Instructions for action: Georgia’s reforms (part 5)
After a collapse of the Soviet bloc in Georgia, the largest fall of the economy occurred. Between 1990 and 1994, GDP fell by 77%. The main product of export was scrap. In 2013, Georgia ranked 8th among 189 countries by ease of doing business indicator, reports “Investor”.Georgia’s reformers have decided to take advantage of successful reforms already undertaken by other countries. Since the period of reforming in Georgia has begun rather late, in 2004. The main persuasion of the initiators of reforms was that it shouldn’t be much state intervention, and its powers should be limited.
It was planned to change according to local conditions. In addition, it was decided to implement reforms quickly and aggressively, with a maximum release of business from restrictions. Such activities quickly led to the dissatisfaction of the population and reduced public support, as in the transition period, people became extremely vulnerable to economic problems.
The main objective put forward by the leaders of Georgia was a rapid reformation in order to integrate the country into world processes and organizations. Also, raising the level of well-being of the population and confidence in the state authorities was considered important.
One of the key reforms the reformers in all post-communist countries had to face was an introduction of competitive tax legislation. In 2004, Georgia had a large number of different taxes, their rates were huge. Thus, from 2004 to 2007, the number of taxes was reduced from 21 to 6.
In 2005, the VAT was reduced to 18%, while the income tax (20%) and social insurance (33%) were combined into one income tax at a rate of 25%, which was subsequently reduced to 20%. An important step was the announcement of a tax amnesty, which allowed a significant part of businesses to come out of the shadows. Such actions contributed to the fact that tax revenues increased from 14% of GDP in 2003 to 21% in 2005 and 27% in 2012. The next decision was the opening of economic frontiers. The import duty rate was 0%, subsequently, the duty was set at 0.2%. The low duty contributed to the flow of both goods and capital into the country.
Georgia, like every other country in the socialist camp, had a large number of state enterprises that could not fit into the market economy, and the state could not manage them effectively. Thus, a global privatization of state assets was implemented. Back then the Minister of Economy Kaha Bendukidze said:
“We will sell everything except our beliefs”.
One of the problem areas in Georgia was the energy sector. In early 2004, the supply of electricity was limited to 8 hours a day. The illegal connection to the network, or even theft of the transmission network, have become widespread. Thus, in order to change the situation, this area was privatized and conditions for investing were created. In addition, contracts for direct electricity supply were signed with producers and consumers. The state monopoly on wholesale trade was abolished
Georgia was famous for its tourism but the influx of tourists was slowed down by the difficulties with visa registration. Georgia has made a rather unexpected and extraordinary step by canceling visas for about 94 countries. This contributed to the fact that the inflow of tourists began to grow by 40% annually. At the beginning of the reform the country was visited by about 300 thousand people and in 2013 the number grew up to 5.4 million people.
The result of economic reforms was the adoption of the Act of Economic Freedom. Its essence was that the government is prohibited from introducing new taxes or raising tax rates except as a result of a national referendum. It was also prohibited to create new regulatory bodies or introduce new types of licensing. The Act prescribed a high rate of government expenditure of 30% of GDP, a national debt of 60% of GDP, and a budget deficit of no more than 3%. With this act, the state was protected from significant slowing down of reforms like in Hungary and Bulgaria.
Georgia was one of the last to start a journey on the path of reform, but an effective and targeted policy led to widespread reformation and improvement of economic performance. An important factor was the safeguarding of reforms from changing. However, it should be noted that the changes were not implemented easily, and often in spite of public opinion. After reforming the state, the reformers were removed from power.