has applications in many fields other than healthcare. And it is high time for this principle to be studied and applied in Georgian policymaking.


THE HARM OF OVERZEALOUS “HARMONIZATION”

Ever since signing the EU Association agreement in June 2014, Georgia has embarked on a spree of initiatives seeking to “harmonize” Georgia’s legislative and regulatory environment with EU’s acquis communautaire. The aim, so it appears, is to instantly transform Georgia into a European nation.
It all started on September 1, 2014, with the introduction of new VISA AND RESIDENCY REQUIREMENTS, modeled – so the Georgian public was told – after the best EU regulations, and intended to meet EU requirements as part of the visa liberalization process.
Within just a few months, several other pieces of legislation have been drafted and submitted to parliament (a few more may be in the pipeline without any knowledge on the part of relevant businesses and civil society stakeholders), allegedly as part of the harmonization effort.

    • A new law on LABOR MIGRATION, submitted to the Georgian Parliament in early 2015, sought to prevent trafficking (a goal consistent with Georgia’s obligations under the visa liberalization plan), but also (Article 16) to restrict the ability of Georgian companies to hire badly needed international experts. Hard to imagine, but true! Thanks to a concerted communication effort by the Georgian business community, and goodwill on the part of the Ministry of Economy and Sustainable Development, Article 16 was swiftly removed from the draft law.
    • Recent amendments to the Georgian law on BROADCASTING (Article 64 § 2) restrict sponsorships and limit advertising to 12 minutes per hour. The idea to reduce advertising time to somewhat more civilized levels is consistent with EU rules, yet Georgia seems to be in a particular hurry to tick off this harmonization box. Whereas the Association Agreement talks about gradual “approximation” over a period of 3-5 years, Georgian parliamentarians opted to dramatically accelerate the process by making these truly life-saving amendments effective almost immediately (as of April 1, 2015). Instead of creating harmony, this kind of fast-track overzealous approximation does not allow private broadcasters any time for adjustment, jeopardizing their ability to generate income, produce high quality content, and maintain independence. Unfortunately, suggestions by Rustavi 2 and other TV channels to stagger reductions in advertising time over several years have so far fallen on deaf ears.
    • Yet another example of rushed legislation that appears to ignore the interests of businesses concerns the recent decision to increase EXCISE TAXES ON ALCOHOL AND TOBACCO as of January 1, 2015. The Government’s official aim was to increase budget revenues while harmonizing Georgia’s regulatory environment with that of the EU. Yet, the manner in which the whole process was rushed raises many questions. Georgian companies were not allowed any time to adjust their investment and production decisions, leaving them with excess capacity and losses. Furthermore, the level of excise taxes on alcohol was set at a level exceeding that of many European nations. This was decided without examining relevant demand elasticities, that is, the extent to which higher taxes will affect sales and budget revenues. In a country with rich traditions in home production of high quality alcoholic drinks (that are not subject to excise taxes), demand for alcohol is likely to be quite a bit more elastic than in most European nations. After all, Georgian consumers can switch to homemade wine or chacha, spelling doom for Georgian government’s plans to raise an extra 100mln GEL in excise tax revenue.

A COMMON PATTERN?

Taken alone, none of these legislative initiatives are particularly damaging for the Georgian economy. Georgian companies would have quickly acquired the ability to handle the extra layer of bureaucracy when bringing foreign experts and workers. Broadcasters will raise per minute prices for advertising and sponsorships, and advertising companies will learn to deliver their marketing messages in fewer seconds. Forced to pay higher excise taxes, Georgians will drink less beer and more wine. Breweries will adjust production volumes or export to Azerbaijan. The Association Agreement will be implemented ahead of schedule. At least on paper.

The problem with all these initiatives is that they represent a pattern of policymaking that is very different from the European ideal which Georgia is supposed to aspire to. And, taken together, they defeat the very purpose they are supposed to serve: bring Georgia into the European family of nations.

First and foremost, the manner in which these new regulation are enacted undermines Georgia’s reputation as a great place to do business. A key consideration for new investors is stability and predictability of the business environment. Countries may certainly change their internal regulations from time to time, but this should be done in coordination with the business community, while listening to companies and allowing them sufficient time to adjust.

Second, Georgian policymakers should learn to do much better homework before coming up with new laws and regulations. To do no harm, doctors may prescribe additional X-ray or blood tests. Policymakers can employ standard tools of applied economics analysis to simulate the impact of proposed regulations on tax revenues, GDP, income and investment levels, as well as evaluate associated corruption risks. While common in Europe, none of these tools are used in Georgia. Yet another good possibility is to move in small steps, conducting policy experiments and assessing their impact.

Third, unless dealing with urgent or complicated technical matters (such as Lari devaluation), Georgia’s policymaking process could benefit from greater participation by interested parties. Practically all EU approximation measures could and should be subjected to a lengthy and inclusive process of public consultations that would increase their chances to be politically accepted. In fact, such consultations are explicitly encouraged by the EU Association Agreement.

Last but not least, the hasty attempts to tick off boxes on EU harmonization may undermine the very process of Europeanization the Georgian government is trying to promote. The use of the Association Agreement as a smokescreen for passing dubious laws not only harms Georgia’s immediate economic interests, but also plays into the hands of those political forces that aspire to bring Georgia back into the Russian fold.

*     *     *

The other day, I heard Giorgi Kadagidze, the governor of the National Bank of Georgia, speaking about the need for Georgia to grow at a faster pace, and how faster growth is predicated on the government’s ability to implement painful and costly adjustments. The kind of “second-generation” structural reforms envisaged by governor Kadagidze would take time to implement. Until then, however, there are many things the Georgian government could STOP DOING. In this way the government would save taxpayers money, save itself the embarrassment of backtracking and apologizing, and save Georgian businesses the nervous energy and resources that could be put to more productive uses.

It is time for the Georgian policymakers to learn the Hippocratic principle: do no harm!

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Comments

 
Guest - Miranda on Friday, 13 February 2015 18:45

Great and "to the point" article!
Concerning the topic itself, I just wonder how quickly Doing Business indicator will worsen for Georgia.

Great and "to the point" article! Concerning the topic itself, I just wonder how quickly Doing Business indicator will worsen for Georgia.
Guest - Fady Asly (@fadyasly) on Saturday, 14 February 2015 17:13

Fantastically well written piece! Thanks Eric.

Fantastically well written piece! Thanks Eric.
Guest - Eric Livny on Monday, 16 February 2015 16:41

Thank you, Fady! It was my pleasure to contribute to the ongoing debate. I hope I did no harm :-)

Thank you, Fady! It was my pleasure to contribute to the ongoing debate. I hope I did no harm :-)
Guest - mfmsm on Monday, 16 February 2015 22:32

This is well worth submitting as a guest piece to The Economist. You just need to change the place of the verb in : so the Georgian public was told (recte); and goodwill (one word). It also needs to be circulated among the EU agencies working in Georgia, and in Brussels and Strasbourg as well. (I already wrote to them in October about the visa and residency law; and can do my bit and forward it to two Presidents (one-ex) - you never know what clicks with people or why. The EU definitely did not intend the Association Agreement to have deleterious consequences on Georgia as a side effect. I believe Georgia has to abide by the spirit of the Association Agreement and that the EU has some leverage over Georgia; and if they do not, the issue should be raised in the European parliament (where ex-President Landsgerbis, to whom I propose to send it) still works at 86 years old. I saluted Fady's great work on the same theme yesterday and I hope he found my comment [smiley]

This is well worth submitting as a guest piece to The Economist. You just need to change the place of the verb in : so the Georgian public was told (recte); and goodwill (one word). It also needs to be circulated among the EU agencies working in Georgia, and in Brussels and Strasbourg as well. (I already wrote to them in October about the visa and residency law; and can do my bit and forward it to two Presidents (one-ex) - you never know what clicks with people or why. The EU definitely did not intend the Association Agreement to have deleterious consequences on Georgia as a side effect. I believe Georgia has to abide by the spirit of the Association Agreement and that the EU has some leverage over Georgia; and if they do not, the issue should be raised in the European parliament (where ex-President Landsgerbis, to whom I propose to send it) still works at 86 years old. I saluted Fady's great work on the same theme yesterday and I hope he found my comment [smiley]
Guest - Hvino. Georgian Wine (@Wine_of_Georgia) on Wednesday, 18 February 2015 01:12

Thank you. We have usedd your quotaton in "Expert commented on Georgia's alcohol excise tax rise": http://news.hvino.com/2015/02/expert-commented-on-georgias-alcohol.html

Thank you. We have usedd your quotaton in "Expert commented on Georgia's alcohol excise tax rise": http://news.hvino.com/2015/02/expert-commented-on-georgias-alcohol.html
Guest - Eric Livny on Wednesday, 18 February 2015 02:18

It is my pleasure. With your permission, I linked the full text of my article in the comments section on your website.

It is my pleasure. With your permission, I linked the full text of my article in the comments section on your website.
Guest - megiddo02 on Tuesday, 24 February 2015 17:26

By choosing to follow Europe, Georgia has taken the wrong path. Economically, Europe is a failed model. Why copying a loser? Many of the regulations the UNM government enacted are much better than what Europe has to offer.

By choosing to follow Europe, Georgia has taken the wrong path. Economically, Europe is a failed model. Why copying a loser? Many of the regulations the UNM government enacted are much better than what Europe has to offer.
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