GEORGIA
Rank: 35 Regional Rank: 20 of 41
eorgia’s economy is 68.7 percent free, according to our 2007 assessment, which makes it the world’s 35th freest economy. Its overall score is 3.9 percentage points higher than last year, partially reflecting new methodological detail but mostly as a result of an increase in labor freedom. Georgia is ranked 20th out of 41 countries in the European region, and its overall score is equal to the regional average.
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The economy is 68.7% free
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60
Georgia scores highly in business freedom, fiscal freedom, freedom from government, and labor freedom. Business operations are simple and not hampered by red tape. A very low top income tax rate complements the low corporate tax rate, and government tax revenue is fairly low as a percentage of GDP. Government expenditures are also low, and government-owned businesses are a negligible source of revenue. Georgia’s labor market is highly flexible and far freer than those of most advanced economies. As a transforming post-Communist economy, Georgia has much to improve. Trade freedom, property rights, and freedom from corruption remain problems, and an inefficient bureaucracy burdens many commercial sectors. Non-tariff trade barriers are correspondingly high, and property rights cannot be guaranteed by the courts because of inefficiency and persistent corruption. BACKGROUND: Georgia became independent with the collapse of the Soviet Union in 1991, but its survival was later threatened by civil wars and secessionist movements. President Mikheil Saakashvili has remained politically dominant since February 2005. On May 2, 2006, Saakashvili announced that Georgia will re-examine its membership in the Commonwealth of Independent States, a Russian-dominated bloc of former Soviet republics. The government has undertaken several privatizations and structural reforms, such as streamlining trade tariffs and taxes. Georgia has benefited from completion of the Baku– Tbilisi–Ceyhan oil pipeline from Azerbaijan to Turkey, which provides oil transit revenue. How Do We Measure Economic Freedom? See Chapter 3 (page 37) for an explanation of the methodology or visit the Index Web site at heritage.org/index.
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Europe Average = 67.5 World Average = 60.6
20
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2007
QUICK FACTS
Population: 4.5 million GDP (PPP): $12.8 billion 6.2% growth in 2004 5.8% 5-yr. comp. ann. growth $2,844 per capita Unemployment: 15.3% Inflation (CPI): 5.7% FDI (net inflow): $489.5 million Official Development Assistance: Multilateral: $137 million Bilateral: $221 million (42% from the U.S.) External Debt: $2.1 billion Exports: $1.6 billion Primarily scrap metal, machinery, chemicals, fuel re-exports, citrus fruits, tea, wine Imports: $2.5 billion Primarily fuels, machinery and parts, transport equipment, grain and other foods, pharmaceuticals
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GEORGIA’S TEN ECONOMIC FREEDOMS
Business Freedom Trade Freedom Fiscal Freedom Fdm fm Government Monetary Freedom Investment Freedom Financial Freedom Property Rights Fdm fm Corruption Labor Freedom 78.9 61.8 94.2 91.3 77.9 60 70 30 23 99.9
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= world average
receives equal treatment. There are no restrictions on purchases of or investment in domestic companies, stocks, bonds, or any other property, and local participation in businesses or investments is not required. Both domestic and foreign investors can use a one-stop-window system to obtain a business license in 24 hours. Foreign firms are allowed to participate freely in privatizations. Residents and non-residents may hold foreign exchange accounts. There are limits and tests for payments and current transfers. Capital transactions are not restricted but must be registered. Judicial inefficiency and corruption are the only major impediments to foreign investors.
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BUSINESS FREEDOM — 78.9%
Starting a business takes an average of 16 days, compared to the world average of 48 days. This benefits entrepreneurship and helps to maximize job creation. Obtaining a business license and closing a business are relatively simple. The overall freedom to start, operate, and close a business is relatively well protected by the national regulatory environment.
FINANCIAL FREEDOM — 70%
Georgia’s small financial sector has undergone substantial liberalization since the 1990s. The central bank assumed a supervisory role and imposed stringent reporting and capital requirements that led to the closure or merging of a number of banks. There were 20 banks as of April 2005, down from 247 in 1995. The top six banks account for about 87 percent of banking assets. Non-performing loans are a problem for some banks. Foreign bank branches are welcome, and foreign investors are majority owners of several banks. The government does not have a stake in any bank. Despite consolidation, the banking sector remains weak, and banks remain risk-averse. The insurance sector includes significant foreign participation. The stock exchange is small and underdeveloped.
TRADE FREEDOM — 61.8%
Georgia’s weighted average tariff rate was 9.1 percent in 2004. While Georgia has made progress toward liberalizing its trade regime, certain non-tariff barriers, including agriculture subsidies and an inefficient and corrupt customs process, continue to add to the cost of trade. Consequently, an additional 20 percent is deducted from Georgia’s trade freedom score to account for these non-tariff barriers.
PROPERTY RIGHTS — 30%
Judicial corruption is still a problem despite the government’s substantial improvement in trying to raise the level of efficiency and fairness in the courts. Under its anti-corruption program, the government has fired thousands of civil servants and police and has prosecuted several bureaucrats. Both foreigners and Georgians continue to doubt the judicial system’s ability to protect private property and contracts.
FISCAL FREEDOM — 94.2%
Georgia has low tax rates. The top income tax rate is a flat 12 percent, and the top corporate tax rate is 20 percent. Other taxes include a value-added tax (VAT), a tax on interest, and a tax on dividends. In the most recent year, overall tax revenue as a percentage of GDP was 18.2 percent.
FREEDOM FROM GOVERNMENT — 91.3%
Total government expenditures in Georgia, including consumption and transfer payments, are low. In the most recent year, government spending equaled 19.1 percent of GDP, and the government received 0.7 percent of its total revenues from state-owned enterprises and government ownership of property.
FREEDOM FROM CORRUPTION — 23%
Corruption is perceived as widespread. Georgia ranks 130th out of 158 countries in Transparency International’s Corruption Perceptions Index for 2005.
LABOR FREEDOM — 99.9%
The labor market operates under highly flexible employment regulations that enhance employment and productivity growth. The non-salary cost of employing a worker can be high, but dismissing a redundant employee is costless. Rules on increasing or contracting the number of work hours are very flexible. Georgia leads the world in labor market freedom.
MONETARY FREEDOM — 77.9%
Inflation in Georgia is relatively high, averaging 7.3 percent between 2003 and 2005. Relatively unstable prices explain most of the monetary freedom score. Prices are generally set in the market, but the government may impose control over prices through regulation of state-owned enterprises. The government also provides subsidies for agricultural products. Consequently, an additional 5 percent is deducted from Georgia’s monetary freedom score.
INVESTMENT FREEDOM — 60%
Georgia has undergone a major structural reform to create a business-friendly environment. Foreign investment
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2007 Index of Economic Freedom