TBILISI, Georgia - Despite having been invaded two months ago by a country 30 times its
size, the Republic of Georgia appears to be dealing with that crisis
far better than the United States and other major governments are
dealing with the international financial crisis, and thus the question
The answer quite simply is that the Georgia leaders are not so
arrogant to think they know better than markets, and hence they are
relying on the market to solve most of their problems.
Georgia is a poor country, but for the last four years it has
experienced some of the highest economic growth rates on the planet -
from more than 9 percent to 12 percent per year. It has been eight
years since my last visit to Georgia, and observable changes are quite
remarkable. The New Economic School in Georgia just hosted the European
Resource Bank (a coalition of primarily European economic policy
organizations) meeting this year, which is what brought me back.
After having experienced sputtering reform and progress from the
time of the fall of the Soviet Union, Georgians elected perhaps the
freest market government in the world four years ago. The president,
prime minister and state chancellor are all dedicated free marketeers
who studied F.A. Hayek and Milton Friedman and have learned from the
successes of Margaret Thatcher and Ronald Reagan.
Many, including former high-ranking Russian officials, have argued
that part of Moscow's motive in invading Georgia was to punish this
newly successful upstart that was formerly part of the old empire.
While Russia was becoming less democratic, Georgia was becoming more
democratic. While Russia has engaged in renationalization and
re-regulation, Georgia has engaged in mass privatization and
Much of the inspiration and drive for the radical free market reform
of the Georgian economy comes from a mountain of a man named Kakha
Bendukidze, whom I first had the pleasure of meeting some years ago in
Russia. Kakha, as he is commonly referred to, is the head of the State
Chancellery and one very smart and wise fellow.
Commenting on the international financial crisis, he correctly
observed that as long as governments continue to rely on central banks
and extensive regulation of the financial industry rather than free
banking, "periodic financial crises will continue to plague mankind."
He argues that it is unrealistic, as Hayek and Friedman also did, to
assume central bankers know more and can outguess the market, and that
financial regulators can somehow prevent the next crisis, since they
are unlikely to see where it is coming from.
Georgia has been engaged in fundamental tax reform, rate lowering
and flattening, including removing almost all taxes on capital that are
the seed corn of the economy. The Georgians are actively reducing the
size of government by doing away with ineffectual programs and those
that can be better done by the private sector.
As part of their successful effort to get rid of much of the
corruption that had been rampant, they reduced the number of government
workers by 50 percent, raised the salaries of those who remained and
put in place a zero tolerance policy regarding corruption.
As part of their effort to deregulate, they have reduced the number
of required licenses from 950 to 144. It is now possible to do all the
paperwork and obtain the permits to start a new business in one day.
Registration of a change in property ownership now takes two hours
instead of the previous 30 days.
Georgia once had a major problem with smugglers, but the new
leadership removed almost all tariffs and other trade barriers, and
with it the profits for smuggling and related corruption.
At the time of the invasion, the government resisted putting in
price controls and other forms of resource allocation. As a result,
there was no sustained jump in prices, and the free market quickly
filled whatever shortages were caused by the war. In fact, if the
leaders of the central bank exceed the inflation targets, they will be
The prime minister, Lado Gurgenidze, was both educated and spent
considerable time in the United Kingdom and clearly was influenced by
Mrs. Thatcher. I asked him if he was concerned that the pressures to
grow the size of government because of the invasion would undermine
Georgia's reforms (note: history shows governments almost always grow
in relative size versus the private economy in the time of crisis, such
as wars or financial instability, even if governments create the
The prime minister replied that the Georgians have not retreated
from their reforms, including shrinking the size of government, and
they fully understand any retrenchment would be very damaging.
Georgia does have problems, including the large number of refugees
resulting from the war. But unlike Washington and the European
governments, the Georgian leaders did not deal with their crisis by
creating the new "program of the day." Instead, they told the people
the government would continue to stay out of their way and the people
would have to find ways to solve the new problems. Most of them have
done that quite well and the government remains highly popular.
There is a message here for the political leaders of America and Europe, but I expect most of them still will not get it.