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 a 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 against the siege of 23 Arab countries? Guess what? Its 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 for 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 which 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 economic mainstream, which is still caught in model worlds where everything is determined by material incentives.
Comments
Is this -- In Georgia ... economic entities are competing to win popular favor by paying money to the state -- really true and is this attitude indeed predominant in Georgia? I would love to think so, but do have doubts...
It wouldn't make sense to advertise something which is totally expected by everybody. For example, even in a corrupt country a company would not advertise that they did not bribe, because even there it is normatively expected that one does not bribe. So the advertisement shows that the Georgians are not yet at that point where paying taxes is a fully established norm. This may be a good thing, in fact, as one should keep in mind that paying taxes IS an important contribution of an individual or a company to the society, and it is something which neither politicians nor fellow citizens should take as granted.
I believe this has to do with the low levels of corruption in the country. The individuals and businesses would take pride in contributing to the society that provides them with the means of operating on civilized terms.
For example in the US people complain about taxes a lot. But an average American takes pride in being a "taxpayer". Paying taxes gives the citizens a sense of power, and the sense of an earned right to hold their politicians accountable.
I definitely agree with that comment. The less (felt) corruption there is in a country, particularly in the public sector, the more tax paying is considered to be a good thing.
My first thought was, there my cell phone charges go. Taken away from me, and given to the governmnent.
I have to say I am somewhat sceptical of whether the Georgian society is really characterized by an abundance of social capital. See for example this study by the CRRC, http://crrccenters.org/store/files/Projects/CRRC_Social_Capital_Briefing_Paper.pdf, which suggests that. Less scientific but far more entertaining, one can just look at the recent soap opera surrounding Maestro TV, or the incident at Munich airport, with opposition politicians having an impromptu fist fight. If the opposition is more preoccupied with fighting among themselves than with winning elections, then this suggests to me that there is a lack and not an abundance of social cohesion in Georgia.
You linked to a very interesting study which indeed I will read. Afterwards, I will write again about this issue. Of course, just one single observation does not allow for claiming that in Georgia there is an abundance of social capital. In this respect, my blog article was too general, exaggerated, and unscientific. However, let us see what this study of the CRRC claims in detail. Perhaps I can pick some fleas in their trousers... ;-)
I would say:
1. If one looks at the Georgian history since 1990-s, there are rather signs of lack of social capital and not vice versa.
2. Perhaps it could be true that the "new" framework after the Rose Revolution supports the creation of social capital.
Well, I do not know the Georgian people well enough to verify or falsify your first statement. My first impression is that the Georgians are quite a decent people. I will write about certain experiences which support this view in a future blog entry.
I agree with RT and others that the pride of paying taxes is far from predominant norm in Georgia. Magticom is not just a random company - it is indeed the biggest taxpayer in Georgia and they have used this for marketing already before. If you are a market leader in something, you should take advantage of it! And Magticom is not doing it to "keep politicians accountable" but rather to keep politicians away. Gia Jokhta-Beridze has had tense relations with the incumbent government. That extra line "in the form of tax payments only" is quite loaded, don't you think? But I hope the values regarding tax paying are really changing.
Dace, that's a neat observation! - something to study in the field sociolinguistics and text interpretation. From what I understand, depending on the intended audience, the ad can be read either as a demonstration of power - a warning to politicians, or as a display of goodwill capital by a socially responsible company... like a wolf that is trying to smile :-)
Very nice, Dace .... there are just few instances where language and economics are related. Are there secret messages in the ad? Is it a warning to politicians not to interfere with Magticom? This ad might be much deeper than I thought.
If you are interested in a mathematical analysis of the relation between economics and language, you should have a look at this book (can be downloaded for free): http://arielrubinstein.tau.ac.il/el.html
Very interesting article indeed, however I would be careful in suggesting that Georgia's culture (or any country's) is the source of its economic fortunes and misfortunes. Perhaps it would be more appropriate to think of this relationship on the opposite way as well, i.e. Economic Conditions defining cultural behaviour. In this sense, maybe the fact that Magticom advertises its fiscal responsibility was caused by the fact that fiscal irresponsibility is on the headlines almost every day. Thus a profile of a company that "helps" their country by paying taxes at a time when other economies suffer greatly from tax evasion is something that "sells".
Nikos, I hope for Greece that people are "advertising" their success in tax evasion in order to differentiate themselves from a great mass of obedient tax-payers (it may help project an image of an innovative, creative and dynamic business).
More seriously, cultures are shaping behavior and are shaped by circumstances. Everything within a system is interconnected. Isolating one factor as THE cause would typically lead to wrong conclusions.
A philosophy professor I was fortunate to study with many years ago would give the example of the Japanese and Jewish people (incidentally, Florian chose exactly the same people) who, at least in his view, went through a dramatic cultural change in the 20th century.
He would ask in a class situation: imagine the traditional Japanese society with its military ("samurai") traditions. Would anyone believe that in a matter of half a century the samurai nation became a nation of traders? Think of the traditional Jewish way of life: prayer, small trade, money lending. Would anyone believe that in a matter of one or two generation this would be a nation of fighters, willing and able to protect a newly acquired ancestral land against the assault of 20+ Arab nations?
exactly my point!
Well lets hope Greeks force philosophy professors to use them in order to ask whether anyone could believe they would be teaching Germans fiscal discipline in a couple of decades and lets hope these same philosophers wont use Georgia as the example in a -who could believe a country with so much potential gone bursting bubble way- scenario.
Inshallah!!!
The Chinese may be an even more striking example for the importance of values. I will explain that in my next blog entry...
Well, in social sciences of course everything is related with everything. So for sure, the economic situations has repercussions on the values. Nevertheless, I think that the main direction of causality leads from the values to economic success. I have some more to say about this issue, and I think I can come up with very strong empirical evidence (case studies), but I want to save it for my next blog entry.