Mistreated Georgian Capitalism

Georgian flag in TbilisiThe new left in Georgia has been quite consistent for years, arguing that the current socioeconomic problems are a result of liberal state practices combined with the opening of the local economy to global economic forces [neoliberal globalisation]. This is not the case, primarily for two reasons: first, there has never been a fully functioning market economy in Georgia, as evidenced by the rights of private property owners being continuously violated, and economic exchanges that were bound around de-facto monopolies. Second, no sector has actually suffered due to the wild influx of global capital; to the contrary the full investment potential has, in fact, never been used.


After overthrowing the first president Zviad Gamsakhurdia, militant groups, former communists and close associates of Eduard Shevardnadze, were quick to privatise state-owned enterprises, lands and every other part of the state where one could earn a nickel. These events can be best understood by the Russian term prikhvatizatsia [прихватизация] which means to illegally capture governmental properties [in Russia’s case it was USSR properties]. The left has argued that this was a classical liberal takeover, a Randian exercise of a selfish will, the survival of the fittest etc., however, in reality, there is not much in common between a well-functioning liberal economy, and crime and corruption. The economic asymmetries in modern Georgia can be traced back to that very point of departure. It was not free market competition that caused the disappearance of the middle class and accumulation of wealth by a handful of individuals, but rather the criminal activities of politically empowered forces.  


I have argued elsewhere that there are three types of market asymmetries. The first is an innate asymmetry, which was first identified and analysed by George Akerlof, Joseph Stiglitz and others. The model is quite simple and implies that one part of a transaction always has more information about the transaction than the other. The second type of asymmetry is an acquired asymmetry that takes place due to communication errors. Among other typical communication errors in a real world, obtaining information [advantage] by unlawful means is the most important one. In an ideal system, acquired asymmetry is managed by laws. However, when the legal system does not work properly these two asymmetries synthesise and produce the third, a structural asymmetry. Here, some actors not only have an advantage in transactions over others, they also have the power to determine the nature of whole economic communication [in many cases that of a political communication as well]. In Georgia those actors, who once in the 1990s effectively used the corrupted state to gather enormous wealth, still hold a structural power.


Another widely discussed topic by the Georgian left is an ill-treated model of Singaporisation – a label that is often used to describe Saakashvili’s economic policies. The critical narrative arguably correlates libertarian policies with large-scale poverty among the Georgian population. However, the data does not show this correlation: leading up to the global economic crisis in 2008 [and the five-day war], there was a steady and substantial growth. In fact the declines in poverty rates and the decrease of extreme poverty rates [though modestly] followed the trend of GDP growth.


It is worth noting that the UNM could never become a truly libertarian party. The regime required a strong top-down control of the system that intrinsically limited individual freedom. Simultaneously, there was a significant populist narrative involved in the official rhetoric. A strong duality between the articulated party direction and actual political practices reflected on economic policies as well [it also divided the party members]. The Act on Economic Freedom that has been harshly criticised by the left, not only for economic reasons, was originally proposed to encourage investments by adding a long-lasting legal credibility to the state’s economic direction. In the long run the act arguably assisted FDI growth, but not at a rate that could immediately affect the well-being of population.

georgia fdi 

The Saakashvili government was far from the liberal ideal. The above-mentioned duality in the UNM tolerated the corrupt elite, many of whom had collected their wealth in 1990s. However, there was also a new wave of millionaires affiliated with the regime. The state for some, was small only on paper, there were numerous cases of businesses being bullied by representatives of the political establishment.  Asking for political or social contributions in the form of unofficial taxes seemed to be a habitual order of things. It goes without saying that this practice is in conflict with the core of a liberal economy, in which private property is defended rather than attacked by the state and where the political system distances itself from economic transactions.


Global economic forces have never been a real threat to the local economic system, neither have they affected functionality of medium and small businesses. Nowadays, for instance, the largest share of the FDI comes from the transport and communication sector, while other sectors barely reach two-digit figures. Achieving a full-scale economic openness in the case of Georgia does not depend solely on the Government’s willingness to do so because instability in the region, a small market and other factors do not make the place innately attractive for foreign capital. Even if the state decided to go full-scale libertarian, in the current situation this would be a difficult task to accomplish.


There is a very relevant backlash against world capitalism, and most people, from the radical right to the radical left, agree that the system has to be fixed. However, considering Georgia in that same fold as the developed West appears to be a bizarre discursive exercise.


I have to conclude this piece with a common political conversation:

The right: Venezuelan people starve because of socialism! [irrelevant]

The left: Venezuelan people starve because of a corrupted political system that pretends to be a socialist one. [relevant]


Similarly, Georgia suffers not because of capitalism but because of the corruption that appears under the false notion of capitalism, the same way as it would appear in a socialist setting.


Lasha Markozashvili obtained his doctoral degree from Adam Mickiewicz University in Poznań. Currently, he is an invited professor at the Free University of Tbilisi and a founding editor at the Georgian Journal of Systemic Politics.