Georgian lari and economic growth

Free market principles have taken Georgia from economic woes to incredible economic growth.

Dateline: Valencia, Spain

Smaller countries often have the most important stories to tell when it comes to economics and business. They tend to be the most daring on policy experimentation, and their private sectors are usually the most innovative.

Because smaller countries are usually better connected and less rigid in terms of bureaucracy, they can show a degree of dynamism that we rarely see in bigger states.

The Republic of Georgia is one such example. This country of about 3.7 million people has overcome an uphill battle since it left the Soviet Union nearly 25 years ago. After being devastated by civil war, economic decline, and political unrest, it experienced one of the world’s most impressive economic turnarounds.

Georgia’s economy grew by an average of 5.93 percent from 2003 to 2015, and it came in at 24th on the World Bank’s 2016 Doing Business survey. The numbers tell an impressive story, as the government has taken the right approach to promote domestic business and encourage foreigners to start offshore companies and establish tax residency in Georgia.

Plus, my personal experience in this country is that it is full of enterprising, forwarding-thinking people who would rather do something for themselves, their families, and their communities than passively rely on the government to bring about the changes they want to see.

Here are a few lessons that we can all learn from Georgia’s economic success over the past 12 years:

Wealthy People Create Wealth

The same reason that some people distrust wealth is the reason that we should embrace it. Wealth begets more wealth. People who own assets have income that they can invest in other assets and/or use to launch entrepreneurial ventures.

The government of Georgia has recognized that an economically underdeveloped country such as their own can’t ensure a decent standard of living for its citizens without growing its stock of private capital.

The most efficient way to do this? Attract it from abroad.

Much of Georgia’s economic success has come from encouraging wealthy and/or skilled individuals to move to the country and launch offshore companies.

It has done this with a simple tax code with low rates (and by making it easier for foreigners to establish tax residency in Georgia), a streamlined system of bureaucracy that makes it easy for people to start businesses, and relatively open immigration procedures that make it easy to enter, work, and stay on a 100 percent legal basis.

Many of the new businesses and construction and infrastructure projects being launched around the country are made possible with foreign money. Many Georgians have decent-paying jobs and upward mobility because foreign investment is propelling private sector growth.

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Red Tape Doesn’t Work

Most countries in Central and Eastern Europe still retain much of their old, obsolete bureaucratic structures. That means armies of pencil pushers and Byzantine procedures for simple things like renting an apartment (I should know, I lived in Hungary for three years!).

This is to the detriment of everyone, except for the poor souls who are employed doing these stultifying tasks. But that’s exactly why it’s been hard to trim the bureaucratic fat. People depend on these agencies for employment.

Fortunately, Georgia took care of that problem for good after the Rose Revolution in 2003. The number of activities subject to licensing was cut by 90 percent, and the country went from #112 on the 2006 Doing Business to #18 in 2007.

The results have been overwhelmingly positive. By making it easier for people to live their lives, including to conduct business, the state has unlocked the creative potential of its citizens and attracted enterprising individuals from around the world.

Free Trade Works

Free trade is unpopular in Europe and North America these days. It’s not difficult to understand why. Large numbers of people in places like Detroit and Manchester can no longer count on that factory job that sustained their parents’ livelihoods.

Yes, that sucks. But free trade creates immense quantities of wealth and boundless opportunities, even if certain individuals and communities understandably feel left out.

Much of Georgia’s economic growth is due to the fact that it has one of the world’s most open trading regimes. Georgia has only three tariff rates (12 percent, 5 percent and 0 percent) and the vast majority of its imports have no duties at all.

Georgia has an average most-favored nation tariff rate of only 1.5 percent, the lowest in the WTO. That means that consumers enjoy lower prices and importers can do business relatively unhindered.

Immigration is Good for Growth

When times get tough, immigrants are usually the first people to be blamed. Their contributions are ignored altogether and they’re blamed for guzzling public resources and/or taking jobs from deserving native-born residents. They are simultaneously lazy scroungers and hard-working competitors.

The fact of the matter is that the economic effects of immigration are almost always positive. That’s why the Georgian government has made it easy for people to come to the country and contribute.

… Not because their constituents are cosmopolitan (hospitality is a thing in this country, however), but because political and business leaders realize that foreigners provide the country with injections of capital, skills, and ambition.

Getting a residence permit in Georgia is very easy, especially if you can demonstrate that you already have something in your bank account.

What’s more, there is no such thing as a work permit as is required in the US or EU member states. Working legally in Georgia simply requires that you obtain a residence permit.

The government has even introduced a program to make it easy for “high net-worth” individuals to establish tax residency in Georgia. If you meet the requirements, it could be a straightforward way to pay less in taxes each year.

Low Taxes are Good for Growth

When the United National Movement came to power in the Rose Revolution in 2003, the Georgian tax code had 21 different taxes and a hopelessly bloated bureaucracy. Needless to say, compliance was low and foreign companies were not interested in entering.

The country now has only six taxes (including import duties) and compliance has drastically improved. There are also very good reasons to become a tax resident in Georgia.

The most important thing is that non-Georgian source income is never taxed, so running your offshore business from Georgia is a good way to pay less in taxes.

Personal income that is earned in Georgia is taxed at a flat rate of 20 percent (not ideal but lower than what you’ll find in every OECD country except Hungary). Corporate income is taxed at 15 percent. However, the government is currently developing plans to make retained and reinvested profits completely exempt from taxation.

This charming country has a lot to teach the rest of us, economic policy being just one area. But if you are looking for an exciting location to start an offshore company, establish tax residency, or get a second passport, Georgia is one of the better places out there.

Want access to our in-depth research on Georgia?

Jon Erikson

Jon Erikson is a writer based in Tbilisi, Georgia. His experience consists of consulting for clients in the public and private sectors.
Jon Erikson
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