Economic History Of Georgia (country)

The economy of Georgia is an emerging free market economy. Its gross domestic product fell sharply following the dissolution of the Soviet Union but recovered in the mid-2000s, growing in double digits thanks to the economic and democratic reforms brought by the peaceful Rose Revolution. Georgia continued its economic progress since, "moving from a near-failed state in 2003 to a relatively well-functioning market economy in 2014". In 2007, the World Bank named Georgia the World's number one economic reformer, and has consistently ranked the country at the top of its ease of doing business index.

Georgia's economy is supported by a relatively free and transparent atmosphere in the country. According to Transparency International's 2018 report, Georgia is the least corrupt nation in the Black Sea region, outperforming all of its immediate neighbors, as well as nearby European Union states. With a mixed news media environment, Georgia is also the only country in its immediate neighborhood where the press is not deemed unfree.

Since 2014, Georgia is part of the European Union's Free Trade Area, with the EU continuing to be the country's largest trading partner, accounting for over a quarter of Georgia's total trade turnover.European Commission
Georgia
Retrieved: 7 May 2016 Following the EU trade pact, 2015 was marked by further increase in bilateral trade, whereas trade with the Commonwealth of Independent States (CIS) decreased precipitously.Civil Georgia
Georgia’s 2015 Foreign Trade
, 20 January 2016

History

Before the 20th century Georgia had a largely agrarian economy.

Georgia's modern economy has traditionally revolved around Black Sea tourism, cultivation of citrus fruits, tea and grapes; mining of manganese and copper; and the output of a large industrial sector producing wine, metals, machinery, chemicals, and textiles.

Like many post-Soviet countries, Georgia went through a period of sharp economic decline during the 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; they 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 the Asian financial crisis of 1997. Under the leadership of President Shevardnadze (in office 1995–2003), the government nonetheless made some progress on basic market reforms: it liberalized all prices and most trade, introduced a stable national currency (the lari), and massively downsized government.

During the 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 the process of reform soon after the country gained independence from the 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 in the FSU. Since 2003's Rose Revolution, the new Government of Georgia implemented broad and comprehensive reforms, that touched every aspect of the country's life. Economic reforms were addressed to liberalization of the economy and provision of sustainable economic growth, based on the private sector development. Establishment of an attractive business environment led to significant inflow of Foreign Direct Investment in the country, facilitating high economic growth rates.

In 2013, Georgia ranked in the top ten countries in the Emerging Market Energy Security Growth Prosperity Index, according to an article published by ''CISTRAN Finance'' news. The index identifies emerging nations that have strong growth potential based on energy reserves and GDP.

Following reforms, Georgia's economy successfully diversified and began showing rapid upward growth, averaging over 10% annual real GDP growth from 2004–2007, peaking at 12.3 percent in 2007. Overall, from 2004-2007, the economy of Georgia expanded by 35%.

Georgia's economic liberalization policy demonstrated some resilience to external shocks – war with Russia in 2008 and the global financial crisis. Despite this, in 2008 Georgia economy grew by 2.3%. After contracting in 2009 (−3.8%), the economy recovered soon after, growing 6.3% in 2010 and 7.0% in 2011. The unemployment rate shrunk from 16.9% to 16.3% between 2009 and 2010.

In 2013 the annual inflation rate in Georgia equaled 2.4%. It has been decreased significantly after 11.2% in 2010. Growth of inflation rate was the result of increasing food prices in the world and essential share of the inflation fluctuations came on variability of food prices, as far as the share of food is relatively high in consumer basket of Georgia.

In 2011, IMF estimated current account balance of Georgia was −1.489 BN USD. Georgia has moderate deficits among the European and Transcaucasian Post-Soviet states. The trade with Georgia's major partners continued growing. As an example, in 2016, Georgia exported $87,263.53 worth of products to Armenia, and imported $144,931.92 worth of products from Armenia. Deficits in current account have been more than offset by strong foreign capital inflows, allowing the Georgian currency to appreciate.

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. IMF positively evaluated government's economic policy.

Foreign direct investment in Georgia

Large inflows of Foreign direct investment (FDI) have been a driving factor behind a rapid economic growth in Georgia since 2003.

An attractive and liberal investment environment and equal approach to local and foreign investors makes the country an attractive destination for FDI.

Stable economic development, liberal and free market oriented economic policy, 6 taxes only and reduced tax rates, reduced number of licenses and permissions, dramatically simplified administrative procedures, preferential trade regimes with foreign countries, advantageous geographic location, well developed, integrated and multimodal transport infrastructure, educated, skilled and competitive workforce presents a solid ground for successful business in Georgia. In addition to other advantages, Georgia has Free Industrial Zones, where companies are exempt from all the corporate taxes.

From 2003 to 2011, FDI in Georgia amounted to US$8511.5 million. The highest volume of FDI – 2,015.0 million USD was reached in 2007, with 69.3% yearly growth. High rate of investment was maintained until 2008. In 2007, the EC27 accounted for over 56% of FDI inflows and in 2008 the EC, UAE, and Turkey accounted for nearly 60%. In 2009, FDI inflows were characterized by decreasing trend. The main reasons of decreasing were external shocks – Russian-Georgian war and the influences of global financial crisis.

In the first half of 2017, Armenian Investments to Georgia nearly doubled year-on-year to $5.6 million, while investments from Azerbaijan dropped by 20.3% year-on-year to the overall $224.18 million.

• In 2009–2011 the largest share of FDI felt on Industry sector (31.2) amounted to US$765 million, real estate sector (15.8%) amounting to US$389 million.

The table below shows FDI stock as a percentage of GDP in selected FSU countries. 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.

Foreign direct investment in the country of Georgia by year.

Trade

Since 2014, Georgia is part of the European Union's Free Trade Area, with the EU continuing to be the country's largest trading partner, accounting for over a quarter of Georgia's total trade turnover. Following the EU trade pact, 2015 was marked by further increase in bilateral trade, whereas trade with the Russian-led Commonwealth of Independent States (CIS) decreased by 22%.

As of 2015, in the order of magnitude, Georgia's main exports were: copper ores and concentrates, ferroalloys, hazelnut, medications, nitrogen fertilizers, wine, crude oil, mineral water, non-denatured ethanol and spirits.

In 2015, Georgia's main imports, in the order of magnitude, were: oil products, vehicles, hydrocarbons, copper ores and concentrates, mobile phones and other wireless phones, wheat, cigarettes, iron tubes and pipes, structures and parts of structures of iron.

In 2019, Georgian exports to Armenia grew by 2% compared to previous year, while imports decreased by 7%. Georgia exported 98.3 million $ worth of products to Armenia (4% of total exports), and imported 46.9 million $ (1% of total imports) in 2019.

International money transfers

Money transferred from abroad to Georgia in 2019 amounted to USD 1.73 billion, according to figures released by Georgia's central bank. Money transfers from Russia, which has been the largest source of remittances for Georgia for many years already, stood at USD 428.89 million in 2019.

Among other largest sources of remittances for Georgia are: Greece with USD 192.56 million in 2019, Italy – USD 239.17 million; the United States – USD 178.41 million; Ukraine – USD 47.3 million; Spain – USD 30.9 million; Turkey – USD 94.85 million; Kazakhstan – USD 26.63 million; the UK – USD 16.89 million; Israel – USD 162.55 million; Azerbaijan – USD 22.17 million; Germany – USD 49.81 million; France – USD 26.37 million; Canada – USD 14.21 million.

Institutional reforms

Under the Saakashvili administration, Georgia undertook a number of profound institutional reforms aimed at modernizing the economy and improving business climate. Kakha Bendukidze (1956–2014) was one of the most notable team members during his governance, coordinating the Ministry of Economical Reforms of Georgia. Implemented institutional reforms created an effective, professional and transparent public sector, motivated to protect the principles of democracy. Due to the economic deregulation policy, number of state regulated spheres sharply decreased, as well as regulation procedures were simplified.

Georgia succeeded in fighting against corruption, that was the one of the main obstacles for development. Success of Georgia is recognized by different rating agencies. According to the Transparency International, Georgia is the top country in the post-Soviet region in terms of fighting corruption. According to the Corruption Perception Index published by Transparency International, Georgia ranked 50th in 2014 (up from 113rd in 2004). "Global Corruption Barometer 2010" ranks Georgia the first among world countries in the term of decrease corruption level. According to International Finance Corporation Business Perception Survey 2012 only 0.11% of surveyed (1 respondent out of 920) named corruption as a problem in relations with public organizations.

Georgia has the most liberal tax jurisdiction in Europe. The number of taxes is decreased from 21 to only 6, tax rates were reduced also. In addition, significant procedural and institutional reforms was implemented – simplified system of tax disputes was established, tax administration system was streamlined and most of taxes currently are paid on-line.

Due to the customs reform customs procedures were dramatically simplified. Customs tariffs reform significantly simplified and sharply reduced the costs connected to the foreign trade. Number of import tariffs was abolished on approximately 90% of products and only 3 tariff rates exist instead of previous 16. Currently 86% of tariff lines are duty-free compared to 26% in 2005. Modern Customs Clearance Zones were established and customs clearness procedures could be made starting from 15 minutes only.

Modernization of system of licenses and permits resulted in decrease of number of licenses and permits and simplification of related administrative procedures.

Privatization of state property – Starting from 2004, provision of transparent privatization policy was one of the important reforms of the Government of Georgia, that was addressed to denationalization of the remained state property in order to attract foreign investments, increase and develop the private sector and effective use of country's resources.

Liberal labour legislation simplified the relations between employers and employees. As a result of the reform, ”Heritage Foundation” and other analytical centers named Georgian Labour Code as one of the most liberal in the world, because it significantly reduced hiring and firing expenses.

Georgia offers the most simplified procedures for registration of business, property, for getting different documentations via “One-Stop-Shops”, where the most procedures could be done on-line. Doing Business 2012 report (WB) places Georgia 16th in terms of Ease of Doing Business index (up from 112 in 2006), naming Georgia as the top reformer amongst the 174 countries over the last 5 years. Georgia is amongst the leaders in other ratings, namely, registering property – first place; Dealing Construction Permits – 4th place, Starting a Business – 7th place; Getting Credits – 8th place.

Licensing regulation

Due to the reform of the system of licenses and permits, the number licenses and permits was reduced by 90%. Currently, licenses and permits are only used in the production of highly risky goods and services; also usage of natural resources and specific activities. The procedures of issuing licenses and permits were significantly simplified, the “One-Stop Shop” and “Silence is Consent” principles were introduced which implies that if person is not notified with argumentation rejection about issuance of license in limited framework, the license is considered as issued from the relevant body.

The procedures for getting a construction permits was dramatically simplified and it requires just 3 procedures. The time for getting the construction permits was sharply reduced. According to Doing Business 2012 (WB) Georgia is the best performer in the Eastern Europe and Central Asia (ECA) region and places on 4-th position in the world. The number of procedures and days, the cost (% of income per capita) is much more lower, than in ECA region and OECD countries.

Things have changed after new Law on Issuance of Licenses and Permits was introduced in 2005. The approval process for building a warehouse in Georgia is now more efficient than in all EU countries except Denmark.

Tax collection

Since January, 2011 the new Tax Code came into force. It unifies the old Tax and Customs Codes. The new Tax Code increased confidence towards the Georgian tax system and enhanced trust in the Georgian tax authorities, by improving communication between taxpayers and the tax authorities, by protecting the taxpayers’ rights, by making administration more efficient, and by harmonizing the Georgian laws with the best international tax practices and EU directives.

Only 6 taxes exist in Georgia with law tax rates: Income Tax (personal income tax) 20%; Profit Tax (corporate tax) – 15%; Value Added Tax – 18%; Excise – varies; Property Tax up to 1% of the self-assessed value of property; Customs Tax – 0%; 5%; 12%. In addition, significant procedural and institutional reforms were performed, simplified tax dispute settlement, streamlined tax administration decreased the time and cost of paying taxes. Georgia made paying taxes easier for firms by simplifying the reporting for value added tax and introducing electronic filling and payment of taxes.Georgia_Pocket_Tax_Book
, Ministry of Finance

Number of import tariffs was abolished on approximately 90% of products and only 3 tariff rates (0%, 5%, 12%) exist instead of previous 16. Georgia sets Import Taxes on only several kinds of agricultural and manufactured goods . In addition, there are no quantitative restrictions (quotas) on imports and exports.

Labour regulation

With unemployment around 16% and many jobs in the informal sector, Georgia undertook a far-reaching reform of labour regulation. The new Labour Code was adopted on 17 December 2010. 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 labour union to fire a redundant worker. The new law provides for 1 month's severance pay at least, replacing complex rules under which required notice periods depended on seniority and the manager had to write long explanations to labor unions and the relevant ministry. 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.

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.

According to Global Property Guide index, Georgia currently holds 40 points out of 100. That stands for "The court system is highly inefficient, and delays are so long that they deter the use of the court system. Corruption is present, and the judiciary is influenced by other branches of government. Expropriation is possible."
Some unsatisfied responses concerning the judiciary system may be found among Georgian websites, though its genuineness is controversial.

Unemployment

Unemployment has been a persistent problem in Georgia ever since the country gained independence in 1991. According to National Statistics Office (Georgia) unemployment rate stood at 16.9% in 2013 and it has been decreased at 11.6% in 2019.

Nearly 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 persons into the category of self-employed workers. As of 2007 416,900 persons 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 rather in urban areas and in Tbilisi.
Neighbouring countries show somewhat similar results. For example, Armenia in 2015 had 18.26% unemployment rate, which is 532.644 people.

Structure of the economy

Energy

In recent years Georgia has fully deregulated its electricity sector, and now there is free and open access to the market.

Georgia has a sizable hydroelectric capacity, a factor that has become an increasingly important component of its energy supplies and policies. The country's topography and abundance of hydro resources give it serious potential to dominate hydroelectric markets in the Caucasus region. The Georgian Ministry of Energy estimates that there are around 26,000 rivers within Georgian territory, with approximately 300 of those rivers being significant in terms of energy production. The Ministry also claims that current projects for hydroelectric power plants total around US$2.4 billion. Alexander Khetaguri, the former Georgian Minister of Energy, proposed new hydroelectric projects worth well over 22,000 megawatts of capacity, which would cost over US$40 billion and would be privately funded. These projects alone would transform Georgia into the world's second-largest hydropower producer.

In 2007, Georgia generated 8.34 billion kilowatt-hours of electricity while consuming 8.15 billion kWh. Most of Georgia's electricity generation comes from hydroelectric facilities. In 2005, the country generated 6.17 billion kWh of hydropower, or 86% of total electricity generation. In 2006 rapid growth in hydroelectricity output (by 27%) was matched by equally strong growth in thermal electricity (by 28%). Since then the share of hydropower has grown even bigger, when Inguri