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Georgian architect of Saakashvili’s reforms warns of mounting costs for Ukraine

August 27, 2014

With the Ukrainian economy experiencing a severe crisis and a war with Russian-backed separatists raging in the east, reforms are a matter of life and death for the country, Georgian reformers believe.  

“The question of reforms is not one of taste but one of inevitability,” Kakha Bendukidze, the chief architect of Georgia’s economic reforms in 2004 to 2008, told the Kyiv Post.

Ukraine needs radical reforms and the later the nation starts them, the more radical they will have to be, added Bendukidze, who became an adviser for Ukraine’s Economic Development and Trade Ministry in May.

In 2003, Georgia faced the same problems as Ukraine does now – a corrupt bureaucracy and overregulated economy. But, following the 2003 Rose Revolution and Mikheil Saakashvili’s election as president in 2004, Georgia turned from a failed state into a Westernized democracy with a low level of corruption and fast economic growth.

Georgia’s example has inspired many in Ukraine, which experienced a similar Western revolution in February 2014, when then-President Viktor Yanukovych was overthrown.

Georgian reforms

According to the World Bank, Georgia is named as the number one economic reformer in the world.

The reforms envisaged massive tax cuts, and one of the lowest flat income tax rates in the world (12 percent) was introduced. The number of taxes was reduced to six from 22, and import tariffs on most goods were abolished.

Another aspect of the reforms was comprehensive privatization of government assets. Bendukidze, who was Georgia’s economy minister from 2004 to 2008, once said that his aim was to sell everything except for his conscience.

The Saakashvili administration also introduced one of the least restrictive labor codes in the world, drastically reduced the number of licenses and permits for business and repealed antitrust legislation.

Under Saakashvili, Georgia’s gross domestic product grew 9.6 percent in 2005, 9.35 percent in 2006 and 12.4 percent in 2007. In the Doing Business ranking, Georgia jumped to the 8th place in 2014 from the 112th one in 2003.

Apart from reforming the economy, Georgia overhauled its law enforcement system and drastically reduced corruption. The country’s traffic police was completely dissolved. A new department was created, and most of the traffic police officers were replaced with new ones.

Pre-reform situation

In some ways, the situation in Georgia before the reforms was similar to the current one in Ukraine.

“Georgia was a failed state, bankrupt, divided, politically and socially polarized,” said Ekaterine Zguladze, who was a Georgian deputy interior minister in 2006 to 2012 and acting police and public order minister in September to October 2012.

But the situation in Georgia in 2003 was better than the current situation in Ukraine, which is more similar to Georgia in 1993, Bendukidze said. In 1993 Georgia’s economy was bankrupt, and it was waging a war with its breakaway republic of Abkhazia.

Another difference with Georgia is a lack of a clear, defined reform program.

“The Euromaidan Revolution was an insurrection of consciousness, a civil society rebellion, a civilizational choice and a geopolitical upheaval, but it was not a movement with a clear political leadership and a pre-defined political platform,” Zguladze told the Kyiv Post. “So there is no pre-established program to implement and I understand the difficulties to turn the spirit of this amazing civic revolution into concrete reforms and policies.”

However, Ukraine has an upside because it has a vibrant civil society and Georgia did not have it and did not involve it in the reform process, Zguladze said, adding that Georgia pretended “not to have an enemy” and “clearly had no friends,” while Ukraine has both.

“You have a genuine industry and entrepreneurs, you have an amazing civil society, creative and well-educated human resources, you have a clear enemy and also, many friends in the world, which we did not have,” she said. “Capitalize on this. Trust me – I know what kind of capital it is.”

Zguladze believes that a strong civil society is a key factor for reforms.

“Never civil society was so strong and clear in Georgia or in any post-communist country, to tell the truth,” she said. “This is huge. And this has to be translated into the political landscape now. This desire, public demand, readiness to fight for it and defend it from external and internal enemies is the mother of all reforms.”

Bendukidze agreed, saying that revolutionaries and bureaucrats were “on the opposite sides of barricades,” and there were groups of Euromaidan activists who were pushing for reforms. However, their energy is insufficient so far, he added.

The positive changes since the revolution include an increase in natural gas and power prices and the first stage of the tax reform but, other than that, no progress has been made on reforms, Bendukidze said. The energy sector reform is intended to bring prices closer to market levels, while the tax reform envisages cutting the number of taxes to eight from 22 and tweaking the value added tax, corporate tax and payroll tax.

Communication

To speed up the reforms, Zguladze urged the Ukrainian government to establish credibility.

“I’d say the only way to do drastic reforms (assuming that there is a strong political will) is to have a higher moral ground than your adversaries,” she said. “To have a higher moral ground, one needs credibility; to have credibility – one must prove capable; to do so … yes, one must deliver results as soon as possible.”

She also said Ukrainian authorities should improve their communication skills.

“Communication with people is critical: communication internally among authors of reforms and those who implement them, with targets of reforms; communication externally with the public,” she said. “But you can’t really sell anything without showing at least part of it today, rather than tomorrow.”

Communication between supporters of different political views is also important.

Bendukidze, a believer in libertarian ideas and free markets, said he had met fellow libertarians among Ukrainian activists and politicians. However, he said that 90 percent of reforms were not related to ideology.  There are situations when both people with right-wing views and those with leftist ones realize that it’s impossible to live this way anymore, and no political force would publicly support corruption, Bendukidze added.

Economic freedom

Georgian libertarians have attributed Ukraine’s economic crisis to its lack of economic freedom. Currently, it is one of the most unfree countries in the world and ranks 161st out of 177 countries, behind Angola, Belarus, the Central African Republic and Russia, according to the Heritage Foundation’s Economic Freedom Index. By comparison, Georgia is ranked 21st.

Since 1991, Ukraine’s economic growth has been the slowest among former Soviet countries.

Despite being an authoritarian country, Russia has carried out many reforms that have not been implemented in Ukraine, Bendukidze said. Russia has cut some of its key taxes, its budget is structured in a better way, and it has no subsidies for coal production, he added.

The tax burden in Ukraine is disastrous, Bendukidze said.

“For Ukraine, this is lethal,” he said. “It’s like pumping 5 liters of blood out of someone.”

Corruption

The overregulated economy is closely linked to pervasive corruption. According to the Corruption Perception Index, Ukraine ranks 144th out of 175 countries, behind such countries as Papua New Guinea, Nigeria and Russia. Georgia is listed as 55th.

“Corruption is a crime, as simple as that,” Zguladze said. “That label is important to change social behavior. And this is essential in defeating systemic corruption.”

Zguladze said that Ukraine should adopt a “zero tolerance policy” for corruption but be very clear on how it is applied and use “discretion on sanctions.” A tax evasion amnesty should also be an option as a parallel measure, she added.

Zguladze believes that, to prevent anti-corruption efforts from turning into a politically motivated witch hunt, reforms should be undertaken in a democratic environment, and “very clear laws and procedures” and proper monitoring should exist. However, democracy should not be used as a “shield for inaction” either, she added.

Firing

Bendukidze believes that, to root out old corrupt practices, law enforcement agencies should be effectively dissolved and created anew, with new people being hired. This idea has been popular in Ukraine, where lustration has become a major demand of the Euromaidan movement.

However, the government should be careful during this process.

“Firing public servants, including police, shouldn’t be an end in itself. One must fire and hire according to problems and needs,” Zguladze said. “If somebody, a group or a whole institution is not performing, and the reason is known, I wouldn’t be afraid to act and fire large numbers of employees.”

But if the government does not know who will substitute these people and when, firing will not bring anticipated results, she added.  

Obstacles for reforms

Given that the same people are still in charge of the bureaucratic apparatus, reforming Ukraine has proved to be a difficult task.

Bendukidze linked the lack of progress to politicians’ reluctance to take unpopular measures before the next parliamentary election, scheduled for Oct. 26. Moreover, the current “Supreme Rada is not fully prepared to support the Cabinet’s measures,” he said.

Another reason is that reforms are being thwarted by red tape.

“Ukraine is a country of numerous bureaucracy,” Bendukidze said. “There are no reform-loving bureaucrats.”

A lack of progress on reforms could lead to disillusion and disappointment.

“It is vital not to lose the momentum created by Maidan. Because radical transformations have a heavy cost and you need public participation and enthusiasm even to carry them out,” Zguladze said. “The worst thing that could happen is that disillusion and cynicism will come back before deep changes are actually delivered.”

Saakashivil’s team has repeatedly criticized the Ukrainian government for dragging its feet on reforms.

“We managed to establish credibility early!” Zguladze said. “The overwhelming mandate of the Rose Revolution or any revolution fades away unless empowered ones deliver.”  

Moreover, the Ukrainian government has so far failed to find a middle ground between realism and idealism to carry out reforms, she said.

Zguladze also said that entrenched interests were thwarting the reforms, and they were bigger in Ukraine than in many other countries.

She said, however, that “every challenge can and must be transformed into an opportunity, sometimes it’s even easier to be brave, ambitious and extravagant in actions during hard times than during stability.”

“One is never ready to launch reforms,” she added. “There is never enough money, enough human resources, enough stability, enough political support to be safe about it. Major reforms do contain huge risks, always. So, I guess, one should realistically assess all the odds and then dismiss them and be ready to tackle them and just launch the reforms.”  

Another problem that she believes to be spurious is the “wrong” mentality, which is often cited by observers as a key impediment for reforms.

Zguladze said that mentality and traditions are “merely an excuse not to move toward progress.”

“We are all from unique countries, speak unique languages, have unique cuisine and enjoy unique wedding customs but overall, humans are driven by same mentality – we want to survive and, when life gets better, we want to live even better,” she said. “It is not written in our genes that we should pay bribes or obey fat bureaucrats who make money out of public service while babushkas are begging for money in suburbs.”

Democracy

Just like mentality, democracy is sometimes cited as an obstacle for reforms because it often leads to irresponsible populists being elected.

Bendukidze cited Churchill, saying that “democracy is the worst form of government but the others are even worse.”

“It would be good if bad decisions were blocked by democracy and good ones were promoted by it,” he said. “But this is not the case.”

It is not majority rule per se that matters but the rule of law, Bendukidze said.

“The main problem is probably that in established institutional democracies, the processes are longer and have costs in terms of efficiency and public support,” Zguladze said. “This is why some of the not quite democratic states have proved to be more successful in improving state efficiency and economy in a limited timeframe.”

But the results of reforms “can only be sustainable in a democratic state, especially in rule of law and justice sectors,” she added.

Saakashvili has been praised by many observers for not preventing democratic transition of power to an opposition party. His United National Movement was defeated by the Georgian Dream party in 2012 parliamentary elections, and in 2013 he was replaced as president by Giorgi Margvelashvili, the Georgian Dream candidate.

“In the long term, there is no other choice that building a strong democracy and reforming together,” she said. “Democracy cannot survive if you don’t deliver strong changes (you have seen it after the Orange Revolution and the comeback of Yanukovich’s authoritarian system because of disillusion and frustration). And changes are not sustainable without democracy.”

Apart from populist candidates characteristic of democracies, another obstacle to Ukraine’s economic reforms in case of its integration with the E.U. could be European bureaucracy, which has been criticized by Georgian reformers for its penchant for overregulation.

However, Ukraine faces a civilizational choice and must choose the E.U. as a counterweight to Russia, Bendukidze said.

“(Russian President Vladimir) Putin brought the issue to a head,” he said. “You join either the European Union or the Eurasian Union.”

Moreover, EU regulation is flexible and differs from country to country, and Ukraine should borrow the most liberal practices – like labor law from Denmark and antitrust law from Spain, he said.

In the EU, Ukraine could fill China’s niche due to its low labor costs and become a major exporter of cheap products to Europe, Bendukize said. He added that Ukraine had a more skilled labor force than China.

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