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Construction site at the Iveria hotel (later renamed Radisson Iveria) in Tbilisi.
The Georgian construction sector was plagued by excessive licensing requirements
before the 2005 reform. Photo: flickr/miss_rubov

By early 2005, the 49-year-old former businessman was put in charge of a whole range of diverse initiatives as State Minister of Reform. This included a new anti-corruption strategy, the privatisation of state-owned agricultural land, public administration reform, a new competition policy, policy on managing forests and health care reform. It also included one of the most important tasks for the government: changing its international image among investors. Despite its early reforms, Georgia still faced a huge image problem among potential investors. An October 2005 article in Forbes was a case-in-point:

"Georgia ranks 128 out of 133 countries surveyed for corruption by Transparency International. Half of Georgia lives at or below the poverty level. Justice-starved courts hew to a political agenda. Kidnappings for ransom also occur. After spending $275 million over four years on modernizing Tbilisi's electricity distribution plant, AES Corp. pulled out of Georgia in 2003 after its financial manager there was slain following electricity tariff increases."[292]

Bendukidze quickly identified a way to anchor the performance of his economic reform team and address the issue of Georgia's poor investment image. He linked his efforts to the criteria defined in international ranking systems - particular the Ease of Doing Business index (EDBI), a new index which had published its first ever report in 2004. Rising in these rankings now became a national policy priority, closely monitored by president Saakashvili; achieving this was soon seen as another major success of Bendukidze.

The EDBI is based on the idea that there is one global best practice model of (minimalist) business regulation. It is also based on the assumption that reform can be achieved through discreet reforms independent of the wider policy and institutional context. As Sam Schueth writes in a fascinating article soon to be published, the authors of the index operate on the basis that

"the state with the fewest separate taxes and separate payments, lowest tax rates, and fastest (electronic) payment system will score highest on the paying taxes indicator. States that score the highest on the employing workers indicator have the least regulation of hiring and firing decisions."[293]

One of the main Georgian reforms in this context was the passage of a new employer-friendly labour code in May 2006.[294] The explicit goal of the new law was to make hiring and firing procedures as flexible as possible. It left employees with little legal protection, while easing many procedures for employers. It stipulated that virtually all aspects of the employer-employee relationship were to be regulated on a contractual basis. It permits such general grounds for terminating employment contracts that, as trade union representatives argue, they amount to "firing people without a reason."[295] It provides for one-month severance pay as the only benefit for workers dismissed by their employers.[296]

"Ease of doing business", 2008 report. Photo: World Bank
"Ease of doing business", 2008 report. Photo: World Bank

In October 2008, speaking at a reception organized by the European Resource Bank in Tbilisi, Georgia's libertarian Prime Minister Lado Gurgenidze lauded the Labour Code as an "entrepreneurial revolution." For Georgia's ranking in the World Bank's "Doing Business 2007" index, it was also a very positive development. Soon Georgia was ranked the 6th most employer-friendly country in the world with respect to labour regulations, and Georgia's labour code was declared one of the three "boldest reforms" carried out anywhere in the world in the 2005/2006 period.[297]

Table: Ease of Doing Business, Georgia and the Employment Indicator (EBDI), 2006 2010

Employment Indicator

2006

2007

2008

2009

2010

Georgia’s global rank with regard to  the Employing Workers indicator

-

6

4

5

9

Difficulty of hiring index (0-100)

0

0

0

0

0

Rigidity of hours (0-100)

60

20

20

20

20

Difficulty of redundancy (0-100)

70

0

0

0

0

Rigidity of employment index (0-100)

43

7

7

7

7

Redundancy cost (weeks of salary)

4

4

4

4

4

Later, addressing criticisms in 2008, Bendukidze stated:

"Maybe it is difficult to explain in the USA, as the USA does not have a labour code or someone dictating how can I be hired or fired and that is the difference to all other countries, especially Europe where contractual agreements between employer and employee are practically not allowed. Why was it controversial? Not because of how it was done but because there is now huge pressure from EU trade unions to reverse the situation."[298]

Gia Jandieri, founder of the libertarian think tank NESG, argued that trade unions were impositions by Western interests not needed in Georgia.[299] He also wrote in his blog (echoing Ayn Rand):

"Like in very many situations everybody tries to forget that the main source of all of our wealth and opportunities is the entrepreneur - businessman, who creates everything and there is no other money from nowhere and nobody So if we want employment, if we want services and goods, if we want to live let's not make obstacles for entrepreneurs, let's give them freedom of choice." [300]

This was not the only reform undertaken to engineer a rise in the EDBI rankings. In its 2007 report, EBDI declared Georgia to be the best reformer worldwide, citing improvements in the "minimum capital required to start a new business," the rise in the number of business registrations, simplification of border procedures, and shorter times for resolving "simple commercial disputes."[301] The EDBI report listed a number of other reforms:

"The social security contributions paid by businesses decreased from 31 percent of wages to 20 percent, making it easier for employers to hire new workers. Better collection of corporate taxes, which shot up by 300 percent, more than made up for the loss in revenues."[302]

The World Bank's Simeon Djankov, the mastermind of the EDBI, spoke about the Georgian reforms as path breaking:

"I believe that after 10 years you will invite me to Georgia not for presentation of Georgia as the number one reformer worldwide but for presentation of Georgia as the country with the number one economy."[303]

Simeon Djankov. Photo: freeuni.edu
Simeon Djankov. Photo: freeuni.edu

Further reforms undertaken in Georgia in 2006/2007 took place in five areas relevant to the EBDI: starting a business, dealing with licences, registering property, obtaining credits and protecting investors. As a result, Georgia rose to 18th in the Doing Business report 2008,[304] from 100th only two years before. And Djankov, who now met with Bendukidze regularly, lent a helping hand to the process (as Sam Schueth noted, he and Bendukidze co-drafted the 2007 bankruptcy law) - later describing the reforms as "unprecedented" and bound to lead to prosperity within 8-12 years!

Georgia's rise in the Ease of Doing Business Index

Doing Business report

2005

(covering 2003/2004)

2006

(covering 2004/2005)

2007

(covering 2005/2006)

2008

(covering 2006/2007)

2009

(covering 2007/2008)

2010

(covering 2008/2009)

Ease of Doing Business rank

137

100

37

18

15

11

Recalculated Rank

-

112

-

21

16

-

Number of reform areas

 

 

6

5

4

2

Following another meeting with Bendukidze on 6 August 2007 to consider the new solvency law, Simeon Djankov announced:

"It's notable that Georgia is one of the quickest reformer countries in the world, so that it's hardly possible to find any precedent to it. Obviously, such reforms are instrumental in enhancing the attraction of the country to direct foreign investment; they facilitate the tempo of economic growth and assist in creating new jobs."[316]

The Georgian reformers understandably prided themselves on the results they achieved. When the Doing Business report 2008 was issued, Georgia's Prime Minister Zurab Noghaideli declared:

"Georgia is already ranking 18th and thus we have kept our promise. It is notable that making business in Georgia has become easier than in Belgium, Netherlands, Austria, France and other countries, not to say anything of the post-Soviet countries; only Estonia is ahead of us among the post-Soviet countries."[317]

 


[292] Matthew Swibel, "Reform, Caucasus-Style," Forbes, 1 October 2005.

[293] Sam Schueth, "Assembling International Competitiveness: Georgia, USAID, and the Doing Business Project", Journal of Economic Geography, Clark University (forthcoming).

[294] Parliament of Georgia, "Legislation 2006."

[295] Paul Rimple, "Georgia: Unions Push for Labor Law Reform," EurasiaNet, 18 November 2009.

[296] Georgia's Labour Code (2005), Article 37, section 3.

[297] World Bank/IFC, Doing Business 2007, p. 3.

[298] CATO Institute, "Georgia's Transformation into a Modern Market Democracy", CATO Policy Forum, 13 May 2008, Washington, DC.

[299] Gia Jandieri, "Labor Market, Unions and the New Labor Code," personal blog (giajandieri.blogspot.com), 12 May 2006.

[300] Gia Jandieri, "Labor Market, Unions and the New Labor Code," personal blog (giajandieri.blogspot.com), 12 May 2006.

[301] World Bank/IFC, Doing Business 2007, Overview, p. 1.

[302] World Bank/IFC, Doing Business 2007, Overview, p. 1.

[303] Press Center of the Chancellery of the Government of Georgia, "Presentation of Research Results of Financial Corporation".

[304] World Bank/IFC, Doing Business 2008.

[305] Each report covers the first half of the preceding year and the second half of the year before.

[306] Simeon Djankov, "Top Reformer Wins Election in Georgia", 7 January 2008.

[307] World Bank/IFC, Doing Business in 2006.

[308] World Bank/IFC, Doing Business 2007.

[309] World Bank/IFC, Doing Business 2008.

[310] World Bank/IFC, Doing Business 2009.

[311] World Bank/IFC, Doing Business 2010.

[312] The ranks were recalculated to reflect the addition of new countries and changes in the methodology.

[313] World Bank/IFC, Doing Business 2007.

[314] World Bank/IFC, Doing Business 2009.

[315] World Bank/IFC, Doing Business 2010.

[316] Website of the Government of Georgia, Press conference at the Chancellery of the Government of Georgia, 5 October 2007.

[317] Website of the Government of Georgia, Press conference at the Chancellery of the Government of Georgia, 5 October 2007.

Suggested readings

For more on the New Economic School of Georgia, see www.nesg.net.

On the Liberty Institute, see "Pro-West leaders in Georgia push Shevardnadze out" by Hugh Pope (2003) in the Wall Street Journal. This article describes the Liberty Institute and the role it played in the Rose Revolution.

For a list of all privatization sales since 2004 (listed by the Government of Georgia) please see www.privatization.ge. Please note that this list does not include all transactions which took place.

Molly Corso, a freelance journalist writing for EurasiaNet published the article "Privatization in Georgia: Solving the 'sensitive' issues" (2005) in which she discusses the privatization process in Georgia and challenges and debates surrounding it.

For the number of state owned enterprises and privatization before the Rose Revolution, please see: World Bank: "Georgia: A blueprint for reforms" (1993).

The following is a reading list on licensing reforms in Georgia: Celebrating Reforms 2007 is a collection of reform case studies from around the world. Compiled by World Bank's Doing Business project, Georgia features two times: with licensing reform and land privatization.

In 2008, World Bank's Doing Business project conducted a study of licensing reform in various countries around the world, entitled Dealing with Licenses, Georgia is featured as an example of an extremely successful reform in the construction sector.

Also in 2008, International Finance Corporation (IFC) in Georgia did a study of Georgia's license reform. To access the study go to IFC Georgia Website or click Georgia after 3 years of Licensing Reform.

Georgia's new Labour Code has been translated into English and can be found in the websites of World Bank's Doing Business project, the International Labor Organization (ILO) and other organizations: Labor Code of Georgia.

Between 2006 and 2010, Georgia rose 89 places from 100th to 11th in the Ease of Doing Business Index (EDBI). In 2010, according to this Index, there are only four European countries which are easier than Georgia to do business in: UK, Denmark, Norway and Ireland. Countries like Germany, France, the Netherlands and even Estonia the first country in Europe to introduce a 'flat tax' policy are behind Georgia in this index.

Look out for Sam Schueth's forthcoming "Assembling International Competitiveness: Georgia, USAID, and the Doing Business Project" in the Journal of Economic Geography (Clark University). Schueth, from the University of Minnesota, lived and worked in Georgia and closely observed the reform process which led to the leap in the EDBI. Schueth was based in USAID's Georgia office. His paper notes "how EDBI rankings can be exploited to obfuscate problematic business conditions overlooked by its measurement methodology."

A detailed report by USAID on EDBI, both on the process and the successes of the project can be found here. See: USAID (2009) "Georgia, Opened for Business: Georgia Business Climate Reform 2009".

A speech by Simeon Djankov, the creator of World Bank's Doing Business (current Deputy PM in Bulgaria) can be found here, from an event organized by the Cato Institute on "How Nations Prosper: Economic Freedom and Doing Business around the World" (2008).

April 2010

 Back Rebranding a country - Next 
Reinventing Georgia: The story of a Libertarian Revolution
Georgia as a model
Georgia as a model
  Bendukidze and Russian capitalism
Bendukidze and Russian capitalism
     
Jacobins in Tbilisi
Jacobins in Tbilisi
  The future of Georgian libertarianism
The future of Georgian libertarianism

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15 April 2010, 00:00