Before Mikheil Saakashvili was swept to power in 2004 by angry crowds, Georgia’s economy and public institutions were a byword for post-Soviet corruption and stagnation. Saakashvili did not seem to have intended to embark on a radical economic reform program before taking office. There was little sign that he would govern on economic policy as anything other than a conventional European social democrat. Reforms would be partial, gradual, and cautious.
Instead, in his first years in office, his government implemented a reform agenda more rapid and thorough than any ever in a transition economy. The police were corrupt, so they were dismissed. For several months there were none on the streets. Crime fell. No one could explain the work of the Ministry of Agriculture, so most staff were dismissed and the building sold. Countless useless regulations and permits that constricted economic life were eliminated, and bureaucratic discretion was substantially reduced. Taxes were slashed, both in number and rate. Corruption fell dramatically.
Then, as if in a fairy tale written by Milton Friedman, foreign investment and economic growth exploded, while state revenues more than doubled. Georgia now ranks 15th on the World Bank’s annual Doing Business survey of the world’s most commerce-friendly regulatory environments, ahead of almost all European Union countries, and up more than 100 places since 2004. Even though (or perhaps partially because) Georgia offers no government deposit insurance, no Georgian banks collapsed during the financial crisis.
Lado Gurgendize, a career investment banker, was a key leader of the reform team, along with Kakha Bendukidze, Vakhtang Lejava, and many others. After returning from London to lead the Bank of Georgia, the country’s largest private bank, he was named Prime Minister in November 2007, after the government’s international reputation had been severely dented by the closing of a private television station owned by a government opponent. During his tenure, Georgia’s economic and administrative reforms were consolidated and deepened in the face of increased domestic political tension and the devastating war with Russia in August 2008. He left office in November 2008 after securing a multi-billion dollar donor support package for Georgia.
In a detailed AEI Development Policy Outlook released this month, Lado chronicles Georgia’s reforms and explains how they happened and why they worked. He argues that key reforms must be simultaneous and complete, not gradual and partial. And he explains why developing countries that use the economic downturn to pursue a similar liberalization agenda will come out better off than those that choose to recenter economic life on the state.
The successes did not bring an end to Georgia’s political instability. Though Saakashvili defiantly weathered the Russian invasion, his leadership is increasingly called into question at home. Many foreign elites have been persuaded by Russia’s account that it was provoked by Georgia into launching the armored assault. Former political allies, such as Irakli Alasania, the former ambassador to the United Nations and chairman of the exiled government of Abkhazia, and Nino Burjanadze, former speaker of parliament and twice acting president, went into opposition in late 2008. They and other opposition leaders have led (and sometimes restrained) noisy protests over the past few months demanding Saakashvili’s immediate resignation. He refuses, as seems appropriate given his decisive victory in a well-regarded poll barely eighteen months ago. But as more members of the core reform team leave center stage, and pressures to buy political support through expansions in social expenditure increase, the future of Georgia’s historic economic reforms is uncertain.
I think that the reforms have been so consequential that any future Georgian government will find it difficult to fully undo them. There will not be a return to the status quo ante. But there was still a lot of reforming to do, and the pace of change could easily slow, with Georgia being overtaken by more competitive reformers. Given the negative perceptions that Georgia must offset to attract investment, it can’t afford to fall behind.
Meanwhile, as Lado notes, other transition economies in Europe, Africa, Asia, and Latin America should take heart from Georgia’s economic and public policy successes. Foreign experts don’t always have the best advice, and they never care more about your country than you do. By pursuing the right policies, even if it seems “crazy” to outsiders, poor countries can take more control of their future.