Democracy Lab

The Georgian Paradox

As Georgia's recent experience demonstrates, fighting corruption and building democracy are two different things.

Georgian President Mikheil Saakashvili is a happy man. Yesterday U.S. President Barack Obama bestowed upon him the privilege of a high-profile visit to the Oval Office. The Obama Administration was rewarding Georgia for its support in Iraq and Afghanistan. Georgia also won points for a recent gesture that has helped to defuse tensions with Russia. (Which perhaps explains why Obama confused the two at one point.)

Today Saakhashvili made an appearance at the World Bank's Washington headquarters. The Bank used the occasion to issue a highly complimentary report on Georgia's anti-corruption campaign. When I caught up with President Saakashvili there, he boasted that Obama had singled out Georgia for its recent efforts to improve governance. "He also was talking about Georgia as a role model for reforms for the whole region," Saakhashvili said.

There's something to that. Anyone who wants tips on tackling sleaze should take a look at the World Bank study. Georgia has made some impressive progress.

Soon after coming to power after the Rose Revolution of 2003, Saakashvili's government decided to demonstrate its commitment to fighting bribery through a dramatic gesture. One of the peskiest forms of corruption plaguing ordinary Georgians at the time involved the notoriously rapacious traffic police, who made a habit of topping up their meager salaries through a variety of petty shakedowns. Overnight Saakashvili fired the whole force of 16,000, replacing it with a much smaller group of carefully vetted, better-paid police. The reform was backed up by spot checks and other measures to ensure that new recruits stuck by the rule of law. Fines were no longer collected at the scene of the misdemeanor but paid at commercial banks. A 24-hour hotline was set up for citizen complaints about law enforcement.

The measures dried up graft in the police force and smoothed the way for a drastic decline in overall crime. The police reform included measures for cutting the red tape involved in issuing driver's licenses and car registrations. The government set up a series of one-stop shops to streamline applications and prevent artificial delays. Among its other positive effects, that move had the unexpected side-effect of transforming Georgia into a regional hub for the lucrative trade in used cars.

The government didn't stop there. It also embarked on a radical simplification of the tax code that dramatically improved collection while broadening the tax base. Electronic filing options for businesses boosted the transparency and efficiency of the whole process. Similar reforms were applied to the customs service, to university entrance exams, and the municipal bureaucracy.

One of the most dramatic reforms involved the energy sector. By 2000, power generation in Georgia had fallen to half of its 1990 levels. Georgians had become accustomed to rolling power cuts - a result of years of financial mismanagement and ubiquitous corruption. Utility companies and the public officials associated with them charged bribes in exchange for providing reliable electricity.

The new government made state utility employees responsible for cash collections. Thousands of electricity meters were installed to track usage and promote transparency. (Since there weren't enough meters to go around, collective meters were sometimes installed for apartment blocks or groups of houses. It wasn't perfect, but still a vast improvement over the old way of doing things.) Electronic billing systems were introduced. The government demonstrated its seriousness by turning off the power to prominent companies that didn't pay their bills. Safety nets were set up for vulnerable groups who couldn't pay the new rates. The government sold off state utilities, but made provisions to ensure the viability of the overall sector.

The World Bank notes that other countries can extract a lot of useful lessons from Georgia's experience. Georgia, and Saakashvili, clearly have a lot to be proud of. "The place is just astronomically better now than it was 10 years ago, and anyone who doesn't admit that isn't being honest," says Mark Mullen, the Georgia director for the anti-corruption watchdog Transparency International. He points out that Georgia is doing far better on almost every measure than regional rivals Azerbaijan and Armenia.

Yet buried in the World Bank study is also an intriguing cautionary note. As the preface rather cryptically observes, Georgia still faces an "unfinished agenda of institutional reforms, which will be needed to ensure the sustainability of Georgia's anti-corruption results by putting in place a robust system of checks and balances."

Wait a minute. So what's not to like?

It turns out that the anti-sleaze campaign is not the only thing that has been happening in Georgia over the past few years. Corruption has shrunk, but the power of the central government has increased. "Georgia's human-rights record is poor," no less than The Economist wrote last year, on the occasion of another Saakashvili visit to Washington.

The media are no longer as free as they used to be. Saakashvili's ruling party, the United National Movement, has steadily chipped away at the independence of the press. The national TV channels are firmly under state control, and their news coverage shows it. A few small outlets are still allowed to report more or less freely in the capital, but most provincial newspapers and broadcast stations are firmly under the government's thumb. In the most recent Reporters without Borders survey of global press freedom, Georgia scored 104 out of a possible 179. That ranking put it below Chad, Northern Cyprus, and Gabon. Sure, that's still better than Ukraine (116) or Russia (142). Not exactly a model, though.

Saakashvili's party controls all of the major executive positions in the country and dominates both parliament and the judiciary. As British Georgia-watcher S. Neil MacFarlane noted in a thorough study last year, Georgian courts have an acquittal rate of less than 1 percent. Freedom House, in its last "Nations in Transit" study, gave Georgia an overall score of 4.86 - putting it roughly in the middle of the chart for the formerly communist countries of East and Central Europe.

In our conversation today, President Saakashvili touched upon recent reforms to the electoral system that shift power from the presidency to parliament. Skeptics say that Saakashvili might well "do a Putin" by taking the job of prime minister when his presidential term expires two years from now. When asked about this, he was coy: "The last thing I want to do is to turn myself into a lame duck by speculating about my own future."

And when I asked whether he was worried about the state of Georgian democracy, the president sidestepped again. Instead he chose to riff on the opposition, which he accused of attempting to "undermine the whole political process, either through shortcuts or radical acts or indeed lots of money poured in." He was clearly referring to his prime challenger, Georgian billionaire Bidzina Ivanishvili, whom he accuses of fronting for his archenemies in the Kremlin. But it wasn't Ivanishvili I was asking about. He's not the man with the power in Georgia. So the real question went unanswered.

"If you bury the democratic shortcomings with the narrative of better governance, you're missing the bigger story," says Columbia University's Lincoln Mitchell, author of Uncertain Democracy: U.S. Foreign Policy and Georgia's Rose Revolution. After the 2003 revolution, he says, Saakashvili and his entourage revised the constitution to tilt the electoral playing field in their favor. The result is a classic example of a system that has all the trappings of a liberal democracy but little in the way of genuine political competition. "The elections are as good as they can be without giving the opposition a chance to win," says Mitchell. He credits Georgia's progress against corruption. But good governance, he points out, is not necessarily the same thing as vibrant democracy. In some cases, indeed, the two may be at odds. "Georgia's elite are modernizers, not democrats," writes Tom de Waal, a leading Georgia-watcher with the Carnegie Endowment for International Peace in Washington.

Transparency International's Mullen concurs. The problem, he says, is that Georgia's dynamic young rulers "think they know what needs to be done, and the population doesn't." Saakashvili and his team "talk about the need to transform Georgia into a modern country - even if people are kicking and screaming along the way." For the time being Saakashvili's emphasis on good governance has served to keep his approval ratings high among most Georgians even as he has undermined democratic institutions. Yet Mullen wonders how long a patronized citizenry, and an increasingly marginalized opposition, will settle for the trade-off.

It's a good question.

Mike Theiler-Pool/Getty Images

Christian Caryl

Guns and Butter

Countries around the world are finding that military involvement in private business is a major barrier to reform. But pensioning off CEOs in uniform is easier said than done.

On the face of things, OYAK Inc. offers a shining example of the qualities that have made Turkey such a big economic success story over the past few years. OYAK is the country's leading car manufacturer (having beaten out Ford's local subsidiary for the top position). It makes tires, cement, iron, and steel. It owns one of Turkey's biggest insurance companies, and its brokerage is a major player in the financial markets. It owns a chain of grocery stores, and also makes some of the things that are sold in them, from biscuits to tomato paste. Its 29,000 employees toil away in 50 different companies.

It turns out, though, that OYAK enjoys a crucial edge over its competitors in the various markets where it's a player. That is because it happens to be the pension fund of the Turkish armed forces. Though its CEO is a civilian, virtually all the members of its board are current or former generals (including the current defense minister). Though the company is beholden to its private shareholders, it enjoys many of the perqs of a public entity. All 200,000 officers in the armed forces are obligated to pay 10 percent of their salaries to the fund. Firat Demir, a Turkish economist at the University of Oklahoma, points out that some members of its board sit on the powerful National Defense Commission, a post that potentially gives them advance knowledge of government decisions on economic policy. (When Turkey devalued its currency in 1994 and 2001, says Demir, many businesses were devastated. But OYAK sailed through with nary a scratch -- a triumph one of its managers attributed to "gut feeling.") Nor does the company pay corporate income tax. Yet its budget is subject to minimal outside oversight.

There's no question that the armed forces, once an all-powerful force in Turkish society, have seen their role gradually erode over the years as democratic institutions have gradually taken root in the country. But Demir argues that the military has managed to preserve considerable political power precisely by retaining a variety of economic prerogatives. OYAK is just the tip of the iceberg. There are other military-controlled charitable funds and companies that enjoy monopoly powers in various business sectors. Meanwhile, the civilian government, led by the Islamist Justice and Development Party, still shields the official defense budget from anything more than superficial scrutiny. "The political side might be restricted," says Demir, "but the economic power is what stays."

Even so, Turkey is much better off in this respect than many other countries around the world. Many societies trying to make the shift away from authoritarianism often find that it's precisely their militaries that stand in the way of crucial economic reforms. That usually turns out to be the case because senior officers control private assets that give them a direct stake in the outcome. From Egypt to Burma, countries struggling to open up their economies are discovering that they have to get past the generals first.

There are powerful historical reasons for this. In many developing nations, the army often turns out to be the most effective state institution. Just take Pakistan, where the army has tended to lord it over the shaky central government since the country was founded in 1947. By some estimates the Pakistani army today controls 10 percent of the civilian economy, including businesses ranging from granaries to cement factories. In China, the People's Liberation Army, direct descendant of a guerilla force that once had to produce its own food and clothing in the field, today owns companies producing everything from bicycles to satellites. "In Central America, for example, particularly Honduras and El Salvador, the military or its pension fund owns banks, insurance companies, telephone companies, shrimp businesses, hotels, and palm oil farms," U.S. scholars Frank Mora and Quintan Wiktorowicz wrote in a 2003 paper. They also pointed out that Nigerian military officers still retain key positions in the economy there, especially in the all-important energy sector.

Buying the army off also tends to be a good insurance policy for would-be dictators. This was already well understood by Roman emperors, who gradually institutionalized bribes to the military in the form of donativa, cash payments aimed at ensuring loyalty. It's a principle maintained today by many modern rulers in the Middle East - Hosni Mubarak being one of the most notable examples. The Egyptian army has translated those prerogatives into a vast business empire that encompasses pasta, butane gas cylinders, real estate, livestock farming, and gas stations. (In 2008, when food prices were soaring, the army boosted its popularity by dispensing free bread from its own bakeries.) Mubarak was happy to let the military make all the money it wanted as long as it didn't pose any challenge to his continued rule. (That this tradeoff entrenched inefficiency and barred many Egyptians from economic opportunity was the least of his worries.)

It should hardly come as a surprise, then, that the military's business dealings are already becoming the key issue in the next stage of Egypt's revolution. The Muslim Brotherhood, set to dominate the newly elected parliament, has already signaled that it's ready to make oversight of the defense budget (implicitly including the army's commercial undertakings) one of its priorities. If the Brotherhood makes good on its threat, it will be justified in claiming that it has taken a major step toward circumscribing the army's power.

But that is much easier said than done. The problem in countries where the military has big private business interests is precisely that the generals understand that they won't be able to compete if the playing field is leveled out. Nowhere, perhaps, is this more of an issue than in impoverished Burma, where large swathes of the economy are under the control of current or former senior officers (the country's former leader, Than Shwe, is shown in the photo above). Sean Turnell, an expert on the Burmese economy at Macquarie University in Sydney, says that there already indications that what he calls "military commercial interests" are "acting in ways to impede reform" -- for example, by retaining their control of licenses for the lucrative export of resources such as natural gas, timber, and gemstones. The only way to break their stranglehold, he says, is through a broad liberalization of the economy that introduces transparency and genuine competition.

That just might work -- but only if the generals can be persuaded that they'll benefit in other ways as the country's economy opens up to the outside world. In reality, squaring this circle will undoubtedly translate into many a messy compromise. Experts say that the countries facing this dilemma should prepare for a long, hard slog.

CHRISTOPHE ARCHAMBAULT/AFP/Getty Images