Georgia Matters

Carnegie Endowment for International Peace

March 23, 2009

Why does Georgia Matter?

Geopolitics

Values

Reforms

A Small But Important Country

Most eastern point of the west

Being the boundary between West and East, Georgia has been an target of geopolitical struggle of•Persians•Byzantines•Arabs•Mongols•Ottomans•Russians

Latest War with Russia August, 2008

• 228 Civilians and 160 Militaries killed, 110 000 persons displaced

• Civil damage 1 billion USD (8% of GDP)

A Small But Important Country

Access to Central Asia from the West

RUSSIA

BELARUS

UKRAINE

TURKEY

GEORGIA

KAZAKHSTAN

UZBEKISTAN

KYRGYZSTAN

AZERBAIJAN

IRANSYRIAIRAQ

CHINA

INDIA

PAKISTAN

ARMENIA

TURKMENISTAN TAJIKISTAN

AFGHANISTAN

Russian control of Georgia means

RUSSIA

BELARUS

UKRAINE

TURKEY

GEORGIA

KAZAKHSTAN

UZBEKISTAN

KYRGYZSTAN

AZERBAIJAN

IRANSYRIAIRAQ

CHINA

INDIA

PAKISTAN

ARMENIA

TURKMENISTAN TAJIKISTAN

AFGHANISTAN

Values Turned into Institutions

• Georgian reforms and institution-building were based on our values - Freedom, Openness, Rule of Law, Human Rights,Tolerance.

• That means transforming soviet style institutions, putting citizen’s choice in the focus and servicing him, creating a system where merit matters…

• The system proved to be resilient to constant challenges – Russian embargo, Russian gas price hiking, Russian war.

Example:Reforming Bureaucracy

How did Georgia make it?

• Number of ministries (1814) and public

agencies (5234) reduced

• Number of public servants halved

• Salaries of civil servants increased app. 15-

fold

• One-stop-shops almost everywhere

Simple reforms leading to significant outcomes

• Registration– business and tax registration merged into one simple process

– Time requirements reduced (30 days 1 hour)

– Paper work reduced (documents 7 2 documents)

– Costs reduced (costs 2160 GEL 160 GEL)

How did Georgia make it?

As a result

Simple reforms leading to significant outcomes

Example: Business Registration

10

Visa policy before the reform

– Visa application procedure - shortest one month for all

countries (going in person to rare consulates)

– Visa-free entry only for the citizens of CIS countries

– 3 different durations of visas - 3 month, 6 month, 12 month

– Standard - single entry visa

– Exception - multiple entry visa

Example: Opening Bordersto the developed and secure countries

Simple reforms leading to significant outcomesHow did Georgia make it?

11

Visa policy after the reform• 3 different entry regimes

Free entry - no visa required for the citizens of 56 countries (free stay up to

360 days)

Simplified visa procedures - getting visa on the border

Restricted entry for citizens of countries suspected in terrorism and human

trafficking

• Flexible visa regulations

Standard – 1 year, exception 5 year visa

Standard – multiple entry visa

• No legal restrictions on ownership/business for foreigners

Simple reforms leading to significant outcomes

Example: Opening Bordersto the developed and secure countries

How did Georgia make it?

And many other reforms

• And

Reform of Financial Sector – restrictions on foreign ownership of banks, on capital account transactions, on entry of sound international banks abolished. Tax Reform – number of taxes dramatically reduced, tax rates significantly lowered, special tax regimes adopted. Trade – customs tariff dramatically reduced, effective rate below 0,26%, non-tariff barriers abolished, as a result international trade significantly increased. Public sector reform - increased salaries (15 fold), increased motivation, reduced number of civil servants, young, qualified professionals attracted. Judicial reform - 126 well-trained judges appointed on the basis of rigorous interviews; Unified Certification Exam for judges, lawyers and prosecutors; High School of Justice established; Increased efficiency of the court process, speedier trials and full protections of the rights of accused; clear separation of first and second instances; Salaries and pensions for judges increased; increased independence of courts – life-time appointment introduced; conflicts of interest eliminated - minister of justice and parliament no longer appoint permanent member of the Council; clear discipline procedures for judges; whistleblower protection - right to claim compensation for monetary and moral damages if their rights are violated due to their decision to disclose particular Information; Criminal justice reform - increased oversight of the Prosecutor's office over the preliminary investigations avoid violating human rights; the limit on pre trial detentions reduced from 9 months to 4 months, the limit on trial detention reduced from 24 months to 12 months; defendant has right: (i) to invite 2 people to witness any investigative actions or searches, (ii) to conduct a private investigation. Licenses and Permits – number of licenses and permits dramatically reduced, one-stop-shop principle and silence is consent principles introduced. paper-work and time-requirements slashed. Prevention of Torture and Inhumane Treatment - criminal sanctions for acts of torture and inhumane treatment increased, different oversight mechanisms used, TV cameras in the prisons, law enforcers are obliged to file a report, including a description of a detainee's physical condition upon the arrest, the suspects can use their own recording equipment during interrogation; the Optional Protocol of the Convention Against Torture and Other Cruel, Inhuman or Degrading Treatment or Punishment is ratified; the Office of the Prosecutor General was downsized by more than 40%, salaries raised dramatically, hence incentive for corruption reduced; increased transparency - Prosecutor's Office no longer supervises the penitentiary system; within the Interior Ministry, Prosecutor's Office and Prisons' Departments human rights departments established staffed by former representatives of NGOs; Human Rights Protection Unit established at the Prosecutor's Office; within the department of prisons the Office of Prisoners' Rights Protection established; the persons authorized by the Public Defender have unlimited access to any pre-trial detention facilities. Penitentiary System Reform - organized crime leaders were separated from other prisoners, housed in maximum security facilities, they no more receive special treatments or unauthorized benefits, new prisons are built, expenditures for food, hygiene and medical care significantly increased; the tuberculosis screening programs are conducted permanently; relevant enforcement agents are equipped with special protective gear and rubber bullets, use of which should be avoided as much as possible; the libraries are equipped with better resources, including newspaper subscriptions. Public Institutions – several Ministries and many Public Agencies abolished, including state anti-monopoly service and state price inspection; Anti-corruption activities - anti-corruption strategy and action plan developed, in compliance with international standards - recommendations from GRECO; legislative groundwork created for extensive reforms that institutionalize fight against corruption. As a result, corruption significantly reduced: according to BEEPs, bribe frequency decreased 5 times; bribe tax frequency decreased 5,5 times; frequency of bribery in tax administration decreased 3,3 times; frequency of bribery for business licensing and permits decreased 4 times. Procedures of business and property registration simplified - one stop shop principle and silence is consent principle introduced; business and tax registration merged in one simple procedure; number of document needed and time requirements dramatically reduced, as a result annual business entry significantly increased; founder/partner obligations towards creditors changed; terms and procedures for partnership inputs made clear; Bankruptcy and foreclosure – procedures of closing a business dramatically simplified. Privatization – private incentive employed wherever possible, sea port privatized, main assets for generating and distribution of electricity privatized, gas distribution companies privatized, international airport transferred with long-term contract, natural resources and forests given out for long-term. Labor Market – simplified relationship between employees and employers, costs of hiring and firing significantly reduced. Education – school-choice system introduced, state funding of students instead of schools, hence competition between schools created/intensified. Healthcare – state funding of patients instead of hospitals, hence competition between hospitals introduced/intensified. Land reform - privatization of state owned agriculture land; effective privatization methods introduced; 0% of property tax on small plots of land (less than 5 ha); 0% property tax on property transaction; 0% of profit tax; 0% VAT on primary supply of agricultural products; 0% of import duty on agricultural equipment. Energy Sector – new capacities deregulated, diversified policy of import, regulation on wholesale prices abolished. Transport – transit fees, quotas and other barriers abolished, railway tariff policy liberalized, “open sky” policy implemented. Food security reform - the concept of reform based on the principle of informative choice - well protected consumers rights; the general principles of the reform: identification of potential risks and prevention; regulation of companies for the purpose of food security; methods of food security defined; control system of risks created within companies; high and low risk group of food production separated and effective method of state control introduced; aspects related to food quality defined; the food companies separated on the basis of potential risks. Water resource management reform - concept of water, basin management concept developed, permitting system of water abstraction and waste water discharge in place; concept includes the principles of river basin management - terms and conditions enabling the river basins to be transferred in a long term use, contains principles based on which water prices differ, concept gives well defined rights and responsibilities of supervisory bodies. Protection of rights on private property - property amnesty, legalization of buildings with construction procedures violation. Sport infrastructure reform - from state owned sport centers to multi-profile private sport complex, hence competition enhanced and management improved. Agriculture Sector Development reform - aims to enhance entrepreneurship in villages and to increase locally produced product export, thus reduce unemployment and poverty at villages, Opening Borders – simplified visa procedures for secure countries and etc…

13

Economic Freedom Index, 2008

Source: The Heritage Foundation

Bertelsmann Transformation Index, 2008

Source: ForbesSource: Bertelsmann Stiftung , 2008 (Rank out of 125 countries)

As a Result

Source: UNCTAD

12

34

56

78

910

11

1314

1516

1718

1920

23

45

87

69

1513

20

1011

1918

2427

31

16

12

Hong Kong, ChinaBulgaria

IcelandMalta

BahamasJordan

SingaporeEstoniaGeorgia

LebanonGuyanaBahrein

BelgiumGambiaPanama

MongoliaTajikistan

CyprusMoldova

Egypt

2007

2006

Inward FDI Performance Index

The Best Countries for Business

1417

4243

4564

8794

103

210

3233

3068

8263

86

41

9Hong KongIrelandEstoniaTurkey

LithuaniaPoland

LitvaGeorgia

AzerbaijanArmenia

Russia

2009 2007

GDP

Source: Department of Statistics of Georgia, Ministry of Finance of Georgia

Nominal GDP (US$bn) Real GDP growth, y-o-y (%)

Source: National Bank of Georgia, International Monetary Fund

Net FDI as % of GDP, ‘07

ALL RESULTED Rapid Growth

21%

13%11%

9% 8%6% 5% 5% 5% 5%

3% 3%

7%

USA

Rus

sia

UK

Aze

rbai

jan

Aus

tral

ia

Chi

na

Aus

tria

Tur

key

Fran

ce

Ital

y

Nor

way

Japa

n

Oth

er

15%

11%9%

8% 7% 7% 6%5% 4% 4% 4%

3% 2% 2% 2% 2%

7%

Net

herl

ands

Cze

chV

irgi

n I's

(UK

)D

enm

ark

Cyp

rus

UK

Uni

ted

Ara

bT

urke

y

Rus

sia

Kaz

akhs

tan

US

A

Ger

man

y

Fra

nce

Aze

rbai

jan

Japa

n

Nor

way

Oth

er

15%12%

9%7% 7% 7% 6%

4% 3% 3% 3% 2% 2%

20%

Rus

sia

Tur

key

UK

Ukr

aine

Aze

rbai

jan

US

A

Ger

man

y

Tur

kmen

ista

n

Fra

nce

Ital

y

Arm

enia

Net

herl

ands

Bra

zil

Oth

er

FDI by country, 2003 FDI by country, 2007FDI = 8,5% of GDP FDI = 19,8% of GDP

16%

11% 10%

6% 6%5% 4% 4% 3% 3% 2% 2% 2% 2% 2% 2%

22%

Tur

key

Aze

rbai

jan

Ukr

aine

Ger

man

y

Rus

sia

US

A

Chi

na

Uni

ted

Ara

bE

mir

ates

Bul

gari

a

Arm

enia

Ital

y

Can

ada

Tur

kmen

ista

n

Fra

nce

Net

herl

ands

UK

Oth

er

Foreign Trade by country, 2003 Foreign Trade by country, 2008Foreign Trade = 40% of GDP Foreign Trade = 59% of GDP

ALL RESULTED Dynamics of FDI and of Foreign Trade of Goods

0

1 000

2 000

3 000

4 000

5 000

6 000

7 000

2003 2004 2005 2006 2007Export Import Total

Foreign Trade of Goods, US$ mln. Foreign Trade of Services, US$ mln.

Source: Department of Statistics of Georgia

ALL RESULTED Rapid Growth of Foreign Trade

0

1000

2000

3000

4000

5000

6000

7000

2003 2004 2005 2006 2007Export Import Total

Total Foreign Trade, US$ mln.

01 0002 0003 0004 0005 0006 0007 0008 0009 000

2003 2004 2005 2006 2007

Export Import Total

Therefore, Georgia Matters

Because Georgia:

• Shows that values are good for development and reforms can lead to significant outcomes

• Plays central role in connecting East to West

RUSSIA

BELARUS

UKRAINE

TURKEY

GEORGIA

KAZAKHSTAN

UZBEKISTAN

KYRGYZSTAN

AZERBAIJAN

IRANSYRIAIRAQ

CHINA

INDIA

PAKISTAN

ARMENIA

TURKMENISTAN TAJIKISTAN

AFGHANISTAN

RUSSIA

BELARUS

UKRAINE

TURKEY

GEORGIA

KAZAKHSTAN

UZBEKISTAN

KYRGYZSTAN

AZERBAIJAN

IRANSYRIAIRAQ

CHINA

INDIA

PAKISTAN

ARMENIA

TURKMENISTAN TAJIKISTAN

AFGHANISTAN

your choice