ISET Economist Blog

O Thou happy Georgia!
Friday, 02 December, 2011

Recently, I attended a show by the famous Erisioni dancing group, which was performing in Georgia for the first time after two years of constant traveling abroad. The Georgian dancers in traditional costumes were sensational, but as an economist, a minor incident caught my attention nearly as much as the Erisioni ensemble. At the entrance, I was given a pamphlet which featured, on the back page, one of the most remarkable advertisements I had ever seen. A company called Magticom announced to be the first Georgian firm to have paid taxes to the government which amounted to one billion Laris. While watching the dancers, I reflected on the amazing characteristics of this small country…

First of all, let me say that a company which is proud of having paid a lot of taxes is simply astonishing! In all other countries of the world, people are proud to have avoided taxes. In the worst cases, like Greece, this goes so far that someone who pays taxes is considered to be at least indolent, if not even outrightly brainless. Greece, a failed society, shows where the competition to avoid taxes finally leads. In Georgia, the competition goes the other way: economic entities are competing to win popular favor by paying money to the state.

Does this difference between the “Georgian attitude” – predominant in Georgia – and the “Greek attitude” – predominant everywhere else – play an important role when thinking about the economic prospects of Georgia? Well, if one’s thinking is rooted in the Anglo-Saxon, neoclassical economic paradigms, the attitudes of people should be irrelevant. According to this school of thought, every economic aspect boils down to a matter of incentives. These incentives are usually thought to be of material nature: people will pay taxes if it pays off to pay taxes, i.e. if the probability of getting prosecuted for tax fraud times the expected fine is higher than the profit which can be made by tax evasion (with some mental discounting made from the latter due to risk aversion). However, the world abounds with instances of economic development driven by values and cultural particularities rather than material incentives. Look at the Far East: until some years ago, it was common practice in Japan not to lock one’s house doors. Burglary was an almost unknown phenomenon – it conflicted with the traditional Japanese understanding of honor and respect for other people’s private sphere. Likewise, one did not lock bicycles and cars in Japan. Imagine the economic surplus which was generated through these values! Guards did not have to be employed, alarm systems were obsolete, police services could be provided on a minimal level. These Japanese values comprised a substantial economic advantage of Japan over its competitors, explaining parts of the tremendous economic success of that country after the Second World War.

Another example is Israel. How is it that this small country with just 5 million Jewish inhabitants can resist the siege of 23 Arab countries? Guess what? It's their culture and attitude! Israelis do evade taxes (and I experienced that myself in the last five years in which I was living in Jerusalem). However, when it comes to existential threats, the Jewish Israelis stand with their country. Each Israeli male has to do army service for 3 years (women for 2 years), and until the age of 40, most Israelis are regularly subject to the so-called “Meluim” (drafts of reserve forces which last between a few days and a couple of weeks). And there is no doubt that the income differential between Israel and its neighbors is also driven by different cultural fundamentals.

What can we learn from these observations? Firstly, I am not afraid of a country whose companies advertise the height of their tax payments. Georgia has a bright economic future, as its citizens have the right mindset. Secondly, it’s the values that count. Anglo-Saxon neoclassical economics is poor and blind. This is not my invention but was stated by a lot of people before me, for example by the prophetic Samuel Huntington. Yet it hasn’t affected the economic mainstream, which is still caught in model worlds where everything is determined by material incentives.

The views and analysis in this article belong solely to the author(s) and do not necessarily reflect the views of the international School of Economics at TSU (ISET) or ISET Policty Institute.