Economy
Despite the severe damage the economy of Georgia suffered due to civil strife in the 1990s, Georgia, with the help of the IMF and World Bank, has made substantial economic gains since 2000, achieving robust GDP growth and curtailing inflation.
GDP growth, spurred by gains in the industrial and service sectors, remained in the 9–12% range in 2005–07. In 2006, the World Bank named Georgia the top reformer in the world.
History
Georgia's economy has traditionally revolved around Black Sea tourism, cultivation of citrus fruits, tea and grapes; mining of manganese and copper; and output of a big industrial sector producing wine, metals, machinery, chemicals, and textiles.
Like many post-Soviet countries, Georgia went through a period of sharp economic decline during 1990s, with high inflation and large budget deficits, due to persistent tax evasion. in 1996 Georgia's budget deficit rose to as much as 6.2%. During that period international financial institutions played a critical role in Georgia's budgetary calculations. Multilateral and bilateral grants and loans totaled 116.4 million lari in 1997 and totaled 182.8 million lari in 1998.
Economic recovery had been hampered by the separatist disputes in Abkhazia and South Ossetia, resistance to reform on the part of some corrupt and reactionary factions, and Asian financial crisis. Under President Shevardnadze's leadership, the government had nonetheless made some progress on basic market reforms: all prices and most trade have been liberalized, a stable national currency (the lari) was introduced, and massive government downsizing took place.
During late 1990s more than 10,500 small enterprises had been privatized, and although privatization of medium- and large-sized firms had been slow, more than 1,200 medium - and large-sized companies had been set up as joint stock companies. A law and a decree establishing the legal basis and procedures for state property privatization reduced the number of companies controlled by the state.
The United States began assisting Georgia in reform process soon after the country gained independence from Soviet Union. Gradually, the focus shifted from humanitarian to technical and institution-building programs. Provision of legal and technical advisors was complemented by training opportunities for parliamentarians, law enforcement officials, and economic advisers.
Recent macroeconomic performance
Over the last few years Georgian economy has been one of the fastest growing in the FSU. Annual GDP growth exceeded 9% in every year since 2005. In 2007 the economy expanded at the rate of 12.4%.
This rapid growth in output was accompanied by rising inflation - 11% in 2007, up from 7% in 2003.
In recent years current account deficit has been steadily growing, reaching 20% of the GDP in 2007. Although this figure may appear huge at first glance, large current account deficits are a common feature among many Eastern European economies.
Deficits in current account have been more than offset by strong foreign capital inflows, allowing the Georgian currency to appreciate.
Recent indications suggest the economy has been severely affected by the war with Russia in August 2008. Third quarter GDP was down by 3.9% compared with the same period of the last year. This marked a sharp reversal of the situation as it was in the first half of the year, when the economy grew by 8.7%. FDI inflows fell to only $150 million in the Q3 2008, compared with $430 million in Q1 and $525 in Q2. This had put Georgian currency under extra pressure. Nevertheless, the government has managed to preserve financial stability thanks to the considerable aid provided by the US and international institutions. EBRD analysts believe that substantial international financial support and remittances from workers living abroad will cover the current account deficit in the medium term.
Foreign Direct Investment
Large inflows of Foreign direct investment (FDI) have been a driving factor behind a rapid economic growth in Georgia since 2003. In 2007 alone the economy of Georgia attacted $1,7 billion in FDI, bringing the total FDI stock to $5,2 billion, which is over 50% of the GDP.
The table below shows FDI stock as a percentage of GDP in selected FSU countries.[13] For statistical purposes, FDI is defined as a foreign company owning 10% or more of the ordinary shares of an incorporated firm or its equivalent for an unincorporated firm.
The major recipients of FDI in Georgia are the telecommunications industry, transportation sector, production and distribution of electricity, and construction.
Institutional reforms
Under the Saakashvili administration, Georgia undertook a number of profound institutional reforms aimed at modernizing the economy and improving business climate.
• Licensing regulation
Just 3 years ago getting a construction permit for a commercial warehouse in Tbilisi required 29 different procedures. Before even applying for the permit a builder needed permission from agencies as diverse as the Center of Archaeology at the Academy of Science and the Inspector of Sanitary Observation. Illegal construction activity was widespread. In 2004 less than 45% of ongoing construction projects in Tbilisi had permits.
Things have changed after new Law on Issuance of Licenses and Permits was introduced in 2005. The law cut from 909 to 159 the number of activities subject to licensing. A one-stop shop was created for license applications, so that now businesses can submit all documents there, with no verification by other agencies required. In the construction industry Georgia eliminated many of the approvals required to obtain a construction permit (while maintaining procedures necessary for regulating in the public interest) and introduced a “silence is consent” rule, whereby a permit or license is automatically granted if no government action is taken within statutory time limits. The number of procedures needed to build a warehouse dropped to 12. The time required fell by nearly 3 months. The approval process for building a warehouse in Georgia is now more efficient than in all EU countries except Denmark.
• Tax Collection
In 2005, Georgia enacted a new Tax Code that introduced lower, flat tax rates. The total number of taxes was reduced from 22 to only 7. The number of taxes was further reduced starting January 1, 2008, when new changes to the Tax Code of Georgia took effect that abolished the 20% social tax paid by businesses. The rate of personal income tax was rased instead, from 12% to a flat 25% rate.[18]
Georgia has seen a drastic fall in perceived corruption of tax officials. In 2005 only 11% of businesses, surveyed by the World Bank, reported that bribery was frequent, down from 44% in 2002
• Labor regulation
With unemployment around 15% and many jobs in the informal sector, Georgia undertook a far-reaching reform of labor regulation. The new Labor Code was adopted on 25 May 2006. The new law eases restrictions on the duration of term contracts and the number of overtime hours and discards the premium required for overtime work. It also eliminates the requirement to notify and get permission from the labor union to fire a redundant worker. The new law provides for 1 month’s severance pay, replacing complex rules under which required notice periods depended on seniority and the manager had to write long explanations to labor unions and the Ministry of Labor. In general, new regulation makes Georgian labor market much more flexible.
Coupled with the fact that Georgia also reduced the social security contributions paid on wages by businesses from 31% to 20% in 2005, and abolished them entirely starting January 2008, these changes make Georgia the sixth easiest place to employ workers globally.
More flexible labor regulations boost job creation. But they don’t mean giving up protections. Georgia has ratified all the core labor standards of the International Labour Organization. Flexible labor regulations that give workers the opportunity for a job in the formal sector and easy transitions from one job to another.
• Judicial Procedure
Reducing corruption in courts was one of the chief priorities of the new government. Since 2004, when the Saakashvili administration came in, seven judges have been detained for taking bribes and 15 brought before the criminal courts. In 2005 alone the judicial disciplinary council reviewed cases against 99 judges, about 40% of the judiciary, and 12 judges were dismissed. At the same time judges’ salaries were increased fourfold, to reduce dependence on bribe money.
Unemployment
Unemployment has been a persistent problem in Georgia ever since the country gained independence in 1991. According to Department of Statistics of Georgia unemployment rate stood at 13,6% in 2006. This is by far the highest level among the FSU countries. However, even this figure is misleading and doesn't reflect the vast discrepancies between urban and rural areas of the country.
Hearly a half of Georgia's population lives in rural areas, where low-intensity self-sufficient farming provides the principal source of livelihood. Georgian statistics service puts individual peasants into the category of self-employed workers. As of 2007 416,900 peasants were listed as self-employed in agriculture. For large families, heads of households are typically described as "individual entrepreneurs", members of the family that help to cultivate land are classified as "unpaid family business workers". The use of this methodology produces relatively low unemployment rates for rural areas (4,8% as 2006).
By contrast, the average unemployment rate in cities is 26%. In Tbilisi unemployment is reported to be reaching 40%. Apart from the obvious social strain that widespread unemployment creates, the issue has strong political implications. Some observers have argued that desperation about poor living conditions fuelled the discontent that eventually erupted into violent anti-government protests in November, 2007.
Source: Wikipedia
