Nika Gilauri on Economics and Geopolitics

In Practical Economics Nika Gilauri reveals his formulas for government reform and economic recovery, including how to fight against corruption, reform fiscal policy and tax systems, privatize state-owned enterprises, and more.

Currently the world is undergoing a major economic and geopolitical reshuffle. The drop in oil prices, European debt crises, China’s economy slowing down, government and central banks running out of the tools to stimulate the growth, refugee crises, etc., are hurting many economies of developed and developing world. In the end, this reshuffle will have its losers and winners. Understanding this process there is a significant competition among governments to attract investment, to attract tourist, to accelerate growth. Which country will end up as a winner very much depends on government efficiency and government innovations – to provide better services, to create better business environment, to create innovative and smart, simple rules, regulations and public finance formulas.

Due to early crises of early 2000’s Georgia had already undergone part of this process. In 2003 it was in much worse situation than the most of the developing countries are now and it managed to transform itself into one of the fastest growing economies and one of the champions of reforms. There is no need for many developing countries to experiment and to look for new solutions – in many cases they can learn from Georgian experience and adapt these reforms for local realities.

After leaving the public sector of Georgia I have been advising many governments on macroeconomic, business environment, energy and other issues. I was amazed to see how similar problems of developing (and in some cases of developed) countries are – corruption and inefficient government services, balancing the budget, inefficient and ineffective public spending, dissatisfied private sector, slow growth, raising debt burden. In five different countries, on four continents (Columbia, Nigeria, Tunisia, Romania and Sri Lanka) I started my presentations by describing problems of Georgia of 2003-2005 (with little adaptations) not saying which country I was talking about and in all five cases the audience thought I was describing the problems of their country. When I told them that I was describing Georgia - everybody was surprised. But when I described how we solved those problems audiences were amazed and wanted to know more about the Practical Economics. That is when and why I decided to write this book – to describe the transformation of a country with almost no prospects for growth, with no natural resources, with highest levels of corruption into a regional champion and a showcase of successful reforms.

In 2003 calling Georgia a country, or a state would have been an exaggeration. It was a failed state – with one of the highest levels of corruption in the world, with non-functioning state institutions, with one of the highest poverty levels in the world, with GDP per capita of below 1,000 USD and almost no prospects for growth, with total electricity blackouts and ruled by criminal families. There was zero trust towards government institutions, paying bribes to government officials was a national sport and people would protest in the streets demanding to know the 2-hour electricity supply schedule (nobody would dream of having 24-hour supply).

In 2012 Georgia had already been named by the World Bank as a top reformer in the world (for the period of 2006-2011), had one of the fastest growing economies in the region, was one of the showcases for fighting corruption and was not only enjoying 24-hour supply of electrify but was net electricity exporter. As a result of these reforms and continued efforts of the next government - by 2017 Georgia had signed Visa Free Agreement and Free Trade Agreement with the European Union.

In figures:

In the period of 2003 – 2012 Georgia managed to quadruple its GDP in nominal terms and double its GDP per capita in PPP terms. Only handful of non-oil-exporting countries have managed to do this in the past half of the century in any one decade – Hong Kong in 80’s, Singapore and Taiwan in 90’s, Ireland and South Korea in 90’s and early 2000’s, Latvia and Lithuania in early 2000’s, Georgia being the latest of these cases.
Average real growth rate of Georgia during this period was between 6-7% and that is including 2008 Russian invasion and 2009 world financial crises. Georgia managed to get out of the crises the fastest in the region with 6.4% growth rate in 2010.
According to Ease Doing Business report Georgia jumped from 112th place in 2006 to 9th pace in 2012, being the only precedent of a country progressing from below 100 into top 10 and being the only developing country in top 10.
According to Transparency International in 2003 Georgia was on the 127th place out of 133 countries researched. In 2014 Georgia was on the 50th place and on the question – have you or member of your family payed a bribe in the past 12 month only 4 % said yes, better result than USA and EU average. Georgian case proves that endemic, historic, or cultural corruption does not exist; if it existed Georgia still would have been among the world champions of corruption.
Debt to GDP came down form 63% in 2003 to 34.8% in 2012.
Despite decreasing number of taxes from 21 to 6 and decreasing all rates of taxes, tax collections to GDP increased from 7% in 2003 to 24% in 2012.
According to the World Bank - due to innovative welfare formulas Georgia’s poverty rate decreased from 21% in 2010 to less than 15% in 2012 and extreme poverty decreased from 7% in 2010 to 4% in 2012” – probably the fastest decrease of this magnitude.
Georgia’s number one export item in 2003 was scrap metal – that’s how bad the economy was. Since 2010 Georgia’s number one export item is vehicles; even though Georgia does not produce any vehicles. But due to simplification of import and registration rules all car dealers are bringing their cars in Georgia for the whole region and then car traders from neighboring countries buy them and take to their chains. It is actually a re-export but creates thousands of workplaces without any heavy investments, without building any new production facilities - only by smart regulations.

The purpose of the book is to describe these transformations, to show how these reforms can be used in other countries and offer innovative policies to public sector leaders at same time trying to answer two main macroeconomic questions:

What is the right size for a government, both in terms of its regulatory footprint and in terms of its budget in relation to the size of the economy?
How do you ensure a government's efficiency in terms of its decision making, its interaction with the private sector, its financial flows, and the services it provides?