Originally published on 15 March, 2011. Kakha Bendukidze died in November 2014.
The FINANCIAL — Kakha Bendukidze, former Minister of Economy, Chairman of the Board of Trustees at Free University of Tbilisi, believes that Georgia should not depend on foreign aid, except for that which is directed to specific projects, as it encumbers the development of motivated society as well as the Government. Mr. Bendukidze, who once was described by U.S. Media as “a large man with a big agenda” says Georgia should be liberal at a maximum level. In an exclusive interview with The FINANCIAL he gave his definition of the good and worst types of foreign aid.
“A huge amount of young, educated, energetic Georgians instead of working in the private sector, creating businesses and making money thus expanding the economy – are working in lazy jobs, international institutions, NGOs, which are eating that money and not creating anything substantial. Those couple of thousands of people are the best part of society in terms of their education and skills,” Bendukidze believes.
“If we construct stricter monetary and fiscal policy then we’ll have much less inflation. In addition when the Government expects high inflation this year, I think that’s a mistake.”
“If there is no budget deficit in the country, it’s much easier for National Bank of Georgia to control inflation. But when we have a budget deficit it’s more difficult.”
Q. There is a lot of buzz being made within the Government and outside about probable GDP growth this year and in the years after. What do you think the growth of GDP will be this year – and based on what premises?
A. Firstly, I think it’s difficult to make predictions. In general I’m quite positive as there are some issues that need to be corrected. Now we’re out of the post-war and global financial meltdown but anyway I’m not expecting double-digit growth definitely, I’m expecting around 5%, but it could be 4 or 6. And it depends on many things including things that are out of our control, like what will happen in the global economy – will there be crisis in any significant country we’re trade partners with, etc.
The reason I’m positive about the growth of the economy is partly due to the fact that the Government clearly recognized that the budget deficit which was quite big in 2009 and less in 2010, needs to be even smaller. Second, it was a very painful issue related to inflation, part of the lessons from which have been learnt – not all of them though, and I think that monetary authorities will be more careful next year and will manage to have moderate inflation.
There is the wrong perception that if you want to increase an economy, high inflation is unavoidable; I think that’s totally wrong, because there is good quality growth like in Singapore, and Hong Kong, where inflation is below 3%.
Q. What about FDI flow which has fallen in the last year compared to the boom in 2007/08 – is it expected to be much less in the coming years?
A. What is much less is the level of FDI overall which is a global issue therefore we will not have a boom this year like there was in 2007/08 but in several years time it’s quite possible. In 2007 we had more than 2 billion USD of FDI flowing in, which is itself a huge amount of money for a country like Georgia. It led to growth of GDP by about 12%. In the coming years, we’ll have much less investments, private foreign direct investments, and it will be close to figures smaller than 1 billion or close to 1 billion.
Q. You know that one of the toughest challenges in 2011 will be inflation – Could you tell us what led to such high inflation rates last year (2010) and what is expected this year?
A. Inflation was a result of soft monetary policy, but if we construct stricter monetary policy then we’ll have much less inflation. When the Government expects high inflation this year, I think that’s a mistake.
If there is no budget deficit, it’s much easier for National Bank of Georgia to control inflation. But when we have a budget deficit it’s more difficult.
There are two sectors which can be active agents in expanding the monetary base; these are the private sector and public sector. In particular, the public sector is doing this by foreign borrowings and the private sector is also doing this by foreign borrowings. And it’s very clear that if you want to curb inflation you should restrict growth of the monetary base; hence there are two ways, first the Government has to borrow less money, narrowing the deficit, that’s positive, which means that inflation is not increasing and the private sector can borrow more money. Or on the other hand you have to make private-sector borrowing more difficult and in this way we remove part of the money from the market but of course that will hurt private sector grow. But we need the private sector to grow.
Q. As it’s widely known, you hate foreign aid and have always been against it, could you provide an explanation for which type of aid is encumbering government and society development?
A. All foreign aid is distorting development, but some types are much more distortive. For example, there is Millennium Challenge Corporation aid which is based mainly on more or less providing money to the private sector or taking responsibility for one big public project, like was the case with the Samtskhe Javakheti project; and this type of aid is less distortive for Georgia.
But there is another type of aid which is more distortive – e.g. a large part of aid which comes through EU cooperation, hundreds of millions of dollars, which is going to different types of technical assistance; which means that money goes to European experts coming and saying what we can or can’t do. And who usually give the wrong advice.
That’s the worst type of aid, which deteriorates our integrity and our ability to make decisions ourselves; it’s a poison pill for any nation; because if you want to build a nation, which is definitely our goal, then you should make each citizen responsible for his/her decision and think about their future themselves. You can invite an advisor only when and if you need them; but we’re forced to take them. “Forced” – doesn’t mean that someone is beating us to make us do that, but there are many different mechanisms for how to make this attractive for you. And that’s the worst type of aid.
About public borrowing from abroad – very long term borrowings are deteriorating the quality of the management. As any bureaucrat will be ready to borrow hundreds of millions of dollars if they know that they have to repay it only after 30 years.
Government borrowings are very bad, as they’re reducing manoeuvre capabilities for the private sector. Hence if you have a huge inflow of that type of public/quasi-public money then you’ll not have the same big inflow of private money because there’ll be inflation and you need to control this inflow. Another negative impact is that a huge amount of young, educated, energetic Georgians instead of working in the private sector, creating businesses and making money thus expanding the economy – are working in these lazy jobs, international institutions/NGOs, which are eating that money and not creating anything substantial. They might not be a huge amount, meaning a couple of thousand people only, but they’re a very well-educated and therefore crucial part of society.
Q. The new tax code seems to have simplified conditions for businesses. But large businesses still find it hard to clearly understand the concept of it. How do you think, is there a need for changes to be implemented in this regard to the tax code and of what kind?
A. Nothing is perfect and nothing is “black and white”. This new tax code has some new things which are very important, for example you can have a preliminary agreement with the tax authority (which we actually wanted to introduce in 2004 but at that time it was politically impossible), so if you have a very big deal but don’t know how it can be taxed, then you go to the tax authorities and say I’m doing this type of deal and we think that we should pay that amount of money from this activity. Then the tax authorities go through it scrutinising and then they say – you can do this and that’s how much you should pay. So finally you have clear knowledge of how much to pay them. (Then they can’t disagree with you because they’ve already made an agreement/analysis about the deal. This type of innovation is very important for large projects; so there are several such good types of innovations in the new tax code. Also a very good innovation for IT companies if they want to export software from Georgia, is that they’re not paying profit tax; so they’re working in Georgia like an offshore country.
But there are some points which need to be clarified for businesses and there are some places which need to be changed also. These changes are part of the activity of different civil society institutes, like the Business Association of Georgia, AmCham and others. So they should look at those unclear places and then work together with the Government to eliminate those areas of confusion.
Q. In Georgia there’s no pension fund, except for single insurance and other companies, and you also advised Ukraine not to have it. What would you suggest (another way) for a pension system to help those in need after they retire?
A. Let’s start from what pension means, there are two ideas about why pensions exist; one is pension when an employer is accumulating some money and then paying it to his/her former employee after he/she retires but this is not an issue here. The initial idea about pensions is how to prevent old people being reduced to poverty and that’s what we need to manage.
People need pensions because they’re below certain levels of income and life and that’s the system to which Georgia is moving, it might be moving slower than it should, but we’re moving in that direction anyway; and I think that it’s about equity.
If we switch the huge amount of money we’re spending on the social system, which is for different types of pensions and 1.6 billion GEL aid, to more targeted, needs-based help – we’ll not have a single Georgian family with elementary problems. And they all will be able to solve their basic daily needs.
Today a large part of that money is not targeted. Let’s say 20% is means tested whilst 80% is not. I’d be extremely happy to see changes in this situation in 10 years time thus having 80% going to who needs it and 20% to category based.
Q. The Labour Code of Georgia still remains a concern for labourers and their rights defenders. But you still claim this labour code should stay as it is now? Could you give us more insight in to why you think so?
A. Most of the people who’re saying we’ve got a bad labour code have never read the labour code and I recommend they read it carefully.
An employer and employee can make an agreement themselves. Why do we need a special regulation?! Special regulations for labour have been the result of developments in the 20th century, based on the rise of communist and socialist parties, the presence of the Soviet Union and the way leftists and populists were trying to enhance their power.
There are certain people who are more protected by the labour code, for example minors, and pregnant women. But when there’s an educated young guy we should not regulate and say – you can’t work here or there or you should ask for that much salary or this much. There is no need for such a labour code. As a compromise of course we have a labour code which is a short one and directs parties for mutual agreement.
In addition we don’t need minimum wages because it will lead to even higher unemployment than we have now. Because people who work for low wages, taking into account that the minimum wage is higher, will become unemployed too.
Q. The recent publication of The Heritage Foundation & the Wall Street Journal assigned Georgia 29th place in economic freedom although people, especially foreign experts, claim that a country imitating others with highly liberal policies can’t survive? What do you make of that?
A. They are idiots; if such experts really do exist.
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