Path out of Kleptocracy – a response to ESI on Doing Business by Hans Gutbrod

Debating Doing Business – A view from the ground 

“Straight out, the only reason why I ultimately decided to invest in Georgia is because the country undertook many of the reforms suggested by Doing Business.” (Hans Gutbrod)

A few weeks ago we wrote about the 2015 World Bank Doing Business survey:  Pumpkins, outliers and the Doing Business illusion (4 November 2014).  We looked in particular at countries we know well, Georgia and Macedonia, and at their astonishing rise through these rankings:

“In January 2013, one of Germany’s leading papers, FAZ, wrote a long article about our analysis on Georgia. And we set out to take a closer look at Macedonia. We focused on these two amazing results: how it was possible for Georgia to have a better business climate than Germany – not only for one year, but in consecutive reports, year after year – and how Macedonia managed to beat Switzerland.”

We also examined how the aggregate position in these rankings is generated. And we concluded: 

“Overselling Doing Business can do harm, if it suggests that the key problems facing a country like Macedonia are easy to identify and to address without any real understanding of local comparative advantages or disadvantages, of existing businesses and industrial legacies. Doing Business authors argued that their research “defies the often used saying, ‘one size doesn’t fit all.'” This implies that it is straightforward both to diagnose the illness and to prescribe the right medicine. It remains true today, as it was in 2004, that Georgia and Macedonia have much more to learn from Germany and Switzerland (or Poland and Slovakia, countries in “Danubia”) than vice versa.

We started by noting that rankings are both useful and inescapable. This means that their authors have a responsibility to present the findings in such reports in a sober way. Here the Doing Business report still has some way to go.”

This is an important debate, all the more because rankings are inescapable. So we invited some experts we highly respect, who understand the region we discuss and the way the World Bank works, to comment on our findings, in order to launch a wider debate on the future of rankings in general and on Doing Business in particular.  

The series starts with Hans Gutbrod, who has worked as a regional director for the Caucasus Research Resource Centers (CRRC), covering Armenia, Azerbaijan and Georgia. With CRRC, Hans has occasionally worked for World Bank projects, among 30+ other donors. He was not involved with Doing Business, and is not working on World Bank projects at this point. Next to working in policy research and on transparency issues, he co-founded an agriculture company in Western Georgia in 2009. Hans holds a Ph.D. in International Relations from the London School of Economics.

If you are interested to contribute to this debate, please write to me on


Doing Business: The Path out of Kleptocracy – a response by Hans Gutbrod

The recent publication of the Doing Business report by the World Bank brought a new round of debate on the value of these rankings. As in recent years, critics have pointed out a number of methodological concerns, as has the European Stability Initiative. From my point of view, these criticisms are mostly misplaced. I think that I bring a perspective that can add to the debate: for more than six years, I ran a research organization doing many dozens of projects across the Caucasus and beyond. This research often grappled with how to quantify economic, political and social change. Together with colleagues, I have also set up rating systems that have received some degree of attention. Moreover, for more than five years I have been active in business in Georgia, setting up, with two Georgian colleagues, one of the first larger-scale export-oriented agriculture ventures. In other words, I have an understanding of social science methodology — and I have actually been doing business.

Straight out, the only reason why I ultimately decided to invest in Georgia is because the country undertook many of the reforms suggested by Doing Business. It’s easy to set up a company, the tax structure is clear, we have been fully compliant, and in an environment of significant political and geopolitical risks, we do not have to worry about cumbersome or predatory regulation. The flexibility of the labor code matters, too. It is so desperately difficult to make things work in these environments that — unless you have huge amounts of money, which I do not — you should be able to hire people quickly, without adding long-term cost burdens. We want our workers to commit, so we pay them a good salary. Our salaries are very significantly above minimum wage, for work that can be done in combination with other jobs. I am not saying that all businessmen take this approach. Yet the idea that little labor legislation automatically implies exploitation does not make sense, from my perspective. You get good work by paying a fair wage.

Small tweaks matter, too. Georgia allows its notaries to do transactions via Skype. If, prior to this reform, you have ever chased around Ottawa in a Canadian winter to get a permission to apply for water rights notarized (notary), apostilled (Department for Foreign Affairs and International Trade), verified (local Georgian Embassy), and then shipped (DHL, at the cost of an expensive dinner for two) you will learn to value the kinds of reforms that Georgia undertook. Doing Business indeed highlighted that Georgia went on the right track.

Are the Doing Business indicators sufficient? No, of course not. But they are necessary. Let me unpack that argument: under the very government that undertook a number of excellent reforms, we were worried about heavy-handed tax police and about unchecked rogue elements in the Ministry of Internal Affairs. These excesses were not fully reflected by the Doing Business rankings. It is seen as a weakness of Doing Business that it does not fully account for such realities. At the same time, is this a fair criticism? Doing Business sells itself as focusing on the kind of business regulation that serves as an instrument for obstructing (and usually fleecing) entrepreneurs. Doing Business fulfills on that promise. Yet of course this angle only captures one aspect of the total business environment. It is, however, a critical angle, without which only the very rich, or the very well-connected, can get things done.

Doing Business has another desirable feature, one that is also the subject of criticism that ultimately is shortsighted. Doing Business creates many winners, in that it marks progress according to different categories. In that way, Georgia can do better than Germany, and Azerbaijan, otherwise not exactly a role model of reform, can also make progress. That is, of course, a sacrifice of rigor, but conversely an excellent application of research (or parental experience): if you want change, creating winners is an attractive strategy.

From what I have seen over the years, Doing Business is one of the best tools that the World Bank has come up with. It is extraordinarily powerful, in pointing in a direction that helps the world move away from kleptocracy. Not everyone in the World Bank is happy about this success, as departments that have not invented Doing Business want more attention for the concerns that they are seeking to advance. From their perspective, the methodological shortfalls of Doing Business are particularly glaring. And these concerns are relevant: it is likely that some (small) improvements to Doing Business are possible. Yet in this discussion, let’s keep the big picture in mind.

Doing Business helps to advance an important cause. If people have an even better system, it would be great to hear about it and to have spelled out how it works. But let’s understand all that Doing Business does before getting stuck on what finally are marginal quibbles. Actually doing business is not just about academic rigor, it is about creating opportunity and jobs in tough environments where those typically are in short supply.

Follow Hans on Twitter at @HansGutbrod


Further reading:

Coming soon. New ESI Report on Georgia

After two years of research, which took a team of ESI researchers across all of Georgia, from Batumi on the Georgian black sea coast to the wine-growing areas of Eastern Georgia, from Washington DC to Brussels and Moscow, we are now glad to be able to announce the upcoming publication of a brand-new ESI report later this week.

After a grim, post-Soviet decade, Georgia had captured the imagination of the world in November 2003 when a display of people power swept away the old political establishment. In its place came a new generation of leaders – young, articulate and determined to propel their small republic out of poverty and isolation and into the European mainstream.

This report looks at the promises of the Rose revolution, the way Georgia presented itself as a model for other countries, and the implications of its elites embracing libertarianism as a national ideology.

This report is about a remarkable man, a south east European country in a time of transition, and the power and influence of a seductive ideology. The man is Kakha Bendukize, a philosopher-entrepreneur and one of the most interesting thinkers in today’s post-Soviet world; the country is Georgia, a small republic of 4 million people in the South Caucasus, eager to become a global model; and the ideology is libertarianism, the belief that people will be freer and more prosperous if government intervention in people’s economic choices is minimised.

For more on our Georgia research and the report itself, please come back to the ESI website later this week. In the meantime, here is a preview from the introduction:


Election poster featuring Michael Saakashvili 2003. Photo: Peter Nasmyth
Election poster featuring Michael Saakashvili 2003. Photo: © Jonathan Wheatley
John Galt in the Caucasus

Atlas Shrugged, a 1957 novel by the libertarian thinker Ayn Rand, is an ode to the free market, the minimalist state and the sovereignty of the individual. It is also a useful text to read if one wishes to understand the worldview of Georgia’s most influential policy makers.

The main character in the novel, the engineer John Galt, escapes from an America that has become a breeding ground for socialist ideas. Galt calls on other men and women of talent and ambition to follow him to the remote mountains of Colorado in order to establish a utopia of pure capitalism. For Galt, the engineer, the scientist and the entrepreneur are the true heroes of mankind. In the end, America discovers that it cannot survive without the talents of Galt and his fellow libertarians. They return from Colorado, defeat the collectivist morality of the grey, submissive masses and bring down the oppressive state. As Galt puts it, triumphantly,

“With the sign of the dollar as our symbol – the sign of free trade and free minds – we will move to reclaim this country once more from the impotent savages who never discovered its nature, its meaning, its splendour. Those who choose to join us, will join us; those who don’t will not have the power to stop us …”

Ayn Rand’s philosophy has for decades made her one of the most popular authors in America and an icon of the American right. Her ideas owe much to her personal experiences as a child in Russia at the time of the Bolshevik revolution. John Galt’s America is in fact reminiscent of the Petrograd of her youth. Her horror of collectivism stems from the memory of her father’s shop taken over by communist revolutionaries. She left post-revolutionary Russia for the US in 1926, never to return.

Today, some of Ayn Rand’s most committed followers are in fact found very close to Rand’s native Russia. Georgia, a republic in the Southern Caucasus, has in recent years styled itself as a modern-day capitalist utopia in Europe’s highest mountains. In 2008, Georgia’s prime minister was Lado Gurgenidze, who had made his fortune as an investment banker and named his private firm Galt and Taggart, after the two heroes of Rand’s novel. Georgia’s president Mikheil Saakashvili recently informed the Georgian parliament that the 19th-century national hero (and saint) Ilia Chavchavadze was in fact “the first Georgian libertarian.” Georgia also has its own John Galt, a philosopher-entrepreneur with a mission. His name is Kakha Bendukidze, and this is his story.

Bendukidze’s biography offers ample material for a full-length novel. Born in 1956, he spent most of his adult years in Moscow. Making his fortune in Russia in the 1990’s, he rose to become one of country’s top twenty oligarchs,[1] and an influential voice on economic policy. However, by 2004, as Putin’s regime tightened its grip on strategic industries, Bendukidze found his options in Russia were becoming limited. He began disposing of assets, and moved to Georgia. In the opinion of Russian oligarch Boris Berezovsky, already in exile,

“Bendukidze does not belong to Putin’s circle of friends and he understood sooner than everyone else that everything would be taken away from him… Bendukidze by far hasn’t exhausted his potential but right now the Russian authorities do not need such talented people.”[2]

At the time, some Russian liberals even hoped that one day Bendukidze, like John Galt, might return, when libertarian ideas regained favour in Moscow. As Vitaliy Tretyakov wrote in Rossiiskaya Gazeta:

“What can be said with absolute certainty is that Russia is highly interested in the success of Bendukidze’s truly historical mission… The liberal economic experiment that Kakha Bendukidze will certainly try to carry out in Georgia would (if successful) rehabilitate Russian liberalism (if this is at all possible).” [3]

Excerpt from upcoming ESI Georgia Report

[1] Guriev and Rachinsky, “Oligarchs: The Past or the Future of Russian Capitalism?” July 2004.

[2] Alexander Shvarev, “He Is Not Sure about the Russian Authorities” (in Russian), Vremya Novostey, no. 94, Jun. 2, 2004.

[3] Vitaliy Tretyakov, “Bendukidze’s Mission” (in Russian), Rossiiskaya Gazeta (Federal issue), no. 3492, Jun. 3, 2004.

Suggested background reading: ESI Picture Story – Peter Nasmyth’s Georgia (January 2009)

New wars? A comparison of the Balkans and the Caucasus

Recently, some people have argued that there is a possibility of a new violent conflict in the Western Balkans. It there anything to this claim, which flies in the face of continued international troop withdrawals from the region?

Let me make the case why these claims are not only implausible but in fact dangerously misleading.

First, if either leaders or voters in the Balkans were to believe that there was a real threat of a resumption of violence one would expect this to be reflected in national defense policies: in military spending and in the size of Balkan armies or paramilitary forces.

This was certainly the case in the late 19th century. Then Balkan states had some of the largest standing armies (in proportion to their populations) in Europe.

It was true on the eve of the outbreak of war in former Yugoslavia in 1991. One toxic legacy of communist Yugoslavia’s policy of armed non-alignment was an abundance of arms and paramilitary formations, a population trained and educated in the spirit of partisan warfare and popular defense, and a large number of intelligence agencies and special forces in addition to the huge and expensive Yugoslav Army and its enormous network of domestic defense industries.

It is also the case today in the South Caucasus: a region which in the early 1990s experienced a similarly tragic trajectory of war, ethnic cleansing and aggressive nationalism as the Balkans did. Today’s leaders in Georgia, Armenia and Azerbaijan (not to mention Russia) certainly consider the very real possibility and threat of a return to war in a region, full of unresolved (frozen) conflicts. This is reflected in their rhetoric. It also has a measurable influence on policies and budgets.

However, one of the most interesting developments in the Western Balkans in recent years has, in fact, been the demobilisation of formerly highly mobilised societies. Let us not refer to trends as hard to measure as better neighbourly relations or a decline in interethnic tensions. Let us focus instead on hard facts concerning military spending and serious violent crime.

Gerald Knaus, Carl Bildt, and Miroslav Lajcak. Photo: ECFR
Rumeli Observer, Carl Bildt, and Miroslav Lajcak.
Vienna brainstorming, January 2010. Photo: ECFR

I prepared some tables to illustrate this argument for a recent brainstorming on EU Balkan policy that took place in Vienna (participants in the meeting included foreign ministers Carl Bildt, Miroslav Lajcak, analysts Mark Leonard and Ivan Krastev, Vesan Pusic and a few other Balkan analysts).

First, men under arms and defense spending. Let’s compare what has happened in the Balkans with trends elsewhere on the European periphery in recent years.

The last five years have seen growing military spending in the Caucasus. At the same time this period has seen a decline in defense spending and in the number of men under arms in the Western Balkans. As a result there are today, proportionately to the population, two and a half times (!) more men under arms in the South Caucasus than in the Balkans (see Table 1).

Western Balkan countries have also decided to have considerably smaller armies than either Turkey or Greece, their regional neighbours (table 2). And although they are richer than the countries of the South Caucasus, their military budgets are significantly smaller (table 3). This means that they can allocate more of their public spending to other things, from education and health spending to public infrastructure.

Table 1: active soldiers/paramilitaries relative to population size

Population active soldiers/active paramilitaries
Balkan states 29.9 million people 101,785
South Caucasus 15.3 million people 156,870

Table 2: active military for 1 million people

Germany 2,965
Switzerland 3,000
Western Balkans 3,404
Turkey 8,523
South Caucasus 10,252
Russia 10,490

Table 3: active soldiers/paramiliaries and defense budget relative to population size

Population (million) Active soldiers/paramilitaries Defense budget (US$)
232 million
223 million
962 million
163 million
59 million
943 million
395 million
1,258 million
1,100 million

(The data on soldiers and budgets comes from the most recent ISS publication The Military Balance 2009, except for Kosovo which has some 2,500 active soldiers/paramilitaries)

How about other forms of violence? One alternative theory is that even if real war is unlikely in the Balkans today, there is always the possibility of spontaneous, smaller scale ethnic violence erupting and than getting out of control.

Well, what we can certainly say is that there is no evidence for this in any of the data of recent years. In fact, when it comes to citizens’ inclinations to pick up arms against each other the Balkans, despite the legacies of the 1990s, are considerably more peaceful than other parts of today’s EU (see table 4).

Table 4: homicide rates per 100,000 population

Austria 0.8
Switzerland 0.9
Serbia 1.4
Slovenia 1.5
Croatia 1.6
France 1.7
Bosnia 1.8
Macedonia 2.2
Montenegro 4.1
USA 4.2
Poland 5.6
Albania 5.7
Estonia 6.8
Latvia 8.6
Ukraine 9
Russia 20
South Africa 39.5

The Georgian crisis and EU-Russian relations

In last night’s BBC World Today programme, the Italian and Polish Foreign Ministers, Franco Frattini and Radek Sikorski, and I were interviewed on the recent crisis in Georgia and how it affects EU-Russian relations and EU foreign policy. You can listen to the full interview here:


Gerald Knaus on the Georgian crisis. © 2008 BBC World Today. All rights reserved.

I also wrote a commentary (in German) in the Austrian Falter magazine, it’s called “Russen und Rosen” (“Russians and Roses”)

Franco FrattiniRadek Sikorski
Franco Frattini – Radek Sikorski