Protesting The CEO Of Georgia

Since he was swept into power in the aftermath of Georgia's 2003 Rose Revolution, President Mikheil Saakashvili has had a job that few would envy.

His massive daily task list includes building democracy in what by all accounts was a failed state, reasserting control over two secessionist regions supported by neighboring Russia, rescuing the economy from Moscow's trade embargo and reorienting his country toward NATO and the West. If that weren't enough, he has also been conducting the world's most radical experiment in economic reform.

Last week, Saakashvili's juggling act came crashing to the ground. After six days of protests called by a dozen opposition parties in the capital, Tbilisi, ended in street fights between demonstrators (who were 70,000 strong) and riot police, Saakashvili imposed a state of emergency to shut the protests down. Opposition politicians accuse Saakashvili of ruling like an autocrat, changing election rules in his favor and throwing his foes in jail. Special forces closed the opposition TV station, Imedi, controlled by Badri Patarkashvili, a billionaire oligarch with a murky Moscow past who now vows to spend his entire fortune to bring Saakashvili down. In hopes of a fresh mandate, Saakashvili (who enjoyed 60 percent approval ratings in polls before the protests) has called for an early election.

It's a sudden tragic twist in what otherwise has been an incredible tale. When Saakashvili, a 39-year-old Columbia University-educated lawyer, took over in 2004, years of autocracy and civil war had left the dirt-poor ex-Soviet ministate in the Caucasus seething with corruption and crime. Public services had collapsed as citizens abandoned the country in droves. The new leadership cracked down on graft, crime and over-regulation—in some cases, to the extreme. Greedy cops taking bribes? The new Interior minister sacked the entire 16,000-strong traffic police. Bureaucracy dragging the economy down? More than 1,000 types of permits were abolished and 40 percent of civil servants fired. Taxes too high? The types of tax have been cut from 22 to seven. A flat tax on income of only 12 percent has raised the government's take by 220 percent. More important, the low and user-friendly tax has been an incentive for many companies to leave the black market and go legit. That, in turn, means they can get credit and investment—and create jobs and growth. The payoff: since 2003, GDP has tripled and the number of businesses quadrupled. Saakashvili was performing like a tough-love CEO.

Naturally, the reforms have created disgruntled citizens. Some of them, mostly middle-aged and older men, showed up at the protests last week. "They're firing everybody over 40," says Nugzar Zhvania, a 41-year-old train operator who was one of 400 people laid off from the railroad. A refugee from the Russian-controlled breakaway province of Abkhasia, Zhvania now has to get by on a monthly welfare check of 11 lari ($7). Many of the 70,000 demonstrators came from rural villages, where jobs have yet to trickle down but prices for staples have been rising. But the protests were no second installment of the Rose Revolution; young and middle-class Georgians largely stayed away, as they've by and large benefited from the reforms.

To the ardent libertarians in Saakashvili's cabinet, no reform can be too radical. "When government micromanages, it inevitably leads to dysfunction and corruption," Minister of Reform Kakha Bendukidze explains. Despite the protests, privatization has been swift and, international observers say, remarkably transparent and smart (e.g., this year, the government auctioned off the country's hospitals—but only to bidders who committed to building a brand-new hospital for each old one they bought). Growth is running at a red-hot 14 percent this year, and annual foreign investment at a world-beating 25 percent of GDP. In the World Bank's ranking of the ease of doing business in 178 countries, Georgia has risen from 112th place in 2005 to 18th in 2007, zipping past Korea, France, and Germany. It was the biggest improvement the Bank has ever seen.

Whether Saakashvili can get Georgia to stay its course will have reverberations far beyond the country's borders. Politically, Georgia has been a rare Western, democratic outpost in a region dominated by Russia, Iran and the autocracies of Central Asia. Economically, Georgia's reform successes have been a benchmark for other underdeveloped countries. Strategically, Georgia's Black Sea ports and brand-new pipelines are the only way for Central Asian exports—mainly oil and gas—to bypass Russia and Iran. If the Georgian experiment derails, it will be tragedy not only for Georgians but for the entire region.