Interview with Vladimer Papava

A lawmaker from the ruling National Movement party, Vladimer Papava, spoke with Civil.Ge about reasons why he thinks that setting up of a free economic zone is not a good idea for Georgia. Papava, a senior fellow at the Tbilisi-based think-tank Georgian Foundation for Strategic and International Studies (GFSIS) who was economy minister in mid and late 90s, also spoke out against abuse of property rights and inflation.

Q.: The Parliament plans to discuss a proposal on free economic zone, proposed by President Saakashvili. What do you think about this proposal?
 
A.: My stance is extremely negative; although it was not always negative, because in the early nineties I was working on the relevant draft law myself. But eventually I came to the opinion that as far as by then the country was undergoing economic liberalization and reforms, creation of free economic zones would be senseless. 
 
In 2000-2001 Adjara’s ex-leader Aslan Abashidze initiated to create a free economic zone. The draft law proposed at that time under the name “Special Economic Zones” envisaged halving of a profit tax.
 
I would never imagine that the idea of free economic zones would emerge again after the Rose Revolution, when so many important steps were taken towards liberalization. You know that high customs dues, which were introduced after 2000 by then Finance Minister [Zurab Nogaideli], have been reduced again to their previous level; issuing of licenses and permissions to launch a business has significantly simplified.
 
After all this liberal reforms the idea of creation of free economic zones is even more senseless.

I do not know what was the major reason behind this idea – whether it was lack of knowledge or just private interests.

The current draft law is under the name “Free Industrial Zones” - that is a type of Free Economic Zones and the name itself defines its nature; however, the proposed draft law itself does not provide any sign that the zone will be focused on any particular sectors.
 
The proposal, in itself, means that certain tax exemption should be enforced on a certain territory, involving cancellation of a profit tax and property tax. A multi-currency regime is also envisaged.
 
So, my position is following: if these advantages will stimulate, as the government claims, the economic growth, why should this territory cover only 10 or 20 hectares? Let’s have such economic growth on the entire territory of Georgia.
 
Q.: Can you elaborate further about risks and challenges, you think, the proposal poses?
 
A.: As soon as such a law is adopted, the situation in this zone will become uncontrollable. On the other hand it is not yet clear where the zone will be set up [the draft law does not specify location].

Initially, the Georgian President said that the zone will be created in port of Poti, but it is clear that it will not be only in Poti; I guess all the lawmakers elected from the single-mandate constituencies will try to have this kind of zone in their constituencies.
 
On the other hand, the neighboring countries will definitely try to incite the creation of such zones on the territories adjacent to their borders. We already face the problem of territorial integrity and why should we create such territories which are uncontrollable.
 
The following threats are anticipated: the operations carried out on these territories will be less controllable by the central authorities. Regions with large number of ethnic minority population, which border with our neighboring states, will try to get involved in this process [free economic zone]. A certain capital will start to flow there under the cover of a western capital to carry out the interests of some of our neighboring states and naturally, this will not always be acceptable for us.
 
Just imagine that our American friends ask us to create Free Economic Zones there [in border regions], I mean those Americans, who have the same ethnicity as our neighbors. It is well-known that the financing of the Kars-Akhalkalaki railway project was blocked by the Americans and it is quite clear whose interests were behind this decision.
 
Such zones can also become a place for money-laundering or other uncontrolled operations. We already have very low level of monetization. If we permit the multi-currency regime, the currencies of our neighbors will appear in the border regions. Why should we lose one of the key tools of macro-economic stability and economic sovereignty?
 
I do not confront anyone. I simply express my opinion and it remains unchanged regardless of which government has initiated it – ex-Adjarian leader Abashidze, which was absolutely unacceptable for me or Mikheil Saakashvili’s government.
 
Q.: Officials say inflation reached 8.8% last year, which became one of the reasons for criticizing central bank chief Roman Gotsiridze in the Parliament. What do you think about it?
 
A.: Actually I do not trust this official figure and any citizen will agree with me that inflation rate was much higher than 8.8%.  
 
By the way, I want to remind you that last July, when the State Department of Statistics reported a 14.5% inflation rate – although in reality it was probably much higher – this triggered severe criticism by the International Monetary Fund. Then, the government dismissed the head of the Statistics Department. Afterwards, the inflation rate started decreasing. This means that if you replace a head of the Department by a person, who will obey you, you will receive any figure you want.      
 
Increase of foreign investments, as well as increase of amount of money transferred from Georgians living abroad, as well as privatization process has greatly contributed to increase of foreign currency, and first of all US dollar, in Georgia, however the supply of Lari has remained unchanged. This has triggered appreciation of Lari against Dollar, which in turn hits export.

In order to avoid excessive appreciation of Lari, the National Bank bought US dollars, hence putting into circulation additional amount of Lari which in turn triggered the growth of inflation rate.
 
The government’s extremely great expenses on public works have further contributed to inflation. The government should of course continue construction of roads, but there is no need in so many, lets say, fountains.

I do not think it is right to make the National Bank a scapegoat. No matter who was the chief of the National Bank – Gotsiridze or someone else – there was nothing the National Bank could do about it.

Q.: The World Bank said last year that Georgia was a top reformer; how this is translated into practice on the business climate in the country?
 
A.: When the property rights are not protected in the country; when the property is seized without any adjudication; when owners are forced to ‘voluntarily’ give up their property, how can we speak about being top reformers?
 
But, on the other hand, this status [of top reformer] helps to boost the country’s international image.
 
Q.: But how these allegations on abuse of property rights influence on foreign investments?
 
A.: Inflow of investments was not hampered. Because, mainly those people, who have no foreign business partners, are most vulnerable. If the owner is a foreigner, he is protected because the government does not risk touching him. Therefore, some Georgian businessmen have become cleverer and started to give a share to foreigners. In this case, the government will find it difficult to take away property.