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This chapter, the introduction to Practical Economics, discusses the challenge of fixing a broken country and describes the situation in Georgia in the early 2000s. The author, Georgia’s former prime minister, Nika Gilauri, explains why he believes that other countries can learn from the reforms he oversaw between 2004 and 2012. The chapter contains an overview of the impact of this large-scale transformation in areas ranging from corruption and doing business to economic growth and energy supply, as well as a personal account of how Mr. Gilauri, a political novice at the time, became a member of the cabinet in 2004.

This chapter describes the measures taken in Georgia after the 2004 to fight corruption, eradicate the shadow economy, and promote economic growth. Examples of such measures include better pay for public officials, performance rewards, deregulation, simplification of regulation, and investments in checks and balances. Based on his experience leading successful anti-corruption reforms, the author challenges the widespread belief that corruption is innate in societies and provides both concrete examples of creative corruption-prevention approaches, such as mystery shopping, and evidence of the impact of his reforms in Georgia, such as the country’s performance in Transparency International’s Corruption Perception Index and the Global Corruption Barometer.

This chapter discusses the right size of government in fiscal terms – identifying characteristics of Budget Optimum – i.e., the parameters of fiscal policy that should contribute to the fast and sustainable economic growth for the particular country in a particular time period. In the first part of the chapter it is argued that budget deficit is not the main parameter of Budget Optimum, but budget to GDP ratio and public expenditure to budget should be examined much closer in parallel with budget deficit. In its second part, this chapter chronicles Georgia’s economic recovery plan and its impact on key indicators – making the case for anti-austerity. The third part of this chapter lays out the broader institutional implications of the Georgian reform experience and, suggesting that some rules are outdated, offers innovative concepts – from the management of international financial institutions to cooperation between central banks and governments.

This chapter describes the benefits of the hub economy and tells the story of how Georgia became a hub for regional trade thanks to simplified rules and smart regulations. As its centerpiece, this chapter presents an account of successful Georgian reforms in “Doing Business” areas recognized by the World Bank, such as Georgia jumping from 112th place in 2006 the 8th place in 2014, as well as Georgia being named as the top reformer worldwide for the period of 2006–2011. The chapter provides a first-hand account of how the government changed the mindset of public officials with the introduction of the “one government” principle and rules such as “silence is consent.” It concludes with a discussion of the World Bank’s ranking methodology and a case example from Kazakhstan, a country that has applied many of the lessons learned in Georgia to create its own road map for reform in 2015–2016.

This chapter describes how Georgia’s government ended the rule of the shadow economy with the help of tax and customs reforms. The key was simplicity. The number of general taxes was cut from 21 to 6, all of them low, flat, and simple, and despite this action tax collections increased tenfold in the period of nine years (2003–2011) in nominal terms and from 7 to 24 percent in terms of percent to GDP. The number of customs duties was reduced from 16 to 3. More than 90 percent of all imported goods were allowed into the country without any customs duty, making Georgia one of the most open economies in the region. The author also outlines some innovative approaches to tax administration such as outsourcing of tax audits to private sector, using lottery for improved tax compliance, etc. The chapter concludes with a discussion of the Estonian model of profit taxation.

This chapter describes the formulas for privatization that were used to privatize almost all state-owned assets in Georgia between 2004 and 2011, including its ports, airports, water utilities, and power grid. To improve service levels and ensure long-term economic feasibility for investors, the government followed a best-practice process, comprising five steps – from replacing top managers and laying down the regulatory framework for the future private companies to screening and selecting bidders. The chapter also explains why Georgia’s railway and its oil and gas corporation were exempt from full privatization. It concludes with a discussion of alternatives to outright privatization, such as issuing Eurobonds and establishing public-private partnership funds, which combine the benefits of competitive pressure on public enterprises with governmental control.

This chapter describes how Georgia modernized its energy sector. When Nika Gilauri took office as minister of energy in 2004, blackouts were the norm, power was supplied to customers only for a few hours a day, and only about 30 percent of the power used was actually paid for. The Ministry of Energy itself suffered frequent power outages. The situation was further aggravated by seasonal effects. In Georgia, where hydroelectric power is the primary source of energy, generation peaks in summer, but consumption peaks in the cold winters. As a result, Georgia has long depended on seasonal energy imports and was deep in debt with all neighboring countries. This chapter tells the story of how the government turned things around through decisive industry restructuring. By 2006, the country had 24-hour energy supply even in remote areas, and the payment rate had reached 96 percent. And one year later, in 2007, Georgia has turned into net electricity exporter.

This chapter describes the introduction of a new welfare formula in Georgia that replaced a myriad of pre-existing social subsidies and tax breaks, many of which had been introduced to win the favor of voters prior to elections. These subsidies were flat and tied to all manner of products and services, from electricity to public transport, and they benefitted very different groups of people, from single mothers to war veterans. In a bold move, the new government froze most of these subsidies. To make sure that what little funds were available in the post-reform budget went to the neediest people, a scoring model for poverty based on property and living expenses was introduced. Based on this model the “[p]overty rates decreased from 21 percent in 2010 to less than 15 percent in 2012, and extreme poverty decreased from 7 percent in 2010 to 4 percent in 2012” (according to the Word Bank).

This chapter describes how the government partnered with private enterprises to renew the country’s healthcare system. Before the reforms, health insurance was a foreign concept for the vast majority of Georgians. In 2006, less than 1 percent of the population was insured. At the same time, most healthcare facilities were in a state of ill repair, and the medical staff was insufficiently trained. In response, the government divided the country into healthcare clusters and requested bids from insurance companies to provide basic coverage for the neediest in a given cluster. The winning bidder was obligated to renovate or rebuild and operate the hospitals in that area. By 2012, more than half the population was insured and more than 150 new or renovated hospitals were opened. What is more, competition between providers also resulted in higher incentives for medical personnel to perform well and grow professionally.

This chapter tells the story of how Georgia’s government reformed higher education in Georgia by diverting the flow of financing from institutions, such as schools and universities, to customers, i.e., students and their parents. Prior to the reform, many institutions were underfunded, and almost all teachers were underpaid. Under the new scheme, students were given vouchers that could be redeemed at any school. This created healthy competition among providers, and it improved the quality of education dramatically. Additionally, a system was put in place under which government bonuses were awarded for performance, as measured by student achievements in university entrance exams and school final exams, as well as for teacher proficiency and certification. The chapter concludes with a discussion of the plan to establish an American University in Georgia.