Georgia Proves That Open Economies Work: Here’s How
September 21, 2023
Not so very long ago, there was a small country at 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 crises, wars on multiple fronts, and a corrupt, unqualified 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 of the success of open economies. It also shows that market-driven growth in human productivity is especially important for countries like Georgia — small, lacking natural resources, and with essentially nonexistent industrial bases.
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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, and as of 2023, it ranked in 7th place.
Making the country an easier place to start a business immediately translated into a flood of startups. Business density tripled, and Georgia became a center for offshore investment.
Georgia’s economy grew by an average of 5.36% from 2004 to 2023. 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% of Georgians were living on $3.90 per day or less in 2003. As of 2022, that percentage had fallen to a historic low of 5.6%.
In the case of Georgia, economic growth corresponds to reductions in extreme poverty. This gives 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 endpoint. That being said, here are a few of the policies that have helped propel it forward:
Free Trade
Georgia doesn’t have much of an industrial base and runs a perennial current account deficit.
However, instead of attempting to build the country’s industry through government intervention (a policy model 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. Its average most-favored-nation tariff rate (the average rate it applies to imports from other WTO countries) is 1.5%. This is actually the lowest average tariff rate among all WTO members.
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.
Thus, The Georgian government has made it easy for foreign nationals to live and work there. Foreigners are not required to obtain a work permit to earn income in Georgia legally.
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.
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, there is no capital gains tax on foreign-source income. Low tax rates are an unmistakable growth facilitator.
What does deserve more analysis is the simplicity of the Georgian system. When UNM took the country’s leadership 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.
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.
For wealthy entrepreneurs and investors, there are a lot of opportunities in Georgia and across Europe. Nomad Capitalist can help as a boutique consultancy for those who want to legally reduce their taxes, diversify, protect their assets, and increase their freedom.
Navigating the world of second passport services has become increasingly complex and, in recent years, has seen big changes. Don’t waste any more time. Apply here to become a Nomad Capitalist client, and we will help you legally go where you are treated best.
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