Georgia: Selected Issues
Author: International Monetary Fund
Publication Date:
16 May 2006
eISBN:
9781451814590
Language:
English
Keywords:
ISCR; CR; Georgia; government; shadow economy; LEPL; Shevernadze government; government intervention; respondent firm; business indicator; Georgian authorities; Business environment; Public sector; Baltics; Global
Download PDF (403 KB)

This Selected Issues paper reviews the financial sector development in Georgia in recent years, and investigates why it has lagged behind economic development, as well as developments in more advanced transition economies. The paper briefly reviews recent financial sector development in Georgia, comparing it with developments in its neighboring countries in the Caucasus, the seven poorest countries in the Commonwealth of Independent States (CIS-7), the Baltics, and central and eastern Europe. The paper also analyzes possible factors constraining financial intermediation in Georgia and in some of the CIS countries more generally.

Abstract

This Selected Issues paper reviews the financial sector development in Georgia in recent years, and investigates why it has lagged behind economic development, as well as developments in more advanced transition economies. The paper briefly reviews recent financial sector development in Georgia, comparing it with developments in its neighboring countries in the Caucasus, the seven poorest countries in the Commonwealth of Independent States (CIS-7), the Baltics, and central and eastern Europe. The paper also analyzes possible factors constraining financial intermediation in Georgia and in some of the CIS countries more generally.

II. Recent Surveys on the Business Environment29

“Posner points out that corruption flourishes with a weak legal system, and with larger government. Obviously, if governments strongly regulate many activities, then companies, unions, and other groups that are regulated can do better if they can “bribe” officials to overlook or relax these regulations. So the wider is the reach of governments, the greater is the corruption potential.” The Becker-Posner Blog, August 28, 2005

A. Introduction

31. Georgia has come a long way since the Rose Revolution of January 2004 brought the current administration into power. The last years of the Shevernadze government saw poor management of public resources, and increasing corruption in the public sector, which lead to low tax collections and rapidly rising domestic arrears. January 2004 swept in Saakashvili and other politicians, ready to engender a new policy environment based on the slogan, “Georgia without Corruption.”

32. Reforms were revitalized under the new administration. The anti-corruption drive became the focal point, and the themes of change were to reduce graft in tax and customs administration, and to improve governance in the public sector.

33. An important step taken to reduce corruption early on was to improve the incentives for public officials. High-ranking officials were sacked or prosecuted, and in many cases, had to make large reparations payments to the state. This resulted in a remarkable surge in tax revenues, with the tax to GDP ratios increasing by 25 percent in 2004, and 9 percent in 2005. These revenues gave room to the authorities to undertake many important programs—such as further improving public sector incentives by higher civil sector wages and pensions, upgrading the country’s defense capacity, and clearing the bulk of arrears from the previous administration—while maintaining fiscal stability.

34. The Georgian authorities have clearly established momentum in these areas, and a series of surveys that came out in 2005 and early 2006 already reflect improvements resulting from the policy changes undertaken. This chapter examines these survey-based business indicators and internationally accepted indices of governance.

B. Surveys of 2005

35. The surveys were selected to show recent changes in various areas related to business environment and governance, as well as to show the relative rankings in the region and comparisons to more advanced transition countries.30 The surveys are BEEPS, Doing Business, Global Competitiveness, Freedom House, Economic Freedom, Corruption Perception, and Reporters without Borders.

C. BEEPS

36. The Business Environment and Enterprise Performance Survey, referred to as BEEPS, is a large survey of firms in transition economies, jointly conducted by the World Bank and the European Bank for Reconstruction and Development. There have been three such surveys conducted in 2000, 2002, and 2005, and the identical sampling approach used for all three years makes for good comparison over time. The sampling techniques used includes the sectoral composition of the firms that reflects relative contribution to GDP, size that covers small to large firms, and ownership that includes both foreign and state-owned firms.

37. The 2005 results for Georgia show impressive improvement in the areas targeted by the authorities (Figure II.1). Macroeconomic stability and taxes were less of a constraint to doing business, and there was a dramatic drop in firms citing tax administration as a problem (from 84 percent of respondent firms in 2002 to 23 percent in 2005). While there was only modest improvement in the constraints placed by business licensing and permits and customs regulatory requirements, the percent of firms that reported corruption as a problem saw a large drop from 66 percent in 2002 to 39 percent in 2005.

Figure II.1.
Figure II.1.

Georgia: Business Environment

Citation: IMF Staff Country Reports 2006, 170; 10.5089/9781451814590.002.A002

Source: Business Environment and Enterprise Performance Survey (BEEPS).

38. A disturbing development has been the lack of improvement in the judiciary, and the increase in contract violations as faced by firms. The limitations in infrastructure—transportation, energy, and telecommunications are the areas highlighted in the survey—created obstacles to business activities in Georgia. These results reinforce the authorities’ focus and priorities to rehabilitate public infrastructure.

D. Doing Business

39. The World Bank’s Doing Business 2005 surveys professionals—e.g. lawyers and accountants—about procedures, rules, and laws required for various hypothetical transactions, such as building warehouses and buying land. While BEEPS reflects effective constraints to doing business, this complementary survey shows the existing procedural and regulatory framework as experienced by the relevant professionals.

40. Overall, Georgia showed the second largest improvement in 2005 over the previous year in the ease of doing business index, but still ranked low at 100 out of 155 countries (Table II.1). Notwithstanding comparable performance with countries in the region in starting a business and registering property, it took almost 100 days longer to deal with licenses in Georgia than in Armenia, and almost 200 days longer to enforce contracts (Table II.2). The Baltic unweighted average (Estonia, Latvia, and Lithuania) shows a reference framework as exists in more advanced transition countries.

Table II.1.

Rankings of Selected Countries, 2005

article image
Source: Doing Business, World Bank
Table II.2.

Georgia in a Comparative Perspective: Selected Indicators of Doing Business

article image
Source: World Bank Doing Business database.

41. Somewhat surprising are the procedural requirements for exporting and importing a standardized cargo of goods (Table II.3). An official procedure in this regard is counted from the time an agreement is made between the two relevant parties to the delivery of the cargo. It takes 20 days longer to export, and 15 days longer to import goods, in Georgia than in Armenia. The companies that need to import raw materials and/or intermediate goods for subsequent export have to collect 24 documents and 77 signatures, and it would take 106 days just for the paperwork. The trade liberalization strategy and the customs code being discussed now in parliament that envisages a complete elimination of tariffs by 2008 and streamlining of customs regulations, would be steps in the right direction to create more open trade.

Table II.3.

Trading Across Borders

article image
Source: World Bank Doing Business database.

Number of all documents required to export/import the goods.

Number of all approvals, signatures or stamps that are required to export/import the goods.

Time necessary to comply with all procedures required to export/import the goods.

E. Global Competitiveness

42. The World Economic Forum (WEF) surveys the business community and uses macroeconomic data to compile the Growth Competitiveness Index (GCI), which is meant to reflect the perceived potential to achieve sustained growth. The index is a weighted average of three indices covering technology (0.5), public institutions (0.25), and the macroeconomic environment (0.25).

43. Georgia ranked 86th out of 117 countries in 2005, up eight spots from the previous year, which was the seventh largest upward move (Table II.4). The two main areas of improvement were macroeconomic stability and the quality of public institutions. The former, according to respondents, was due to an improved fiscal setting and somewhat easier access to credit. The latter saw striking improvement in that the government used criteria that were more objective to make policies and decide on contracts. While organized crime was less of a problem, and there was slightly less corruption in general, the business community noted that corruption remains a serious problem in Georgia.

Table II.4.

Growth Competitiveness Index Rankings 1/; 2005 and 2004 Comparisons

article image
Source: World Economic Forum.

Finland ranks the highest with a GCI score of 5.94, while Chad (117) ranks the lowest with a GCI score of 2.37.

GCI 2005 ranking for Estonia is 20, for Latvia 44, and for Lithuania 43.

F. Nations in Transit

44. Freedom House (FH) ranks transition countries on the development of democratic institutions. The ratings are based on a democracy score calculated by ratings in areas including the electoral process (EP), civil society involvement (CS), independent media (IM), judiciary (JFI), and corruption (CO). While Georgia ranks relatively favorably in the region, its score went from 4.83 in 2003 to 4.96 in 2005, losing ground in the areas of media independence, and the judicial framework and its independence (Table II.5).

Table II.5.

Selected Democracy Scores, 2005 1/

article image
Source: Freedom House.

Ratings are based on a scale of 1 to 7, 1 is the most and 7 the least level of democratic development.

G. Economic Freedom

45. Heritage Foundation’s Index of Economic Freedom rates each country by looking at 50 independent economic variables that fall into 10 broad categories that are equally weighted: trade policy; fiscal burden of government; government intervention in the economy; monetary policy, capital flows and foreign investment, banking and finance, wages and prices, property rights, regulation, informal market activity. Georgia jumped from 100th place in 2005 to 68th place in 2006, with its score improving from “mostly unfree” last year to “mostly free” this year (Table II.6). Areas of improvement were concentrated in monetary policy, the financial sector, and foreign investment, while property rights, regulation, and the informal market scores remained poor.

Table II.6.

Economic Freedom Category 1/

article image
Source: Index of Economic Freedom, Heritage orgnaization.

Score of 1–1.99 indicates free; score of 2–2.99 indicates mostly free; score of 3–3.99 means mostly unfree; and score of 4–5 indicates repressed.

H. Corruption Perception

46. Transparency International (TI) combines many surveys to construct a composite Corruption Perceptions Index (CPI) that reflects corruption as it is perceived to exist in the public sector. Businesspersons and analysts including local experts are surveyed. The Georgian index used six surveys including WEF and FH surveys mentioned in previous sections. Although Georgia showed modest improvement in 2005 over 2004—from 2.0 to 2.3—it ranks in the lowest quintile of countries (Table II.7).

Table II.7.

Corruption Perception Index (CPI), 2005 1/

article image
Source: Transparency International.

An increase in the score indicates an improvement.

47. TI has developed another measure of corruption, the Global Corruption Barometer, to complement the CPI. The Global Corruption Barometer uses public opinion surveys to gauge the general public’s own perception and experience with corruption. While the cross-country comparisons of scores indicate that these rankings cannot be taken at face value,31 it is interesting to note relative rankings of institutions within a country (Figure II.2), and how perceptions have changed over time for any country. Regarding the former, the judiciary got the worst score at 3.9 in Georgia, while the police scored well at 2.9, reflecting the massive restructuring of the police force in 2004. When asked about their experience with corruption over the past 3 years, 46 percent of the public thought corruption had decreased at least a little, while 20 percent thought it had increased at least a little. When asked about expectations for the next three years, 38 percent of respondents thought corruption would decrease, while only 8 percent thought it would increase, reflecting some optimism.

Figure II.2.
Figure II.2.

Georgia: Comparison of National Institutions and Sectors 1/, 2/

Citation: IMF Staff Country Reports 2006, 170; 10.5089/9781451814590.002.A002

1/ Question asked: to what extent do you perceive the following sectors in this country to be affected by corruption?2/ Score 1: not at all corrupt, … 5: extremely corrupt.

I. Reporters Without Borders

48. Reporters without borders compiles a press freedom index and publishes an annual ranking of 167 countries based on their own assessments. The survey includes questions about direct attacks on journalists, indirect pressure, as well as pressure from non-governmental groups. In 2005, out of 167 countries, Georgia ranked 99, which was close to Armenia at 102, with Azerbaijan ranking the lowest in the region at 141. While index levels seem comparable to Armenia, there appears to have been some deterioration in Georgia over the last two years (Figure II.3).

Figure II.3.
Figure II.3.

Worldwide Press Freedom Index 1/

Citation: IMF Staff Country Reports 2006, 170; 10.5089/9781451814590.002.A002

Source: Yearly worldwide press freedom ranking of countries published by Reporters without Borders.1/ A higher number means more restraints on freedom of the press.

J. Conclusion

49. One of the main missions of the current administration has been to reduce corruption. By doing so, they have created a tax base that is on more solid footing and a business environment that is much improved. Their philosophy—that a major way to reduce corruption is by narrowing the scope of government and reducing the opportunities for rent seeking behavior—is evident in many spheres. There are various strategies being discussed, including trade liberalization, the customs code and the banking sector strategy, that reflect streamlining and a more liberal approach.

50. Much progress has been made in a short time, and the surveys already reflect improvement. It should be noted, however, that the data reported on were based on surveys conducted in late 2004 early 2005, quite a short time after the change in government. Most likely, the next round of survey results will show even greater gains. That said there are clear indications that some areas need greater attention.

51. The authorities are building on the first stage of reforms to create sustainable growth in Georgia. It remains important to continue improving policies and their effective implementation, as well as creating appropriate incentives to reduce corruption even further. There is a need to strengthen legal institutions to allow for the proper enforcement of property rights and contracts, which are essential features of a well-functioning market economy. Also important is a free press, which is an important way for corrupt acts or just bad policy to become exposed, changed, and rooted out. Finally, development of the various political branches will ensure that checks and balances are effectively created.

References

29

Prepared by Susan M. George.

30

This paper assumes that corruption misallocates resources and lowers efficiency (Murphy, Schleifer, and Vishny, 1993), and hence any reduction in corruption is an economic good.

31

The police and media scored at 3.1 and 3.5 respectively in the U.S., worse than the 2.9 score for both in Georgia.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Georgia: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 2006: Issue 170
Publisher:
International Monetary Fund
ISBN:
9781451814590
ISSN:
1934-7685
Pages:
63
DOI:
https://doi.org/10.5089/9781451814590.002

Georgia: Business Environment

Georgia: Comparison of National Institutions and Sectors 1/, 2/

Worldwide Press Freedom Index 1/