Dateline: Tbilisi: Georgia
Not so very long ago, there was a small country on the crossroads of Europe and Asia. The country’s economic development had been stifled by seventy years of Soviet central economic planning. After gaining independence in 1991, it was then forced to grapple with short-term economic crisis, wars on multiple fronts, and a corrupt, inept government that always seemed on the verge of tipping over.
Then, something amazing happened. A young wave of leaders accepted responsibility for the country’s future, replacing the geriatric Soviet holdovers who’d stuck around just long enough to lead the country down a road to nowhere.
Many of these young reformers had adopted pro-market viewpoints while studying in the United States and Europe. They set out to build a functioning capitalist economy for the first time in the country’s long history.
The country, of course, is Georgia.
The wave of young leaders (the most notable being Mikheil Saakashvili) entered office after the Rose Revolution in 2003. Their United National Movement (UNM) party led Georgia until 2012. While they are no longer in power, they left a lasting, positive mark on the country’s economy.
Georgia’s market transformation during that period is a case study for the success of open economies. It also shows that for countries like Georgia — small, lacking natural resources, and with essentially nonexistent industrial bases — market-driven growth in human productivity is especially important.
Georgia’s Success by the Numbers
Economic growth came relatively quickly after the Rose Revolution. In 2006, Georgia was ranked 112th on the World Bank’s Doing Business survey. In 2007, it came in at number 18 and was dubbed the world’s leading economic reformer.
Making the country an easier place to start a business immediately translated into a flood of startups. Business density tripled from 2003 to 2012 and Georgia became a center for offshore investment.
Georgia’s economy grew by an average of 5.93 percent annually from 2003 to 2012. GDP per capita rose by 66 percent over the same period. These are impressive figures for any country, and are even more impressive considering that growth was negative in 2009 due to the aftermath of the 2008 Russian invasion.
The proportion of the population living in poverty declined rapidly over the same period. Using figures adjusted for changes in purchasing power, 40 percent of Georgians were living on $3.90 per day or less in 2003. By 2013, that percentage had fallen to 28.6 percent.
In the case of Georgia, economic growth corresponds to reductions in extreme poverty. This givies more people access to markets and creates still more opportunities for private businesses to produce and exchange goods and services.
The Pillars of Georgia’s Economic Growth
Georgia’s economic transformation didn’t happen overnight. And, like all instances of economic development, it is an ongoing process with no end point. That being said, here are a few of the policies that have helped propel it forward:
Georgia doesn’t have much of an industrial base and it runs a perennial current account deficit. However, instead of attempting to build the country’s industry through government intervention (a policy paradigm that has failed miserably in most other parts of the world), the government has opted to let the market decide which goods and services should be produced in the country.
Georgia became a WTO member in 2000 and now has one of the world’s most open trading regimes. It’s average most-favored nation tariff rate (the average rate it applies to imports from other WTO countries) is 1.5 percent. This is actually the lowest average tariff rate among all WTO members.
Plus, Georgia has only three tariff rates (0 percent, five percent, and 12 percent) and no quantitative import restrictions.
An Open Immigration Policy
A country can never have enough talented, enterprising or wealthy people. That’s especially true for an emerging market like Georgia that needs to attract offshore investment and entrepreneurship in order to achieve lasting economic growth.
The Georgian government has thus made it easy for foreign nationals to live and work in the country. Foreigners are not required to obtain a work permit to legally earn income in Georgia. They are required to obtain a residence permit, but the process is simple and successful in most cases.
Obtaining a second passport in Georgia is also a possibility.
Minimal Barriers to Entry
Perhaps nothing is worse for a developing economy than barriers to entry. Such barriers impede growth in individual sectors by the dominance of monopolies that use their wealth to influence government for their zero-sum benefit. Potential competitors are denied market access, prices go up and quality goes down.
Worst of all, fewer people are able to put their skills and creative energies to productive use.
The Georgian economic model recognizes the benefits of open-access markets. Consequently, the UNM government sharply reduced the number of licensing requirements in the economy.
In 2005, government agencies were ordered to justify each of their licensing requirements. Those deemed not crucial for the economy’s functioning were swiftly canceled.
Georgia also subscribes to the “Silence is Consent” principle. This means that, in cases when a license is required, 30 days following submission the applicant is free to legally do business unless expressly told otherwise by the authorities.
Taxes Made Simple
Much has been said about Georgia’s low tax rates. And they are low by most standards: 20% on personal income, 15% on corporate income, 5% on dividends and interest, and 1% on property. Plus, no capital gains tax and foreign-source income is exempt in all cases.
Low tax rates are an obvious growth facilitator that don’t need to be discussed in detail.
What does deserve more analysis is the simplicity of the Georgian system. When UNM took leadership of the country in 2003, the Georgian tax code had 21 different taxes.
By 2008 that number had fallen to six, where it stands today (including import duties). To make matters even simpler, the government introduced an electronic system for both filing and paying taxes in 2011.
The country still has a long way to go in the direction of tax reform, but perhaps no country in the world has achieved the same level of progress over the past decade.
Given all of Georgia’s economic success, it should definitely be an option for those looking to get a second passport, set up an offshore company, or make offshore investments.
If you’re interested in getting a second passport in a foreign country and want my help, apply for a Strategy Call.
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