Eleventh place, minus small business

Nino Arveladze

Matter of constant disputes in Georgia is a subject – which is more important for the development of the country’s economy – support of small business or large investments.

Besides this arguments are held around the question whether small business should develop with the liberal values of Adam Smith’s “invisible hand” or by itself, or on the contrary by means of some state program of institutional support. In the epoch of international crisis, another question was added to the issues of constant arguments – set priority should help economy to overcome crisis and employ people at the same time.
In the recent period, quite a number of changes in various fields and reforms were made. However, quite often a “new step”, abolition of old hasn’t been followed by creation of new. One of the examples of this took place on 24 May of 2006 when law on “Support of small and medium sized enterprises” adopted on 23 July of 1993 was abolished (it seems that we orientate only on big issues and do not consider a word “small” as important). Growth of small and medium sized business showed regressive results. According to UNDP research, 50.6% of workers were employed in 2003 in this type of enterprises and their common share in total production made up 20.6%. This number decreased to 40.1% in 2008 and their common share in total production was 17.3%. (See table No 1).
On 18 September of current year, civil movement “Solidarity”, with the support of Friedrich Ebert Foundation held broadened forum on small business at the hotel D-Plaza. Civil movement Solidarity with the support of international organizations has worked on the draft bill on small business during several months. (See maga- zine Georgian Economy No 5; www.geoeconomics.ge; www.geoeconomic.com).
Head of representative office in Friedrich Ebert Foundation in Caucasus, Mathias Iobelius spoke about unprecedented success of Georgia in World Bank’s rating (allow me to remind you that Georgia is on eleventh place in doing business) and declared that “Rating is misleading the society. Georgia is not an economic paradise without any obstacles for doing business. It is impossible to talk about Georgian economy and do not mention the problems for business to preserve positions on market and enter new markets that mainly concerns small and medium sized companies”. Speaker declared that it is necessary for the government to realize that support of small and medium business development is assimilated with the development of democracy in the country.
Economic experts held debates on the set issues. Among other question, draft bill on support of small business in Georgia designed by civil movement Solidarity was discussed. Economic expert Mr. Emzar Jgerenaia spoke about five specific problems of small and medium sized businesses:
1. Taxation code – despite progressive tax rates in the new tax code and simplification of tax accounts, there are such imperfections in payment control and technical details of calculation that obviously impede business development in the country. For instance, small business has no mechanism price-off merchandise that is a considerable obstacle for business in general. Businessman cannot cut outdated or damaged goods; or amortization, the procedure is designed in such a way that it is impossible for a small enterprise to perform it. Accounting of expenses remains current theme, staring from business trip to oil expenses, nothing to say about frequent closures of companies and difficulties of leading bankruptcy cases.
2. Market geography – without state support, it is very difficult for a small business with the turnover of GEL 100-200 thousands to set European market as its checkpoint, as it is hard even for large enterprises. Acquainting small business with European non-tariff regulations is a hard task. It is necessary to establish small business administration for this aim that is considered in a presented draft bill. This tradition exists in many European countries, when state is supporting small business in various exhibitions and other technical issues by means of industrial parks and direct entrepreneurial relations.
3. Financial resource – financial resource is not a benefit granted by the state or banks to small business. State holds serious mechanism, it can give cheap resource to market, cheap programs that is of special importance for start-up business. There are no special programs for the support of start-up business in Georgia;
4. Technical base – Technical base of small business in Georgia is absolutely uncompetitive. Analysis made in the field of construction materials that included construction service field showed that 90% of construction materials are imported. Transportation of construction materials is very difficult. There are frequent cases when materials are outdated or damaged, as quite often transportation takes a lot time. Local small business has big advantage here as there are big resources for this. Management is required for increasing competitiveness of Georgian construction materials. However, due to serious problems at technological market this segment remains undeveloped. Georgia can successfully use industrial parks for technical re-equipment. Small size factories have no funds for purchasing modern machines and conduct technical re-equipment, while it is impossible to produce competitive goods without corresponding technologies;
5. Management and qualified staff – specific approach is needed for rising management’s and employed personnel’s qualification. Under the condition when unemployment problem is extremely sharp in Georgia it is necessary to have serious approach to the preparation of qualified staff. If the state does not establish special fund and small business administration doesn’t involve in the accomplishment of the mentioned issue (relevant article should be written in a law), then serious talks about development of small business will be utopia. Whole Georgian will be unemployed, but at the same time staff deficiency will be a sharp problem in the country.
Deputy CEO of Professional Union, Mr. Gocha Aleksandria spoke about the role of small business in increasing the scale of living in the population. He declared that it is impossible to develop country’s economy and raise standard of life without proper development of small business.
Speaker outlined question of relations between small business and financial police and declared that in the country that boasts about support of small business development, it is unacceptable to carry out ambush policy, sequestration of a property and long-term closure of shops and enterprises. The worse is that this is taking permanent character. Mr. Gocha Aleksandria declared that business is terrorized in the existing situation. He reckons that state should assign funds for qualified retraining of the staff and the policy that implies in some regions only cook training programs is wrong.
Economic expert Mr. Demur Giorkhelidze declared while talking about international practice that social responsibility does not contradicts with the idea of liberalism and it doesn’t mean creation of bureaucratic mechanism of management.
Demur Giorkhelidze reckons that Georgian state is facing a necessity of adopting a law on small business and supporting this institution that on its part encourages development of this field in the country. Speaker emphasized USA president’s serious approach to small business that is proved by appointment of the head of small business administration on a responsible position.
Head of civil movement Solidarity Mr. Kakha Kokhreidze spoke about problems in small and medium business in Georgia. He noted that August Russian-Georgian war in 208 was a big strike for Georgian economy. However, in case of designing correct strategy it is still possible to save the country’s economy. Kakha Kokhreidze declared that “Georgia has wonderful opportunity to become leading economy in a region” with the support of USA and European Union. However, unfortunately, there are such internal problems in the country that development of small business is placed under question. Held forum once again reminds Georgian government that country’s economic policy needs to be changed, while business support initiatives more frequency. Small business has huge potential in creating of new working places. Draft bill considers establishment of non-governmental independent public legal body that protects interests of small and medium sized enterprises.
Forum designed a declaration that was signed by every participant.
On the one hand, elaboration of draft bill on small business is very important, but on the other political will that raises small business in the range of first priority issues for the aim of improving economic environment in the country. We declare that we are ancient Europeans, but it is necessary to use rich past wisely. Otherwise, we resemble Ekvirine, character from a novel “Kamushadze’s hardship” of Georgian writer Davit Kldiashvili. The only thing we do is boasting about last year’s harvest.
Our foreign friends will not be surprised by the problems of Georgian economy, as together with other obstacles, SMEs in Georgia are not fulfilling the role of locomotive of the economy. There is no connection between large and small businesses in the country. There is no difference between small and large businesses in the tax code. It is a fact that main obstacles for the development of SMEs in Georgia are economic-organizational and institutional circumstances. Without corresponding political will this segment once again will be left without law and any talks and ratings about what a wonderful economy we have will be false, this will be just a cheating of ourselves and each other with beauty but bitterly.