Implementing Structural Reforms: The Experience of Georgia

Wednesday, September 7

Presenter
Mr. Aleksi Aleksishvili, Chairman and CEO, Policy and Management Consulting Group (PMCG) & former Minister of Finance and Minister of Economic Development, Georgia


Summary
What do successful structural reforms look like? Mr. Aleksi Aleksishvili, former Minister of Finance and of Economic Development of Georgia, shared his first-hand experience with the Georgian bold and comprehensive structural reform program during the mid-2000s, discussing both implementation challenges and results.

On September 7, Mr. Aleksi Aleksishvili discussed his experience with structural reforms in Georgia in 2004–07. Mr. Aleksishvili is former Minister of Finance and Minister of Economic Development of Georgia and currently provides policy advice to other governments as Chairman and CEO of the Policy and Management Consulting Group (PMCG). Based on his experience, he spoke primarily about fiscal reforms related to tax policy and administration, customs, and trade policy but also discussed business-enabling reforms of the regulatory environment and those tackling corruption.

As part of the reforms, in a decisive attempt to strengthen the tax system the Georgian authorities reduced the number of taxes to six (e.g., abolished the social tax altogether), cut tax rates, improved tax administration, and introduced e-filing and e-procedures. As a result, the tax system became more resistant to corruption, tax avoidance and the size of the informal economy declined significantly, and tax revenues more than doubled, reaching 25% of GDP. Similarly, the government simplified customs procedures and optimized the system of import duties, which is now one of the most liberal in the world. The average weighted import duty fell to 1.5%, and 90% of all imports can now enter Georgia duty-free.

The fiscal reforms not only improved direct policy outcomes but also supplemented numerous other measures taken by the authorities to make the business environment more attractive in the areas of starting a business, getting construction permits, accessing finance, and enforcing contracts, among others.

These efforts were recognized internationally—the World Bank rated Georgia as the global top reformer of the regulatory environment during 2005–10. In Doing Business 2007 alone, Georgia improved its ranking by 75 positions, to #37; six years later it entered the list of the top 10 countries with the best business environment. Mr. Aleksishvili emphasized the importance of using this rating to visualize the progress made. The government was able to do this both to sustain reforms within the country and to capitalize on them when talking to outside investors.

Another important area covered was bureaucracy, which Mr. Aleksishvili dubbed “the number one impediment to reforms.” The Georgian authorities made significant efforts to reduce the bureaucracy by restructuring ministries and reorganizing staff. These measures were often quite painful; in some cases, all the staff were laid off or replaced. A prominent example was the reform of traffic police: road inspectors were abolished, and then over time replaced with a completely different mobile traffic police force, with new people; this was an area where, in Mr. Aleksishvili's view, gradualism did not work. Consequently, Mr. Aleksishvili noted, the number of civil servants imposing unnecessary regulations declined, and corruption is no longer perceived as a major obstacle to doing business in Georgia.

The following Q&A session opened with a general note that while much has been achieved, Georgia should not stop there: unemployment, an inadequately educated workforce, a high trade deficit, external vulnerabilities, financial risks and fiscal challenges call for further policy actions and structural reforms. During the discussion, audience members were interested in a wide array of reform implementation issues, notably why some governments can conduct reforms while others cannot, the social consequences of layoffs, ways to fight corruption, and the proper initial conditions to start reforms. Mr. Aleksishvili noted the importance of ownership, leadership, and political commitment to reforms. Fighting corruption, he argued, should start from the top. And he emphasized that while reforms may have negative consequences for some groups, especially in the short run, the benefits outweigh them.

Alexei Miksjuk, Junior Economist, JVI

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