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An impoverished neighbourhood near Kipshidze Street, Tbilisi. Photo: flickr/Henning(i)

Mikheil Saakashvili had risen to power on the promise to fight corruption, not on a free-market platform. In fact, in 2002 EurasiaNet described Saakashvili as having a "centre-left, pro-government ideology."[244] In 2003, Saakashvili's National Movement Party had opposed the privatisation of strategic companies, including the Ferro Alloy Plant in Zestaponi, the port in Poti and electricity distribution companies.[245] Observers have noted that, in 2004, Saakashvili's primary focus was to consolidate power and root out corruption, while delegating economic matters "first to Prime Minister Zhvania and subsequently to State Minister Bendukidze."[246]  His inspiration, as he repeatedly told Western journalists, was heroic state-builders in the mold of Mustafa Kemal Ataturk. Kakha Bendukidze told ESI that in his view the Rose Revolution government initially had a "leftist" agenda.[247]  All this was soon to change, however.

In summer 2004, shortly before leaving Moscow to take up his post as Georgia's new Minister of Economy, Kakha Bendukidze gave another long interview to the Russian paper Vedemosti.  He explained that he did not possess a "detailed knowledge" of the Georgian economy. He also noted that this was unnecessary: "The knowledge of fundamental principles easily compensates for not knowing some specifics."[248] Since the prescriptions for good economic policies were universal, there was no need for special expertise to turn around the Georgian economy. All that was required was courage, conviction, revolutionary enthusiasm and a team of highly motivated associates working together in different parts of the Georgian government.

Kakha Bendukidze's ability to provide a vision of economic development dovetailed perfectly with Saakashvili's anti-corruption and state-building agenda, placing him at the centre of power from the moment of his arrival in Georgia. His first argument was non-controversial: Georgia's economic situation was disastrous and recent trends deeply worrying. As he kept repeating, unlike Russia Georgia was not "a rich country that had its own source of revenues which allows it not to think about tomorrow."[249] Georgians had "nothing to lose."[250] From this, it followed that Georgia was ripe for economic radicalism:

"If Georgia implements a standard medium-liberal policy, as happened in the Czech Republic, Hungary and partly in Russia, it will grow at 4 percent annually, maybe even faster in the beginning due to the effect of hidden capacity. However, this means that the existing gap between Hungary and Georgia will remain forever."[251]

The country was too poor to resort to anything but radical liberalisation. And by embracing radical reforms, Georgia could do more than merely copy the experience of others: it could strike out and break new ground. This was also the expectation of many of Bendukidze's admirers in Russia upon hearing of his appointment in Tbilisi. As Vitaliy Tretyakov wrote in June 2004 under the title "Bendukidze's Mission" (Rossiiskaya Gazeta), Bendukidze's new position in Georgia offered the chance for a historic experiment:

 "we all will shortly witness a highly interesting social experiment. The first goal is to prove the possibility of building an absolutely liberal economy in a given country in the post-Soviet space. The second goal is to prove the effectiveness of economic liberalism in transforming one of the poorest (despite its mountains, sea and fruits) countries of the Commonwealth of Independent States (CIS) into a prosperous one. And, in addition, to demonstrate the capacity of liberalism for building a new economy and maybe a new modern industry virtually from scratch."[252]

Soon Bendukidze would articulate his ambition to create a "Hong Kong on the Black Sea." This involved first and foremost a new understanding of the role of government. For Georgia to grow faster than former communist countries in Central Europe, it had to go further than they did in reducing the role and regulatory powers of the state. At a June 2004 press conference in Moscow, Bendukidze was unequivocal:

"Any economic policy should have maximum deregulation of the economy as its priority. In Georgia, this should take the form of ultra-liberalism, since if Georgia wants to build a normal country, its economy has to grow at very high rates."[253]

In this view, a liberal economic policy brought growth, and an ultraliberal policy brought high growth. The main responsibility of the state was to get out of the way of business:

"To catch up with someone, you have to do something better. Only business can do something better. Only business can create the material basis for existence. In order for business in Georgia to work more effectively than in Hungary, it has to be freed from its entanglements. And I think this is exactly the recipe for a poor country. There is simply no other recipe for a poor country."[254]

This view – its radicalism, sense of historic mission and can-do optimism – was bound to appeal to a Rose Revolutionary government in search of an economic strategy. To catch up, said Bendukidze, Georgia had to grow at double-digit rates.[255] In 2003, he pointed out, Russian President Vladimir Putin promised to double Russia's GDP within ten years. Georgia should be even more ambitious. Citing such historical precedents as Taiwan and Japan, Bendukidze argued that Georgia should try to "triple [its] GDP within 10 years."[256] Ultra-liberal reforms, he later pledged, would help the economy grow at 12 percent annually by 2007.[257]

Bendukidze's libertarianism also helped to justify some policy decisions already taken. In his speeches he would often cite the disbanding of the Georgian traffic police in 2004 to illustrate the central tenets of his reform philosophy.

"We had a road police which was doing nothing apart from taking bribes. So one day all these policemen were fired. For three weeks there were no policemen in Georgia. People asked 'ah what will happen?' Well nothing happens because it is a dysfunctional institution. If I switch off the light in the room with no light, nothing will happen. There was no light before and no light after."[258]

Abolishing the traffic police had been an emblematic and popular part of an anti-corruption campaign in summer 2004. For Bendukidze, however, it was also a model development strategy since growth was a function of scrapping ineffective public institutions. There were many such institutions in Georgia: ministries, agencies, inspectorates. "If you have institutions which do not work, why keep them?" Bendukidze told ESI. "My personal opinion is that most of these institutions are not needed as they do not create any public good."[259]

In a country where the state was corrupt and unable to perform most of its functions, where citizens had to pay out of their own pockets for supposed public services like health care, disbanding state institutions was easier than reforming them. Abolishing public institutions not only saved money and reduced corruption; it was also a driver of development. With this in mind Bendukidze, began to assemble a team of people to implement his vision. People such as Vakhtang Lezhava, who in August 2004 became Deputy Minister of Economic Development[260]; or Tamar Kovziridze, another deputy of his. [261]  Bendukidze was also on the lookout for young people who shared his vision and were not "tainted" by the communist mentality.[262] Some associates he found among the young members of the New Economic School of Georgia (NESG), a non-profit libertarian organisation based in Tbilisi. The founders of NESG had been inspired by the libertarian Mises Institute in Alabama in 2001. For some years they translated and disseminated key libertarian texts. They also worked with like-minded libertarian think-tanks elsewhere, including the CATO Institute, the Heritage Foundation and the Atlas Foundation in the US.[263]  Nino Gorgadze, a project manager at the NESG, remembers:

"After Bendukidze came in to conduct the reforms, he asked Paata Sheshelidze, the founder of NESG, for good young people who can help him. We selected fifteen people from NESG, and after interviews eight started working with Bendukidze in 2004."[264]

They were all in their early twenties. Gorgadze herself was twenty when she started working with Bendukidze in October 2004. Soon she was formulating policy on the energy sector, licensing and permits, food safety, reform of regulatory institutions and anti-monopoly regulation.[265]  As she put it:

"Bendukidze insisted on working with young people. He believed that they are the only ones not tainted with a communist mentality. Only very few in our team were older than 30. Kakha also does not believe that people require a specific expertise to be able to do a certain job. He thought that if you talk to people for a few hours and explain things, and then you give them tasks to do, they have a free mind to decide how to do the tasks given. You either are creative or you are not."[266]

2004 saw the launch of an aggressive privatisation campaign. A new tax code was adopted, effective from 1 January 2005.[267]  It featured a 12 percent flat income tax rate (the lowest in Europe) and reduction in the number and rates of other taxes. In November 2004, Bendukidze presented a "concept economic strategy" whose central tenet was the importance of shrinking the role of the state. It was not made public but accepted by the prime minister. When, at the end of 2004, Bendukidze became minister of state in charge of coordinating reform, he embraced a new flagship project that came to represent this revolutionary approach: the drafting of a new law on licences and permits.

Licensing regulations had long beset Georgia due to their huge number, impracticality and the potential for corruption. Obtaining a construction permit for a warehouse in Georgia's capital required "18 different procedures, including 9 approvals of as many agencies."[268]  In 2004 "only 207 of the 484 ongoing construction projects in Tbilisi had permits."[269]  The transportation sector provided another example of a particularly arcane and burdensome licensing system.[270]  Every small business was familiar with the experience of health and food safety inspectors preying on them to extort money. Every car owner was aware of the utter uselessness of certifications of cars. 

The goal of Bendukidze's licence reform was revolutionary: to cut the number of licences and permits to the absolute minimum and dramatically simplify licensing procedures. The actual reform process only took three months. Lili Begiashvili, then Bendukidze's deputy, described it as follows:

"When we started the reform in February 2005 we brought representatives of all Ministries to the table. We created an intergovernmental commission to work on the issue… We sat down together and went through all the permits and licences that were issued by the various state agencies and we gave them the timeframe to figure out what licenses they should abolish, what will happen if they abolish them and to provide us with arguments for those they wanted to keep. Everyone at the higher lever was involved. Can you imagine, we went through all the licenses one by one!"[271]

The reform team met with each line ministry, asked questions if certain licences were useful and listened to counterarguments to keep them. It studied the experience of other countries, from Sweden to New Zealand. The new law introduced new principles designed to simplify procedures, such as "silence is consent": "if a license/permit is not issued within the timeframe set by the law, the license/permit shall be deemed granted."[272]  The law set a 30-day limit for issuing licenses and a 20-day limit for issuing permits. It also listed all the licensing requirements. It was a revolutionary reform by any standard: only 10 out of 30 OECD countries had then even done a full count of their existing licenses and permits.[273] The Netherlands had listed over 1,100 various types of licenses in 2005. After a reform, their number was reduced by 22 percent.[274]  In Georgia the number of activities requiring a business license fell from 909 to 159[275] and then further to 137.[276] No other OECD reformer had ever abolished as many licences: an 85 percent reduction. The licence reform was signed into law in June 2005.[277]

Hand in hand with these reforms came government restructuring and streamlining of institutions. As Lili Begiashvili, who served as Bendukidze's deputy minister for reform coordination, told ESI,

"The license reform went in line with structural reform. The idea behind these reforms was to give commercial and service functions to the private sector and thus remove them from the state. That is why people were dismissed from their jobs at the state agencies. Some agencies we just had to close as the state had no business in offering those commercial services. There are different figures about how many people were dismissed I read somewhere that after these reforms that the number of people working at the state agencies was decreased from 120,000 to 50,000, but I am not sure. I can say for sure that in the Ministry of Agriculture worked 3,424 people and only 600 remained."[278]

Of 90 licences and permits issued by the Ministry of Agriculture only 9 remained. Only two licences remained in place concerning food production (concerning baby food production and packaging). Although a modern food safety law (based on advisors funded by USAID and the European Commission) was passed in summer 2005, it did not enter into force. An EU-funded report proposed to introduce at least two new licences: for companies which "produce, pack, store products of animal origin for human consumption for exports" and for companies "producing high risk production for the domestic market" (animal feeds, nuts, low acid canned foods). Neither was done. A new Food Safety Agency was set up in 2005 but then, after one year, most of the newly hired inspectors were fired again. At the end of 2006 the total number of food inspectors in the country was 19. They did not have the authority to actually investigate producers. They had no budget for serious controls. There was no effort to train inspectors. Nor were any efforts made to check on the quality of food imports.  De facto, Georgia became the only place in Europe without any food safety system at all. All of this was a matter of pride for Bendukidze, as he proudly told the Financial Times that it was the job of the market to regulate food producers.

In the summer of 2004, the government also began firing public servants. For legal reasons, abolishing entire agencies and ministries proved to be an even easier way to accomplish large-scale dismissals. The number of ministries was reduced.  According to the consolidated government budget documents, the number of civil servants declined from 102,593 in 2004 to 74,790 in 2005. Some dismissals did not take place in accordance with the relevant laws:

"Unfortunately, there were a lot of irregularities and bad practice in firing public servants. There were some cases when civil servants were forced to sign resignation letters. It happened right after the Rose Revolution. I have to say that I asked all my employees not to sign such letters." [279]

Bendukidze also pushed for Georgia's economy to open up completely to the outside world - to abolish visas, reduce trade restrictions and make it as easy as possible for foreign investors to operate in Georgia. Georgia unilaterally abolished visa requirements for citizens of many high- and middle-income countries, which former Prime Minister Gurgenidze defined as having a nominal GDP per capita exceeding US$10,000.[280] The government cut import duties down to three basic rates of zero, five and 12 per cent – the second lowest worldwide, according to the Georgian Ministry of Foreign Affairs – as compared to the sixteen different tariff rates, ranging up to 30 percent, that had previously been in force.[281] All quotas on imports and exports were removed.[282]  As Bendukidze proudly stated, Georgia's customs regime was one of the most liberal anywhere, on a par with Singapore, Hong Kong, and Macau.[283]

Privatization.ge, a website launched by the Georgian government to list state assets for sale
Privatization.ge, a website launched by the Georgian government to list state assets for sale

Georgia had had a privatisation policy since the 1990s. It was, according to Bendukidze, a sham. "What happened in Georgia [before the Rose Revolution] is not called privatisation," Bendukidze said in 2004. "It is called giving away the assets to the good boys."[284] As far as he was concerned, "genuine privatisation" was something altogether different.

"The sale for money, as much money as possible, without any agreements on the transfer of management rights, without any conditional ownership, without any kind of 10-year lease agreements – these are all tricks of the devil and we must get rid of them."[285]

Many Georgian politicians were skeptical about selling strategic enterprises and anxious about the influx of Russian capital.[286] Bendukidze did not share their concern. He summed up his approach to privatisation in an instantly famous remark: "Everything can be sold, except conscience."[287] He saw "good prospects" for Russian investors in such areas as "the privatisation of the Batumi Sea Port, oil and gas pipelines."[288] A special webpage, www.privatization.ge listed all enterprises and assets put up for sale. These included so-called strategic assets such as the Batumi and Poti ports, the Chiatura manganese mining company and a metallurgical plant in Rustavi.

The results of the new policies were striking. Before 2004, receipts from privatisation had been meagre. Annual reports produced by the National Bank of Georgia deplored the gap between expected revenues and actual receipts. In 2000 privatization revenues added approximately US$9.4 million to the Georgian budget.[289] In 2006, by contrast, they amounted to $547 million. Privatised objects included a large number of Georgia's hydropower stations, in addition to many of its major industrial and mining companies.

Table: Privatisation receipts (2004-2009)[290]

Year

Amount (USD)

2004

75,831,017

2005

195,221,568

2006

547,053,941

2007

465,610,151

2008

65,324,601

2009 (until 22 July)

3,806,975

The experience of working on these path-breaking reforms produced an intense sense of loyalty among the new team which Bendukidze had brought together. Lili Begiashvili described working with him as "great":

"He is so highly educated. He loves working at night and I had a lot of sleepless nights particularly when we worked on licensing reform. For three years I was not asleep before 3 AM. Kakha was coming at the office in the evening and stayed there the entire night and I was supposed to be there all that time. He was a great manager; he did not like intrigues and did not buy into them. He was the only man who had enough capacity to make the reforms, who else could do that? The reforms he pushed through were amazing."[291]

The flat income tax, low custom rates, open visa regime and law on licences and permits: all these were only the beginning of Georgia's libertarian revolution, however.

 


[244] Irakly Areshidze, "Early Review of Georgia's Local Elections", Eurasia Insight, 6 June 2002.

[245] "National Movement Calls for Nationalization of Strategic Facilities," Civil Georgia, 2 August 2003.

[246] Rukhadze and Hauf, "The Georgian Economy Under Saakashvili", The Financial, 21 April 2009.

[247] ESI Interview with Kakha Bendukidze, 25 January 2009.

[248] Alexander Bekker, "Interview: Kakha Bendukidze, the Minister of Economy of Georgia: 'Georgia Has Nothing to Lose'" (in Russian), Vedomosti 93 (1133), 2 June 2004.

[249] Alexander Bekker, "Interview: Kakha Bendukidze, the Minister of Economy of Georgia: 'Georgia Has Nothing to Lose'" (in Russian), Vedomosti 93 (1133), 2 June 2004.

[250] Ibid.

[251] Ibid.

[252] Vitaliy Tretyakov, "Bendukidze's Mission" (in Russian), Rossiiskaya Gazeta, no. 3492, 3 June 2004.

[253] "Kakha Bendukidze Promised Ultraliberal Reforms for Georgia" (in Russian), Polit.Ru, 2 June 2004.

[254] Ibid.

[255] Alexander Bekker, "Interview: Kakha Bendukidze, the Minister of Economy of Georgia: 'Georgia Has Nothing to Lose'" (in Russian), Vedomosti 93 (1133), 2 June 2004.

[256] Ibid.

[257] "Economy Minister Outlines Privatization Policy," Civil Georgia, 10 June 2004.

[258] Bendukidze's speech at Cato Institute's Policy Forum "Georgia's Transformation into a Modern Market Democracy", Washington DC, 13 May 2008.

[259] ESI Interview with Bendukidze, January 2009.

[260] Government of Georgia, "Vakhtang Lezhava".

[261] Government of Georgia, "Tamar Kovziridze". She was then appointed chief advisor for foreign economic affairs of the prime minister and is now in charge of negotiations with the EU on trade issues.

[262] ESI Interview with Nino Gorgadze, Project Manager at the New Economic School of Georgia, Tbilisi, 18 June 2009.

[263] ESI interview with Paata Sheshelidze and Gia Jandieri, 2008.

[264] ESI Interview with Nino Gorgadze, Project Manager at the New Economic School of Georgia, Tbilisi, 18 June 2009.

[265] ESI Interview with Nino Gorgadze, Project Manager at the New Economic School of Georgia, Tbilisi, 18 June 2009.

[266] ESI Interview with Nino Gorgadze, Project Manager at the New Economic School of Georgia, Tbilisi, 18 June 2009.

[267] "New Tax Code Approved", Civil Georgia, 22 December 2004.

[268] Svetlana Bagaudinova, Dana Omran and Umar Shavurov, "Licensing 159 Activities, Not 909," in Celebrating Reform 2007: Doing Business Case Studies (2007), International Finance Corporation, World Bank, USAID (Washington): p. 23.

[269] Svetlana Bagaudinova, Dana Omran and Umar Shavurov, "Licensing 159 Activities, Not 909," in Celebrating Reform 2007: Doing Business Case Studies (2007), International Finance Corporation, World Bank, USAID (Washington): p. 23.

[270] World Bank, Georgia: Reform in the Food and Agriculture Sector, Washington, DC, 1996, p. 10.

[271] ESI Interview with Lili Begiashvili, Former Deputy Minister of Reform (under Bendukidze) and former Deputy Minister of Agriculture, 1 May 2009.

[272] International Financial Corporation, "Georgia: After Three Years of Licensing Reform," 2008, p. 3.

[273] OECD, Regulatory Policy Committee, "Indicators of Regulatory Management Systems," 2009, p. 77 (Fig. 37).

[274] OECD, "Better Regulation in Europe: An Assessment of Regulatory Capacity in 15 Member States of the European Union": "Better Regulation in the Netherlands", 2009, p. 68.

[275] Svetlana Bagaudinova, Dana Omran and Umar Shavurov, "Licensing 159 Activities, Not 909," in Celebrating Reform 2007: Doing Business Case Studies (2007), International Finance Corporation, World Bank, USAID (Washington): p. 23.

[276] International Financial Corporation, "Georgia: After Three Years of Licensing Reform," 2008, p. 3.

[277] Parliament of Georgia, "Legislation – 2005".

[278] ESI Interview with Lili Begiashvili, Former Deputy Minister of Reform (under Bendukidze) and former Deputy Minister of Agriculture, 1 May 2009.

[279] ESI Interview with Lili Begiashvili, Former Deputy Minister of Reform (under Bendukidze) and former Deputy Minister of Agriculture, 1 May 2009.

[280] Milken Institute, "A Conversation With Lado Gurgenidze, Former Prime Minister of Georgia," 28 April 2009.

[281] Georgian Ministry of Foreign Affairs, "Trade: Overview".

[282] Ibid.

[283] CATO Institute, "Georgia's Transformation into a Modern Market Democracy," Policy Forum, 13 May 2008.

[284] Justin Burke, "Georgian Economics Minister Designate Discusses Privatization Plans," Georgia Daily Digest - EurasiaNet, 10 June 2004.

[285] Ibid.

[286] Giorgi Sepashvili, "Bendukidze – State Minister with Big Mandate to Reform," Civil Georgia, 16 December 2004.

[287] Ibid.

[288] Alexander Bekker, Aleksey Nikolskii, "Georgia Borrowed Bendukidze" (in Russian), Vedomosti 93 (1133), 2 June 2004.

[289] National Bank of Georgia, "Annual Report 2000", p. 16.

[290] Source: www.privatization.ge. The website only gives individual privatization deals, no annual totals. Some deals are not on the website.

[291] ESI Interview with Lili Begiashvili, former Deputy Minister for Reforms Coordination, Tbilisi, 1 May 2009.

Suggested readings

In one of the most recent interviews ("There Is Only One Way – Building a Free Economy" «Каха Бендукидзе: Путь один - строить свободную экономику») (also available in English), given to Radio Free Europe/ Ekho Kavkaza in December 2009, Bendukidze spoke about his general approach to liberal reforms and the Georgian experience. He emphasized the need to reduce the state apparatus in order to achieve greater efficiency and to stimulate the private sector:

"We had a clear understanding of the following fact: every extra bureaucrat who sits in the state apparatus is a real obstacle to economic development and prevents the creation of five jobs in the private sector. As long as you have a large state apparatus, you will have a small private sector. This was clearly understood, and that is why we were not afraid or embarrassed to radically cut their numbers. This is a very painful process because the people who are dismissed are not happy about and most of them join the opposition to the government that has dismissed them."

April 2010

 Back "Nothing to lose" - Next 
Reinventing Georgia: The story of a Libertarian Revolution
Georgia as a model
Georgia as a model
  Bendukidze and Russian capitalism
Bendukidze and Russian capitalism
     
Jacobins in Tbilisi
Jacobins in Tbilisi
  The future of Georgian libertarianism
The future of Georgian libertarianism

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15 April 2010, 00:00