Lessons from Georgia

18 October 2018, 10:00

What significance might Georgia’s reforms have for Ukrainians? For some they can mean happiness for a nation that is close to them and is one of the few post-soviet republics to have succeeded. For others, they are a guide for how to act during the reform process in Ukraine. And for some they represent disillusionment, because an entire series of Georgian reformers, from former president Mikheil Saakashvili and the late Kakha Bendukidze to consultants and middle managers in various government agencies, who arrived in Ukraine after the Revolution of Dignity, yet left at worst ambiguous results, at best far poorer than they had in their native Georgia.

Whatever we might think of Georgia’s reforms, their example is priceless. But no matter how much we hear about it, there will still be some gaps and missing pieces, facts that we don’t entirely know about, whose careful analysis might help Ukraine avoid some of its own mistakes on the path to transformation. In July, the International School of Economics in Tbilisi (ISET) ran its annual summer school called “Studying Georgia’s reforms and progress,” which is affiliated with Tbilisi State University and has funding from the Prague Civil Society Centre for (PCSC). Over the course of a week, Georgian reformers shared their experience. The Ukrainian Week was at the event and brought back quite a few interesting thoughts for Ukraine.

Not what it looks like

Too many Ukrainians assume that Georgia’s reforms were never fully successful. They say that, the country was very poor and simply became poor. This is not, in fact, what happened, and a number of arguments prove it. Firstly, the Statistics Bureau of Georgia says that in QI-18, the average salary in the country was 1,059 lari or US $426 a month, which is 46% higher than the average salary in Ukraine. Georgia’s per capita GDP is nominally 59% higher than Ukraine’s but only 23% higher in purchasing power parity terms. In short, statistically Georgia’s doing substantially better than Ukraine. What’s more, there was nothing like this prior to the domestic crisis of 2014-2015 and the collapse that the civil war in the early 1990s brought on meant that Georgia started off in a considerably poorer position.

Secondly, strange as it might be, Tbilisi has a much better fleet of cars than Kyiv does. At a time when many Europeans travelling to Ukraine’s capital comment on how many expensive cars are on the roads: in Georgia, there may be fewer high-end cars, but there are far more good quality cars and it would take considerable effort to find a cheap soviet-era car. This reflects higher incomes, but also much lower customs costs, plus an automobile sales sector that is very well organized and effective.

Yet another factor is playing a role here: Georgia cares about people. Georgian officials look at what people are lacking and try to fill the need. Georgian officials and the country as a whole have a very different worldview. For this reason, after reforms were carried out, the problem with cars running on foreign plates never came up: quality new and used cars are available to even the most ordinary household.

Thirdly, many tourists fill the streets of Tbilisi these days, and a significant number visit the provinces. Moreover, these are not just Russians, who probably outnumber guests from other countries, but visitors from Europe, North America, Arab countries, and Asia are more common than in most of Ukraine. Georgia’s tourist industry appears to be quite well established, both in the capital and in the regions, with a broad range of well-organized tours on offer. And people travel to Georgia precisely because it offers a set of advantages over other possible destinations, from good roads and other infrastructure to service in hotels, locals who speak English, tasty native cuisine, and so on. Most of Ukraine’s cities need to put in considerable effort if they hope to boost their tourist numbers.

At the same time, Georgia continues to develop at a good clip today, with GDP growth nearing 5% for several quarters in a row. Economists now say that it could well go up to 7%, dispelling one myth about how the country’s success has been rolled back since the current administration took office. The specific direction that development has taken may have shifted, but the fact that the country continues to develop can be seen very clearly in the regions, like Batumi.

Liberalization in action

The depth and radical nature of Georgia’s liberalization is something Ukrainians can only dream of. Taxes have gone down, customs duties have been dropped, the lion’s share of oversight and control agencies has been shut down, and many other decisive steps have been taken. But there are also many unknown factors whose understanding would be very useful to Ukraine.

Georgians themselves admit that any new initiatives in economic policy were seen through a certain filter prior to the reform period: should the opportunities for corruption be increased or reduced? Should opportunities for bureaucratic discretion be expanded or contained? In short, the battle against corruption was part and parcel of the awareness of the reformers, which cannot always be said about Ukraine. And this is one way to evaluate such individuals: if a person lives to combat corruption, this effort will have an impact sooner or later, but if they only simulate this battle, here will never be any results. Demand for corruption to be taken down was directly evident during Georgia’s Rose Revolution and it determined the depth and scale of liberalization. It was not based on someone’s whim, treated as a “clever idea,” but was simply the logical outcome of what the Georgian people wanted.

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The main result of this economic liberalization was that Georgia opened itself to the world. Its approach made all the difference. For starters, there was a conceptual vision: we are a small country so we have to open up. For many Ukrainian economists with a soviet background, this tactic seems crazy and completely wrong. Yet the strength of a country lies in its internal organization and not in the number of protectionist barriers it puts up. Georgia’s reformers understood this.

The results of this particular way of viewing things were quite interesting. At the summer school, the dairy and beer industries were used as examples. Prior to the implementation of reforms, each of them had one dominant Georgian company that controlled more than 50% of the domestic market. Moreover, the owners were also elected lawmakers who were strongly against any opening of the market or the removal of barriers, arguing that this would destroy national producers, of which they were the prime example. The Saakashvili Administration decided to ignore them and opened the domestic market. The result was a dramatic growth in the selection of products and lower prices across the board—a clear win for consumers. But the main thing was that FDI began to flow in, reaching an astonishing 20% of GDP in some years. This gave the sectors a real shot in the arm, effectively renewing them and generating a large number of new, efficient, well-paying jobs. In short, not only did consumers gain, but the entire country did because even if profits from beer and milk went abroad, the jobs stayed in Georgia, expanding over time and stimulating demand and the overall living standard in the country.

Interestingly, both producers who had resisted reforms left the market. Clearly they could not survive in a competitive environment and were unable to adapt to the new economic situation. This alone is a major lesson for Ukraine, which has a very high level of protectionism and a powerful lobby both in its legislature and beyond that is trying to protect domestic manufacturing through various barriers. However, it doesn’t understand that all that does is preserve stagnation in the economy and is ultimately against the national interest. Of course, liberalization cannot be undertaken without a clear idea and the necessary technology that reflect the country’s particular economy. If everything is done properly, the economy will become stronger, not weaker and the country will gain. There’s an impression that few people in Ukraine understand this, which is another good reason to take a good look at what Georgia has done.

Striking while the iron is hot

One more interesting point is that by shutting down most of its oversight agencies, Georgians understood one important thing: in order to even start talking about an Association Agreement and DCFTA with the EU, they had to restore the work of agencies that ensure food quality, restrain monopolism, and so on. And so they began to set up such agencies from zero, only to discover that state agencies that start with a clean page work considerably better than the counterparts that were shut down.

So Georgia had a positive experience with firing its entire police force and set up a new one from zero, but no one was sure that the same approach might work with agencies responsible for economic policy. It worked. The situation was completely different from what happened in Ukraine, where officials seem too reluctant to shut down an agency for fear of losing institutional memory. However, if that institutional memory primarily preserves various corrupt schemes, who needs it? Ukraine’s reformers are indecisive and have tended to follow a different path, setting up new agencies that overlap, such as NABU, SAP, HAAC, and so on—without actually shutting down the old ones. In time, it could turn out that this approach has some advantages. For Georgia, there was no going back, so the only way was forward. Ukraine does have a way back and historically it’s been demonstrated that, when there is a way back, there will always be those who try to take advantage of it.

Finally, there is an important factor without which Georgia’s liberalization might never have taken place. After the civil wars of the early 1990s and effectively up to the Rose Revolution, Georgia was a failed state, as even Georgians themselves will admit. No one was paying taxes, no one was paying their utility bills, and the country was pretty much bankrupt. In Ukraine, power may have been cut off for several hours a day in many cities in the 1990s, Georgia did not do so on a daily basis. As a result, the country’s budget was completely strapped: according to the IMF, even in 2003, revenues were less than 16% of GDP. By contrast, they constitute 30% in liberal economies and up to 50% in social ones and even in Ukraine revenues were over 40% in 2017.

On one hand, this meant that the government of Georgia was unable to meet its obligations: pensions were tiny, and even that was not being paid out, and the debt kept growing. On the other hand, most government agencies were carrying out their fiscal functions very poorly and it was easy enough to shut them down when the time came, without much of a loss in terms of budget revenues. The budget was in dire straits and constant non-payments offered the basic conditions to liberalize, which Georgia’s reformers took complete advantage of. This is precisely what’s missing in Ukraine. When the Yushchenko Government was faced with chronic shortfalls and low economic activity, the situation was not used to liberalize.

Today, Ukraine has found itself in a trap because many agencies are bringing in substantial revenues, so closing them down and building them up again from scratch is not an option for even the country’s most desperate reformers. For instance, last year the tax administration brought over UAH 250bn to the budget, and customs brought in not much less. Who in their right mind would undertake the radical reform of either, risking the loss of such substantial revenues and a growing deficit? This is an important lesson about undertaking reforms when there’s a crisis and not missing the opportunity. It’s a lesson Ukraine has not yet learned.

The Saakashvili factor

No doubt many Ukrainians are very disenchanted that former Georgian president Mikheil Saakashvili failed to accomplish anything in Ukraine. This raises many questions, including just how much of a role he played in Georgia’s reforms. Without an answer, it will be very difficult to absorb any of the lessons Georgia has to offer.

The best indicator of Saakashvili’s significance can be found in the attitude of ordinary Georgians towards him, as well as Georgian elites—and it’s split. As Georgians themselves will admit, they tend to see the world in black and white, and grey tones just don’t exist for them. That is also how they see Saakashvili and how his team operated. Some Georgians place him on a pedestal, while others stop short of cursing him. Still the best praise is this: without Mikho, what happened in Georgia would have been impossible—and that’s all the acclaim that he needs.

Indeed, Saakashvili has many critics, and very negative opinions of him fall into two categories. First is that he was overly decisive in fighting crime—tightening the screws from the very beginning, but forgetting to loosen them up a little afterwards.  The smallest violation could end up with a jail sentence. Indeed, some relatively small thefts or bribes could leave the guilty party with a 10-year sentence. This meant that a great number of Georgians paid a steep price for the country’s reforms, including the police officers who lost their jobs, and other public sector employees were let go. Still, many Georgians will testify that they were satisfied with the end result of the transformations.

The second factor is a logical outcome of the first: many Georgians have not forgiven Saakashvili for having lost territory. His impulsiveness and decisiveness led to overdoing it in the first case and to a far worse outcome 10 years ago. Many Georgians think that it was a mistake for him to declare war because now Russia refuses to even consider the possibility of Abkhazia or South Ossetia returning to Georgia. From Ukraine’s position, it’s hard to judge the appropriateness of such assessments. On one hand, our country never declared war, gave up Crimea without a fight after listening EU and US advice not to “aggravate” Russia, and basically only defended itself in the Donbas. Its reward was broad material, diplomatic and humanitarian support from the Americans and Europeans—something Georgia did not get. 

On the other hand, various sources state that, in both cases, Moscow had clear plans of attack that had been put together long before with the strategic goal of establishing conflict zones and space for its own military bases in Abkhazia, South Ossetia and Crimea to prevent NATO’s expansion. In short, no matter how the two countries responded to its aggression, the result was largely the same. The difference was only in the scale. Ordinary Georgians don’t really take this into consideration, placing all the blame on their own former president. Georgian reformers see it even more specifically: “Russia simply could not allow this success story on formerly soviet territory to continue.” If that’s the case, what does it matter who responded to its aggression or how? More importantly, what does this imply for Ukraine’s future?

One reformer who was a deputy minister several times under Saakashvili said that the former president never micro-managed. Whether by agreement or by tacit agreement, Saakashvili was responsible only for the vision, leaving the details to Kakha Bendukidze to deal with. This explains a lot why Saakashvili was unable to get any results in Ukraine. In Georgia, he had full authority and a highly motivated team while those who opposed him had far less economic influence: during the collapse of the 1990s, there simply wasn’t much to get wealth on and accumulate that kind of power in Georgia.

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In Ukraine, Saakashvili’s team proved far weaker in terms of professionalism and was far from the kind of quality that the situation demanded. Moreover, he had much less power and he found himself confronting oligarchs, government officials and criminal elements, all of whom enjoyed enormous clout, both materially and numerically. Moreover, arguments that, had Saakashvili been premier or president of Ukraine, he would have succeeded with reforms are also not entirely relevant, as it’s not entirely clear which is the greater evil: broad powers without the necessary team or few powers with a good team. Once all this is taken into account, Saakashvili’s failure in Ukraine should neither disenchant people nor cast a shadow on his accomplishments in his own country. However, it should be a wake-up call for those who want to see changes in Ukraine, for them to see the real complexity of their goals and the power of those resisting change, and to possibly regroup their resources to bring about successful reforms the second time around.

All things considered, Saakashvili is truly a great man, for all his flaws. If his role is assessed in relation to the scale of Georgia, it becomes clear that Ukraine has not had anyone his measure since it became independent. This is something Ukrainians need to understand. Such a figure could only have appeared in a country that had become a failed state, when it was managing to survive largely on funding from international donors. At the turn of the millennium, Georgia had a huge network of NGOs sponsored by the West. They had considerable influence within Georgian society and were nurturing independent professionals who understood the true value of democracy and a market economy. The West also tried to use soft power through NGOs, but it was not nearly as successful: the country was far wealthier and Ukrainians learned to take advantage of all kinds of privileges and then began to take advantage of their access to the flow of foreign money into the country. And so the West’s influence over the country was minimal which meant conditions were not the same as in Georgia and so no one the caliber of Saakashvili appeared. Whether or not someone could have is a good question.

A country for the people

All of Georgia’s reforms are linked by a thread that represents the deep desire of the country to serve its people and to make their lives better, something that is not always so obvious in Ukraine. The example of the automobile market mentioned earlier is one case. A few more can be added.

The most visible example is architecture, a cultural element that leaves traces of a given era for many years on the faces of a county’s cities, whether it’s the post-war architecture in downtown Kyiv or the Austro-Hungarian beauty of Lviv. Tbilisi has a number of different traces. A kilometer or two outside the center, the leftovers of the ruins of the 1990s are visible: humble jerrybuilt shacks and historic buildings whose façades have not been cleaned up for many decades. The downtown, however, boasts many new glass towers alongside low-rises of varied forms. Proportionally to the size of the city, they are probably equal in number to those in Kyiv, but there is one critical difference. In Ukraine’s capital, all the new buildings are commercial properties: shopping centers and, less frequently, business centers. In Tbilisi, a lot of government and public buildings are new, including the Palace of Justice, the Tbilisi Concert Hall and the Peace Pedestrian Bridge. The greatness of a state that cares about its people can be measured by the buildings that are not for commercial purposes and by the overall variety of buildings. In every provincial center in Georgia, visitors will find modern Palaces of Justice—monuments to Saakashvili and his epoch. For Mikheil Saakashvili they and other infrastructure were the visual evidence of his administration’s reforms. Some might call it showy, but in reality they are simply evidence of the fact that the state has money and is prepared to spend it on its people. In Ukraine, this has not been evident.

A final telling example is that, despite nine years of reforms, the income gap in Georgia has not changed, based on a variety of comparative statistics. It can even be seen just by looking around the capital, where you can see poorly dressed grannies with bags of goods or kiosks selling all kinds of junk. At the same time, the government has not gotten caught up in social populism. As one of the presenters at the summer school noted, better to have the kind of inequality that is in Europe than the inequality of a Katmandu. When a cat moves forward, the tail inevitably follows, but when the cat starts chasing its tail, it runs around in circles. This is the best argument against Ukraine’s social populists, who have never achieved anything but are always trying to increase the standard of living. A country’s efforts should go into increasing the economic pie, and not into dividing the small one that Ukraine has today. As long as the country keeps doing the latter, it will find itself stagnating rather than developing.

All told, there’s a good deal that Ukraine can learn from Georgia. The main thing is to want to learn, to go forward and to change the country. So far there hasn’t been enough of any of this. Not enough, at least, to shift the balance of forces against those who don’t want to see change at all and are determined to keep things that way.

Translated by Lidia Wolanskyj

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