The Georgian Age (Part one)

‘A week is a long time in politics’, observed Prime Minister Harold Wilson. Just ask the Georgians. Since its Rose Revolution in 2003, under the leadership of Mikheil Saakashvili, Georgia has been a model economic reformer. This has been built on the back of increased freedoms and improving competitiveness: wholesale privatisation of 13,000 companies; reform of the tax code including a reduction in corporate tax from 47 percent to 15 percent, the abolition of capital gains, interest rate and dividend taxes, and lowered personal tax at a flat rate of 25 percent (scheduled to reduce to 15 percent within five years); opening markets to the point that Georgia is among the four countries with the least import tax (the others being Singapore, Hong Kong and Macau); easing regulations; improving tax collection (up fivefold in revenue in five years); and putting an end to widespread corruption. In simple terms, Georgia is a country-wide economic libertarian project, and the results have been spectacular. Georgia was the top reformer worldwide in 2007 in terms of the ease of doing business, as measured by the World Bank, climbing from 112th to 37th place in one year, the biggest progress ever made, and moving up to 15th (out of 178 countries) by 2008. The number of licences required to do business has decreased nearly tenfold. Between 2002-05, according to the Bank it made the largest reduction in corruption among all transition countries. Georgia leads the world today in labour market freedoms. Filling his country with young, Western-educated staffers, Saakashvili fired 80,000 state employees soon after taking office, including 60,000 security force members notably from the notoriously corrupt traffic police. The Ministry of Agriculture, which once had 6,000 employees, today has just 300, its building in the process of being converted into a luxury hotel. The results? Economic growth rates around ten percent annually, large inflows of foreign investment ($2 billion in 2007), and increased government spending especially in infrastructure. Tourism is an increasingly significant part of the Georgian economy. Real estate development and tourism has boomed, with a million tourists visiting Georgia with its ‘ski and sea’ offerings in 2006, bringing in more than $300 million. Poverty among the country’s 4.5 million citizens has fallen dramatically from 54 percent in 2001 to 24 percent today. As Michael Davey, regional head of the European Bank for Reconstruction and Development (EBRD) has commented, because of these reforms Georgia has ‘being doing amazingly, exceptionally well.’ Economic reform is of course fundamentally a political business. Businessman-turned-politician Kakha Bendukidze, a great Buddha of a man, is regarded as the architect of the reforms, though he pooh-poohs any suggestion that any single person has been key. ‘The Rose Revolution was based on leftish rhetoric,’ he notes, ‘but it was important to turn it from such rhetoric to rightish actions.’ For managing the politics of economic reform, as in other countries, is said to be like a violin: you pick it up with the left hand, but play it with the right. ‘When asked by MPs how long it would take to turn Georgia around, I said that at three percent growth it would take 70 years when they said it should take maybe three,’ Bendukidze says. ‘High growth is thus important, but we needed to find a way to not only have growth but job creation given the job destruction inherent in this process. We needed not just to solve economic, but political and developmental issues.’ The government’s aim was to provide the environment in which business could thrive, rather than promoting specific sectors – ‘picking winners’ in developmental parlance. This is why the government has avoided using sectoral incentives given the fast-changing nature of markets. Thus growth has not only come from services such as tourism, but unexpected areas such as hair transplants for a largely South Korean market. ‘Progress is about personal freedoms and taking opportunities,’ says Bendukidze who holds a Russian PhD in biology. ‘In the Soviet Union it was very easy to have five year plans as one could be imprisoned for deviating. But fundamentally, governments destroy value and we cannot organise progress. We don’t need a sector strategy, rather we need the market to work properly.’ Or as Prime Minister Lado Gurgendize notes, ‘We don’t do subsidies, incentives, exceptions or industrial strategies of any kind.’ One reason for the reform approach taken has been the awareness that Georgia needs to stand out from others. As Gia Jandieri of the New Economic School think-tank argues, ‘Radical reforms were needed to make us attractive in a highly competitive global environment. We are competing against China and others, not just our neighbours.’ Tbilisi also realized that no-one owed them a living. Bendukidze: ‘Why should Switzerland open its borders to our citizens. We have to care about our own country.’ Georgia has unilaterally opened its border to developed countries, removing visa restrictions on 50 developed countries with more to follow. Foreigners do not require a work permit. It has adopted the technical regulations of ‘respected’ countries, meaning that their goods and practices do not require regulatory certification by Georgia. It is now employing the same profiling procedures on financial regulations. The lessons for others, the erudite Gurgendize, who was recruited from the international banking sector, says in summary is: ‘Have flat taxes, no currency or capital controls, full flexibility of labour markets, eliminate red tape, show zero tolerance for corruption, and ensure protection for investors.’ But as Bendukidze, now heading the Chancellery, notes, ‘nothing is forever – there are retreats and defeats’. This August it all went pear-shaped when conflict between Russia and Georgia broke out over the disputed regions, inside Georgian borders, of Abkhazia and South Ossetia. (Continues tomorrow) Dr Mills heads the Johannesburg-based Brenthurst Foundation; Nielsen is with Bankinvest in Denmark and is an Associate of the Foundation.