Yevgen Silvestrov, coordinator of “Economical Strategy” group chose the most interesting points from the lecture by Georgian reformer Kakha Benukidze
At the end of last week, on July 26th, I went to a meeting with Kakha Benukidze organized by the Kyiv School of Economics. As they introduced their guest, the organizers expressed the hope that Kakha would be more optimistic that day than usual.
“Yes,” said Kakha, “the morning today is wonderful, the weather is great!”
Everyone laughed, understanding that this would be probably the most optimistic thing he would say that day, it seemed.
And they were not mistaken. When he discussed issues important to Ukraine, Benukidze called everything by its proper name and logically proved that there are no reasons for optimism yet or already. Below are the theses of the six most important topics we spoke about to Benukidze during the meeting.
How to lead the economy out of crisis
A businessman has revenues and expenses. Rental payments, salaries, expenses on bookkeeping, bribes for committees, taxes. For a businessman all these constitute the expenses part. If the businessman has a right to chose, where to buy raw materials and by which prices etc., in case of tax payments and bookkeeping he is void of any alternative. And here the state has to make it beneficial for the businessman to conduct business, and if it is able to influence the decrease of expenses, it is simply obliged to do so.
Why the state cannot replace the businessman in business
Nobody knows what will happen tomorrow. Tomorrow consist of two parts:
- what we know today;
- what we don’t know.
Nobody can predict the future: what technologies and demand will be, etc. Different business owners make different decisions – right ones, wrong ones, partially right ones. The demand and the market determine who is more efficient.
Say a businessman is selling piroshki. He can make the decision to add pepper to some of them – it will be a product for those who like spicy food. If an arbitrary “Kyiv bakery factory #3” decides to launch such a product, it will take three years to make such a decision. They need investigations, technological processes, calculation, accountability before the management etc. A businessman solves this issue fast.
One businessman solves their own task. Many businessmen solve the tasks of society.
What has to be done for business
- Open the markets. All the participants have more of a choice what raw materials and goods to buy, whom to sell to.
- Taxes can be made high or low. Low taxes stimulate business. High taxes subdue it. Taxes are a master key.
- Low regulation pressure. Expenses can be both material and psychological. Even if a businessman is constantly thinking about checks and problems with accountability, it will not help him develop his business.
- Controlled inflation. Inflation is a tax for the future.
Why reforms are slow in Ukraine
It is impossible to carry out ideal reform. There will always be mistakes, but it is important to act. There are two types of reforms: quick ones and long-term ones. At the very beginning Georgia abolished more than half of the small taxes. The effect was obvious already the following year. In 2004 the taxes constituted 13% in regard to the GDP. In 2005, 21% in the following years this coefficient grew 1% annually. Now the ration of incoming taxes to the GDP constitute 27%.
Throughout the following 8 years they were constantly perfecting the reforms.
Kakha adheres to the principle that the taxes should be decreased as much as possible. Revenue and social taxes in Georgia at the moment constitute a sum of 25%.
The tax reform in Georgia was carried out together with the Ministry of Finance. Some small taxes were simply eliminated. Small business goes largely untouched by the tax service there. When opportunities for personal corruption were gone, it became obvious that it is simply economically unsustainable to check some businesses or types of businesses.
Taxation in Ukraine sounds like a joke: “Why can’t we shave the pig? Little hair and lots of squealing.”
On the economical situation in Ukraine
Your state apparatus is horribly inflated. A lot of things are being regulated. Even the things that some countries in the world would never even consider regulating. For example, crop rotation!
When we started reforming the Pension Fund in Georgia, says Kakha, we discovered that 30% of the pensioners don’t exist. I assume you also have “dead souls.”
The government made some correct steps, but this is insufficient. You have wasted five months you could have used for reform. Your Parliament is just nuts! In the recent months it managed to pass laws which increase the already over-inflated and impossible budget. For example, in the educational sphere. The ban on closing schools and the decision to increase students’ stipends. On what money? There is no money!
The Parliament is not supporting necessary bills? I talked with one of the Ministers, says Kakha. He lamented that they failed to pass his bill. The Minister was unable to say, however, who in particular presented his bill in the Rada. When we were trying to pass the land privatization law in Georgia, I practically lived in the Parliament for 1,5 months. I convinced them, drank coffee with the members, I tried to prove that it would not be damaging. And this was how they passed the law.
On Ukrainian society
Now we are solving the issue of whether the Ukrainian state will exist in itself or not. I see you Ukrainians, and it seems to me you don’t care! You are very passive. You don’t need reforms, because you do not fight for them! Were are protests to lower the taxes? Were are the marches to demand reforms? And whom am I telling all this? You, the people who just rebelled and deposed the previous government. But you calmed down and relaxes! I was in the President’s Administration, there are people spending the nights on the stairway there, whose children are dying in siege. They are trying to save them. They are really fighting! And you are not. You are meeting, talking, drinking coffee and then going you separate ways. You will lose the country this way.
Now Ukraine holds the key to the situation in the world. But the people who got this key are too little to handle it. Russia’s occupation of Crimea ruined the world order when the countries remained within their borders. If Ukraine manages to achieve its independence and territorial integrity, it will give hope to free the occupied territories both in Georgia and Moldova. And I have high hopes for this.
Translated by Mariya Shcherbinina