From the late 1980s to mid-2004, Kakha Bendukidze was a Russia-based entrepreneur, in particular, he was managing director of the country’s biggest heavy-engineering group, OMZ (Obiedinennyie mashynostroitelnyie zavody), serving simultaneously as vice president of the Russian Union of Industrialists and Entrepreneurs. However, in 2004 he was accepted the Georgian President Mikheil Saakashvili’s offer to lead the country’s Ministry of Economy, and later became Georgia’s minister on economic reform coordination. In 2008-09, he was head of the State Chancellery. In 2004-07, when he was minister, Georgia became the top-reforming country in the world, and jumped from 137 to 11 on the ease of doing business scale, ahead of Germany and France. This earned him the title of “Father of Georgian reforms.”
Today, Bendukidze is retired from big politics and has returned to science. He is working at the Free University of Tbilisi, which he founded. The Day made an appointment with him on Freedom Day, November 22. During the interview, Bendukidze shared his experience of implementing economic reforms in Georgia, and offered his assessment of reforming in Ukraine. He began by talking about the achievements and consequences of the Orange Revolution.
“Ukraine’s revolution defended and preserved democracy. Since then, Ukraine has had several elections, where one political force peacefully took over from another. Of course, there remains the question about the likelihood of such a process repeating in the future. However, mankind has not come up with a better way to learn democracy. On the other hand, after the Orange Revolution it was quite normal to expect much more economic reforms – for one, in medicine or education. But the main thing is that your elections were democratic and peaceful. It means that the process of learning democracy (and its values) by the nation is still in progress.”
This string of democratic elections in Ukraine has eventually brought back to power the old leaders of 2004. How would you account for this?
“I may not know all the details, but it seems as if the people were disappointed, since they felt no improvement after the Revolution. No new political forces appeared that would demonstrate colossal political will to reform the country, and succeed in it.”
Now your country is experiencing a change of power, with the arrival of the billionaire Bidzina Ivanishvili’s party. Observers believe that Georgia is actually following the “Ukrainian scenario.” What do you think?
“It is too early yet to say how Georgia’s policies will develop. Time will show.”
Are Georgia-Ukraine relations likely to change with the new team in office?
“I do not think that the change of government in Georgia will somehow tell on our countries’ bilateral relations. We have had, and always will have, good economic and political relations. I cannot see any factors which would cause a fundamental change.”
Is the new Georgian team going to pursue the economic reforms which were at a certain point in time launched by you?
“A part of reforms will be ditched. In particular, the government has already announced changes in health care and agriculture. But they will hardly be able to give up the police reform, since it raises the risk of letting corruption sneak back, which will encounter a harsh response from society. That is why I believe the new administration will have enough prudence not to let this happen. In my opinion, the reforms which already involve a lot of people will stay.”
Georgia’s pension reform is cited among its most successful ones. But the new team is now poised to revise it.
“Today Georgia indeed is willing to revise the pension reform and replace it with a system of cumulative pension deposits. Why are they doing this? It’s too much crowd-pleasing. A closer look makes it clear: there is too much risk involved that the cumulative pension system could misfire.”
“THE CUMULATIVE SYSTEM IS UNACCEPTABLE FOR DEVELOPING ECONOMIES”
Why cannot the cumulative system be implemented, though? Would this option work for Ukraine, where the next stage of pension reform, after the raising of retirement age, should involve (according to the reformers’ agenda) the implementation of the cumulative pension deposit system?
“All in all, I am skeptical about the compulsory-tax cumulative pension system in developing economies. Such kind of pension system is nothing but self-deception and obvious loss of money. Why do I say so? A cumulative system is only efficient on one indispensable condition: the presence of financial instruments whose profitability would outdo not only inflation figures, but also the nominal GDP growth. Only under such conditions will pension deposits be able to effectively protect citizens from old-age poverty. Otherwise, the deposit will simply depreciate. That is to say, people will only become relatively poorer.
“But it is impossible to create these instruments ‘by hand.’ If a developing economy has low inflation and growth figures, it will consequently have many bankruptcies, and a large proportion of the accumulated funds will be lost. A country with a relatively high inflation and growth rates (which is actually the case with Georgia and Ukraine) – say, 5 percent inflation and 5 percent economy growth, i.e. 10 percent nominal growth – should have reliable financial instruments with the profitability of at least 12 percent per year. Obviously, it is unrealistic. That is why I say that the cumulative pension system is unacceptable for developing economies.”
“In the rich world, a successful pension system is employed in the US. But there is no coercion on the part of state to accumulate anything. It is up to the citizens to decide how much and in what way they should save. Everyone should decide for themselves how they want to dispose of their money. Meanwhile, developing economies have only one option: state-funded pensions, as we have done in Georgia. There is an alternative method of individual accumulation: invest in your children’s education or in real estate.
“It is a temptation to imitate the solution of the pension problem via additional income tax and pseudo-savings for the sake of transient political circumstances. The advantage of this approach is that one cannot immediately see the possible outcome. The bad news is that the outcome will be inevitably bad. The cumulative pension system is meant to rob the masses of their savings. How can we avoid it? The government must come up with a mechanism (just as Bismarck envisaged), which would allow every senior citizen to keep his or her savings and ensure a decent living standard in their ripe old age. This is the task. Besides, the government also must create such conditions which would enable a citizen to earn, save, and preserve his savings.”
The tax reform in Ukraine is reduced to attempts to decrease the taxes for bigger payers and expand the basis of assessment thanks to small and medium businesses. Do you think this is a right approach? Will it provide the country with economic growth and additional budget revenue?
“Small business is a special category. Considering its size, administrative expenses for law observance for small business are just deadly. That is why a lot of countries have already reached a conclusion that the smallest business should be taxed in a different way, and the rest of subjects have to be in equal taxation conditions. Otherwise, the state will artificially stimulate this or that form of business in the economy. And it is not the state’s task.”
“FOREIGN CURRENCY SALE TAX IS AN ARCHAIC MEASURE”
What taxes should exist in order for business to operate comfortably and for the state to receive revenue?
“For example, some might like VAT, and some might not. But if it already exists, it is a trap, you cannot get out of it. There is not a single case known in the world when VAT would exist at first, and then it would be lifted. It can be renamed, but not lifted. In order to achieve a long-term economy growth of about 6 percent, taxation in a country should be less than 20 percent of GDP. This is the standard. But it is not enough. The clearer is the process of tax revenue distribution, the better, and then business can cope with a bit bigger taxes. For example, in Finland this index is 50 percent of GDP.”
The National Bank of Ukraine is trying to solve a problem of economy dollarization and decrease demand for foreign currency in retail through implementation of a tax on foreign currency sale by the population and compulsory sale of 50 percent of foreign currency gain by the exporters. Do you think this will help solve the problem?
“I think this is plain stupid. Foreign currency sale tax is an archaic measure, more typical for the early 20th century. The more monetary freedom, the better. If people buy up dollars, it means that hryvnia monetary policy is worthless. Obligatory sale of foreign currency by exporters is also a countermeasure that decreases trust in hryvnia even more. This tax and obligatory sale convince business and population that something bad might happen to hryvnia. That is why such set of currency measures will not affect the market in a positive way.”
How can the dollarization problem be solved?
“If we look at the problem from the global point of view, out of 200 countries that exist now, less than a half have their own currency. Besides, there are only about 10 quality currencies. Only such countries like the US, Canada, Australia, New Zealand, Japan, Switzerland, and the EU can boast of quality and stable currencies. Currencies of the rest of the countries are not independent, they cannot be trusted. Many currencies have a very short history of existence, or they are tied to these quality currencies.”
The land reform will leave the right to buy land only for natural persons (no more than 100 hectares per person). Legal entities will be able to get a long-term lease, and lease areas in each oblast will be limited. Will this help Ukraine reveal its agrarian potential?
“I do not understand why legal persons are not allowed to buy land.”
“IT IS AN ILLUSION THAT THE WHOLE WORLD IS HOLDING ITS BREATH WAITING FOR THE FREE LAND MARKET TO OPEN AND THEN RUSH AND BUY ALL UKRAINIAN LAND”
Because there is a risk of latifundialization of Ukraine through purchase of the land by big Russian or Western foreign companies.
“This is self-deception. If long-term lease is allowed, what is the difference if latifundia emerges on basis of ownership or lease? In my opinion, this is not right and is not likely to bring Ukrainian agrarian and industrial complex to the peak of its development. Land is a good, and it should be sold just as any other good. Everybody was allowed to buy and sell agricultural land in Georgia, and nothing terrible happened. It is an illusion that the whole world is holding its breath waiting for the free market to open and then rush and buy all Ukrainian land. This is a fear left from Soviet times.”
Ukraine actively fights to be independent from Russia. One of mechanisms of this independence is the construction of a liquefied natural gas receiving terminal. In order for it to work, a liquefaction plant that would use Azerbaijan gas should be built in Georgian port Kulevi. Why has the construction not been started yet?
“Perhaps, SOCAR (the State Oil Company of Azerbaijan Republic) should build it, since it is the supplier of gas. Gasification and liquefaction are very expensive. If Ukraine wants to decrease energy dependence on Russia, it should at least stop subsidizing prices on energy sources. There is no other way, unless you suddenly discover a new Qatar in Ukraine.”
Do you think Ukraine managed Soviet heritage properly? Did we have another way of development, except for that of the “wild” capitalism?
“There is always a different way. But a different government is required for it. At that moment, Ukraine did not have it.”
But for example, Ukraine is similar to Poland in their Soviet-time peculiarities. However, the latter went a different way.
“I do not know why you think there was no wild privatization in Poland. Polish people think otherwise. Privatization is a rather delicate matter, you cannot say whether it has been good or not beforehand. Only time will show it. If there was no privatization, economy would have not reformed.”
Do you think Ukraine and Georgia managed to diverge from the Soviet way of thinking?
“No. This process is similar to the story of Moses from the Old Testament, who led Jews through the desert for 40 years. From the Soviet Union and to the ‘promised land,’ we have only covered half of the way. There are at least 20 more years ahead.”
What is your general assessment of reforms process in Ukraine?
“Even though they are slow, they are happening. The other thing is that there is no clearly stated political will for implementation of radical reforms in Ukraine, because there is no demand for it within the society. Perhaps, Ukrainians’ living standards are satisfactory, and even though they like to complain a lot, people are not ready for radical reforms.”
What do you recommend for our country to do in order to achieve economic breakthrough?
“Ukraine needs to decrease taxes and state regulations, and solve justice problems.”
