1150 November 2007 toNovember2008. country. Hewastheprimeminister ofGeorgiafrom , thedominantprivately owned bankinthe and London,spearheadedtheturnaround ofBank after adecadeatinvestmentbanks inEasternEurope career bankerwho,uponreturning toGeorgiain2004 Lado Gurgenidze([email protected]) isa effort, anditoffersalessonfromwhichreform-mindedleadersinotherdevelopingcountriescanlearn. 2004, Georgiaisoneofthosetestcases.Itssuccessduetothecoherentandcomprehensivenaturereform document successfulcasesofreformfromwhichtheycanlearn.Giventhebreadthandscopeitsreformssince bold actionstorollbackthesizeandroleofstateintheireconomies.Now, morethanever, itisimportantto capital inflows—havestalled.To improvetheirbusinessandeconomicclimates,developingnationsshouldtake past decade—exportsofconsumergoodstowealthyindustrializedcountries,exportscommodities,andprivate The globaleconomicdownturnisexactingaheavytollondevelopingeconomies.threeenginesofgrowthinthe By LadoGurgenidze A Georgia’s SearchforEconomicLiberty: P those whoremainedwassquelchedbythealmost feet byemigrating.Theentrepreneurialenergyof quarter ofGeorgianadultshadvotedwiththeir was high,andcorruptionrampant.Abouta fewcompetitiveexports,thecrimerate produced who caredtovisitthecountry. Theeconomy was inadequateevenforthefewforeignvisitors a for inefficiencyandcorruption,blackoutswere ture. Theenergysectorwasespeciallynotorious public servicesormaintainingcriticalinfrastruc- was thusincapableoffundingeventhemostbasic not exceed15percentofGDP. Thegovernment plex andinefficient,taxrevenuecollectiondid Georgia hadhightaxrates,theco engaged insubsistence-levelagriculture.Although unemployment, andalargeruralpopulation spread corruption,littleforeigninvestment,high was saddledwithstiflingbureaucracyandwide part ofeverydaylife.Thetouristinfrastructure bore manycharacteristicsofafailingstate.It rior totheRoseRevolutionin2003,Georgia Blueprint forReforminDevelopingEconomies S e etet tet .. ahntn ..206228250 www.aei.org 202.862.5800 venteenth Street, N.W., Washington, D.C. 20036 de wascom- - $2,925 in2008. 150 percent,from$1,188in2004toanestimated with nominalGDPpercapitaincreasingalmost to almost$13billionoverafive-yearperiod, Nominal GDPgrewfromapproximately$4billion higher from2005throughthefirsthalfof2008. enjoyed realGDPgrowthratesof8.5percentor financial sectortosupplythemwithcapital. business andtheinabilityofsleepydomestic insurmountable bureaucraticbarrierstodoing Key pointsinthis From thisinauspiciousbeginning,Georgia • • • • Georgia’s leadinliberalizingand growing. downturn, developingcountries should follow conventional economicwisdom in theglobal Counter towhatappearsbebecoming explain theturnaround. bureaucracy, andlabormarketliberalization banking, privatization,freetrade,trimming Key reformsintaxation,monetarypolicy, and highgrowthrates. openness, highprivatecapitalinflows, Saakashvili hasgeneratedeconomic Liberalization underPresidentMikheil and socialstagnation. Until 2003,Georgiawasmiredineconomic 1 Virtually allkeysectorsofthe Outlook o • June 2009 • No. 2 :

Development Policy Outlook - 2- economy have contributed to this growth, in contrast to agencies—such as the Public and Civil Registries and the development of countries richer in natural resources. the vehicle registration and driver’s license authority— This suggests that President ’s policy has improved dramatically, with consumer experiences at of increasing economic liberty was the decisive factor in these agencies now comparable, or in some cases superior, Georgia’s transformation. to those in industrialized countries.3 Exports grew at a cumulative annual rate exceeding Mikheil Saakashvili’s policy of increasing 20 percent, and the export base and geography of imports broadened considerably. The number of foreign visitors economic liberty was the decisive factor in grew by some 300 percent, exceeding 1 million in 2007. Georgia’s trans