Issue 5, 2012. October-November

   

BUILDING ON THE GEORGIAN MIRACLE

Economists with the new government are focused on continuing to improve the Georgian economy — and its role as a regional hub for pro-business reforms and policy.

Nicholas Clayton

Over the past eight years, Georgia's economic policy has been marked by waves of reform.

Now expectations are high that billionaire, Bidzina Ivanishvili, and his Georgian Dream coalition will build on the country's reputation as a regional hub and incubator for pro-business laws and innovations.

While much has been done to free up Georgia's economy and improve its public services, the coalition still has work to do. Tax policy has been widely praised, but institutions like the judiciary lack the transparency and independence necessary for a free and open market.

Sarphi Border Crossing

Georgia's scores on World Bank "Ease of Doing Business" indexes soared under the previous government, but Georgian Dream representatives point out that the country is still ranked 88th out of 142 countries in the World Economic Forum's 2011-2012 Global Competitiveness Report.

Within the report, Georgia scores high in a number of areas including seventh in the overall burden of government regulation, third in trade tariff burdens and third in number of days to start a business.

However, it also ranks near the bottom on such indicators as "protection of minority shareholders' interests" (119th), "effectiveness of anti-monopoly legislation" (135th) and "intensity of local competition" (128th).

Nodar Khaduri, who co-authored the coalition's platform, said the new government will seek to increase transparency and competition across the board.

For now, he said, it is difficult to propose particular policy changes because the previous government was often opaque in its regulatory policies and their implementations — an assertion backed up by the World Bank's Country Partnership Strategy for 2010-2013.

In the report, the World Bank also said that many government institutions remain weak and "continued efforts are needed to reduce the perception that [the judiciary] is not independent, and that it can be heavy-handed in its approach."

A more independent judiciary in Georgia would be a great improvement, says Lasha Gogiberidze, a partner at BGI Legal. BGI primarily handles transaction finance and corporate M&A deals. High-ranking officials now rarely interfere with low-level cases, such as unemployment disputes, he says. Still, he said he regularly sees decisions that are "totally out of whack."

Nonetheless, Georgia's reforms in a number of areas have made a stark impression on its neighbors.

Stepan Grigoryan, director of the Analytical Centre on Globalization and Regional Cooperation, in Yerevan, Armenia, said that Georgia's police reform is "legendary" in the region. Every year, hundreds of thousands of Armenians travel to Georgia, and most come back impressed with the business environment, the quality of public services and especially Georgia's streamlined customs system at the border, which Grigoryan said is incomparable with Armenia's.

Officials around the region have also approached the private sector in Georgia for advice on replicating the country's successes.

David Tomadze, a manager and tax expert at the Georgia branch of PricewaterhouseCoopers, said that his office fields inquiries from abroad about Georgian policies on a daily basis. Earlier this year, Tomadze, who used to work in the state revenue service, traveled to Kyrgyzstan to give a presentation on Georgia's renovated tax system.

In April, Georgia announced that it was taking a model approach to its reputation as an effective reformer — turning reforms into an export product. "We've had numerous visits from countries like Kyrgyzstan and Moldova, where they learn all the basics with which we started the reforms of our government, judiciary, ports and customs, interior police system, tax reforms, fighting corruption," said Giorgi Tsikolia, director of the investment and export policy department at the Ministry of Economy and Sustainable Development.

Robin McCone, director of PricewaterhouseCoopers in Georgia, said that two specific tax reforms stand out above the rest, the Alternative Tax Audit (ATA) and the Advanced Tax Ruling (ATR). ATA allows companies in Georgia to use independent accounting firms to comprehensively audit them for open tax years.

Meanwhile, the ATR allows companies to determine their future tax positions. This is particularly useful for companies thinking to relocate to Georgia or those already in the country that are considering reorganization, McCone said. He pointed out that these reforms also improve the asking price for Georgian companies, whose bidders may be worried about historic exposures.

"If a target company has done an ATA then these risks are removed. This means the normally lengthy and expensive tax due-diligence process can largely be avoided," McCone said. "In my view these developments reflect the attitude and objectives of the revenue service which is to cooperate with taxpayers and create an environment where there is more certainty to do business."

Advisors to the Georgian Dream coalition say that they intend to expand upon the previous government's tax reforms, with particular emphasis on the judicial system. In the coalition's campaign platform, it pledged to create specialized tax judges to "restrict the dominant role of the state in tax-disputes" and promised to end the practice of sequestering businesses' bank accounts and assets amid ongoing audits and rulings.

McCone remains hopeful that countries across the former Soviet Union will begin adopting some of Georgia's more effective innovations, although he stresses that much of the country's success arose from a confluence of factors that include having a small population and a historic level of public will to totally overhaul the system.

"I think it was the will and the desire to get rid of corruption that was more important, not the changing of the system. You've got to get to the edge of the cliff," he said, noting that other countries, such as his native New Zealand, have gone through similar processes. "The country was basically bankrupt, so that meant that the population was willing for everyone to take a bit of pain and suffer for two to three years to turn everything around.