08TBILISI117, GEORGIA IMPROVES ITS RATING IN HERITAGE FOUNDATION’S

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Reference ID Created Released Classification Origin
08TBILISI117 2008-01-24 12:50 2011-08-30 01:44 UNCLASSIFIED Embassy Tbilisi

VZCZCXRO0283
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHSI #0117/01 0241250
ZNR UUUUU ZZH
R 241250Z JAN 08
FM AMEMBASSY TBILISI
TO RUEHC/SECSTATE WASHDC 8670
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 TBILISI 000117 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/CARC, EEB/CBA, EEB/IFD/OIA AND EEB/TPP/BTA 
COMMERCE FOR 4231 DANICA STARKS 
STATE PASS USTR 
 
E.O. 12958: N/A 
TAGS: ECON EINV PGOV GG
SUBJECT: GEORGIA IMPROVES ITS RATING IN HERITAGE FOUNDATION'S 
ECONOMIC FREEDOM REPORT 
 
 
1. Summary:  Georgia has improved its standing in the 
Heritage Foundation's annual Index of Economic Freedom.  In 2008 it 
has moved up from 35th to 32nd out of 163 countries surveyed 
throughout the world.  According to the conservative think tank's 
report, which measures countries' performance on ten different 
factors, Georgia scores highly in business freedom, fiscal freedom, 
freedom from government, investment freedom and labor freedom. 
Improvement is needed in the areas of property rights protection and 
corruption.  End summary. 
 
---------------------- 
Economic Freedom Index 
---------------------- 
 
2. The Index of Economic Freedom published by the Heritage 
Foundation is a tool for policymakers and investors and is aimed at 
developing a systematic, empirical measurement of economic freedom 
in countries throughout the world.  The Heritage Foundation is a 
well-known conservative think tank whose stated mission is to 
formulate and promote conservative public policies based on the 
principles of free enterprise, limited government, individual 
freedom, traditional American values, and a strong national defense. 
 The Foundation's 2008 Index of Economic Freedom measures 162 
countries across 10 specific factors of economic freedom, such as 
Business Freedom, Trade Freedom, Fiscal Freedom, Freedom from 
Government, Monetary Freedom, Investment Freedom, Financial Freedom, 
Property Rights, Freedom from Corruption, and Labor Freedom. 
 
3. The average economic freedom score worldwide is 60.6 percent. 
Scores approaching 100 represent higher levels of freedom. 
Countries with higher than an 80 percent index are classified as 
'free', from 70 to 79.9 as 'mostly free', from 60 to 69.9 as 
'moderately free', followed by 'mostly un-free' (50-59.9 percent) 
and 'repressed' (below 50). 
 
--------------------- 
Georgia Scores Highly 
--------------------- 
 
4. According to the 2008 Economic Freedom Report Georgia's economy, 
at 69.2 percent free, is above the world average of 60.3, making it 
the world's 32nd ranked economy and qualifying it in the category of 
'moderately free'.  With this score, Georgia is in the company of 
Spain, Austria, Norway, Slovak Republic, Czech Republic and El 
Salvador.  Georgia is ranked 18th out of 41 countries in the 
European region, and its overall score is above the European 
regional average of 66.8. 
 
5. Out of ten factors evaluated, Georgia scored extraordinarily well 
in business freedom, fiscal freedom, government size, investment 
freedom and labor freedom.  The report concludes that business 
operations are simple and not hampered by red tape.  A very low top 
income tax rate complements the low corporate tax rate, and 
government tax revenue is relatively low as a percentage of GDP. 
Georgia is strongest in labor freedom, according to the Heritage 
Foundation, because its labor market is highly flexible and far 
freer than those of most advanced economies. 
 
6. The report concludes that only two categories remain 
significantly below the world average: protections of property 
rights and freedom from corruption.  Property rights are not 
adequately protected by the courts because of inefficiency and 
persistent corruption.  The report recognizes that thousands of 
civil servants and police have been fired and high-level officials 
arrested for corruption, but finds the government still faces a 
significant challenge in controlling the problem.  Georgia's score 
for freedom from corruption is only 28 percent. 
 
7. Georgia's Business Freedom Index is 85 percent compared to last 
year's 78.9 percent.  The report states that starting a business 
takes an average of 11 days, compared to the world average of 46 
days. Obtaining a business license and closing a business are 
relatively simple, and overall freedom to start, operate, and close 
a business is relatively well protected by the national regulatory 
environment.  Obtaining a business license requires less than the 
world average of 19 procedures and 234 days. 
 
8. Fiscal Freedom is 90.7 percent (compared to 94.2 percent in 
2007), as Georgia has low tax rates.  Freedom from Government is 
ranked at 81.3 percent (91.3 percent in 2007).  The change is due to 
increasing government spending for consumption and transfer 
payments.  In the most recent year, government spending equaled 25 
percent of GDP.  Progress in privatizing state-owned enterprises has 
been substantial.  Trade Freedom is 71 percent.  Georgia has made a 
significant progress towards liberalizing its trade regime, but 
agricultural subsidies, an inefficient customs process and other 
barriers continue to add to the cost of trade.  Monetary freedom is 
71.4 percent.  Inflation is relatively high, averaging 8.7 percent 
 
TBILISI 00000117  002 OF 002 
 
 
between 2004 and 2006.  Rel
atively unstable prices explain most of 
the monetary freedom score.  Georgia's score would have been 10 
percentage points higher if not for governmental measures that 
distort domestic prices.  Investment freedom is 70 percent and 
financial freedom 60 percent.  Georgia together with Denmark leads 
the world in labor market freedom.  The labor market operates under 
highly flexible employment regulations that, according to the 
Heritage Foundation, enhance employment and productivity growth. 
 
9. As a transforming post-Communist economy, Georgia still has much 
to improve.  Trade freedom, property rights, and freedom from 
corruption remain below desirable levels, and an inefficient 
bureaucracy burdens many commercial sectors.  According to the 
report, non-tariff trade barriers are relatively high, and property 
rights cannot be guaranteed because of inefficiency and persistent 
corruption in the courts.  With regard to property rights 
protections, Georgia scores a 35 percent, low compared to its other 
scores.  The report states that many in Georgia doubt the judicial 
system's ability to protect private property and contracts.  It 
singles out weak enforcement of laws protecting intellectual 
property rights for criticism. 
 
------------------------------ 
Georgia vs. Former Soviet Union 
------------------------------ 
 
10. For comparison, Georgia's neighboring states received much lower 
scores, except Armenia, which came in at number 28 in the world, 
four places ahead of Georgia.  Russia is ranked as 134th (120th in 
2007), Azerbaijan 107th, and Turkey 74th.  As for the other former 
Soviet republics, Georgia lags behind Estonia (12) and Lithuania 
(26), but scored better than Latvia (38), Kazakhstan (76) and 
Ukraine (133).  Georgia even topped some European economies such as 
Norway (34), Portugal (53), France (48) and Italy (64). 
 
11. Georgia's progress to date has also been reflected in 
Transparency International's Anti-corruption in Transition report 
and the World Bank/IFC's Doing Business survey.  The latter found 
Georgia to be the 18th easiest country in which to do business. 
Georgia may move further up in the next Heritage rating, if it can 
improve those areas, such as the fairness and impartiality of the 
judicial system, that are holding it back. 
 
TEFFT

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