Publication: Eurasia Daily Monitor Volume: 2 Issue: 213

This November the Georgian government, including President Mikheil Saakashvili, has repeatedly emphasized the urgent need to improve the country’s business environment. The rekindling of this issue hints at the government’s increasing concern about the worsening socio-economic situation in the country. Already independent analysts are warning of murky prospects for the Georgian economy. In particular, analysts say the government lacks a clear economic strategy and still governs the country under a “revolutionary regime.” Indeed, between June 2004 and September 2005 the cost of living increased from 133 to 147 Laris ($74-82) per month.

At a November 14 meeting with the Georgian business elite, Saakashvili made an impassioned plea for increasing cooperation between businessmen and the authorities and improving the business environment in the country through new legislative initiatives that he promised to submit to parliament within a month. These initiatives include further simplification and liberalization of the tax and labor codes, the banking system, the law on entrepreneurship, export-import procedures, and judicial regulation. According to Saakashvili, these initiatives would eliminate ambiguous laws and reduce state interference into private business. Parliament is already scrutinizing a bill to fight organized crime and racketeering, which are widely perceived as serious burdens on local businesses.

Analysts and members of the Georgian Business Federation argue that the new tax code, despite liberalization, still creates burdens for small businesses through taxes on profits, property, and income as well as high excise rates and various local fees. The Georgian parliament, which approved the tax code overwhelmingly in 2004, has now received some 100 proposed amendments. Economic analyst Niko Orvelashvili says that the new tax code is “attractive only theoretically”; it has many loopholes for financial machinations and it evidently favors the authorities over taxpayers.

Many participants in the November 14 meeting did not share Saakashvili’s optimistic evaluation of business prospects in Georgia, although few of them dared to voice their concerns publicly. “I don’t share Saakashvili’s optimism, because my colleagues and I possess first-hand information about business restrictions. The statistics that the President aired are half true,” said Giorgi Topadze, owner of the Kazbegi beer brewery.

Topadze’s statement likely reflects the bitter reality. Recently published statistics show that the excessive hopes that government pinned on the widely advertised tax amnesty (see EDM, November 11, 2004) have not materialized. Instead of the expected $4 million windfall, the state budget collected only $35,000 due to tax evasion. Only eight persons have used the amnesty. Analysts argue that most of those affected by the amnesty preferred to find patrons in the new government for their illegal business rather than pay their back taxes.

Saakashvili also focused on business problems during a November 3 meeting of the government. He admitted that entrepreneurs in Georgia who are not patronized by senior officials are totally unprotected. Saakashvili’s confession echoes concerns raised by international donors. At the “Invest in Georgia” forum on November 11, Denny Robertson, director of the USAID Caucasus mission, said the lack of a strong small-enterprise sector is one of the main deterrents for Georgia’s economic development. “Conferences and five-star hotels cannot change the economic situation in Georgia,” he said.

In an interview with Ekho Moskvy radio on November 12, President Saakashvili stated that next summer his government would launch a long-awaited poverty reduction program that would address “the greatest challenge for Georgian society.” Today more than half of the Georgian population lives below the poverty line.

According to the latest nationwide census, the Georgian population has shrunk from 5.4 million people in 1989 to 4.3 million in 2002, largely due to labor migration. Independent analysts assessed the job situation in Georgia before and after the 2003 Rose Revolution (accurate official data are still unavailable) and came to conclusion that the number of unemployed in Georgia currently exceeds 1 million. This conclusion appears to be close to reality, especially after taking into account the mass downsizing of staff at state-funded bodies following the Rose Revolution that left at least 70,000 citizens jobless.

Saakashvili and his team have previously expressed their desire to create favorable conditions for local small- and medium-sized businesses and foreign investors. However, little progress has been observed in this endeavor. Today many people in Georgia, including members of pro-government circles, are forced to admit that the Rose Revolution has failed to create jobs or boost business and foreign investment. Besarion Jugheli, parliamentarian from the ruling National Movement, admitted to his party’s failure to fulfill the pre-election promise about comprehensive assistance to small business, including either exemption of micro-entrepreneurs from taxes for two years or introduction of fixed tax rates. These problems, along with other unresolved issues, have social-political implications that might endanger the stability of Saakashvili’s government in the near future.

(Akhali Taoba, October 12, 15, November 12; Alia, October 13;, November 3; Basta, November 6; Kavkas Press, November 11; Kviris Palitra, November 7-13; Ekho Moskvy, Kavkas Press, November 12; TV-202, Civil Georgia, November 14; Sakartvelos Ekonomika, 2005, Vol. 10)