The answer quite simply is that the Georgia leaders are not so arrogant to think they know better than markets, and hence they are relying on the market to solve most of their problems.
Georgia is a poor country, but for the last four years it has experienced some of the highest economic growth rates on the planet — from more than 9 percent to 12 percent per year. It has been eight years since my last visit to Georgia, and observable changes are quite remarkable. The New Economic School in Georgia just hosted the European Resource Bank (a coalition of primarily European economic policy organizations) meeting this year, which is what brought me back.
After having experienced sputtering reform and progress from the time of the fall of the Soviet Union, Georgians elected perhaps the freest market government in the world four years ago. The president, prime minister and state chancellor are all dedicated free marketeers who studied F.A. Hayek and Milton Friedman and have learned from the successes of Margaret Thatcher and Ronald Reagan.
Many, including former high‐ranking Russian officials, have argued that part of Moscow’s motive in invading Georgia was to punish this newly successful upstart that was formerly part of the old empire. While Russia was becoming less democratic, Georgia was becoming more democratic. While Russia has engaged in renationalization and re‐regulation, Georgia has engaged in mass privatization and deregulation.
Much of the inspiration and drive for the radical free market reform of the Georgian economy comes from a mountain of a man named Kakha Bendukidze, whom I first had the pleasure of meeting some years ago in Russia. Kakha, as he is commonly referred to, is the head of the State Chancellery and one very smart and wise fellow.
Commenting on the international financial crisis, he correctly observed that as long as governments continue to rely on central banks and extensive regulation of the financial industry rather than free banking, “periodic financial crises will continue to plague mankind.” He argues that it is unrealistic, as Hayek and Friedman also did, to assume central bankers know more and can outguess the market, and that financial regulators can somehow prevent the next crisis, since they are unlikely to see where it is coming from.
Georgia has been engaged in fundamental tax reform, rate lowering and flattening, including removing almost all taxes on capital that are the seed corn of the economy. The Georgians are actively reducing the size of government by doing away with ineffectual programs and those that can be better done by the private sector.