Two new airports are the jewels of the country’s new transportation image. The airport in Tbilisi opened last February and the airport in Batumi opened several months later.
Giorgi Lomsadze and Molly Corso
The Georgian government has been applauded for its far reaching reform platform. On paper, the business climate has greatly improved. AmCham News spoke to government officials, businesses and economists to see the effect of those reforms on the ground.
A legacy of reforms
While Georgia has repeatedly scored praise by the World Bank as one of the most aggressive reformers for business, some economists question if the reforms are on the right track.
According to the World Bank’s 2008 Doing Business Report, over the past three years Georgia has significantly strengthened investor protections, simplified dealings with licensing and eased access to credit. The government’s effort resulted in a catapult leap through the report’s ranks. This year Georgia came in 18th on World Bank’s Ease of Doing Business rankings, a significant improvement that places the country in the company of developed countries like Belgium (19) and Switzerland (16).
“No other country in the world that we have seen since the beginning of the project has reformed this fast or in as many areas as Georgia has,” .
Georgia was not the biggest reformer this year but it did managed to break into the list’s top 20, an impressive feat when one considers which countries rank at the top of the survey. The report looks at how a country improves its legislation for business, so the more a country reforms the better its score. In order to continue to climb through the ranks, according to Djankov, a country must maintain its pace of reforms. Normally, he said, a country’s government will concentrate on one particular area and shoot up the survey based on those scores. The Georgian government however has repeatedly reformed in a multitude of categories, which makes it unusual, according to Djankov.
This year Georgia reformed four out of the report’s ten categories: dealing with licenses, getting credit, protecting investors and closing a business. The country lost five points in trading across borders.
According to First Deputy State Minister of Reforms Coordination Vakhtang Lezhava, the key to the reforms has been to reduce layers of bureaucracy. He noted that a simple move like merging business and tax registration reduced the number of days required to register a business to just one. Registering “other types” of legal persons takes up to three days, he said.
Minimum capital requirement for limited liability start-ups has been reduced to nil. In an effort to streamline licensing and permitting procedure, Georgia adopted one-stop shop practice and silence-denotes-consent rule. Total number of licenses and permits was cut by 84 percent. Some 756 licenses and permits were eliminated. As a result, twice as many companies are registered in 2007 as compared to 2003, according to the Ministry.
Business owners like Alexandra Aliyeva-Romanenko appreciate the difference these changes make. Romanenko recently expanded her Azerbaijan-based mail and currier business, PX Post, to Georgia. According to her, the government’s efforts to reduce licenses and registration hurdles made a real difference.
“I didn’t face any problems, it was quick and efficient,” Aliyeva-Romanenko said. In comparison to Azerbaijan, Aliyeva-Romanenko said Georgia provides easier and more competitive licensing system.
Better than Germany?
But economists like Vladimer Papava, a deputy chairman of the parliamentary committee for finance and budget, question the country’s progress. A recent study by the International Financial Corporation (IFC), which also implements the Doing Business report, found that small and medium business owners in Georgia are feeling less optimistic about business reform in Georgia. While the authors noted that businesses were less concerned about issues like corruption and taxes then they were a mere four years ago, the report mentioned “significant challenges,” including concerns over unclear tax laws, inspections, licensing and customs.
“Unfair competition, insufficient infrastructure development, and ongoing concerns about corruption…contributed to business owners’ lack of optimism: only 40 percent indicated confidence that the business environment would continue to improve in the coming year, down from 75 percent in 2003,” IFC said. The report, published in June, is based on a survey of 2000 small and medium businesses in Georgia.
While Georgia is listed four points above Norway according to the report, Papava argues that the figures are misleading. “Investing in Georgia has become safer for foreigners, but not for local businessmen,” he said, commenting that “arm-twisting” business owners to obtain their property is becoming more common and some Georgian businesses are turning to foreign companies for “protection.”
“If you go by the Ease of Doing Business rankings, you would think that doing business in Georgia [ranked 18] is easier than, say, in Germany [ranked 20],” Papava said.
Djankov admitted the results appear to be a little “shocking.”
“At the first blush kind of a shocking comparison,” he said during the presentation. “How can it be that the business environment is just as good or slightly better than in Germany?”
According to him, it is imperative to look at the report in a “historic” setting. Djankov explained that while Germany is a wealthy country today, it was not when the bulk of its legislation was written – right after the end of World War II. He noted that it took another decade for Germany to reap economic benefits.
Another example is Estonia: according to Djankov, Estonia went through its reformative process in the early 1990s.Now it has one of the fastest growing economies in Europe but it took over ten years for problems like high unemployment to be resolved.
“Essentially what you need to compare is growth on the one side and on the other side how many years of growth or business creation you need to get to the level that Germany is today,” he said.
Djankov pointed to several indicators that reforms are on track in Georgia, the biggest being the number of businesses being created.
Paata Sheshelidze also noted that while Georgia is moving forward, there is both “good news and bad news” with the reforms. According to Sheshelidze, the president of the New Economic School-Georgia, the government has done a good job liberalizing the barriers to business, it is “missing opportunities.” He said the two issues that plague the reforms are property rights and high spending.
Lezhava admitted that some problems remain. Many practices, customs procedure being one of them, remain to be slow and inefficient. Often cargo trucks spend days if not weeks queuing on the borders awaiting customs clearance.
According to him, the government is already preparing new, streamlined procedures to tackle the problem. Lezhava explained that reforms are underway to convert general customs clearance to risk-based checking. A list of select trusted importers will be compiled and they will be offered a much simplified customs clearance procedure. “Goods coming from countries where falsifying invoices is a common practice will be subject to a thorough check, while imports from the E.U. and other developed economies, where such practices are highly unlikely, will go through a simplified control procedure,” he said.
The economic benefits of reform
Despite the fact that reforms have resulted in dramatic tax cuts, the country is receiving more tax revenues than ever before.
The number of taxes was slashed from 22 to seven. Corporate profit tax was reduced from 27 percent to 15 percent and VAT was lowered two points from 20 percent to 18 percent. Electronic filing system of tax returns is also underway.
The European Bank for Reconstruction and Development reported that improved tax and customs administration in tandem with anti-corruption drive resulted in an increase in budget revenues from 16.2 percent of GDP in 2003 to 23.4 percent of GDP in 2005.
Privatization program has been in full gallop following the Rose Revolution, with the government shedding the burden of numerous state-owned companies and selling farm lands. Already sold are steelworks, telecom, energy distribution companies, to name but a few. Approximately $90 million of private investments has been made in the airport of Batumi and Tbilisi, adding to the overall growth in foreign direct investment which has tripled since 2003.
“We have good statistical evidence to expect foreign direct investment to rise to $2 billion this year,” Lezhava said, adding that will represent 20% of the country’s GDP.
Papava ridiculed Georgia’s economic progress as overrated. “These data are based on cooked statistics. Despite the fact that prices on bread doubling, prices on pharmacy, oil, gas and electricity went up, the Department of Statistics reported 4.7 percent annual inflation rate from January through August.”
Government officials defend the numbers, noting that some inflation is due to international factors outside their control. Sheshelidze also shied away from using statistics. However, he noted that there are indicators that show real improvement, like the number of businesses being registered, and the increase in tax revenues.
Before and after
Although Georgia has repeatedly scored well on surveys like the Doing Business report, most are evaluating change in terms of comparison: what has the government done to improve, as opposed to how strong the country’s laws are in relation to other best practices. The World Bank report provides a disclaimer that the rankings do note give the complete picture and are mainly focused on the regulations conducive to business.
In the business community investors also tend to judge Georgia’s reforms in terms of before and after. While it is clear that the Saakashvili government has made strides to develop the business climate, the most important change appears to be the fact they want to improve. John Braeckeveldt, of Gosselin Georgia, an affiliate of an Antwerp, Denmark-based moving company, praised the reforms as a welcome change from “bribes and complete mess” to a business-friendly environment. “What I appreciate the most is the attitude change. Now you can go to the officials, talk to them and come up with solutions.”
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