TCS Daily

Revolution and Reform

By George Robakidze - November 21, 2005 12:00 AM

Almost two years have passed since the "Revolution of Roses" in Georgia. On 23 November 2003 peaceful demonstrations forced the former long-time leader Eduard Shevardnadze to resign. Once one of the Soviet Union's most prosperous republics, Georgia was a mess. Rampant corruption, unpaid salaries and pensions, permanent shortage of electricity and other problems made it one of the poorest and least stable countries in the world. Fast and radical reforms were needed to overcome the difficulties and avoid the collapse of the state.

The first thing the newly elected government did was combat corruption. In summer 2004, more than 15,000 policemen were fired and newly trained, "people-friendly" patrol police recruited. The high-profile arrests of a number of former officials from Shevardnadze's government were also among the most popular moves of new administration. A new anticorruption strategy was elaborated and adopted. It consists of strengthening anticorruption measures, strengthening institutions and monitoring the fulfillment of Georgia's international obligations in this field.

The next step was to boost an almost dead economy. A new and critical phase of reforms has been started in this field. A wave of privatization was initiated which will play a distinctive role in the economic development of the country. Georgia has made impressive progress in reducing the regulatory barriers to business, in particular market entry requirements, as well as streamlining taxation rules by reducing the number of taxes, the rates of some direct taxes, and eliminating some tax breaks. The social tax was reduced from 33 percent to 20 percent; VAT from 20 percent to 18 percent; and income tax from 20 percent to 12 percent.

Another important step for the liberalization of the economy was the abolition and simplification of the system of licenses. In June 2005 a new law on licenses was adopted reducing number of licenses from 909 to 120 and introducing the new, so-called "Single window"(one stop shop) approach. The system of product certification, metrology and standardization has been dismantled and the voluntary certification with elements of recognition applied to imported products has been introduced.

There were significant changes in the financial sector as well. All commercial banks have been transformed into joint-stock companies. The supervisory authority of the National Bank of Georgia has been significantly broadened. The licensing regime for commercial banks was improved by the introduction of fit and proper criteria for supervisory board's members and large shareholders. The mechanism of collateral was improved through the simplification of its selling procedure. A credit bureau was established. Supervisory capital was increased from 5 to 12 Million GEL (app. €5 Million), which is in compliance with European standards. The European Bank for Reconstruction and Development (EBRD) has raised Georgia's score from 2+ to 3- for banking reform progress. The National Bank maintained moderate inflation while allowing nominal appreciation of national currency. Besides that, during 2004-2005 foreign exchange reserves were building up significantly from €153 million in 2003 up to € 359.5 million in 2005. The share of Euros in reserves is approximately 40 percent.

The state budget during last two years was tripled due to the better revenue collection and reduction of illegal imports. The progress made by Georgia in recent years has been recognized by the international organizations (i.e. the World Bank in its 2005 Report on the Investment Climate, according to this report Georgia was granted 2nd place in the world on reforms).

Georgia as a WTO member country is a relatively open economy. The average import duty is around 7.5 percent, with imports on agricultural products reaching the maximum rate of 30 percent. Georgia has a number of free trade agreements with some of its main trade partners (Russia, Ukraine, Armenia, Azerbaijan, Kazakhstan, Turkmenistan). Steps have been made to recognize the regulatory standards of the EU in order to facilitate imports from the EU. Currently the EU applies a GSP+ regime to Georgia, which is based on the unilateral preferences granted by the EU in the form tariff removal/reduction. It is expected to extend this regime in the nearest future. The Partnership and Cooperation Agreement between Georgia and the EU provides the basis for the legal harmonization undertaken by the Georgian authorities.

Despite impressive steps in reforming the economy of Georgia, some observers doubt the actual enforcement of the new rules (the issue of "good laws and bad practice"). There is a long list of things still to be done, but there is a strong belief that the country goes in right direction to achieve trough independence and prosperity. The main challenge is to sustain the reform in order to generate economic benefits before possible reform fatigue appears among the population and to implement properly the new simplified legal framework.

The possible positive outcome of European Neighborhood policy could be the creation of the free trade area between the EU and Georgia. It would have a number of economic and political advantages compared to the current trade regime. In terms of the economic benefits, it would remove remaining barriers to imports from the EU thereby contributing to competition and lower prices in Georgia as well as facilitating the imports of intermediate products and improving incentives for the foreign direct investment. It would also improve the market of Georgian companies which still face barriers under the GSP+ regime, at the same time reducing the trade diversion effects which could have taken place after the EU enlargement in the new members of the Union. Finally, it would have several important political benefits such as sending the signal to foreign investors and providing a mid-term goal for Georgian authorities to focus on. A free trade agreement would be a better option if compared to other possible trade arrangements such as the customs union with the EU because it would not impose new obstacles to Georgia's trade with Russia and other geographically close important trade partners.

The author is Head of the Office for European Union affairs in the Foreign Ministry of Georgia.


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