REVIEW #7: Georgia’s Succesful Public Sector: Background and Lessons

Georgia became independent in 1991 after the country cut economic ties with Russia. It immediately eliminated the market for produced goods and caused the limitation or stoppage of more than 900 state-owned factories and thousands of collective farms. However, the privatization of land, apartments, houses, and factories did not help immediately. Post-Soviet Georgia, though being one of the most privately (though illegally) run economies, needed better business skills and environment. Nevertheless, that development had to “wait” until the political situation was ripe for true and comprehensive free market reforms after the Rose Revolution in November 2003 and the presidential and parliamentary elections of 2004.


Highlights of Real Privatization1

Voucher privatization” did not achieve the desired outcome. Factories with outdated technologies, producing low-quality goods, were unable to attract foreign investments and suffered from a Russian energy blockade. That significantly slowed down the privatization process. In the 2000s, Georgia attempted a second stage of privatization. Yet some of the big companies (like Georgian Railways) remained under state ownership. A significant part of arable lands remains under public ownership, and most private land needs registration.

The indexes of economic freedom, by the Fraser Institute and the Heritage Foundation, clearly indicate that there are private property protection problems in almost all post-communist countries. Georgia, though not an outsider on those lists, still lags behind developed Western nations.

After two waves of privatization, the state still keeps several hundred public companies (however, most of them are not in operation). Although almost all clinics are private in the health care system, a huge majority of high schools are state-owned. The efficiency of state-owned institutions remains very low — they either operate with subsidies or stagnate and waste the scarce resources of the poor country.

Privatization, however, is not only a sale of government-owned properties: It is first and foremost a process of separating the government from intervention in many other areas, not just the economy. Georgia is a positive example, and an almost unique exception in this respect.

Georgia ended the taxpayer-funded welfare system in 2008 after eliminating the social taxes and the state funds managing their distribution. The decision was long in the making by events happening before and since the collapse of the Soviet Union. It made Georgia’s fiscal system one of the cleanest and the most sustainable. It has no official social obligations or liabilities toward its citizens, who were incentivized to take care of their own fate in old age and health2.

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1 Georgia’s privatization was legally outlined as early as 1991 by the Law on the Privatization of State-owned Enterprises in the Republic of Georgia. The voucher scheme occurred between January 1992 and July 1994. It did not work for many reasons, but the main one was that loss-making entities (the vast majority of state-owned firms) were not liquidated. The new “reform” was attempted by the 1997 Law on State-Owned Property Privatization, but that failed too. The “seller” (the Ministry of State Property) was bound by approvals, there were more than 20 exemptions from privatization, and there was a myriad of employee privileges for the post-privatization period. All those hurdles were resolved by the 2004 privatization program (spearheaded by Kakha Bendukidze), which was based on a simple principle: SOEs go those individuals or organization that paid top price.

2 The reforms were fiercely criticized. See Simon Gabritchidze, An Analysis of Recent Health System Reforms in Georgia: Future Implications of Mass Privatization and Increasing the Role of Private Health Market, Institute of Public Affairs, Warsaw, Fellowship Program for Georgian Public Policy Analysts

Policy Papers 06/07. Later, critics recognized “some success”: Kate Schecter, The Privatization of the Georgian Healthcare System, Anthropology of East Europe Review 29(1) Spring 2011, pp. 16-22. A more detailed account of the outcome may be found in: Frederik C. Roeder, Andria Urushadze, Kakha Bendukize, Michael D. Tanner, and Casey Given, Healthcare Reform in the Republic of Georgia: A Healthcare Reform Roadmap for Post-Semashko Countries and Beyond, April 6, 2014. A more contextual review of Georgia’s privatization may be found in: Larisa Burakova, Robert Lawson, Georgia´s Rose Revolution: How One Country Beat the Odds, Transformed Its Economy, and Provided a Model for Reformers Everywhere, Guatemala, Universidad Francisco Marroquín, 2014, and: Лариса Буракова. Почему и Грузии получилось. Москва, Альпина Бизнес букс, 2011, especially chapter 5.

Gia Jandieri