wyeth nchc georgia poster
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Mentor: Mark McNeil Supervisor: Kay Ryals
ABSTRACTThe Republic of Georgia is located in the Lower Caucasus and has existed as a logistical hub between Europe and Asia for over 14 centuries. It has had a tumultuous history, but recently took significant steps to modernize and rebuild its economy. During the past decade, Georgia has experienced major economic growth, which peaked at 12% GDP growth in the spring of 2008 (World Bank). In 2013, it was ranked as the 8th-easiest country in which to do business, just above Norway and the United Kingdom (GCB). The Republic of Georgia’s economic success is due to major reforms that have allowed this Post-Soviet country to emerge into the competitive global market. In the coming decades, Georgia will need to revisit some of the economic policies to insure its continued success for long-term sustainability. Through this research I was able to answer two main questions:
1) What were the primary causes that allowed Georgia to transform its economy?
2) Is it possible to apply this model to other Post-Soviet countries?
BACKGROUNDThe Republic of Georgia is a small country located south of Russia. It has had a rough history, which involved invasions by the Persians, Turks, and Russians. Georgia experienced three glorious years of freedom after the collapse of the Tsarist regime, but was promptly annexed by the Soviets in 1922.
Since achieving independence in 1992, following the collapse of the USSR, the Republic of Georgia has taken drastic steps to break from its past and become a leader among the struggling post-Soviet countries. However, when the Soviet Union collapsed, Georgia’s economic structure disintegrated. The major processing factories that were set up during the Soviet Union emptied within days. In response, Georgia began a wave of land-privatization. Entrepreneurs bought up large agricultural and metallurgical processing plants, selling much of the Soviet infrastructure for a quick profit, only to leave behind the looming concrete shells of the factories and desolate orchards.
This small fertile country, which was once referred to as the “fruit basket of the Soviet Union”, has now witnessed two miraculous decades of independence and economic growth. With this project I undertook the challenge to explain the “WHY?” behind this story.
OUTLINE OF RESULTSThe Republic of Georgia’s economic success can be attributed primarily to three overarching elements:
• Bureaucratic Reform
• Rise in Foreign Direct Investment
• Decrease in Corruption
1) Law Enforcement
2) Tax System
Along with Armenia and Azerbaijan, Georgia became part of the Transcaucasian Soviet Republic where it was prized as a resort destination and an agricultural hotspot.
FOREIGN DIRECT INVESTMENTThe ability to open a business and start a career in Georgia appealed to many people, and attracted billions of dollars of foreign investment as well as human capital. The shift towards a more liberal investment environment led to a spike in FDI growth which surpassed $2 Billion in 2007.
After a decade of stagnant growth, Mikhael Saakashvili was elected in January 2004. He began his term with the goal of “westernizing” Georgia by beginning with the government. His main focus in the government was taking away all the “red tape” and bureaucratic drag left over from the Soviet Union. One of the results was a sharp increase in new businesses. Opening a new business became cheaper and required less red tape.
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Business Freedom Index Score from 2005-2014
Georgia Ukraine Estonia
Ease Of Doing Business Index from The World Bank
In 2004 the police force characterized by its Soviet-Era hierarchical structure and rampant corruption. For many other NIS and Post-Soviet countries, corruption is the main reason for economic failure. Corruption is a disease to the economy, and Saakasvhili realized this when he was instated. He revamped the legal police code, and a few months later 16,000 policemen were fired and many of the branches were merged together. Only 15% of the previous police force was left in office. These actions were met with high levels of controversy and city wide protests. However, despite the drastic measures, over three quarters of a 2010 poll by Transparency International said that low-level corruption has decreased in the past years, and that this is due to key governmental action.
2005 2006 2007 2008 2009 2010 2011 2012
One of the most prominent effects is that FDI increases the tax base, which is always an issue for new governments. The influx of capital also provides jobs that were otherwise outsourced, and as a result the increase of exports and production from these new industries give the country credibility on a global scale.
Wyeth Binder, Irvine Valley College
From Amidst the Soviet Ruins: The Republic of Georgia's Economic Revival
Wyeth Binder, Irvine Valley CollegeMentor: Professor Mark McNeil
Intourist posters by Aleksandr Zhitomirsky, 1939
TAX SYSTEMCorruption is not merely limited to low level bribery. One of the most damaging faces of corruption was tax evasion. Georgia has had a long history of being unable to collect taxes, as is the case with most post-Soviet countries. When Saakashvili came to power, he completely reorganized the financial system. He brought the tax agency and the customs agency under the supervision of the Ministry of Finance. This improved transparency and allowed for better monitoring.
Recently the Revenue Service was completely digitalized with new software. This technology drastically reduced the level of personal interaction with authorities, which led to a decrease in personal bribes (Granickas).
Distribution of crimes committed by acting policemen before the
Decreased Stayed the Same Increased
Armenia Azerbaijan Georgia
In the past three years how has the level of corruption changed in your country?
Poll by: Transparency International June 2010
This extract from a study on tax policy in developing countries sums up the current situation in Georgia. The system has numerous constraints ranging from its relatively young bureaucracy to a lack of infrastructure. However, it is making steps in the right direction.
Tax Revenue in Billions of USD Tax Revenue as Percent of GDP
Rise in Tax Revenue from 2003 to 2008
Transparency International May 2010
CONCLUSIONThe Republic of Georgia is now at a pivotal point in its history. It has experienced almost two decades of significant change, and has gained publicity worldwide. As a competitor in the global market, Georgia has to plan strategically for the long run. It has come a long way economically, but still has many hurdles to overcome, such as rebuilding trust in the justice department and encouraging its citizens to play their part in the politics of the country. Two significant events that have greatly impacted Georgia are the recent trade agreements with the EU and the imminent economic threat from Moscow.
The new agreement will void multiple tariffs from Georgia to all the EU countries and increase Georgia’s exports, which is crucial to boosting the success of small medium enterprises.
Georgia is a vulnerable country. It is in a highly desirable location for both trade and agriculture, but does not have a significantly strong military backing. The Russian annexation of Crimea in February 2014 came as no surprise to Georgia who witnessed a similar situation with Abkhazia in 2008. These recent events have been detrimental to the political stability of the region and resulted in a decrease of foreign investment. Continued conflict in the region could slow potential growth and be damaging to trade partnerships with Georgia.
"Ninety-five per cent of Georgians regard [the agreement] as protection from Russian aggression," says a young Georgian, Irakli Pachulia. (BBC)
Security and stability are the two building block of a sustainable economy. For many of the post-Soviet countries such as Ukraine and Azerbaijan, corruption is a significant problem and these nations would definitely benefit by following Georgia’s lead in this regard. The next step would be to increase internal growth by relaxing regulations on investment and reducing red tape for businesses. Transparency is necessary for the tax system, and software technology can reduce bureaucratic drag in this area. However, the government must ultimately strive to build trust both internally and externally.
Professor Mark McNeil, Head of Economics, Irvine Valley CollegeDr. Kay Ryals, Head of Honors Program, Irvine Valley College
Works CitedBird, Richard M. “Tax Challenges Facing Developing Countries” National Institute of Public Finance and Policy. 12. Mar. 2008. Web. 22 Oct. 2014. "Georgia Direct." BBC News. BBC. Web. 22 Oct. 2014.Granickas, Karolis. "Technology and Corruption in the Post-Soviet Region." Open Knowledge Foundation. 22 Mar. 2012. Web. 17 Mar. 2014.Gürsoy, Faruk. “Foreign Direct Investment and Growth Relationship in Georgia.” International Journal of Economics and Financial Issues. Vol. 2. pp.267-271. No. 3, 2012Kemularia, Rusudan. "Tax Reforms in Georgia." Ministry of Finance Presentation. Ministry of Finance, 12 Apr. 2011. Web. 17 Mar. 2014.Kramer, John M. “Political Corruption in the U. S. S. R.” The Western Political Quarterly 30.2 (1977): 213-224. 17 Mar. 2014.Siradze, George. “Structural Reorganization and Staff Optimization in the Ministry of Internal Affairs” Ministry of Internal Affairs, Tbilisi. Web. 22 Oct. 2014.Transparency International. Global Corruption Barometer 2010. Transparency International, International Secretariat Alt-Moabit 96-10559 Berlin, Germany. 24 Feb. 2014. The World Bank, World Development Indicators. Georgia. The World Bank. Web. 24 Feb. 2014. The World Factbook: Georgia. The World Factbook. Central Intelligence Agency. 06 Feb. 2014. Web. 24 Feb. 2014.
This chart is benchmarked to June 2013 and ranks the efficiency of different business sectors. “A high ranking on the ease of doing business index means the regulatory environment is more conducive to the starting and operation of a local firm” (World Bank).
Net Foreign Direct Investment In Georgia from 2005-2012
No matter what any country may want to do with its tax system, or what anyone might think it should
do from one perspective or another (ethical, political, or developmental), what it does do is always constrained by
what it can do (Bird).
Rose Revolution 2003 Russo-Georgian War 2008
Financial Collapse 2008
Although an economic story is more complex than three bullet points, these areas that I have researched are the most critical and are common for other post-Soviet countries. However, the way in which Georgia has dealt with these issues is unique compared with the surrounding nations, and can serve as a blueprint for other newly independent states (NIS) emerging into the global market.
Why is FDI good for small, emerging economies?
From statistical research causality runs from FDI GDP and is confirmed in the case of Georgia (Gürsoy).