Articles

A Step Forward, a Step Back

Issue 6, 2010, December-January, Magazine Investor.ge

David Archvadze, Senior Lawyer MKD, analysis the Georgian government’s policy toward regulation before and after the Rose Revolution.

Introduction

It is well known that a country’s ability to regulate its economy is key to its development. Regulation implies different types of consents, authorizations, licenses, permits, and certificates which are established by the laws of Georgia -- as well as different and more or less complicated standards and technical regulation, strict sanitary-hygienic requirements, and state control and supervisory bodies.

Generally, the business environment is one of the main indicators of the economy, and the regulation system is an essential part of it.

The situation before “The Rose Revolution”

The situation in this field in Georgia before the Rose Revolution was alarming; moreover, the situation was disastrous for the State’s economic development. While it may seem unbelievable today, there were more than 900 different types of licenses, permits, certificates, and authorizations at that time. The number of barriers for starting and developing a business reached a level that made any kind of business initiative unattractive, and the economy in ruins.

During this period the parliament of Georgia adopted two laws (on May 14, 1999 and on May 14, 2002) that increased the number of licenses and permits. There were ten legislative acts in the field of licenses, and two legislative acts in the field of permits. It should be noted that three types of licenses and thirty-eight types of permits alone were issued for the food and tobacco industry during the period.

There existed about forty controlling/supervisory authorities that collected “tributes” from entrepreneurs because no control or supervision existed at that time. For example, the Sub Agency of the Ministry of Economy of Georgia – The State Inspection of Prices, also the Sub Agency of the Ministry of Health, Labor and Social Protection – The Labor Inspection.

The situation after “Rose Revolution”

The Rose Revolution brought to power a new government that enjoyed unprecedented support and authority. The new authorities announced the building of a liberal economy and its development as one of the main priorities along with other directions.

The so-called reformative team had two main goals to accomplish:

  1. The creation of an open economy. The beginning of a comprehensive process of privatization, when all types of enterprises – small, medium and large -- were privatized. The privatization strategy put an emphasis on earning money for the state.  
  2. Streamlining and simplifying laws and regulations on business. The whole range of activities carried out to  facilitate  business  largely centered on the deregulation process  of Georgia. The number  of licenses, permits, certificates and standards was decreased dramatically; technical regulations and standardization became a voluntary process; a number of controlling/supervisory authorities was abolished.

The government's reforms have started to take root: “Doing Business 2011: Making a Difference for Entrepreneurs - promoted Georgia to 12th place among 174 states of the world. The report notes that Georgia is the only country in Eastern Europe that rated in the top 15. The report also establishes the new category: how the field of business regulation has changed since 2005. Based on the new scores, Georgia is the most active reformer state of business regulation in the world and is number one in the list.

Growing Pains 

Despite the above-mentioned success and achievement, we believe that -- along with the positive impact -- there are also some negative aspects for the economic development.

The abolition of licenses and permits essentially simplified doing business in Georgia by creating conditions that promoted the attraction of investments. It damaged, however, the export potential of the State and possibly damaged the lawful rights and interests of consumers in the country. In particular:

  • On December 27, 2005 the Parliament of Georgia adopted the Law on Safety and Quality of the Food. The purpose of the law was to secure the health, life and the economic interests of consumers with respect to food, for the effective functioning of the internal market and its diversity. Due to deregulation, however, the law was amended to postpone its implementation until January 2015 (2013 for “high risk” food producers). The amendment created problems for Georgia’s agriculture exports so the government passed a law on safety and quality of food on March 26, 2010.
  • On May 25, 2006 a new Labor Code of Georgia was adopted that granted  broad rights  to the employer and  left employees  with  limited  rights. One particularly  troubling  aspect  was  the right of an employer to dismiss  an  employee  without any grounds. The Supreme Court of Georgia, however,  ruled  in  favor  of  workers’  rights  on  April  28, 2010. The  Court  interpreted  that  paragraph  B, article 37 of  the  Labor Code  (the termination of the labor agreement) may not be interpreted  as the unilateral  right of the employer to dismiss the employee  without any grounds. Hopefully, this decision will promote workers’ rights in our country.

Conclusion

We can unambiguously conclude that the regulatory system of permits and licenses ensures compliance with certain standards and encourages the establishment of fair practice. The licenses/permit structure of the country, however, requires a true balance.

A simple regulatory system can facilitate business and provide easy access to the market. Too much deregulation, however, may have the adverse effect, and too much overregulation may have a “chilling” effect for business activities. 

                                                              


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