The Act of Economic Freedom introduced by President Mikheil Saakashvili to Parliament on Wednesday October 6 aims to decrease Government spending and scrap bureaucratic hurdles, making Georgia “a flagship of the world’s liberal economy.” The programme includes proposals to hold a referendum before taxes can be increased or new ones introduced, ban the establishment of new regulatory agencies and discontinue the introduction of any new licenses or permits. The President also called for a constitutional limit on Government spending to be established, set at 30% of gross domestic product (GDP), for foreign debt to not exceed 60% of GDP and the budget deficit to be pegged at no more than 3% of GDP.

The President told Parliament that adopting this bill would further increase foreign direct investment (FDI) in Georgia and create new jobs. He also proposed to direct 30% of the budget to social programmes, pensions, healthcare and education. Pledging to “restrict the possibility of executive Government interfering in the dynamics of economic governance,” Saakashvili’s speech upheld the principles of the liberal economy and denounced government intervention.

The liberal economic model, also known as the American Model, has been guiding Georgia since the Rose Revolution. Teimuraz Tsurtsumia, Deputy Chairman of the Economy and Economic Policy Committee of Parliament, said that such economic liberalization was profitable for Georgia. “When a country, our country Georgia, chooses the way of democracy, the way of development, approaching the civilized world, I think the route of economic liberalisation is preferable,” Tsurtsumia said. 

Calling for further “liberalisation of the economy from bureaucratic and normative acts and the overall simplification of bureaucracy,” the most important aspect of the President’s proposal, Tsurtsumia said that the proposal will be subject to several more stages of debate and study before it can become law. Parliament is likely to spend 5 to 6 months debating it whilst obtaining expert opinion from all sides. The economic programme is likely to pass through Parliament substantially unamended, Tsurtsumia said.

Paata Sheshelidze, President of the New Economic School of Georgia (NES-G), which advances ideas of economic freedom and noninterventionist government, said that he hoped for the programme to be implemented with even more liberal economic provisions, including further tax cuts, monetary reform to institute a gold-linked lari, a ban on import tariffs, cuts in bureaucracy, lowering budget spending and the elimination of so-called stimulus and job creation programmes. Sheshelidze said that the proposed expenditure-to-GDP ratio of 30% was “very high” for Georgia. The NES-G advocates a 7% limit, which, combined with other reforms, allegedly leads to 15-20% yearly economic growth. Budget deficits and government borrowing, including foreign debt, should be scrapped completely, Sheshelidze said.

“The liberal economy is the only adequate system for Georgia and all other countries,” Sheshelidze said. “This about individual liberty and freedom of choice, about rights to use private property freely, about justice, about the efficient allocation of resources and the employment of all those who like and are willing to work, this is about economic growth.”

Saakashvili’s proposal to further liberalise the economy follows some recent improvements in Georgia’s international economic rankings. Doing Business 2010, a report compiled by the World Bank and International Finance Corporation, ranked Georgia 11th out of 183 countries. Georgia gained 5 places on the previous year, becoming the best performing country in Eastern Europe and Central Asia. Georgia also received a 69.8 score, on a 0 to 100 scale, in the 2009 Index of Economic Freedom compiled by The Heritage Foundation and Wall Street Journal. The country improved its overall score by 0.5 over 2008 and is now ranked the 32nd freest nation in the world and 19th in Europe.

“Bureaucratic regulation is not excessive, and the labour market’s flexibility and freedom are exemplary,” reads the Heritage Foundation’s report on Georgia. “The top income and corporate tax rates are low, as is the overall tax burden.”

Georgia scored 99.4 on labour freedom, one of the factor’s measured by The Heritage Foundation, due to the country’s “highly flexible labour regulations.” The Heritage Foundation cites the moderate costs of employing non-salary workers, flexible rules regulating the number of working hours and the lack of any obligation to pay severance pay as the main factors which gave Georgia its impressive score. 

Saakashvili’s speech also carried criticism of some recent global socio-economic tendencies. “Achieving the goal [of economic liberalisation] is of special importance and is also possible and needed now, when ambiguous, disorientated and populist socialist trends are waving around the world shaken by the global economic crisis,” Saakashvili said.

While the liberal economic model has allegedly driven economic growth and equal opportunity, substantial opposition to such policies has also been on the rise. Critics including economists Joseph Stiglitz and Robert Pollin and linguist Noam Chomsky cite an increase in corporate power, rising inequality, deteriorations in living standards, lax environmental regulations, social exclusion and low social mobility as direct outcomes of the liberal economic model.

Some of these trends have not bypassed Georgia. Unemployment has been on the rise since 2004, reaching 16.5%, which amounts to 315,800 people, in 2008. Almost one third of the population (31%) lived below the poverty line in 2006. Georgia spent only 3.1% of GDP on education in 2006, making it the 145th nation in the world in terms of education spending. The average monthly nominal earnings in education and health and social welfare, as recorded in the quarterly bulletin published by the Department of Statistics, are the lowest of any sector of economic activity, constituting respectively 254.1 and 304.2 lari per month in the first quarter of 2009.