The Results of 2005 World Economic Freedom Study: Georgia Holds the 66th Place

FATI MAMIASHVILI

On September 8, a presentation of the report of the world economic freedom study arranged by “New Economic School – Sakartvelo”, “Fraser Institute”, “Fridrich Nauman Foundation”, and “TBC Bank” took place.

Based on the data of the year 2003, Hong-Kong holds the first place in the report according to the study’s results (8,7 points), Singapore holds the second place (8,5 points), New Zealand, Switzerland, and the US hold the third place (8,2 points). They are followed by Australia, Estonia, Luxemburg, and United Arabian Emirates. According to the study, the large countries are ranked in the following way: Germany – the 19th place, Japan – 30th place, France – the 38th place, Italy – the 54th place, Mexico – the 69th place, India – the 66th place, China – the 86th place, Brazil – the 88th place, Russia – the 115th place.
During the period since 1985, Africa, South America, and the countries of the former communist bloc have the worst indicators. Botswana is the best among the African countries, Chile and Costa Rica are the best in South America, while Congo and Zimbabwe are the worst in Africa, and Venezuela – in South America. Cuba and Northern Korea have the worst indicators. As to Georgia, according to 2003’s data, it holds the 66th place together with India and Paraguay; it means that the indicators of economic freedom are still low in Georgia.It’s the ninth year since the study of economic freedom has been carried out in many countries of the world headed by famous economists, the Nobel Prize laureates – Milton Freedman, Harry Becker, Douglas Norti, James Gvarti, etc. The results of the studies are published annually in Fraser Institute’s report. The data on the situation in Georgia for 2003 was for the first time introduced in Fraser Institute’s report this year. It is noteworthy that Georgian partners of Fraser Institute – the society for spreading economic knowledge – “New Economic School – Sakartvelo”, which is a member of the international network for studying economic freedom since May 9, 2004, and the Southern Caucasus republics became members of this network in 2005. At the same time on May 18 of the last year “the network for studying economic freedom in the Caucasus” was established by “New Economic School – Sakartvelo” and Fridrich Newman Foundation; conferences and meetings were held in Tbilisi, Baku, Erevan. According to the appraisal of foreign experts, “the network for studying economic freedom in the Caucasus” is a union of like-minded persons, which will be able to collect and analyze corresponding information, propagandize the ideas of economic freedom, inform the governments and public at large, and work out special recommendations for perfection of the situation.
What does the study of economic freedom mean? – According to the official information of “New Economic School – Sakartvelo”, comparative analysis of economic freedom and democracy made by Columbian University’s politologist – Eric Gatske, which was reflected in the results of the study of the world economic freedom, confirms that economic freedom is 50 times more effective in prevention of violence between nations than democracy, at the same time, according to statistics, the influence of democracy is rather insignificant. The countries with low level of economic freedom (2 points according to 10 point system) are 14 times more often involved in conflicts than the countries with high level of economic freedom ( 8 points and more). This kind of correlation does not change even when the study implies such factors as membership in the EU, possession of nuclear weapons, regional peculiarities, etc. After studying of economic freedom the so called economic freedom index is established, which determines difference between the countries.
The studies have established that an average indicator of economic freedom has increased from 5,2 to 6,4 in comparison with 1985 (Fraser Institute of economic freedom determines the indicator of economic freedom according to 10 point system).
Now, as to Georgia. This year the data on economic freedom in Georgia was for the first time published in Fraser Institute’s report. According to this report, Georgia holds the 66th place.
We asked one of the study’s authors – Paata Sheshelidze to comment on how this result is appraised by foreign partners.
Paata Sheshelidze – the president of “New Economic School – Sakartvelo”: “Foreign investors, of course, critically appraise the index of economic freedom in Georgia. This means that Georgia is very weak in many components. The indicator of its economic freedom is low even compared to some post-soviet countries. But holding the 66th place in 2003 is, of course, interesting, since this position was mainly stipulated by two components: the study was based on statistical data. In 2003 the share of the Georgian government in the GDP was small, that is the government’s expenditures were very low in comparison with the GDP. According to this component, we hold the 4th place in the world. But this index did not reflect the real situation, since in reality the quality of expenditures’ redistribution was high – the collected taxes were directed not to the budget but into the pockets of concrete persons. The same thing can be said about other several components, that is why the 66th place in 2003, as I have already said, is based on formal data”.
According to official data, from the viewpoint of economic freedom, in the first fourth of the countries the GDP per head makes up 25,062 USD, while in the last fourth – only 2,409 USD; the average economic growth in the first fourth of the countries makes up 2,5%, and in the last one – 0,6%; in the first fourth the poorest part of population has average income of 6.451 USD, and in the last one – only 1.185 USD; unemployment in the first fourth makes up 5.2%, in the last one – 13%; average lifetime in the first fourth is 77.7 years, and in the last one – 52.5 years; only 0.1% of children in the first fourth have to work, and in the last one – 22.6%; political rights in the first fourth have 5 points according to 7 points system, and in the last one – only 1.7 points.
The study of economic freedom undergoes annual changes. Presently, the parameters of its appraisal contain the following factors: taxes and government spending, government’s interference with economic activities, inviolability of property and legislative system; monetary and credit system; availability of foreign trade; regulation of production, credit, and labor markets.
Paata Sheshelidze: “The most interesting conclusion of this year’s study is that economic freedom of the country is in the first place in the appraising, then – political rights, security, etc. The main criterion determining progress of a country is the quality of economic freedom. That is why we have to give our citizens an opportunity to work, get rich, become more attractive personally more proud. I think that Georgia has to make a choice quickly in order not to lose time. Every month, year – is a lost life of each concrete person. No one, including politicians, should not have a pretension that they will be able to put in order others’ lives.
Our study confirms that a country that has chosen economic freedom is strong, protected, people in it are more happy, there is a longer lifetime in it, and what is most important – the indicator of new-born children’s health is higher”.
Economic freedom in the country is appraised taking into account the facts how a person and its property are protected against violence in it; how each of them is independent in personal choice, commerce, and business activities; to what extent the barter is voluntary; to what extent the domestic market is open and foreign trade is available; to what extent business environment is competitive; to what extent the supremacy of law is provided; to what extent the proprietary rights are inviolable; how distinctly the rights and obligations of the authorities are determined, how capable and solid the political institutions are.
According to the results of economic freedom’s study, economic freedom is oppressed everywhere where taxes and government spending are high, and there is interference of the state with personal and economic activities of a person; it is known that personal choice, voluntary barter, and market coordination become limited under political dictate. It is also known that the more the economic freedom is, the higher the living standard inside the country is.
What must change in Georgian reality so that our indicators of economic freedom would be higher?
Paata Sheshelidze:
“First of all we need more freedom for economic agents, and less restrictive rights for the authorities. In my opinion, changing of the monetary policy is the most important task, Lari should be ensured by gold and not by air as it is the case today. The financial policy should be limited: accumulation of debts, taking of loans must not be allowed, taxes should be reduced considerably, regional authorities should be given the right to reduce their share in total taxes, and hence attract businessmen to their regions; tax competitiveness should exist and each region must be given a chance of introduction low taxes.
Any economic regulation must be eradicated.
Just imagine, a corresponding certificate is needed in order to make something, but one does not need any document in order to steal or kill a man! Correspondingly, when a person makes some product, we must give him an opportunity to do it. From this point of view, the government’s obligations should be reduced too – so many taxes, controlling and regulatory bodies are absolutely unnecessary, and it is better to use the money spent on them for purposes, for example for development of infrastructure. Besides, Georgia should open the door for everyone in international trade. In general, custom duties are not necessary, however, at the same time it is very important to open more frontier points, which will give the population living near the border an opportunity to work and trade with contiguous countries.
Political decentralization is very important. One person must not manage everything and all matters must not be decided in one place! Responsibility should be shared, and more people should have an opportunity to think. In the sphere of international security Georgia should give up any militaristic ambitions. All problems can be solved if economic growth will be our aim”.
How will the index of economic freedom in Georgia improve in the studies of the next 2006 year where the situation in Georgia in 2004 will be reflected? – In the year 2004 the share of the Georgian government increased considerably in the volume of GDP. That is why, according to the preliminary forecast, a sharp deterioration is expected in this component, in 2004 many regulatory and controlling bodies were functioning in the country, and correspondingly a big difference in this component between the indicators of 2003 and 2004 is not expected.