We finished with a bang. The last two stops on the Free Market Road Show saw what was left of the team travel to Tbilisi in Georgia and ChiČinÄu in Moldova. We also had a rather distinguished guest join us.
Prince Michael von Liechtenstein spoke about the paradox of Georgia wanting to be more like the EU, while the EU seems to become more like Georgia and its failed socialism.
The driving reason for the EU was trade. Its driving force was the small Benelux countries. That effort was then hijacked by the German and French leaders Schroeder and Chirac, and turned into a political union. Now, nobody knows where the EU is headed. But the real world is giving it a beating, as von Liechtenstein laid out.
First came the financial and sovereign debt crisis. Then the Russian security crisis. And now the migration crisis. Underlying all this is a bizarre monetary policy. Von Liechtenstein took the audience through the last three in detail.
The EU has a âlack of common conceptâ when it comes to security. There isnât enough agreement from east to west, and so there is no single foreign policy for all foreign threats. When it comes to migration, Africa, not the Middle East, is the real threat. Europe can expect another two million African refugees now that the Middle East has served as an example. With Europeâs labour laws, absorbing those migrants will be a nightmare. And the European Central Bankâs destruction of savings and subsidising of debt will end in disaster, especially for the older generations.
Swinging back again
Despite all this, von Liechtenstein argues we need the EU and its ideas. Somewhere under all the disastrous policy failures are the ideals of individualism and freedom. We just need to save those ideals and dig them back out. The pendulum can swing back again, just as it has swung to the left. Bringing back some semblance of national sovereignty is a start.
As for Georgia, von Liechtenstein said it must be wary of the EU. In many ways, Georgia is one of the freest countries in the world. The EU will try to reign this in.
Vakhtang Lejava, the chancellor of our host Free University of Georgia, explained that small government means small mistakes. Big government means big mistakes. And privatisation is like getting an egg out of an omelette. The opportunities for getting privatisation wrong are just inherent in the process. Instead, allow change to take place outside the governmentâs control. In my mind, Uber and Airbnb are examples of this.
Paata Sheshelidze, a founder and the president of the universityâs economics school, kept his farewell speech short and punchy. The pro-EU movement in Georgia is really just anti-Russian. It is self-defence motivated, not pro EU. This leads to a coalition with âbad guysâ, the sorts who are nationalist not liberal. What the liberals need is a personality â a leader. The good news is, EU membership will take time, so the country can stay quite liberal and free from EU regulation for now.
As we left, the celebrations for Georgiaâs national day took hold. Miniature floating paper heart shaped hot air balloons floated past the window. Tanks lined the street as we walked home. And down below our restaurant we could see the ruins of the prison which once housed Joseph Stalin for bank robbery.
Last but not least, Moldova
Moldova once marketed itself to tourists as âthe cheapest country in Europeâ. Like everywhere else the Free Market Road Showhas travelled, it claims to have wonderful wine. But when it comes to interesting oddities, it really does take the cake. And rather than getting a theoretical explanation, we asked someone who has to deal with those oddities directly to explain them.
Localised American entrepreneur and president of the Foreign Small Enterprise Alliance, David Smith, stole the show with a boots on the ground reality check. (Smith was in the Peace Corps in Moldova, so the âboots on the groundâ phrase doesnât sound as bad as it seems â even if he is American.)
Because Smith actually pays his taxes and complies with Moldovan regulations, he can say what he likes about the government and its systems. Unfortunately, it also makes him a fool; as they say: âIf everyone pays their taxes and you donât, youâre a criminal. If nobody pays their taxes and you do, youâre a fool.â But Smith wears his foolâs hat proudly while setting up the Smokehouse Restaurant in Moldova.
According to Smith, 80% of Moldovaâs tax revenue comes from customs tax. Thatâs why iPhones are incredibly expensive here. Itâs also why there are so many Land Rovers at border towns. No electricity, no running water, but a heck of a lot of bribes and smuggling.
Cash on high demand
Not that Moldova doesnât have plenty of taxes which could be paid. Smith calculates that out of every euro in salary, 68 cents would go to the government â if anyone other than him actually paid the tax. The solution is to pay your staff mostly in envelope cash. Which works well, but creates some fascinating problems. The demand for cash is enormous. And if youâre trying to operate legally, youâre on the wrong end of the cash receiving stick.
Thanks to an underdeveloped banking system, itâs very hard to move money around the country to pay your suppliers. Then again, paying your suppliers above board has its own problems too. If Smith wants to buy an onion for his restaurant, he has to file a report and be able to account for the onion at any given time should he be raided by tax authorities.
In the midst of all this, itâs simply too hard for businesses to play by the rules. You canât pay your staff legally, and they donât want to be either, because cash is so much more valuable to them too.
All this puts the war on cash into perspective. As governments clamp down on economic activities through tax, regulation and restrictions, cash is the opt out option. Itâs the only thing that stops governments from actually implementing their crazy schemes in practice, because people can simply go underground. Without cash, you actually have to operate according to those crazy schemes. But thatâs damn near impossible given how restrictive things have become.
Cash is the last line of defence
Quite frankly, I am now very worried about the war on cash. Cash might be the only thing keeping economies like Moldova from dying under their governmentâs weight. Greece would be toast without its underground economy â thereâs no way the country can live up to EU regulation in a competitive way.
In the end, tax policy is not about high or low, said Smith. Itâs about smart and dumb. In Moldova, taxes are blatantly designed in such a way that you simply donât pay them. Instead, they are a system of government control. If nobody is compliant, anyone can be cracked down on whenever the political establishment happens to decide they donât like a person. Thatâs what the Free Market Road Showâs Frederico FernĂĄndez explained in his speech about Argentina. It happened to some of his friends who wrote articles about the government.
Smith added another dimension to this concept. The Moldovan tax authorities arenât on the hunt for unpaid taxes. Theyâre looking for mistakes in paperwork. Because a simple error, such as leaving a box unticked on your onion buying form, can leave a tax inspector with life or death powers over your business. The result is more Land Rovers, paid for in cash. (Land Rovers are the vehicles of choice because, in the midst of all this bribing around, thereâs no money left for maintaining roads.)
Moldovian apathy
Why is Moldova stuck on its road to development, Smith asked. Apathy is his answer. If he gave the same speech at a university in the US, there would be outrage. In Moldova, the universities are silent. If people want change, universities are an ideal place to start.
Another odd feature of Moldova is the absence of numbers. When discussing business, politics or personal financial situations, people in Moldova donât speak about numbers. Sure, Smith is an American, but still, I think he had a point. It is culturally odd to consider finances as a numerical issue to Moldovans. With that sort of mindset, itâs not mystifying they find life difficult.
After the event, things got even more interesting. We discovered, for example, that the local beer quality standards were written by the owner of the local ChiČinÄu beer brand, thereby creating an impressive barrier to entry for any competitors. Foreign food is more expensive in âthe cheapest country in Europeâ than in Italy, thanks to the customs taxes. And shepherds in Romania and Moldova couldnât be controlled during communism because they were close to nomadic. So when communism ended, they became the business owning class â they were the only people communism left with any sort of capital stock, even if it was just sheep.
The co-founder of our hosting university dropped by for a visit too. She explained how Moldovaâs best and brightest go to Europeâs universities and come back with precisely the socialist ideas that ruined Moldova. If only they remembered how life was under a communist regime, she lamented. Instead, academic Europe gives those ruinous ideas legitimacy. The race is on now. Will collectivist ideals ruin Europe before the Moldovans have to learn that lesson at home the hard way again?
David Smith is a brave man for hanging around to find outâŚ
Category: Geopolitics