Georgia Country Profile
General Information
Political Climate
The Rose Revolution in 2003 was a positive turning point in Georgia's political and economic development. Georgia had struggled with years of civil war, unstable institutions and rampant corruption. Lack of good governance resulted in mass popular protests that culminated following a rigged election in late 2003. The protests, which came to be known as the Rose Revolution, forced the resignation of the President in November 2003 and the subsequent landslide election of Mikheil Saakashvili and his United National Movement (UNM) party in January 2004. In September 2007, a newly galvanised opposition encouraged non-violent nationwide anti-government demonstrations, criticising Saakashvili for his alleged autocratic style of rule, his failure to alleviate poverty and to put an end to corruption, and his lack of effort to engage in meaningful dialogue with opposition groups. The government repressed the protests and imposed a two-week state of emergency. The government's handling of the demonstrations dealt a heavy blow to Saakashvili's image as a democratic reformer, and he attempted to ease tensions by announcing that presidential elections would be moved forward to 5 January 2008 from later in the year. Saakashvili was re-elected, but now faces a much more invigorated opposition than he has encountered in the past and a much weakened mandate. This mandate was somewhat strengthened, however, by the parliamentary elections in May 2008 in which the UNM became a clear winner. Once again, international observers gave the elections a mixed review.
Georgia's ongoing conflicts with Abkhazia and South Ossetia, as well as that with Russia based on its support for the two areas' separatist ambitions, date back to the country's independence in 1991. In mid-2008, Russia announced its recognition of South Ossetia and Abkhazia as independent states. Since President Saakashvili came into power, the conflicts with the separatist areas have been so tense that Russia has had so-called peacekeeping troops stationed within them, allegedly in order to protect Russian ethnic minorities. On 7 August 2008, Georgia attempted to forcibly reincorporate South Ossetia leading to a counterattack by Russian military into Georgia proper. The EU eventually brokered a ceasefire plan between Georgia and Russia in which Russia agreed to withdraw its troops to inside the separatist regions. In order to remedy the potential economic setback, a Georgia donor conference was held to decide on an aid package for the country. The conference was heavily criticised by Transparency International Georgia 2008 for the lack of transparency and accountability as well as the lack of consultation with civil society organisations and the opposition party in the Parliament. The fact that the Georgian government wanted to keep secret the Joint Needs Assessment - the basis for the decisions made at the conference - and the conference being held behind closed doors were, in particular, major points of criticism. This is evidence that the crisis with Russia has spurred a political agenda in Georgia which is, at least in the short term, more concerned with security issues than with good governance issues.
For several years, the Georgian government, led by President Saakashvili, has placed anti-corruption efforts, together with economic reform, at the top of its agenda. Since 2004, Georgia has seen tremendous progress in clamping-down on corruption and reinstating good governance. This is supported in Freedom House 2010, in which it is reported that citizens are now encountering less petty corruption on a daily basis. According to the Bertelsmann Foundation 2010, the government’s anti-corruption efforts have been focusing on improving the transparency and effectiveness of the civil services. However, they are mostly centred on low and mid-level corruption rather than targeting high-level corruption. As a result, the country is still struggling with problems of high-level corruption and embezzlement. According to Transparency International Global Corruption Barometer 2010, the judiciary and the political parties are perceived to be the two most corrupt institutions in Georgia by the general public. Seventy-seven percent of the households surveyed perceive the government efforts in fighting corruption as 'effective', and 78% of the households perceive that the level of corruption in Georgia has decreased in the past three years. According to the OECD Second Round of Monitoring Report Georgia 2010, the level of corruption has decreased significantly in the past four years. Among other findings, the establishment of the Anti-Corruption Interagency Council in 2008 and a significant progress in criminalising corruption in line with international standards, is illustrating that the government is committed to fighting corruption.
Business and Corruption
According to the Bertelsmann Foundation 2010 and the US Department of State 2008, Georgia has a business-friendly environment and is extremely open to foreign investment. The Heritage Foundation 2011 also describes the Georgian economy as ‘mostly free’ as a result of its remarkable regulatory reforms in recent years. On the other hand, a 2010 article by Carnegie Endowment points out that free and fair competition is still lacking in Georgia, and monopolies continue to dominate nearly every sector of the economy. Despite a recent economic slowdown, the country has generally enjoyed solid economic growth rates, even though it has had to deal with Russian economic and visa sanctions.
While corruption appears to be on the retreat in Georgia, companies identify crime, theft and disorder as some of the major constraints that hamper the business climate, as illustrated in the World Bank & IFC Enterprise Surveys 2008. According to World Economic Forum Global Competitiveness Report 2010-2011, business executives rank access to financing as the most problematic factor for doing business in Georgia, followed by policy instability. On the other hand, corruption is ranked among the least problematic factors for doing business. This tendency is supported by the World Bank & IFC Enterprise Surveys 2008, in which only a little more than 4% of companies report that they expect to make informal payments to public officials to ‘get things done’. It is important to note that the experience level of corruption varies depending on the size of the company surveyed. For instance, 79% of small-sized companies expect to give gifts to obtain import licences, compared to none of the medium-sized and large companies. None, regardless of size, expect to bribe in order to secure a government contract. Except for obtaining import licences, the level of corruption within the business sector in Georgia is considered relatively low compared to the rest of Eastern Europe and the Central Asia region. The number of companies that are expected to make informal payments to ‘get things done’ has decreased significantly, compared to the World Bank & IFC Enterprise Surveys 2002, symbolising the diminishing role of bribery since President Saakashvili came into office.
According to the World Bank & IFC Enterprise Surveys 2008, 8% of companies still report that they encounter corruption in meetings with tax officials, with most of these being small-sized companies. In contrast, none have reported bribery in order to secure government contracts, which is a significant improvement. Conversely, several other sources note that anti-corruption measures within the fiscal area have had major effect. For example, according to Global Integrity 2008, tax collection and administration has significantly improved over the past several years. This is perhaps largely due to the passing of a new tax code in 2004 and the merger of the Tax Department, Customs Department and the financial police to form the Department of Revenue in 2007. However, a feature of the Georgian economy which hampers transparency is a large proportion of informal/unregistered companies. According to the World Bank & IFC Enterprise Surveys 2008, 52% of the companies surveyed claim to be competing against unregistered companies. Nevertheless, the Bertelsmann Foundation 2010 reports that the size of the informal economy has been significantly reduced due to efficient government efforts to ensure market-based competition. It is recommended that companies develop, implement and strengthen integrity systems and conduct extensive due diligence when planning to invest in or are already doing business in Georgia.
Regulatory Environment
Most government reforms since 2003 have been aimed at improving the business climate by reducing administrative burdens. According to the US Department of State 2008, Georgia has carried out many efforts to improve the country's business environment, including cutting the number and rates of taxes, improving tax and fiscal administration, streamlining licensing requirements, deregulating, and simplifying customs and border formalities. As a result, Georgia was seen as having the largest reduction in corruption and improvement in the business environment among all transition countries from 2002 and 2005, as noted by the World Bank Anticorruption in Transition 3 2006. The World Bank & IFC Enterprise Surveys 2008 reports that senior management can expect to spend an average of only 2% of its time dealing with government requirements and regulations, down from 9% in 2002. However, according to the World Economic Forum Global Competitiveness Report 2010-2011, policy instability now ranks among the largest obstacles for doing business, although business executives identify the burden of government regulation as among the least troubling in the world. The World Bank & IFC Doing Business 2011 ranked Georgia 12th out of 183 countries in regard to the ease of doing business worldwide. Starting a company in Georgia only requires 3 procedures and takes 3 days, at a cost of 5% of GNI per capita.
To promote investment in Georgia, the Georgia National Investment Agency (GNIA) was established under the Ministry of Economic Development, and it functions as 'one-stop shop' for investors. GNIA provides information about investment opportunities and relevant regulations and laws. Furthermore, GNIA assists in project implementation and also acts as liaison to the government. According to the World Bank & IFC Georgia After Three Years of Licensing Reform 2008, the Law on Licences and Permits was introduced in 2005 aiming to combat corruption, and to streamline the licence and permit requirements. As a result, the total number of licences and permits was reduced by 84%. The Law contains two key principles: ‘Silence is Consent Principle’, meaning that if an administrative body fails to respond within the set timeframe, the licence or permit will automatically be granted. Under the ‘One-Stop Shop Principle’, the administrative body issuing the licence has to ensure the approval of additional licensing conditions by the other relevant administrative bodies. A simplified 2004 Tax Code that was enacted in 2006 and has reduced the number of taxes and level of corruption and abuse of power in this sector. In 2009, Forbes Tax Misery and Reform Index listed Georgia as one of the most tax friendly countries in the world.
Foreign individuals and companies are restricted from holding agricultural land in Georgia. However, according to the US Department of State 2008, a loophole exists which allows agricultural land to be purchased by non-nationals and then transferred under the name of a Georgian entity that can be up to 100% foreign-owned. The same source strongly recommends that investors exert extreme caution when looking to purchase property in Abkhazia, as identifying legal title is particularly troublesome in the region and the property may have improperly been placed on the market by the de facto authorities in Abkhazia. Despite that the legal framework to protect property rights has improved since the Rose Revolution, companies should still be aware that due to deficiencies in the judicial system, it can still pose problems protecting property rights, as reported by the Bertelsmann Foundation 2010. According to Georgian investment law, disputes between a foreign investor and a government office may be resolved in Georgian courts or at the International Centre for Settlement of Investment Disputes (ICSID), unless the parties agree to a different method of settlement. If the dispute is not taken to the ICSID, the foreign investor has the right to take the dispute to an international arbitration authority set up by the UN Commission on International Trade Law (UNCITRAL) to settle the dispute in accordance with the rules of the international arbitration agreement. Due to irregularities in the Georgian court system, companies that enter into contracts with private Georgian companies are advised to include a provision for international arbitration of disputes in their contracts. Access the Lexadin World Law Guide for a collection of laws in Georgia.
