Despite the severe damage the economy suffered due to civil strife in the 1990s, Georgia, with the help of the IMF and World Bank, has made substantial economic gains since 2000, achieving robust GDP growth and curtailing inflation.
GDP growth, spurred by gains in the industrial and service sectors, remained in the 9-12% range in 2005-07. In 2006, the World Bank named Georgia the top reformer in the world.
Georgia's economy has traditionally revolved around Black Sea tourism, cultivation of citrus fruits, tea and grapes; mining of manganese and copper; and output of a big industrial sector producing wine, metals, machinery, chemicals, and textiles.
Like many post-Soviet countries, Georgia went through a period of sharp economic decline during 1990s, with and high inflation and large budget deficits, due to persistent tax evasion. Georgia's budget deficit rose to as much as 6.2% in 1996. During that period international financial institutions played a critical role in Georgia's budgetary calculations. Multilateral and bilateral grants and loans totaled 116.4 million lari in 1997 and totaled 182.8 million lari in 1998.
Economic recovery had been hampered by the separatist disputes in Abkhazia and South Ossetia, resistance to reform on the part of some corrupt and reactionary factions, and Asian financial crisis. Under President Shevardnadze's leadership, the government had nonetheless made some progress on basic market reforms: all prices and most trade have been liberalized, a stable national currency (the lari) was introduced, and massive government downsizing took place.
During late 1990s more than 10'500 small enterprises had been privatized, and although privatization of medium- and large-sized firms had been slow, more than 1'200 medium - and large-sized companies had been set up as joint stock companies. A law and a decree establishing the legal basis and procedures for state property privatization reduced the number of companies controlled by the state.
The United States began assisting Georgia in reform process soon after the country gained independence from Soviet Union. Gradually, the focus shifted from humanitarian to technical and institution-building programs. Provision of legal and technical ad visors was complemented by training opportunities for parliamentarians, law enforcement officials, and economic advisers.
Large inflows of Foreign direct investment (FDI) have been a driving factor behind a rapid economic growth in Georgia since 2003. In 2007 alone the economy of Georgia attacted $1,7 billion in FDI, bringing the total FDI stock to $5,2 billion, which is over 50% of the GDP
The table below shows FDI stock as a percentage of GDP in selected FSU countries. For statistical purposes, FDI is defined as a foreign company owning 10% or more of the ordinary shares of an incorporated firm or its equivalent for an unincorporated firm.
|Rank||Country||FDI stock as a percentage of GDP (2007)|
Under the Saakashvili administration, Georgia undertook a number of profound institutional reforms aimed at modernizing the economy and improving business climate.
Just 3 years ago getting a construction permit for a commercial warehouse in Tbilisi required 29 different procedures. Before even applying for the permit a builder needed permission from agencies as diverse as the Center of Archaeology at the Academy of Science and the Inspector of Sanitary Observation. Illegal construction activity was widespread. In 2004 less than 45% of ongoing construction projects in Tbilisi had permits.
Things have changed after new Law on Issuance of Licenses and Permits was introduced in 2005. The law cut from 909 to 159 the number of activities subject to licensing. A one-stop shop was created for license applications, so that now businesses can submit all documents there, with no verification by other agencies required. In the construction industry Georgia eliminated many of the approvals required to obtain a construction permit (while maintaining procedures necessary for regulating in the public interest) and introduced a “silence is consent” rule, whereby a permit or license is automatically granted if no government action is taken within statutory time limits. The number of procedures needed to build a warehouse dropped to 12. The time required fell by nearly 3 months. The approval process for building a warehouse in Georgia is now more efficient than in all EU countries except Denmark.
In 2005, Georgia enacted a new Tax Code that introduced lower, flat tax rates. The total number of taxes was reduced from 22 to only 7. The number of taxes was further reduced starting January 1, 2008, when new changes to the Tax Code of Georgia took effect that abolished the 20% social tax paid by businesses. The rate of personal income tax was rased istead, from 12% to a flat 25% rate.
Georgia has seen a drastic fall in perceived corruption of tax officials. In 2005 only 11% of businesses, surveyed by the World Bank, reported that bribery was frequent, down from 44% in 2002.
Coupled with the fact that Georgia also reduced the social security contributions paid on wages by businesses from 31% to 20% in 2005, and abolished them entirely starting January 2008, these changes make Georgia the sixth easiest place to employ workers globally.
More flexible labor regulations boost job creation. But they don’t mean giving up protections. Georgia has ratified all the core labor standards of the International Labour Organization. Flexible labor regulations that give workers the opportunity for a job in the formal sector and easy transitions from one job to another.
Reducing corruption in courts was one of the chief priorities of the new government. Since 2004, when the Saakashvili admistration came in, 7 judges have been detained for taking bribes and 15 brought before the criminal courts. In 2005 alone the judicial disciplinary council reviewed cases against 99 judges, about 40% of the judiciary, and 12 judges were dismissed. At the same time judges’salaries were increased fourfold, to reduce dependence on bribe money.
In recent years Georgia has fully deregulated its electricity sector, and now there is free and open access to the market. However, state-owned actors still play an important role, most notably in generating.
In 2007, Georgia generated 8.34 billion kilowatthours (Bkwh) of electricity while consuming 8.15 Bkwh. Most of Georgia's electricity generation comes from hydroelectric facilities. In 2005, the country generated 6,17 Bkwh of hydropower, or 86% of total electricity generation. In 2006 rapid growth in hydroelectricity output (by 27%) was matched by equally strong growth in thermal electricity (by 28%). Since then the share of hydropower has grown even bigger, when Inguri power plant reached full capacity in November 2007. In addition to state-owned Inguri, which has an installed capacity of 1,300 megawatts, Georgia's hydroelectric infrastructure consists of many small private plants.
Georgia's reliance on hydropower leaves the country vulnerable to climatic fluctuations, which requires imports to meet seasonal shortages, but also opens the possibility of exports during wetter conditions. Georgia still has the potential to increase hydro-generated power, through refurbishing existing facilities, as well as constructing new hydropower plants.
Before 2004 Georgia's transmission network was in critical condition, with electricity blackouts being common throughout the country. Since late 2005, distribution has been much more reliable, approaching consistent 24-hour-a-day services. Investments in infrastructure have been made as well. Currently, a privately-owned Energo-Pro Georgia controls 62.5% of the electricity distribution market.
Georgian Natural gas consumption stood at 1.8 billion cubic meters in 2007. Natural gas used to be supplied to Georgia by Russia. In recent years, hovewer, Georgia has been able to eliminate its dependency on imports from Russia, thanks to increased hydroelectricity production, and the availability of new sources of natural gas in Azerbaijan.
In addition, all russian gas exports to Armenia pass through the georgian pipeline system. Georgia takes 10% of that gas as a transit fee.
Currently, about 55% of the total labor force is employed in agriculture, though much of this is subsistence farming.
Georgian agricultural production is beginning to recover following the devastation caused by the civil unrest and the necessary restructuring following the breakup of the Soviet Union. Livestock production is beginning to rebound, although it continues to be confronted by minor and sporadic disease outbreaks. Domestic grain production is increasing, and will require sustained political and infrastructure improvements to ensure appropriate distribution and revenues to farmers. Tea, hazelnut and citrus production have suffered greatly as a result of the conflict in Abkhazia, a crucial area for planting the latter crops.
While approximately 13.1% of the Georgian GDP is generated by the agrarian sector, crops often spoil in the field because farmers can't sell their goods because of high transportation cost, which make domestic goods more expensive than imported goods. In collaboration with European assistance, Georgia has taken steps to control the quality of natural spring water and how to appropriately sell it.
Viticulture and winemaking are the most important fields of Georgia’s agriculture. Over 450 species of local vine are bred in Georgia, and the country is considered as one of the oldest places of producing top-quality wines in the world. Russia was traditionally the biggest export market for Georgian wine. This, however, changed in 2006, when Russia banned imports of wine and mineral water from Georgia. Since then Georgian wine producers have struggled to mantain output and break into new markets.
In 2007 Georgia sold 11 million bottles of wine in about 40 countries, less than it sold in Russia alone before the ban was imposed. Total wine sales abroad in 2007 were down by about nine million bottles, forcing many vineyards to sell land, buildings and equipment to survive.
The transition to legal construction is not without pain. On July 20, 2007 fire brigades had begun demolishing a 13-story building in downtown Tbilisi that had gone up before the reform and was now in danger of collapsing because of faulty engineering. The building had no project or operating license—and didn’t even show up in the city plan. To avoid the many approval procedures, the building company had simply paid off the mayor.