SEPTEMBER 2017
If Russia and Ukraine suffer the effects of having imbibed too much Communist vodka, Georgia is like a refreshing sip of Argo beer, one of the country’s best brews. I [Bob] love Georgia—the people, the food, the beer, the wine, and of course the economic reforms that have taken a Soviet backwater and given it new life. I’ve been to Georgia about fifteen times—more than once a year since my first visit in 2005—and consider it almost a second home.
Georgia is bordered by Armenia and Azerbaijan to the south, Turkey to the southwest, and Russia to the north over the Caucasus Mountains. To the east is the Caspian Sea and to the west is the Black Sea, which, through the Bosporus Straits, provides an outlet to the Mediterranean and the larger world. Still, it usually takes me three flights and at least twenty hours to get to Georgia from Texas.
Tbilisi, Georgia’s capital, looks nothing like a rich European city. It’s shabby and rundown—though a hell of a lot better than it was just a dozen years ago. On my first visit in February 2005, there seemed to be more potholes than cars on the road, and it was cold and dark—not North Korea dark, but close, because the hydroelectric plants could produce only limited energy in the winter. Fuel scarcities meant the gas-powered plants weren’t working much either. It was truly dismal.
To be fair, it’s been dismal in Georgia for hundreds of years. About the time George Washington was fighting the British with the help of the French, the Georgian King Erekle was fighting the Persians with the help of the Russians. It went better for the Americans. Tbilisi was sacked, and Georgia lost the war. In 1801, Georgia was annexed into the Russian empire. Georgia briefly regained its independence after the Bolshevik Revolution in October 1917, only to have the Red Army invade in 1921.
Bob and Ben pose with Paata Sheshelidze, co-founder of the New Economic School at their headquarters in Tbilisi. Paata and the co-founder of the New Economic School, Gia, were instrumental players in pushing for the reforms that transformed Georgia’s economy.
Shortly thereafter, the Georgian Soviet Socialist Republic became a constituent part of the Soviet Union. It wasn’t until seventy years later, in April 1991, that Georgia once again became independent of Russia. Even after independence, it remained a pretty dismal place. Civil wars broke out in three regions. Corrupt officials, many of them former Soviets, ran the country into the ground while neglecting to make meaningful, pro-market reforms.
Georgia was still floundering in this state when economists Gia Jandieri and Paata Sheshelidze first brought me to lecture at the New Economic School that they run in Tbilisi. I barely knew Gia and Paata then, and I knew next to nothing about Georgia’s history or politics. As we drove through the city, they excitedly pointed out sites where demonstrations had taken place during the Rose Revolution, but I didn’t even know what the Rose Revolution was (in case you don’t either: it was a peaceful revolution in late 2003 that ousted the corrupt regime that had ruled the country since 1992).
As it turned out, Paata and Gia were instrumental players in the Rose Revolution, and they pushed the new government, led by Mikheil Saakashvili, toward economic freedom. Tall, charismatic, and liberal (in the European sense), Mikheil “Misha” Saakashvili was a stark contrast to the dour ex-Soviet leaders he replaced. He had a law degree from Columbia, spoke impeccable English, wore expensive Italian suits, and gave the Rose Revolution its name by passing out red roses to symbolize his intent to peacefully reform Georgia’s institutions. He became the country’s new leader in January 2004.
On the first evening of my first trip, Paata and Gia escorted me to a government building where plaster was falling from the walls, wires dangled from the ceiling, and a few bare light bulbs and space heaters were powered by a humming generator. After a terrifying ride in a shaking elevator car with a door that would only close halfway, we arrived to meet the minister of economic reforms, Kakha Bendukidze.
Saakashvili is more of a politician than a policy wonk, and he realized he required help to implement the sort of pro-Western, pro-free-market policies he knew Georgia needed. So he lured biologist-turned-entrepreneur Kakha Bendukidze to be his right-hand man. Bendukidze, a native Georgian, had been running petrochemical companies in Russia and had made a fortune. As the minister of economic reforms, he became the turnaround artist who was able to push through an agenda and jump-start Georgia’s economy. Bendukidze was an imposing figure—a hulking beast of a man who must have weighed 350 pounds. I could tell immediately that Kakha was no politician, but I was also excited to learn that he was a fanatical libertarian.
He excitedly rattled off reforms he had initiated and others he had planned. He boasted that he and Saakashvili were “going to make Georgia the freest economy in the world! Freer even than the United States.”
Frankly, he sounded insane. But as it turned out, Kakha Bendukidze was crazy like a fox. To list all the reforms Kakha pushed through in those heady days from 2004 to 2006 would require a chapter of its own.1 He focused on three overlapping goals: reducing the size of the government, privatizing state-owned corporations into independent businesses, and repealing unnecessary bureaucracy, rules, and regulations. Kakha systematically reviewed executive branch jobs; investigated offices in person to see what, if anything, the bureaucrats were doing (the answer in many cases was not much, though they still collected paychecks); and made huge personnel cuts. For instance, he eliminated the superfluous Department of Pricing (price controls had been lifted more than a decade before), the Price Inspection Office, and the Anti-Monopoly Service, and replaced those three sizeable bureaucracies with a single Agency for Free Trade and Competition, with a staff of six.
In the Ministry of Agriculture, Kakha cut the number of employees from 4,374 to 600; in Tbilisi City Hall, the number of employees fell from 2,500 to 800; the Ministry of Environmental Protection shrank from 5,000 employees to 1,700; and the total number of ministries decreased from 18 to 13. The present Georgian Ministry of Internal Affairs, for example, was formed by merging the Ministry of State Security and the Ministry of Internal Affairs, cutting nearly 50,000 state employees from the public payroll. Kakha also eliminated the utterly corrupt State Traffic Inspection Service that existed merely to extort money from drivers, slashing an estimated 30,000 road police officers from the state payroll and thus, Georgians joked, slashing the crime rate.
Before Kakha’s arrival, Georgia’s half-hearted efforts at privatization were limited and often corrupt. In 2004, however, Kakha declared that “everything was for sale except Georgia’s honor.” Most large-scale state properties—factories, hospitals, and residential buildings—were to be privatized in short order.
Under Kakha Bendukidze’s initial leadership, Georgia’s privatization program was among the most extensive and least corrupt of any former Soviet republic. The government sold off state assets to the highest bidder in public auctions, with no preference given to Georgians over foreigners. There was no corrupt favoritism or insider deals.
The Intourist Hotel, a former gem of a property located in the Black Sea resort town of Batumi, was the very first to be privatized under Bendukidze’s new plan. The first potential buyer was a local, would-be crony capitalist with political connections who offered only a paltry $80,000. Bendukidze refused his offer, ignoring political pressures to make the sale, and ordered an open auction. A Russian investor won the auction with a bid of more than $3 million! Kakha dismissed worries that Russians would buy up the country, insisting that private investment was beneficial to Georgia, whatever the source.
Anyone can view recent winning auctions and bid on property online. You can do it right now if you’d like. Check it out at www.privatization.ge. Visa and MasterCard accepted. I checked the site while writing this chapter and noted that a gentleman named Jambul Gelashvili had recently purchased a 50-square-meter (about 538 square foot) concrete building from the state for 2,480 Georgian Lari, or about $975.2
Georgia’s transparent auctioning of state-owned assets stands in contrast to the privatizations in most other former Communist countries. In most cases, assets were sold at very low prices to political cronies or political leaders themselves. In others, voucher-based privatizations gave citizens coupons with which they could buy stock in newly privatized companies. Unfortunately, many people did not understand the value of the vouchers and were eager to sell them cheaply, even bartering them for food and booze, and unscrupulous brokers took advantage of them.
Private property is essential, but not sufficient, to support a free-market system, which also relies on other economic freedoms—such as the freedom to start a business, produce goods, compete with other businesses, set prices, and hire and fire employees. When Kakha Bendukidze came on the scene, virtually every sphere of the Georgian economy was in desperate need of economic liberalization. Not only did the state own many industries, but taxes were high, and bureaucratic regulation stifled entrepreneurs.
Georgia’s post-Soviet income tax and payroll tax systems were designed with the help of the International Monetary Fund and patterned after high-income nations. As a result, the tax system was highly complicated and had steeply progressive tax rates. It was ill suited for Georgia’s poor, mostly agricultural economy, and it did little to attract needed foreign investors. In fact, the system was so complex and had so many loopholes that it raised little revenue. Something needed to be done to simplify the tax code, weed out corruption, and generate revenue.
The number of distinct taxes was reduced from twenty-two to seven, and later to six. The rates were also reduced, with a 12 percent flat income tax and a relatively simple 18 percent value-added (or sales) tax. Later, the wage tax, used to fund social pensions, was eliminated and folded into the flat income tax, bringing the total tax rate on wages from 33 percent to 20 percent.
Even as the new reforms took hold, Georgia was still functioning under Soviet-era regulations that gave labor unions special privileges, including mandating that most jobs were reserved for union members. In 2006, that law was finally scrapped, and Georgia adopted a simple, liberalized labor code that opened labor markets to free competition and freedom of contract.
Within a few short years, Kakha had accomplished nearly everything he had promised on that cold February evening in 2005. However, he did fall short of a few goals. His plan to dump the nation’s currency in favor of the U.S. dollar, as Panama and Ecuador have done, fell flat. Land privatization efforts in the mountainous parts of Georgia foundered, not so much because of any residual socialist opposition to private property, but because the concept of land ownership is just not very meaningful to the mountain people.
On one trip, I was hiking in the Caucasus Mountains in the northern part of the country, in the region called Khevsureti, which is near the Russian–Chechen border. My Georgian hiking companion and I were staying with a local family far from the nearest road—at least a full day’s hike. When our host told me that they don’t need private property in the mountains, I politely asked him how he and other hill people kept track of their cows and sheep that grazed along the mountains. With fiery eyes, he replied, “I know my animals!” In other words, like mountain people all over the world, he didn’t need any city slickers from the capital interfering in his way of life.
When Kakha began his reforms in 2004, Georgia ranked fifty-sixth on the economic freedom index. In the 2017 edition of the index, Georgia ranked eighth in the entire world, ahead of the eleventh-ranked United States. Can you imagine going from being the Georgian Soviet Socialist Republic in 1991, with almost no economic freedoms, to placing among the freer economies in the world in just a little over a decade? It is truly remarkable.
When Ben visited Georgia with me in the fall of 2017, Tbilisi was no longer a cold, dark city. This was Ben’s first experience in Georgia, and he thought it looked and felt pretty rough—and roughest of all was his hotel towel. The hotel still dried them on a clothesline. Ben was convinced his had been starched.
My visits to Tbilisi remind me of watching a favorite niece or nephew—one you see only once or twice a year—grow up. Today’s Tbilisi has better-paved streets than Dallas. The once dark city now gleams like Paris at night. Tourists come from all over Europe and the Middle East to enjoy Georgia’s famous food, wine, and other attractions, including a new glass pedestrian bridge across the Kura River, the redeveloped medieval section of town with its quaint shops and hip restaurants, the funicular that takes you to a mountaintop where there is a repaired Ferris wheel, and the cable cars that link one mountaintop with another.
Even under Soviet domination, Georgia was far enough from Moscow that it was a center for fine cuisine and avant-garde culture. Tbilisi was a hotbed for filmmakers and artists, like the Tbilisi-born Armenian Sergei Parajanov, who is celebrated today with a whimsical statue of a winged artist soaring through the sky. If the real Parajanov could have soared, he might have avoided the years he spent in Stalin’s prisons. The best Soviet chefs were trained in Tbilisi and, to this day, it is common to find Georgian chefs in the kitchens of the finest restaurants throughout the old Soviet Union.
We, of course, took full advantage of the renowned food and drink during this trip. Georgia’s wine industry is flourishing, and we were more than happy to sample it. It seems like half the men in Georgia are named Giorgi, and we met one at a restaurant that served his award-winning wines. Giorgi trained as a physicist, as many intelligent people did in the former Soviet Union, because it was easier to maintain one’s integrity in the hard sciences like physics and math than in the more overtly politicized fields of history, political science, and economics, all of which had to parrot the Communist Party line. The Soviet Union hopelessly under-produced things like toilet paper and butter, but its education system massively overproduced physicists and mathematicians to the point that some, like Giorgi, ended up making wine.
Actually, even Soviet bureaucrats recognized that Georgia’s relatively dry, warm climate was better suited to winemaking than, say, Siberia’s, so they designated entire swaths of Georgia’s flat central valley east of Tbilisi for winemaking. They imported French grapes and used modern techniques to turn out huge volumes of barely drinkable swill for the masses. Today, no one wants to drink that crap and most of those fields lie fallow, but thankfully the true Georgian wine tradition was kept alive.
Giorgi, for instance, uses native grape varietals that he ferments the Georgian way: crushing the grapes (skins, seeds, stems, and all), pouring the resulting mix into huge clay pots called qvevri, burying the pots in the ground, and then waiting for the right moment. The process might sound primitive, but the wines are surprisingly complex, and the white wines especially come out a deep, nearly orange color from interacting with the skins and seeds. Georgian wines are rightly famous and qualify as a tourist attraction on their own, and investors are flocking to get a piece of the action.
Although we enjoyed plenty of good food and drink, we had an aggressive schedule that involved lectures at several local universities. Over the course of three days we each gave lectures at the University of Georgia, International Black Sea University, and the University of Gori on economic freedom, development, and international trade.
Students were always excited to learn that Georgia was among the most economically free countries in the world, but after hearing about how economic freedom creates prosperity, they always had the same question: “If Georgia is so free, why are we so poor?” It’s a good question. Other factors besides economic freedom can limit development. Georgia has a difficult geographical location, and its large, hostile neighbor isn’t much help either.
And when I say hostile, I really mean it. In August 2008, I was invited by my friends Paata and Gia to lecture at a conference. Just as I hopped on the plane, the Russians invaded Georgia, and when I landed, I found myself in the middle of a war! The Russian army claimed it was assisting the South Ossetians, who wanted autonomy from the Georgian state. The war lasted several days; the Georgians were handily defeated; and to this day two Georgian regions, South Ossetia and Abkhazia, remain under Russian occupation.
The main reason that Georgia is still poor—with incomes that average only about $8,000 per year—is because it was a Russian, and then Soviet, client state for more than two hundred years, spent the first dozen years after the collapse of the Soviet Union pursuing largely socialist policies, and has only recently embraced economic freedom and capitalism. Economic growth compounds over time to raise living standards. Georgia’s reform efforts have spurred significant growth, so while Georgia can’t yet boast of prosperity, it is certainly doing far better than it was, and the future looks much brighter. The evidence was not only visible all around us; it can be seen in the country’s measurable economic statistics. Ben’s colleagues at Texas Tech, Kevin Grier and Sam Absher, and I have examined the impact of the Rose Revolution on Georgia’s social and economic outcomes since 2004.3 According to our conservative estimates, Georgia’s income per person is about 40 percent higher; infant mortality is about 30 percent lower; and employment is about 10 percent higher thanks to the reforms of the Rose Revolution. Moreover, this progress has come without any significant increase in economic inequality. In Georgia, increasing income and opportunity is shared by virtually everyone. The data tell the story, and our eyes confirmed it on this trip.
If Georgia sticks with its reforms, things will keep improving, and some day, Georgian students will not have to ask why their country is poor.
One afternoon in Tbilisi, we went to a converted old factory where, on the ground floor, hipsters drank high-end coffee and munched on gluten-free, vegetarian snacks, while in a conference room on the floor above we participated in a panel discussion about Georgia’s “Law on Economic Freedom.” That law limits the government to an annual budget deficit of no more than 3 percent of GDP, the national debt to no more than 60 percent of GDP, annual government spending to no more than 30 percent of GDP, and prohibits any new tax without voter approval.
The government that had replaced Saakashvili’s wanted to relax these budgetary constraints. Ben and I made the case that as members of a former Communist state, Georgians should know as well as anyone that governments have an insatiable appetite for taxpayer money and a dangerous desire for power over individuals, and that the existing law was a godsend to limit state power, keep reasonable finances, and protect individual freedom. We argued that they should cherish the law rather than dismantle it. A government bureaucrat and a left-wing professor argued against us. After about an hour, we left the Georgians to battle it out in their own language and went in search of beer, which we found in a bar full of bearded hipsters. A week later, we were happy to learn that Georgia’s parliament had voted to keep the law intact for another ten years.
After our talks at the University of Gori, we felt obligated to spend an hour or so touring the local Stalin museum. Josef Stalin was born in Gori as Ioseb Jughashvili in 1878. Stalin received a good education at church schools, including seminary studies in Tbilisi, but he was badly behaved and had no intention of becoming a priest. In fact, he had converted to the ideals of atheistic, revolutionary Marxism by the time he left school in 1899. He soon became a protégé of Lenin, eventually adopted the name Stalin, and became a prominent Bolshevik leader and eventually Lenin’s successor as head of the Soviet Union and its Communist Party. There was no mention in the museum of any of the atrocities committed by Stalin, except for one small display about Georgian Communists who had been killed on his orders.
We already described the intentional famine Stalin inflicted on the Ukraine, but that’s only one of the atrocities Stalin carried out on the citizens of the Soviet Union. During his reign, millions more were executed or worked to death in slave labor camps. According to the most conservative estimates, Stalin is responsible for just shy of ten million deaths, excluding the Ukrainian famine and war-related fatalities. Other estimates are as high as twenty million. Stalin probably ranks just behind Mao as history’s second greatest mass murderer, with Hitler coming in third—and all three dictators were, of course, committed socialists of one sort or another.
The locals are oddly proud of Stalin being a native son, and Gori kept a large statue of Stalin near the town hall until 2010, when Saakashvili’s government flew an army helicopter to the city in the middle of the night and snatched it away.
Our last stop in Georgia was in the wine country near Telavi, to visit Gia’s aunt. Aunt Nino is a bit of a local entrepreneur who runs several businesses in the area, as well as the family’s farm. Nino lives in a large home with her very elderly mother, but her husband and two sons have lived and worked in Brooklyn for several years. The remittances they send home help explain the new modern kitchen and fireplace on the ground floor. While we skewered and barbecued the pork that was butchered only that morning, the women busily prepared a myriad of side dishes. We were in for a mini supra!
The supra, a Georgian feast, is one of the most elaborate meals one can experience. The eating and drinking can begin before sundown and go until sunrise. This was Ben’s first time in a regular Georgian home, and he didn’t understand my excitement. The women began to bring out khinkali, my favorite dumplings in the world; khachapuri, the best cheesy bread ever made; badrijani, delicious eggplant and walnut rolls; shashlik, skewered meats; sulguni, fresh cow cheese; and on and on, until the small table was heaping with food. Oh, let’s not forget the homemade wine, gallons and gallons of fresh, semi-sweet, peachy-colored wine in two-liter bottles that lined the kitchen table. After a small plate or two, the inevitable toasting began.
Gia, as the senior male in the household, became the tamada, the toastmaster. At any proper supra, the tamada initiates each round of toasts, starting usually with a toast to family members, then to ancestors, then to the Holy Trinity, and then to whatever comes up. He drinks after his toast, and then the next person is expected to individually offer a toast closely related to the tamada’s toast and drink, and then the next person goes, and so on. After everyone is done with that round, the tamada begins anew.
After several rounds, Gia initiated a toast to lost friends. But Ben was still unclear on the rules and tried to toast to free markets or something, and we all screamed, “No! You can’t toast to that now!” He was utterly baffled, and I don’t think ever completely caught on to the game.
Gia Jandieri, co-founder of the New Economic School, proposes a Georgian toast at an impromptu supra with Bob, Gia’s Aunt Nino, her mother, and Ben.
When it was my turn, I toasted Kakha Bendukidze. Kakha’s exuberance for economic freedom was matched only by his love of food and drink. A lifetime of excesses led to his death in London in 2014 during a heart operation. By the time of his death, he and Saakashvili had moved to Ukraine to try to kick-start free-market economic reforms there. I still mourn his loss, not only as a champion for freedom, but also as someone who became my friend during my many visits to his country.
Kakha Bendukidze’s name and legacy live on, however, in the form of the Bendukidze Free Market Center in Kiev. We can only hope that the center that carries his name will bring Ukraine the same level of economic freedom and ultimate prosperity that his reforms are bringing to Georgia.