Forbidden to forbid: Georgia as Field for a Macroeconomic Experiment

The idea to protect economic freedoms on a constitutional level has for the first time been thoroughly formulated in the post-Soviet region by the Belarusian economist Jaraslau Ramanchuk. In 2007 he presented the project of an Economic Constitution of Belarus[1]. This document was supposed to supplement the country's Constitution in terms of economic policy and to guarantee economic freedom for the citizens and limitations for government intervention in the economy on the constitutional level. This may look as an interesting, but utopian intellectual project for Belarus, but in Georgia it will soon be reality.

A liberal economic regime guaranteed by Constitution

Georgian President Mikheil Saakashvili proposes to protect and expand the country's liberal economic regime on the constitutional level. According to the Act on Economic Freedom and the relevant amendments to the Constitution, a draft of which he introduced to the Parliament on October 6. If passed, the new legislative acts will set limits on the size of government expenditures and public debt, prohibit the imposition of additional licensing and other restrictions on economic activity of private entities.

Besides that, it will be forbidden for the Georgian state to own shares in banks and put restrictions on convertation of the national currency or movements of capital. Any tax increase will have to be approved on a national referendum [2].

Given that the pro-presidential party has a constitutional majority in the parliament, the Act and the amendments to the Constitution are likely to be passed.


Georgia's success under Saakashvili

Just like any politician, Mikheil Saakashvili can be criticized for many things: for an authoritarian domestic policy, maybe for lack of flexibility and diplomatism in foreign policy (although it is difficult to imagine what a president of Georgia could make in order to avoid the war with Russia in August 2008). Even this initiative and the way it has been announced has a fleur of PR and populism on it. But what no one is able to question is the scale of socio-economic progress achieved by Georgia under Saakashvili.

According to most international rankings, Georgia has one of the most attractive environment for business and for investors in the region (and even in the world). Having almost no natural resources or major industries from the Soviet era, in 2004-2008 the country showed an average annual GDP growth of 9.3% which is comparable to the rate for Belarus (10% in 2008, 8.2% in 2007, 9.9% in 2006) with its preferential prices for Russian raw materials, Soviet industrial legacy and manipulation with statistics.

The flow of foreign investment in Georgia has not stopped even after August 2008 (although it dropped to USD 226.1 million in the first half of 2009 to USD 1.143 billion for the same period of 2008). Economic losses of Russia from the war in the form of capitalization of Russian companies fall (a few tens of billions of dollars), the withdrawal of capital from the country (up to USD 20 billion) and the drop in Central Bank reserves (USD 16 billion) were much greater than the loss of Georgia, so the question of who has really lost that war is not a rhetorical one.

Now Saakashvili together with Kakha Bendukidze, the father of the Georgian economic reforms and co-author of the Act on Economic Freedom, have led the country to a major turning point, when the economic transformation is about to get a real deeply institutionalized character.


The essence of the planned economic transformation

The new reform will not simply allow Georgia to get immunity from leftist populist politicians, because forced redistribution of wealth will be more difficult. Mikheil Saakashvili has a chance to remain in history not as a man who lost the war in South Ossetia or returned control over Ajaria, a different separatist region. Saakashvili and Bendukidze are starting an interesting large-scale experiment, perhaps unprecedented in the economic history. For the first time a country of several millions people will try to move to quite a revolutionary socio-economic system, which differs significantly from the generally accepted model of a Keynesian economy.

It is difficult to blame the current global economic crisis on the free market as long as the modern state holds the key control over the economy through manipulation with interest rates, currency or the amount of money in circulation, or even more through direct participation in economic life. Bendukidze and Saakashvili decided to give up some of these institutional postulates that seem to be axioms for ordinary people but which were not common practice even 100 or 150 years ago. If the experiment is successful, the Georgian experience might have a truly global significance, the example of Georgia could become an important step towards a new economic model.


Obstacles and successes: Georgia and other countries

The main thing that can prevent the success of the newest Georgian reforms are the well-known external circumstances and the well-known danger of war that hangs over the country. Those who wish the Georgian experiment to succeed may only hope for peace in the region. It is noteworthy that this reforms just makes Georgia very interested in peace with its neighbors: in fact, it is much more effective for Georgia (taking into account Russia's military presence, actually much more easy as well) to attract the Abkhaz and South Ossetians with social and economic progress than to return control over these regions by military power.

Circumstances have helped Georgia to carry out radical economic reforms: destroyed by war and corruption, the political leaders simply had no option but to make the economy regenerate itself by implementing radical liberal reforms. Reforms bring their results, and Georgia now looks very well compared to other post-Soviet Caucasian countries - Azerbaijan, where the economy is only driven by oil exports, and Armenia, corrupt and surrounded by enemies.

A low starting position, when there is nothing to lose, plus a strong-willed and well-educated authoritarian president turned out to be the ideal conditions for effective economic reforms. Belarus can only envy and closely monitor the Georgian economic experiment: the time will come to learn from the Georgian reforms, and it may come sooner than it seems.


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[1] for more details about the Economic Constitution of Belarus see here (in Belarusian)

[2] for details see here (in English) and here (in Russian)


// Novaja Europa