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May 24, 2005

Reforming The Republic of Georgia

Last night I attended a lecture at The Foundation for Economic Education (FEE), set in a beautiful mansion in downtown Irvington on Hudson. The guys are serious Libertarians, and they invited Dr. Kakha Bendukidze, economy minister of the Republic of Georgia. This is guy is amazing. I leaned about him after he was profiled in the Economist back in late July of last year. I considered writing to ask for a job, just to work for a radical free market public official. Trained as a professional biologist, then self taught in Austrian economics when doing so in the Soviet Union was illegal, third a mini-oligarch in post soviet Russia and most recently a public official in post rose revolution Georgia. His English was good, despite him telling us that this was his first public speech in English. Truly, the man is an amazing polymath.

He lectured on the extraordinary reforms he (and mostly he) created in Georgia to turn around their economy that was at once statist, corrupt, and bureaucratic. Essentially, he made the following argument. Corruption is the leading problem in semi-developed economies. Corruption is made possible by two major parts, regulation, which creates opportunities for bribes, and state involvement in the economy, which brings politics into economic decision making. Cut the regulation and privatize the state's assets and you can kill a tremendous amount of the corruption in one shot.

They dismantled the highway police (long despised) and fired 80% of the remaining police. There were 23 taxes, and now there are 7, all flat, and he hopes to get rid of a few more. They combined this with a complete tax amnesty (including the ability to request and destroy all old tax documents) to create a new dawn in tax compliance. Tax collection rates went up significantly.

In his privatization efforts, he marked about all the resistance he encountered from the rich "helpful" donors in the west. He is privatizing the ports (opposed by the French as Anglo sphere madness), privatizing their pipeline (opposed by the Americans for security reasons), and even the trains (domestic opposition). The first round of privatizations (before the rose revolution) privatized 85% of the Georgian economy but raised only 50 million. Since last June, Dr. Bendukidze has raised 200 million by privatizing just a portion of the remainder. He has very simple rules for these privatizations, you must pay all cash, and the goods go to the high bidder. He pointed out something I had never considered, that shadowy privatizations don't result in the efficient allocation of capital. He gave the foundation library we were in as an example. It could be best used as as a resort and gather place for speakers. But you get the title in a under the table deal for a few thousand dollars. You aren't sure if your deed is valuable, so you won't poor money in for making it a great world class resort, even if doing so would be very profitable. Why? That would attract attention, and someone might claim your deed is invalid and your investment lost. So you sell the books, the furniture, and maybe the wiring from the walls, then shutter the building. You make a nice profit, but the asset is damaged and removed from efficient use. So it is essential that privatizations be conducted in an all cash, sunny day manner so that all agree on the true owner of the assets. This is what creates real economic vitality.

He also spoke about his compromises with popular demands for socialized medicine and education, and he victories in the use of vouchers in these areas to create more efficient situations.

Humorously, he said the lecture was originally titled "Moving Georgia from Socialism to Capitalism" but that it would have been more accurately called "Moving Georgia from Nowhere to Capitalism". Have all his reforms worked? Last year they had real GDP growth of 9.5% in a shrinking population. May he serve as an inspiration to poor and oppressed everywhere.

Posted by OneEyedMan at May 24, 2005 10:12 AM

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