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Criminals, Fools & Free-Market Moldova

Pay your taxes? Report your onions? Want to join the EU...?
I HAVE BEEN travelling around Europe following the Free Market Road Show since March, writes Nick Hubble of The Daily Reckoning Australia, spreading the gospel of smaller government, lower taxes, and greater personal liberty.
We finished with a bang. The last two stops on the Free Market Road Show saw what was left of the team travel to Tbilisi in Georgia and Chișinău in Moldova. We also had a rather distinguished guest join us.
Prince Michael von Liechtenstein spoke about the paradox of Georgia wanting to be more like the EU, while the EU seems to become more like Georgia and its failed socialism.
The driving reason for the EU was trade. Its driving force was the small Benelux countries. That effort was then hijacked by the German and French leaders Schroeder and Chirac, and turned into a political union. Now, nobody knows where the EU is headed. But the real world is giving it a beating, as von Liechtenstein laid out.
First came the financial and sovereign debt crisis. Then the Russian security crisis. And now the migration crisis. Underlying all this is a bizarre monetary policy. Von Liechtenstein took the audience through the last three in detail.
The EU has a "lack of common concept" when it comes to security. There isn't enough agreement from east to west, and so there is no single foreign policy for all foreign threats. When it comes to migration, Africa, not the Middle East, is the real threat. Europe can expect another two million African refugees now that the Middle East has served as an example. With Europe's labour laws, absorbing those migrants will be a nightmare. And the European Central Bank's destruction of savings and subsidising of debt will end in disaster, especially for the older generations.
Despite all this, von Liechtenstein argues we need the EU and its ideas. Somewhere under all the disastrous policy failures are the ideals of individualism and freedom. We just need to save those ideals and dig them back out. The pendulum can swing back again, just as it has swung to the left. Bringing back some semblance of national sovereignty is a start.
As for Georgia, von Liechtenstein said it must be wary of the EU. In many ways, Georgia is one of the freest countries in the world. The EU will try to reign this in.
Vakhtang Lejava, the chancellor of our host Free University of Georgia, explained that small government means small mistakes. Big government means big mistakes. And privatisation is like getting an egg out of an omelette. The opportunities for getting privatisation wrong are just inherent in the process. Instead, allow change to take place outside the government's control. In my mind, Uber and Airbnb are examples of this.
Paata Sheshelidze, a founder and the president of the university's economics school, kept his farewell speech short and punchy. The pro-EU movement in Georgia is really just anti-Russian. It is self-defence motivated, not pro EU. This leads to a coalition with "bad guys", the sorts who are nationalist not liberal. What the liberals need is a personality – a leader. The good news is, EU membership will take time, so the country can stay quite liberal and free from EU regulation for now.
As we left, the celebrations for Georgia's national day took hold. Miniature floating paper heart shaped hot air balloons floated past the window. Tanks lined the street as we walked home. And down below our restaurant we could see the ruins of the prison which once housed Joseph Stalin for bank robbery.
Last but not least, Moldova.
Moldova once marketed itself to tourists as "the cheapest country in Europe". Like everywhere else the Free Market Road Show has travelled, it claims to have wonderful wine. But when it comes to interesting oddities, it really does take the cake. And rather than getting a theoretical explanation, we asked someone who has to deal with those oddities directly to explain them. 
Localised American entrepreneur and president of the Foreign Small Enterprise Alliance, David Smith, stole the show with a boots on the ground reality check. (Smith was in the Peace Corps in Moldova, so the "boots on the ground" phrase doesn't sound as bad as it seems – even if he is American.)
Because Smith actually pays his taxes and complies with Moldovan regulations, he can say what he likes about the government and its systems. Unfortunately, it also makes him a fool; as they say: "If everyone pays their taxes and you don't, you're a criminal. If nobody pays their taxes and you do, you're a fool." But Smith wears his fool's hat proudly while setting up the Smokehouse Restaurant in Moldova. 
According to Smith, 80% of Moldova's tax revenue comes from customs tax. That's why iPhones are incredibly expensive here. It's also why there are so many Land Rovers at border towns. No electricity, no running water, but a heck of a lot of bribes and smuggling.
Not that Moldova doesn't have plenty of taxes which could be paid. Smith calculates that out of every euro in salary, 68 cents would go to the government – if anyone other than him actually paid the tax. The solution is to pay your staff mostly in envelope cash. Which works well, but creates some fascinating problems. The demand for cash is enormous. And if you're trying to operate legally, you're on the wrong end of the cash receiving stick. 
Thanks to an underdeveloped banking system, it's very hard to move money around the country to pay your suppliers. Then again, paying your suppliers above board has its own problems too. If Smith wants to buy an onion for his restaurant, he has to file a report and be able to account for the onion at any given time should he be raided by tax authorities.
In the midst of all this, it's simply too hard for businesses to play by the rules. You can't pay your staff legally, and they don't want to be either, because cash is so much more valuable to them too. 
All this puts the war on cash into perspective. As governments clamp down on economic activities through tax, regulation and restrictions, cash is the opt out option. It's the only thing that stops governments from actually implementing their crazy schemes in practice, because people can simply go underground. Without cash, you actually have to operate according to those crazy schemes. But that's damn near impossible given how restrictive things have become. 
Quite frankly, I am now very worried about the war on cash. Cash might be the only thing keeping economies like Moldova from dying under their government's weight. Greece would be toast without its underground economy – there's no way the country can live up to EU regulation in a competitive way.
In the end, tax policy is not about high or low, said Smith. It's about smart and dumb. In Moldova, taxes are blatantly designed in such a way that you simply don't pay them. Instead, they are a system of government control. If nobody is compliant, anyone can be cracked down on whenever the political establishment happens to decide they don't like a person. That's what the Free Market Road Show's Frederico Fernández explained in his speech about Argentina. It happened to some of his friends who wrote articles about the government. 
Smith added another dimension to this concept. The Moldovan tax authorities aren't on the hunt for unpaid taxes. They're looking for mistakes in paperwork. Because a simple error, such as leaving a box unticked on your onion buying form, can leave a tax inspector with life or death powers over your business. The result is more Land Rovers, paid for in cash. (Land Rovers are the vehicles of choice because, in the midst of all this bribing around, there's no money left for maintaining roads.)
Why is Moldova stuck on its road to development, Smith asked. Apathy is his answer. If he gave the same speech at a university in the US, there would be outrage. In Moldova, the universities are silent. If people want change, universities are an ideal place to start. 
Another odd feature of Moldova is the absence of numbers. When discussing business, politics or personal financial situations, people in Moldova don't speak about numbers. Sure, Smith is an American, but still, I think he had a point. It is culturally odd to consider finances as a numerical issue to Moldovans. With that sort of mindset, it's not mystifying they find life difficult.
After the event, things got even more interesting. We discovered, for example, that the local beer quality standards were written by the owner of the local Chișinău beer brand, thereby creating an impressive barrier to entry for any competitors. Foreign food is more expensive in "the cheapest country in Europe" than in Italy, thanks to the customs taxes. And shepherds in Romania and Moldova couldn't be controlled during communism because they were close to nomadic. So when communism ended, they became the business owning class – they were the only people communism left with any sort of capital stock, even if it was just sheep.
The co-founder of our hosting university dropped by for a visit too. She explained how Moldova's best and brightest go to Europe's universities and come back with precisely the socialist ideas that ruined Moldova. If only they remembered how life was under a communist regime, she lamented. Instead, academic Europe gives those ruinous ideas legitimacy. The race is on now. Will collectivist ideals ruin Europe before the Moldovans have to learn that lesson at home the hard way again?
David Smith is a brave man for hanging around to find out.
Nick Hubble, feature editor of The Daily Reckoning Australia, is also editor of The Money for Life Letter, helping Australian savers build their own personal retirement funds directly and simply. Currently working on a PhD in economics, he began his career in financial publishing in 2008 after completing an internship at Goldman Sachs.

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