AS SHADE ECONOMY WAS ORDERED TO COME OUT OF THE SHADE, IT IS OBSTINATE (ABSTRACT)

EKA LOMIDZE

The Georgian president first signed the Shade Economy Reduction programme in 1998. Then in 2000 he approved it again though this programme could not be realised.

In 2003 the programme of Industry and Trade Ministry was submitted again; it was signed by the President. Despite this, the data of Statistics Department indicate at the growing rate of shade economy.
Ministry of Industry and Trade hopes that after co-ordinated work, priorities and measures identified in the Shade Economy Reduction Programme will bring significant results leading to the decrease of shade economy, increase of mobilised tax shares and development of legal economy.
Lado Papava
– Shade economy is one of the problematic issues of Georgian economy. When we speak on shade economy, we mix hidden economy and untaxed economy. The both are shade economy, but there is difference between them: an entrepreneur might pay some taxes and make statistic information, i.e. statistically he gets into legal economy, notshade one, but the same entrepreneur might reduce sums paid to the budget by means of financial machinations. Thus, this is already untaxed economy from the viewpoint of taxes. There can be another case: an entrepreneur pays taxes, but he does not provide correct statistic information. Therefore, if we want to study this problem well, we should differentiate these two notions from each other – shade economy from the viewpoint of taxes and hidden economy. The dispute is often unqualified because the above-mentioned fact is usually not taken into consideration. Approximately 35% of hidden economy is shown in statistics whereas according to experts’ estimation, shade economy totals 60-65%. Do we really have such bad statistics and so bad experts? No, they simply study different things. Experts estimate what might have been levied in the form of economic taxes, then they compare the levied part with GDP and receive shade economy scales. As for statistics, it uses information of internal economy – consumption rate of population, official production, import and export, afterwards it determines the ratio of shade economy, i.e. both figures should be correct. Unfortunately, discourse on shade economy is often unqualified. There is objectless criticism of both statistics and government. Can statistic shade economy be overcome? Certainly, it can not as there will always be a certain segment whose statistic will never be registered. At the same time, from the fiscal point of view it is impossible to overcome shade economy, as there will always be a certain firm or a certain person that will conceal profits. It is a common problem for the whole world, only scales are comparatively less in other countries.
– We need to bring most part of shade economy out into sunlight, i.e. its legalisation is necessary. From this point of view, measures taken by the government are of great importance. In 1998 such task was set forth by the Georgian President and the shade economy legalisation programme was developed where many correct and important tasks were considered. The programme was coordinated by the Ministry of Economy. Unfortunately, the programme was not realised as many departments opposed legalisation of shade economy. Already in 2000 Ministry of Economy, Trade and Industry has once again persuaded the president to approve the Programme of Shade Economy Reduction that in reality repeated the previous programme or, to put it in a different way, there were the same tasks. Nor was this programme realised due to the same reasons. In reality, the new minister persuaded the president to sign the same programme and thus, we received twice-repeated Shade Economy Reduction Programme. This, so to say, has come into fashion. All new ministers in the so-called Ministry of Economy work on one and the same programme. I say the so-called on purpose as now we have Ministry of Economy, Industry and Trade instead of Ministry of Economy. All ministers wrote three programmes and neither of them were realised. We now come to it that the programme is deeper that approval of any programme by the President. Moreover, there are many programmes in the country and orders that are not fulfilled. The most important law – national budget law – is not implemented, either. If the law is not realised and if no one is answerable for it, never mind if the order is not fulfilled – no one is responsible for it. Yet, the scheme attached in the programme developed by us mentioned the duties and terms of ministries or departments as well as responsible persons. It is simple to punish the executive who does not fulfil his task, but if budget is not implemented, and if there are unforeseen expenses and no responsible persons, why should an executive be punished for the non-realisation of this or that task provided for by the Shade Economy Reduction Programme. We came to one very important issue that might significantly change the economic development – it is Economic Development and Poverty Reduction Programme. A reader might ask a simple question now – if these programmes are not realised, why should other programmes be implemented? The matter is not only the President, but also donor-states and organisations that stand behind the Poverty reduction Programme. Thus, in the nearest 12 years, Georgia will receive aid from the IMF and World Bank within the frames of the programme – 466 million dollars before 2005. It is a significant aid. Therefore, here we have the mechanism of “financial whip”: if the government does not do this, it will not receive aid. Therefore, the Poverty Reduction Programme has more chances to be realised than any other programmes that are only confined to the signature of the President. As certain elements of shade economy reduction have already found reflection in the Poverty Reduction Programme, “financial pliers” mechanism already started to work here. Elements of shade economy are represented quite distinctly in the Poverty Reduction programme. Let us begin from it that the first task of reducing poverty in the country consists in the improvement of administration. We mean macroeconomic stability, perfection of tax system, establishment of order in problematic regions, regulation of the existing situation. This document is more large-scale and as there are 466 million dollars behind it, it has more chances to be realised in the country.
It can also happen that Poverty Reduction Programme could stay on paper. Then the country will not receive financial aid and poverty will increase. Parliament and Presidential elections are nearing. Any opposition would use this fact during the pre-election campaign. Besides, it is financial mechanism that is provided for in the budget. The government will have no other way out and it will do its best to implement the Poverty Reduction Programme.
Revaz Tsakadze – head of the department of state statistic, national accounts and macroeconomic analysis.
– “During the development of the programme, we expressed the opinion that the Tax Department should enter the available quarterly and annual data in database that would be sent to us. This will make it possible for us to study scales of uncontrollable economy not in accordance with statistic data, but rather in accordance with the data declared in fiscal data agencies. Then, it will be possible to speak about parallel economy, but not about hidden one. If it happens so, the mentioned system will be organised in the future provided the Department of Statistics has this additional function. This will be useful for everybody as analysis will become better. Georgia is a country of transition economy with the on-going development process of legislature, industrial environment and scientific sector. We can speak only about trends during these processes. In economy itself parallel economy is one of the issues that is characteristic of many sectors ? its share ranges from 45%-47%, i.e. of 100% declaration is made by 45-47%, the rest is in shade. These data are much disputed in state control agencies. They conclude that scales of shade economy are greater. Statistic Departments have many arguments to assert that these data are neither more or less ? there is the downward trend. It is noteworthy that construction of Bako-Jeikhan pipeline has served to decrease the rate of hidden economy down from 55% and 57% to the present 53,8% with there being 33% in the whole economy. Compared with GDP, collection of taxes is Georgia equals 14%. When high-rank officials say that the percentage of hidden economy is comparatively higher, it turns out to be that we deal with unprecedented case in the world. From this point of view, there is 8-9% level in Georgia. Unfortunately, the people in state control system can not claim to have strong economic knowledge. They can not see that the greater is the scale of shade economy, the worse it is for the country.
Hidden economy is represented percentagewise in accordance with kinds of activities and branches. The trade sphere is 69-70%, communications is 10-7%. This comes to the modern communications technology that we yet do not manage to register. There are poor data in agriculture, too: there is mainly production of families and the mentioned low rate, mainly, falls at wood-processing industry. One third of hidden economy is legal while the rest is illegal. We have the highest percent in the whole post-Soviet area.
Hidden economy is not what we can see on the surface. We should also examine the bottom in order to see thousands of “tricks” and methods of hiding taxes. It is a partially system problem. On the other hand, there is the disposition of people and corruption level and thirdly, there is the formed state mechanism. Regulation of these processes is very important. In this stage we can assert that we have the most transparent and available statistic data compared with neighbouring countries. For instance, it is impossible to do this in Central Asia due to its authoritarian regime while in Georgia all data are transparent and available representing the main source of information for both the president and other members of the government. As for the growth trend of shade economy, it is logical in our conditions. When an enterprise starts functioning and tries to make legal business, it is sure to encounter such conditions that will “impede” its work and finally move it to the “shade”. I do not see a way of decreasing illegal economy in such situation. An entrepreneur needs a protector in order to work legally, which of itself is already a corruption element. From the interviews with entrepreneurs we know that most of them think that the so-called “roof” is important for business. We speak about large enterprises, but not about small ones. Though there is the opinion that it is easier to make legal business. If collection of taxes reaches 3%, the scales of shade economy will decrease, which will have an effect on population, too. This can be achieved though it is not easy to do so.
As far as we can see, Shade Economy Reduction Programme faces great difficulties that turn its realisation into a long perspective. In this stage the only way out is realisation of Poverty Reduction programme that gives much priority to the reduction of shade economy scales.