Economic reforms

Kakha Bendukidze: There is no alternative

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Successful reforms implemented in Georgia have been a matter of immense interest for many countries in recent years. Several books have been published, touting Georgia as a reform model for other countries. Just recently, the book “Fighting Corruption in Public Services: Chronicling Georgia’s Reforms” was launched by the World Bank. In this interview, Tabula speaks with Kakha Bendukidze, one of the leading architects of those reforms and founder of the Free University of Tbilisi.

What is the reason for the intensity of Georgian reforms? What has brought about the sharp decline in corruption, and why do some consider corruption to be elite? What causes Georgia to advance and still experience problems in international ratings? What precipitated the anti-government rally of 7 November 2007? Have ongoing reforms gained social support? Will reforms continue into the future? Kakha Bendukidze answers these and other questions in this Tabula interview.

- Several books about the success of Georgian reforms have been published in recent years. What is, in your view, the reason for such an interest toward Georgian reforms?

In the 1990s, early 2000s, Georgia was viewed as a failed state. I remember reports presented in various venues of the world, saying that “the Georgian project” fell through; that even though the country obtained independence, it failed to benefit from that; that Georgia possessed nothing, was eroded by corruption, its economy was in a stalemate, so on and so forth. Georgia was not the only country which received such an evaluation, but it proved to be the sole country that managed to turn the situation around. One would find it difficult to say now that Georgia is a failed state. The country faces myriad problems – twenty percent of its territory is occupied; we need a multi-year economic development to secure our place in the world – but no one can say that Georgia is a failed state. That is, in my view, the most important thing that generates such an interest toward Georgia worldwide. Moreover, Georgia has managed to do that in every direction, not only in one direction.

- At least seventy reforms were implemented during the period from 2004 through 2007. According to the World Bank, no other country has ever implemented so many reforms simultaneously. By that criterion, the World Bank ranked us first among reformers. What was the cause of that intensity of reforms?

There was no alternative. Back then, each and every member of government had a feeling that we had very little time to change the situation radically. And that intensity resulted from that feeling and was based on the mandate which the government received from the population then. The real slogan of the Rose Revolution was that we could no longer live like that; things must change, corruption must be eradicated. That was, I think, the reason that everyone – young or not very young, Western- or native-educated members of the government – united together and fought for the implementation of reforms. There were instances when, I remember, my office was drafting laws and we worked in three shifts in order to submit them to the Parliament on time: The first shift finished its job in the morning and left materials for the second shift working during the day, which was continued by the third shift at night, and so on. The result, I think, is obvious.

- The central reform implemented during that period was overcoming corruption. According to international ratings, the corruption perception in Georgia has decreased tenfold, on average, since the Rose Revolution. What was the main vision that produced such a U-turn?

I think it is more appropriate to say “a significant decrease” because it is impossible to defeat corruption. A significant decrease in corruption is not “a” reform in itself but the result of many reforms. It is the result of many reforms that the disaster which endangered the country, and its actual existence, does not pose a danger today. However, that disaster lies in ambush, prepared to attack. Therefore, it needs to be constantly fought and then it will be possible to have a normal environment in the country. That decrease was caused by a whole set of factors – it seems impossible to me to single out one component that led to a change in the level of corruption. It clearly implies the law enforcement system, which has fought and still fights severely against corruption. But that alone would have not been enough. It implies economic reforms as well. Those reforms freed the state from excessive activity, which was a source of daily

corruption, for example, various controlling bodies, etcetera. It also implies the tax reform, which made it possible for an enterprise to survive even after paying taxes. That was actually impossible earlier – an enterprise either had to pay taxes and cease existence or to exist and not pay taxes. Thus, all these reforms implemented in Georgia contributed, to a lesser or greater extent, to the fight against corruption.

- A political will emerged, in fact.

Indeed, it is obvious that the political will emerged. Moreover, the theoretical possibility of corruption has actually diminished. For example, when no one issues permits, accordingly, no one takes bribes for issuing permits. If no one controls, for instance, the opening of veterinary clinics, no one takes bribes in that area. That downsizing of the public sector was very important for combating corruption.

- Critics of the government refer increasingly often to so-called elite corruption in recent times. Others flatly deny the existence of such a thing. What is your take on that?

Elite corruption, in the way some opposition forces imagine, is very much the same as telling you now that there are many crocodiles in this very room but that they are afraid of us and that is why they do not show up. Say, a minister is corrupt but his/her deputies are impeccably clean, or deputies are corrupt and heads of departments are impeccably clean; that is, every mid-level servant is honest. These people see everything and say nothing; their manager is corrupt but they perceive his/her corruption calmly. That is a plot taken from a fairy tale. According to another opinion, what they call “elite corruption” is, in fact, the result of public administration reform, namely, high salaries in public service. In opponents’ view, there is no difference. If in the past public servants stole, now they legally receive high salaries. Critics say that this is also elite corruption because these people now have three or four thousand Lari in wages whereas, in the past, they had thirty Lari and stole fifteen hundred Lari, which they think is better because that income of public servants then was lower. These critics say many such utterly ridiculous things. First of all, I think it is very easy to say that there exists a phenomenon which characterizes your rival negatively, but it is impossible to discover and observe. Lots of things happen in our country for which the government can be criticized, but these critics chose to take an easy path. Instead of investigating problems, fighting to overcome those problems, they put blame for everything on that invented “elite corruption.” If this sort of reasoning is not sufficient, let us discuss [the reality] sector by sector: Where is that elite corruption? And where is it exposed? Is it in the energy sector? Is it in the health care or education sector? Is it in police? Defense? You can expand this list and seek responses to that as well.

- Georgia rates high in those rankings which measure liberal business environments, but lags behind in those indices which focus on institutional development, innovations and etcetera. How would you explain that tendency?

It is quite understandable. What has happened in Georgia? During the past few years we created – and the government carries on that job – conditions. Let’s imagine that you have a large plot of land. You have cleared this land of weeds, removed stones, filled in pits, leveled the ground, installed irrigation canals, fenced, even put up scarecrows to scare away birds from the crops. You have just planted fruit trees. But trees take time to grow, don’t they? What you have planted today you cannot yield as a harvest tomorrow. Georgia is in a similar situation today. The plot of land has been cleaned, most of the stones removed, weeds uprooted, canals built and trees planted. And you have a neighbor which did all of these things two hundred years ago (the USA), or even much earlier (England), or just fifty years ago (Singapore). Of course, their fruit trees are in much better condition because they have already grown. If we evaluate things in terms of preparedness of the ground, the ground may be prepared better in Georgia, But if we do the same according to the size of the trees and harvests, then, clearly, they are better in places where trees were planted earlier. Consequently, there are the ratings which measure conditions for economic development and there are other ratings which measure how the economy has already developed. It is absolutely clear that a fantastic recipe does not exist for, say, doubling the economic growth. That will take several years – not one year. I remember when I was a newly appointed minister, I had a dinner with several members of Parliament from both the ruling and opposition parties. They asked me how long it would take for us to reach the level of European development. I told them that, according to my computation which I had done a little earlier, we would need seventy years to reach the level of such a rich country as Luxembourg. Luxembourg is, of course, a very rich country and none of the other European countries has achieved that level of development. But my prognosis of seventy years very much upset my interlocutors, who retorted: “No way! What seventy years? What are you talking about?” I pacified them, saying that we would catch up with Austria in a shorter time, with Slovakia in an even much shorter span, while with Turkey, rather soon. “Nonsense,” they said, “two or three, maximum four, years would be enough to catch up with Europe.” I started explaining to them that that was impossible because it was a function of power: the difference in growth speeds raises [a country] to a power. The mention of “raising to power” confused my colleagues too much. They realized that the matter was not that easy, and one of the MPs asked me in a whisper whether the president knew about that – as if it were a state secret that we would be unable to achieve the level of European development within three years. We must not have such illusions. That [level of development] is the result of long, daily, monthly, yearly work. Since 2004, Georgia’s standing has improved in the world. Or, in other words, the world economy has grown slower than the Georgian economy. We have come closer to many countries, including developed ones. We stand much closer to them now than we were eight years ago.

- Reforms – or, as you have said, clearing of land – have had their social price too. That was especially conspicuous on

November 2007. Can we say today that the irreversibility of reforms has gained social support?

I would disagree with your assessment of the 7 November event. It resulted from a number of factors. People were unhappy because of implemented reforms, of course; they had lost a chance of ill-gained money – that could have been a person who profiteered on university entrance exams, as well as a customs officer who made money in customs clearance, or a traffic inspector. Besides those people, however, consolidation of the masses was caused by the fact that, in 2007, we had high economic growth, on the one hand, which is good and pleasant, and on the other hand, a relatively higher inflation. Back then, we did not pay attention to that inflation, did not curb it, and that was, in my view, the key reason why the 7 November [protest] happened. In any case, however, these reforms clearly have their price. For example, a person employed in a state agency does nothing and then, as a result of reforms, loses his/her job. That is inevitable, I think. I would put it in a very simple way: If there are people who would prefer to live in March 2003 instead of March 2012 – not because they were younger then, which is, of course, a very pleasant thing, but because they lived better – and if such people are many, it means that these reforms have a high price. If such people are not many, then the price of these reforms is still not low. The simplest and most transparent test of that, I think, is an election. In that period, two local elections thereafter, early presidential and parliamentary elections, were held. An election will also be held this October, and let us see what the result will be. I believe that is the simplest way of gauging government actions in a democratic country, including gauging the price of reforms.

- After the Rose Revolution, Georgia and its government faced a philosophical choice. It had to decide how to alleviate poverty – by means of state intervention or through the free market; who would be a driving force of the country’s modernization – a public officer or a private entrepreneur. In what direction is Georgia heading today?

The answer is very simple. That philosophical choice exists in poor textbooks alone. No matter how much effort a leader of any country undertakes to develop the economy by government being very active and doing very good things, that will never happen. That may be managed once or twice in a selected case. But it is impossible to do that on a mass scale and constantly. In my younger years, we were taught that there was this opinion about three paths – the first [socialism] and the second [capitalism] and also the third one which is neither socialism nor capitalism. That is sheer nonsense because there is only one path – economic development on the basis of private initiative. Any other path simply does not exist. If we do not like Cuba or North Korea, we must acknowledge that the economy cannot develop in a large, interference-in-everything state. Either the economy must develop – and central to it is private initiative – or the economy must bog down in a quagmire and then state initiative is the key. There is a choice here, not of how to develop the economy, but of whether or not to develop it at all. If you develop the economy, you must open the door to private initiative. But if you want the economy to bog down – give way to state initiative.

- With regard to that very issue, in his recent interview with Tabula, Dr. Peter Klein of the University of Missouri, who delivered a course of lectures at the Free University, said that government, as a rule, is not good in the role of an active manager. On the other hand, however, one can hardly find a government in the world which can stand up to that temptation. In your opinion, why is that?

Politicians, public officials who achieved success in their areas, may often be more educated than private-sector representatives. A common illusion among public officials – which I have encountered in various countries, including ours – is that they think private entrepreneurs cannot realize what to do; [public officials are left] wondering why entrepreneurs do not do something that is correct and very simple. A more detailed study, however, may show that the private sector is correct for not taking that step because it is not advantageous but is disadvantageous [in that] it bears risks which public officials do not take into account. Georgia counts several tens of thousands of businessmen. No type of state can compete with them in innovation, in sorting out various options, in achieving success, etcetera. The illusion, however, that I, as a public official, can do something better remains. Projects implemented by a state prove mostly less effective, if effective at all.

- A research and consulting group at the Free University helps one of the countries of sub-Saharan Africa, Rwanda, in its reformation. That country has moved up to 45th place from 50th a year ago among 183 countries in the World Bank’s annual “Ease of Doing Business” ranking. What reforms has Rwanda implemented upon the advice of the Free University and are there other countries which share Georgia’s experience?

In the case of Rwanda, we had little time for consultation. Therefore, our recommendations were very simple. We called them “micro-reforms,” which could be implemented within a span of several months and, at the same time, have a notable impact on economic activity of the population. Moreover, we provide assistance to the governments of Ukraine, Kyrgyzstan in various formats. Some reforms that have already been implemented in Ukraine were directly taken from Georgia, were a replication of reforms undertaken here, and Georgian experts participated in their establishment. There are other countries as well, for example, North African countries with good opportunities, I think, to carry out reforms. Some of our reforms would be good anywhere – for example, the pharmaceutical reform which was implemented in Georgia in 2009. I reported about that reform in Vienna this January at an important economic forum, and the author of Washington Consensus, John Williamson, wondered why all the countries, both large and small, do not implement it. That is neither rightist reform nor leftist. That is just reform toward simplification.

- Recently, international rankings also have been paying attention to the fact that reforms in Georgia have slowed down. Do you agree with that opinion and, if yes, what is the reason for that, in your view?

Let us refer to our example again: We have removed stones; have built up canals; little work is left to be done to put up a fence or plant trees. We cannot repeat everything all over again. That is impossible, isn’t it? I think that the slowdown in the tempo of reforms in Georgia is a natural process. A very important thing is that the reforms have slowed down but have not stopped. Some reforms are always implemented, for example, in terms of new tax regimes and administration. Now there is a need for smaller reforms, including their fine-tuning, in order to have everything well fitted.

- Are fundamental reforms no longer needed?

They are [needed], of course. You are aware of my opinions about, for instance, currency regulation and whether Georgia needs its own national currency – I believe it does not. Besides, in recent years the bureaucracy has taken revenge and, I think, yet another good cleansing of state agencies from redundant functions and excess employment would be appropriate. Moreover, there are reforms that have not been implemented, such as, for example, forestry reform. True, it will be implemented sooner or later, but I have no clue when. Consequently, to claim that all reforms have been carried out would be incorrect. It would be similarly incorrect to claim that [new] reforms will not be implemented. Reforms will be implemented, but not at the same speed as before.

This article first appeared in Tabula Georgian Issue # 93, published 26 March 2012.

 

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