Georgia’s reform trajectory has been nothing short of remarkable. In less than two decades, successive structural, regulatory and economic reforms have propelled Georgia from one of the poorest post-Soviet states to an upper-middle income economy. Georgia ranks among the best performers in the world according to international indices on doing business and openness to foreign investment – achievements many countries look to for inspiration. Yet in recent years, the Georgian government has reflected on why these reforms have not facilitated more broad-based economic growth. FDI attraction has been strong relative to the size of the Georgian economy, but the positive benefits of investment have not been fully realised. Mobilising investment in sectors that can enhance job creation, exports and productivity will be key for Georgia’s recovery from the COVID-19 pandemic. This Investment Policy Review takes stock of recent achievements in improving the investment climate and assesses areas for the government to consider in strengthening its reform efforts to attract FDI that can have a positive impact on inclusive, sustainable growth.
OECD Investment Policy Reviews: Georgia
Abstract
Executive Summary
Georgia’s reform trajectory has been nothing short of remarkable. In under two decades, successive structural, regulatory and economic reforms have propelled it from one of the poorest post-Soviet states to an upper-middle income economy. In recent years, the government has continued to adopt a fast-paced approach to reforms to attract investors and support private sector development. These efforts have yielded strong GDP growth and an increase in FDI stock to more than 100% of GDP. Georgia now ranks among the best performers in the world according to international indices on doing business and openness to foreign investment – achievements many countries look to for inspiration.
However, in recent years the government has reflected on why these reforms have not facilitated more broad-based economic growth. Despite important progress, productivity and exports remain low, and unemployment and poverty are still high, particularly in rural areas. FDI attraction has been strong relative to the size of Georgia’s economy, but the positive benefits of investment have not been fully realised. Most FDI has gone to non-tradable sectors, including transport infrastructure, real estate, construction and financial services. These sectors are important contributors to economic growth, but have not sufficiently advanced job creation or productivity, and may be limited by Georgia’s relatively small domestic market. With the exception of recent growth in tourism and renewable energy, FDI in export-oriented sectors, including manufacturing and agriculture, has remained flat and far below potential.
Georgia is now, like much of the world, facing the unprecedented health and economic consequences of the COVID-19 pandemic. The government took swift monetary and fiscal measures to support healthcare provision and liquidity, and assist at-risk firms and individuals. Disruptions to business, travel, remittances and investment are nonetheless likely to have a severe impact on the economy. Private investment, both foreign and domestic, will be essential for Georgia’s economic recovery.
The government’s unparalleled success in removing many of the obstacles to doing business is commendable. But such reforms by themselves will neither assure a steady inflow of FDI nor maximise the potential gains from investment. Further reforms will need to address gaps in infrastructure and connectivity within the country, and upgrade the skills of the workforce. Improving not only regulatory constraints but the whole investment climate – including the wider legal framework, investment promotion strategy and institutions, policies to promote responsible business conduct, and impediments to growth of priority sectors – will help Georgia attract FDI that can have a positive impact on productivity and inclusive, sustainable growth.
Successive reforms over the past three decades have helped improve the legal framework for investment. Georgia is now open to foreign investment in most sectors, though limited restrictions remain, notably in the agricultural sector. Core investment legislation establishes a level playing field between foreign and domestic investors and provides a clear and predictable framework for property rights. Well-developed laws and institutions on data protection and cybersecurity, which are edging closer to alignment with EU rules in this area, are also noteworthy. A number of important challenges remain despite these achievements, particularly the ongoing efforts to reinforce the independence, accountability and capacity of the judiciary. Sustained momentum is needed for systemic judicial reform to build investor confidence in the court system. Other important challenges include ensuring that intellectual property rights are enforced effectively, realising universal land registration and continuing to improve the legal and institutional infrastructure that supports alternative dispute resolution services. The government could also continue to reassess priorities for investment treaty policy and consider possibilities for introducing further clarifications of key provisions in older investment treaties.
Attracting investment in Georgia’s agricultural and food value chain – collectively accounting for 10% of GDP and 44% of employment – has the potential to generate substantial benefits for key sectors. Beyond providing capital and jobs, investment in agri-food value chains can help enhance productivity growth, bolster incomes, improve food security, support rural development, and maintain competitiveness in international markets. With favourable soil conditions, climate and water resources, Georgia has strong potential to attract FDI in the sector, but boosting exports of high-value food products will require addressing a unique set of challenges for investors. Most food products are predominantly grown by small-scale family holdings, which are often subsistence-oriented and with surplus production frequently sold on local markets. The farm structure is also highly fragmented. Addressing these structural deficiencies is essential to promote investment and generate new growth opportunities for the sector.
Ensuring that investments are targeted strategically in areas that can contribute to Georgia’s sustainable development requires a coherent investment promotion and facilitation strategy and suitable institutional architecture. Several areas of Georgia’s investment promotion framework could be strengthened. Several institutions promote investment and actively pursue investors. While this in itself is not a weakness, the lack of strong co-ordination, starting with a single government focal point for investors, leads to inefficiencies, duplication of efforts, and confusion for investors. A comprehensive investment policy statement would help align all actors behind a joint vision and foster synergies between investment, exports, and enterprise and innovation promotion.
Promoting and enabling responsible business conduct (RBC) is of central interest to policy makers wishing to ensure that business activity contributes to broader value creation and sustainable development. In recent years, Georgia has made significant strides to establish and implement a regulatory and institutional framework that underpins and promotes RBC. The implementation of the EU Association and Partnership Agreements and the development of the National Human Rights Strategy and its Action Plan are important opportunities to consolidate existing efforts and promote RBC principles and standards more explicitly and comprehensively. The challenge will be in implementation. Further measures would be welcome to strengthen the independence of the judiciary and enhance access to both state-based and non-state based remedy, and fully ensure that civil society can operate freely. Labour protection has been reformed and strengthened, including occupational health and safety and the re-establishment of labour inspection. Additional steps could be taken to ensure the effective implementation of these reforms.
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