American swimmer Michael Phelps has won his 23rd Olympic gold medal, setting a new world record at the 2016 Summer Olympics being held in Rio de Janeiro. A total 43 athletes out of the three-million-strong Mongolian population are competing in Rio 2016. Two Mongolian swimmers, B.Dulguun (male) and B.Esui (female), competed in the 50 m freestyle. As every Mongolian turned their eyes to the swimming competition at the Olympics, I finally had the opportunity to dig deeper into the “Georgia swim” and study the nation that has made the Caucasus Mountains home.
Gia Janderi, vice president of New Economic School Georgia, said, “When the Soviet Union disassembled, Georgia slipped into deep economic and political crises. The entire nation struggled, like we were in deep water without knowing how to swim. It took years of effort before we gathered a good amount of knowledge and experience. Having had a bad teacher, we were drowning at times, and coming back to the surface often and then going back underwater. By 2004, we had found our path forward.”
In 2015, The Heritage Foundation placed Georgia 22nd out of 178 countries in terms of economic freedom (Mongolia was 96th), 24th in business freedom (Mongolia was 56th), and 48th in freedom from corruption (Mongolia was 78th). Georgia was strongly in the lead among post-Soviet countries, Eastern European nations, and its neighboring countries.
SAAKASHVILI STYLE: GOVERNANCE REFORM
Corruption had fully taken over Georgia in 2003. Having realized that corruption could not continue as it was, the Rose Revolution had started by the end of 2003, and Georgia had a new government by the beginning of 2004. Mikheil Saakashvili, the leader of the revolution, became president, and was re-elected in 2008. These eight years brought about the nation’s biggest political and socio-economic change. The Saakashvili swim had the following key aspects:
- The tax system was fully changed by leaving six taxes in place out of 20, reducing the number of tax brackets, and decreasing rates. There was a significant reduction in VAT, income, profit, and customs taxes. A system was introduced to allow payment of all taxes online. The corrupt system that allowed companies to abuse and leverage the many tax clauses was brought down. Georgia’s Ministry of Finance reported that tax revenue increased six fold within six years despite the reduction in rates.
- The Rose Revolution reduced the number of government agencies, decreased the number of government workers, and increased their salaries. They also abolished approximately 800 permits and licenses, and privatized land and state properties, such as seaports and airports. Also, a much easier system was introduced to regulations regarding recruiting and firing employees. It brought about major changes to labor relations, which resulted in increased employment and pay.
For example, the OECD’s standards for pharmaceuticals, food, consumer products, and services were fully adopted. This meant that no special permits were required for OECD approved goods and services to enter Georgia. The banks also welcomed this decision, as it made things easier for them to operate. Anyone who had a Schengen visa or came from a country which had a GDP per capita that doubled Georgia’s GDP per capita could freely enter Georgia.
- Another reform that was well received by the Georgian people was the revamping of the police force. It ended the previous system where the police had conspired with criminals and were corrupt at all levels. Trust in the police increased from zero to 80 percent. Georgians even joked that they did not have a single accident for a week despite the absence of a traffic cop.
SAAKASHVILI STYLE: POWER, WINE, AND SPECIAL LAWS
The supply of electricity improved significantly thanks to the privatization of power production and distribution, acknowledgement of foreign investment, and freeing up prices. Taking advantage of rivers flowing from higher mountains, Georgia established private hydropower plants in large numbers. Currently, their electricity exports are twice as great as their imports.
Georgia then started receiving 10 percent of the natural gas transported from Russia to Armenia through Georgia. The natural gas they received in return for providing a transport route was used domestically.
When Russia banned imports in 2006, Georgians reformed their production of goods such as wine, fruit, and mineral water by improving their quality and exporting them to new markets. Within four years, Georgia’s export revenue exceeded what it was before the Russian imports ban. In 2011, Georgia sold 54 million USD in wine, 68 million USD in liquor, and 48 million USD in mineral water (such as Borjomi) to a total of 48 countries. These products comprised 2.5, 3.1, and 2.1 percent of total exports respectively. Nuts alone made up six percent of Georgia’s exports. The 2014 statistics showed that 46 percent of the total population were living in rural areas.
With the goal of having sustainable economic development, the Georgian parliament made a special change to the constitution and passed the Economic Liberty Act. This law prohibited the creation of new taxes, and required the government’s debt, budget expenditure, and budget deficit to not exceed GDP by 60, 30, and 3 percent respectively. As is the norm for constitutional changes, these changes could only be made with approval by a super majority of the parliament. In the eight years that Saakashvili led the country, GDP per capita increased by 300 percent to reach 3,300 USD.
Saakashvili’s party was defeated in the 2012 elections by the Georgian Dream Coalition, which was founded six months prior to the election. Bidzina Saakashvili, the leader of the coalition and the wealthiest man in Georgia, became the Prime Minister. Two weeks prior to the election, a video showing violence against prisoners was aired on an opposition-run television channel. It was the cause of public outcry that resulted in strong opposition votes. When the election results started coming in, it was clear that the ruling party had lost. At that time, Georgia had 538 prisoners per 100,000 people, which led the list globally for prisoner populations per capita. The number of prisoners in Georgia had increased by 400 percent while Saakashvili was in power.
In 2014, Georgia established a free trade agreement with the European Union. Following their intent to become a EU member state, Georgia had been introducing European standards to many of its industries. With a more populist political party at the helm, Georgia’s economy grew by 3.4 percent in 2013, 4.6 percent in 2014, and 2.8 percent in 2015. The inflation rate reached 4.9 percent in 2015, and the value of the Georgian lari declined by 30 percent. It negatively affected the livelihoods of the Georgian people.
As of 2016, Georgia’s external debt has reached 15 billion USD, six billion of which is government debt. The debt is equal to 43.3 percent of GDP. Since 2012, Georgia has been borrowing 220 million USD every year from the World Bank. They borrowed 290 million USD in 2016. As a result, their budget deficit has reached 11 percent of GDP. The most rapidly growing industry in their economy is tourism. Georgia’s tourism industry is now accountable for 23.5 percent of GDP, 20 percent of employment, and 36 percent of exports.
Georgia has learned how to “swim” in democracy and free market relations. It is obviously very challenging for countries that were only recently under communist rule to set up systems that have been in place for hundreds of years in other Western countries. In any case, it is a great achievement for Georgians to reach a point where they have the freedom to choose their way of life, impose judgment and oversight on their government, and be able to change things. Economists believe that, going forward, Georgia needs to pay special attention to protecting property rights in order to continue development and grow their economy. Vakhtang Lejava, director of the Kakha Bendukidze New Economic School, notes the importance of a good education for newer generations to increase economic freedom in Georgia.
Georgians understand that a country can attract foreign direct investment and become connected to international markets only when they have economic freedom and ensure the protection of private property.
Please visit D.Jargalsaikhan’s website, www.jargaldefacto.com.