by Amir Ridzuan Jamaludin. A version was published in The Edge 15 February 2016

Georgia (the former Soviet republic in the Caucasus) is not a very well known country for Malaysians. Mention the word “Georgia”, and most Malaysians would picture “Gone with the wind” and the Deep South, or Coca Cola. What few people know is that in the year 2004, this country embarked upon one of the most dramatic and radical reforms to tackle corruption and the economic malaise that had plagued the country since independence in 1991.

Like many post-Soviet republics, Georgia had been plagued by corruption and bad governance ever since the collapse of the Soviet Union. To make matters worse, it faced Russian-backed secessionist revolts in the northern regions of Abkhazia and South Ossetia which resulted in both declaring secession from Georgia and occupation by Russia. In 2003, after some 12 years of civil war, political uncertainty and economic collapse, the Rose Revolution peacefully
deposed Eduard Shevardnadze, a former Soviet official who had ruled autocratically for almost a decade.

The new government under the leadership of Mikhail Saakashvilli and his minister of economy Kakha Bendukidze instituted various reforms (27 in total) in three different areas, namely de-bureaucratisation, liberalisation and privatisation.

As part of the de-bureaucratisation process, Georgia streamlined its government, reducing the numbers of ministries from 18 to 13. From 52 government agencies that existed in 2003, only 34 remained. Staff size was dramatically reduced, where around two-thirds of civil service jobs were eliminated. For instance, in the Ministry of Agriculture, the number of employees fell from 4,374 to 600; Tbilisi City Hall, from 2,500 to 800; the Ministry of Environment Protection, from more than 5,000 to just 1,700. This much-needed measure made it possible for Georgia to increase civil service pay five-fold, thus acting to curb and deter corruption.

In the area of public safety, Georgia merged two ministries, the Ministry of Internal Affairs and the Ministry of State Security. The two ministries formerly had 75,000 staff but after the merger the number was reduced by nearly two-thirds. The corrupt State Traffic Inspection was eliminated and in a single stroke, 15,000 officers were fired, to be replaced with a newly formed entity two months later. Yet, during the two-month transition period there was no chaos and traffic accidents did not increase. The government was also careful to publicly communicate and
explain the reforms being implemented. They roped in the media and the public to help identify the remaining vestiges of corruption. The reforms have proven to be very successful, as made evident by public perception surveys and data from crime statistics. In 2003, only 5% of the public had trust in the police. In 2012, that number rose to 90%. The crime rate dropped from a high of 73.6 per 100,00 people to 17.2 per 100,000 in 2011. This is a remarkable and significant achievement for any country.

In 2011, Georgia joined the Open Government Partnership initiative in order to further improve the level of transparency and openness in the former Soviet republic. Through the process of public consultation and dialogue, they developed and put into implementation the Open Government Partnership Action Plan of Georgia 2014-2015
( Among the initiatives committed to by the Georgian government was the setting up of one stop centres for all public services (e.g. passports, birth certificates, driver’s license, tax collection etc.), something similar to that of the Urban Transformation Centre in Malaysia. Other initiatives include the introduction of e-governance, setting up of a citizen’s portal, and a unified public information database at as well as an online procurement portal. A far cry from the corrupt, post-Soviet republic Georgia once was prior to 2003.

The Georgian government undertook radical economic reforms with privatisation of state owned assets and liberalisation of the entire sector. Georgia undertook privatisation of state assets in an open, transparent auction in which anyone regardless of nationality was able to participate. Quite a contrast to other similar national privatisation exercises in which state assets were sold to cronies at very low prices or where citizens were given vouchers to buy stock in newly privatised companies. People often did not recognise the value of the vouchers given and were eager to sell them cheaply, even using them to barter for food or liquor. Many felt that
unscrupulous brokers had cheated them out of their vouchers. The openness of the transparent auction succeeded in defusing criticism of the privatisation exercise, even though the proceeds went straight to government coffers.

Georgia also took steps to liberalise her economy. The number of taxes was reduced, along with their tax rates. Georgia went from having 27 distinct taxes to just six. This included a 20% flat personal income tax, 15% corporate tax and 18% VAT (value added tax). They also deregulated the labour market base resulting in labour laws that are similar to the English common law “at will”, and which is only 20 pages long. The policy resulted in a more flexible labour law, reducing the cost of hiring and firing.

Other economic reforms include a drastic unilateral reduction in tariffs (currently at 0.7%), and reductions in the amount of time (measured in days) needed to start a business, obtain construction permits, pay taxes, import goods, and settle contract disputes. The results of these various reforms are substantial. In the Corruption Perception Index, Georgia rose from a low score of 1.8 in 2003 to an impressive 5.2 in 2012 (its 2014 score is 52/100, ranking 50 out 175 countries). In the Doing Business Report 2013, Georgia improved significantly reaching 9th overall. Under Heritage Foundation’s Economic Freedom Index and Fraser’s Institute’s Economic Freedom of The World Index, the country achieved scores of 73/100 and 7.73 out of 10 respectively. By improving her ranking, Georgia has made itself an attractive destination for foreign direct investment (FDI). Between 2006 – 2014, Georgia received a net inflow of FDI of about ten billion US dollars.

A decade of solid economic and political reforms resulted in the formation of a dynamic and robust economy. Georgia’s economy has been resilient enough to withstand the dual shocks of the 2008 South Ossetian conflict and the global financial crisis within the same year. GDP growth slowed to 2.3% in 2008 and quickly bounced back to 6.3% in 2010, reaching 7.2% in 2011.

Despite the reforms, Georgia still has a long way to go. Despite taking harsh measures to deal with corruption, rule of law remains weak. The perceived levels of corruption, though improving, are still higher than average for a European country. While the benefits of economic freedom are beginning to bear fruit, it will be years before Georgia will be able to catch up with the advanced economies of Western Europe and North America, assuming the reforms remain in place and the government’s commitment is unwavering.

The story of Georgia’s transformation provides a best case example for reformers in Malaysia. The speed at which the reforms were implemented was astounding, despite starting at a significantly lower baseline than Malaysia. I am confident that Malaysia will be able to implement radical reforms and follow a similar path to that of Georgia. We are in a much better position than Georgia was in 2003 and have somewhat better and more established institutions.
Additionally, we do not have a belligerent neighbour such as Russia breathing down our necks with threats of armed conflict or annexation. The real question is whether we will be able to muster the political will to do what is necessary and commit to reforms. This, I am not so sure of.

– – –

Amir Ridzuan Jamaludin is Senior Executive at the Institute for Democracy and Economic Affairs.

Leave a comment