September 20, 2016
The spirit of freedom espoused by Kakha Bendukidze and his like-minds dramatically changed Georgia. In Ukraine, we struggle for change as well but we seem to fail to understand the role of freedom in it. In this article I would like to reinforce the spirit of freedom and also discuss how we can use seemingly and undeservedly not very famous but effective instruments invented in Georgia.
During the week of Structural reforms in Ukraine named after Kakha Bendukidze, the great man, who stood behind the reforms in Georgia and was probably one of the most famous practitioners of freedom and libertarianism in the world so far, there were a lot of discussions concerning energy, land, privatization, free movement of capital and the rule of law. These are the important things and such events as well as people who attend them are very inspiring.
Yet there is one question that is pending – why do we even need reforms? or rather do we understand why we need them?
They might not provide us with enormous wealth but they can give us something without what any honestly earned wealth is simply impossible – freedom. Bendukidze himself often said that people must be liberated. And that’s exactly what he and his like-minds did in Georgia.
Here in Ukraine, we admire how Georgians significantly reduced corruption in courts and police, but we very rarely think that that was in order to provide freedom for people. And more importantly, these reforms were not enough to fully achieve it. Kakha Bendukidze in his innovative thought went far beyond anyone could imagine. Of course, courts and police reforms gave people freedom from corrupt officials. But Bendukidze and his collaborators also introduced an instrument that protected the freedom of people from the state itself – a unique, unfortunately unreplicated anywhere in the world Organic law On economic freedom.
Economic Constitution of Georgia
This is how this law is informally called, while Andrei Illarionov compares the significance of the document to the one of Magna Carta or United States Declaration of Independence. That is not surprising since the bill enshrines freedoms in a way no other legal instrument does. Social and economic rights therein are not privileges of guaranteed work or income but the rights to influence the taxes which a person will pay, express free will in labour relations and so on.
As with many great documents, its history wasn’t very smooth. The original draft law was prepared in 2009 by Kakha Bendukidze, Lado Gurgenidze and Vato Lezhava. It contained 13 articles and a long preamble. This draft was never adopted by the Georgian parliament. It was significantly amended, the preamble became shorter, the number of articles was reduced to five, which lead to narrowing of the list of originally foreseen freedoms. While these amendments were made with participation of Bendukidze, it doesn’t mean that he backed down from his position. The reason for such changes in the text is mainly political as clearly not all members of the parliament were libertarian (although a majority of them were) and so the most ‘extreme’ provisions such as prohibition of any legislative restrictions to buy and sell currency could not find enough political support. In 2011 the bill was finally passed and in 2013 it was enacted. The adoption of this law illustrates very well how one of Bendukidze’s political axioms works: to achieve something fairly good you need to demand something extremely perfect.
We should emphasize that despite this, current law serves as a good protection from voluntarism of the state because as an organic law it has more difficult procedure of adoption and abolishment (the vote by a majority of the full list of MPs, while simple laws require only the majority of MPs present as long as it is not less than ⅓ of the total number of MPs), and its provisions can be the ground for the Constitutional court cancelling laws and regulations that contradict it. Of course, too little time has passed to speak of the act’s stability. However, since 2011 it has not been amended.
Below, I analyze the rights and principles provided by the law.
Recognition of importance of economic freedom and limits of interference with it
The Preamble establishes that “economic rights and freedoms are human rights and freedoms that can only be limited according to the rules and within the limits established by the Constitution and laws of Georgia”;
It also stipulates that freedom “is expressed in reduced government, responsible macroeconomic policy and low taxes”.
The rights listed in the law are as follows (those in green are enshrined in the final version of the law in force, others were foreseen in the original draft but never adopted).
The right to low and stable national taxes
People should be able to influence how much they pay to their government. According to the draft law, any increase in tax rates or introduction of new taxes must be approved by a national referendum. This can guarantee stability of the tax system and thus provide one of the most important elements of a stable investment climate. Meanwhile, in Ukraine the tax system is reshaped almost every year, and referendums on taxes and budget are constitutionally prohibited.
The First article of 2011 version of Georgian law prohibits the increase of taxation either by introducing new taxes (except excise tax) or by raising the rate of existing taxes unless allowed through a referendum, the calling of which belongs exclusively to the competence of the Government of Georgia. The change in taxation, however, may be not subject to referendum, if it is temporary (for not more than 3 years) or if it does not increase the overall tax burden.
The right to free movement of capital
This right includes the absolute right to freely invest but more importantly to exchange currencies at any time and also to transfer money beyond national borders and repatriate income. The last one is actually an ultimate incentive to reinvest contrary to the popular fear of capital flight as people would invest in places where they can remain in full command of their money and property. The only restriction in the original draft is relation to criminal liability, which makes sense. The 2011 Law adds unnecessary possibilities of legislative and treaty restrictions.
The right to small state is enshrined more or less in the same way in both the original draft and the 2011 Law.
It is actually expressed in a set of prohibitions for the government:
- from spending more than 30% of GDP.
This deals with the incentive of the government to introduce new taxes or to acquire more assets as it won’t be able to spend more anyway. In this way larger chunk of the national income remains with individuals or firms who earned it – and they, rather than government officials, can decide on the ways to spend it. This puts more responsibility on people themselves and reduces the room for paternalism.
- to have budget deficit above 3% of GDP.
This mitigates the problem of filling the deficit gap by printing more money (inflation) or by increasing sovereign debt.
- to increase state debt to more than 60% of GDP.
This eliminates the risk of the following generation being buried under the debt of stupidity of their ancestors, which is a problem for most of the countries of the world.
The approval of the budget that does not meet the parameters set out is possible only in the event of war or economic recession.
The other thing that was left almost untouched since the original draft is budget universality principle.
This means elimination of all extra-budgetary funds which makes the state budget more transparent. This decision has its pros and cons but one of its largest positive effects is simplicity.
The freedom of pricing, not included in the 2011 Law, allows people and firms to price whatever they sell however they want and prohibits the state to control or regulate prices in any way.
The assumption behind this provision is market efficiency which is reduced by any government interference. If we believe that markets are efficient then prices should be determined by the supply and demand only. In this way inefficient businesses will disappear, while low-income people may be supported through direct cash transfers, which is more transparent.
Logical extension of the freedom of pricing is the right to free trade because quantitative limitations of production, imports and exports are indirect ways of price control. In the 2009 draft law the special emphasis is made on the right to choose standards to which to adhere if different standards exist (either local standards or foreign standards or standards of international organisations of which Georgia is a member may be chosen). Unfortunately the 2011 Law does not contain this provision.
The right to freedom of economic activity, also not included in the final law implies that anyone can conduct any legal business and that the state is prohibited from increasing compliance cost by any means including increase of total number of licenses or permits as well as complication of procedures or toughening conditions for obtaining such licenses or permits.
Large compliance cost prevents businesses from creating jobs and raises their prices. It also creates barriers to entry and thus makes it easier to monopolize a market.
The right to freedom of employment, not included in the 2011 Law, unlike the right to be employed, does not guarantee job placement. Instead, it guarantees the expression of free will of both the employer and the employee not restricted by anything except the existing laws and treaties. It is also the right to freely advocate one’s rights to free employment or to choose representatives for this purpose while the state is prohibited to favour any kind of representation agencies in any way. Another aspect is the right not to be discriminated, especially in hiring and dismissal.
The right to manage one’s social support, which is not reflected in the 2011 Law, means that welfare system finances citizens rather than institutions. All social benefits are monetized.
Does Georgian government actually comply with the law?
The law is in effect only three years and so far the Georgian government has been in compliance with it (Figure 1). It should be noted, however, that in Georgia the government was historically small, so the law just ensures that it remains small.
Source: IMF data
What are the economic effects of the adopted law?
That’s a rather speculative issue because, firstly, the Law On economic freedom is only the crown to the preceding Georgian reforms which ensures their longevity, secondly, it entered into force only three years ago so it is too early to tell, thirdly, the Law regulates or rather deregulates the economy in a very broad and general way, so we can see its consequences only in the long run. Meanwhile, we can assess the effects of Georgian reforms, including this law, within the following set of indicators (2016):
- Ease of Doing Business by the World Bank – Georgia is 15th in the world
- Economic Freedom of the World by the Fraser Institute – 12th in the world
- Index of Economic Freedom by the Heritage Foundation – 23rd in the world
This is a rather positive picture, taking into account Russian aggression and election of a more ‘leftist’ government in 2014.
Is it possible to adopt a similar law in Ukraine?
It should be known that the adoption of the law that protects the above discussed rights would shade people from an abusive government headed by corrupt officials and from emergence of these. Undoubtedly Ukrainian people would benefit from such a legislative protection. However, since Ukraine does not have organic laws, the freedoms contemplated by Bendukidze should be enshrined in the Ukrainian Constitution. Yet for these rights to work another important provision of the direct effect should be added that would say that all the laws and other acts of Ukrainian authorities are automatically null and void if they are in conflict with the rights provided for by the Constitution.
Of course, we should also account for the fact that some disputes may arise between citizens and authorities. Usually, these are resolved by administrative courts but in our case the result of a hearing may be rendering some acts unconstitutional – the competence of the Constitutional court. In other words, another amendment to the Constitution is necessary, one which would allow citizens to file an application to the Constitutional court, subject of which might be establishing the fact of noncompliance of a certain act with the chapter on economic rights in the Constitution and therefore rendering the act void. Even more revolutionary decision may be to pass the competence to resolve such disputes to some kind of international tribunal (for example, European Court of Human Rights), or even private arbitration (although this would be harder because at least I can’t think of an arbitration tribunal which might accept such jurisdiction). The formula of the rule may be that if ECHR decides while resolving any dispute that some right granted by the Constitution is breached by a particular law or act, this law or act is automatically void.
One important question that I haven’t answered so far is will all of this actually happen? And I truly don’t know. Currently there are two projects on the Ukrainian political arena that I think might bring the liberal ideas discussed in this article into life. These are attempts to create Saakashvili’s party and the renewed Demaliance, both of which claim to be ‘right liberal’. However, the first project doesn’t even exist yet, the second doesn’t have a programme, and we don’t know if they will gain any support on the next election.
Anyway, I believe, the framework of freedom as well as the unique mechanism of protecting it introduced by Kakha Bendukidze and enacted by the parliament of Georgia should be thoroughly learned by Ukraine and Ukrainian people as it is certainly one of the most important achievements of the great thinker. Understanding his philosophy and applying instruments invented by him, to my mind, is the key to success of Ukrainian people.