Georgia ranks 23rd among 178 countries by the freedom of its economy and is ahead of most Post-Soviet, Eastern European and neighboring countries.

Despite an overall positive result, Georgia still faces challenges in terms of freedom of its financial sector and the rule of law, specifically unprotected property rights, corruption and lack of independence of the judiciary.

General Results

According to the 2016 Index of Economic Freedom, as of June 30, 2015, the Georgian economy is 72.6% free. The country is 23rd among 178 countries, and 12th among 45 European states. Georgia falls under the category of “mostly free”, which also includes the Baltic states, the United States and most of the developed countries.

Georgia is ahead of all four of its neighbors and the majority of Post-Soviet countries in almost all components, and is ahead of all the Eastern European countries with its overall result.

Negative Results

Georgia has relatively low scores in the following 3 components of economic freedom:

Property Rights - 40%

The property rights component is a qualitative assessment of the extent to which a country’s laws protect private property rights. It also assesses the likelihood that private property will be expropriated by the state and analyzes the independence of the judiciary, and the existence of corruption within the judiciary.

Georgia’s score of 40 is described as: “The court system is highly inefficient, and delays are so long that they deter resort to the courts. Corruption is present, and the judiciary is influenced by other branches of government. Expropriation is possible.”

Freedom from Corruption - 52%

The index derives Georgia’s score (52 out of 100) for this factor directly from Transparency International’s Corruption Perceptions Index, which measures the level of perceived corruption in 175 countries.

Even though 52% seems low compared to Georgia’s score in other components, it is not a bad result compared to other countries.

According to the Corruption Perceptions Index, with is score of 52 Georgia ranks 48th among 168 countries, and is ahead of 19 Eastern European and Central Asian countries and 7 EU Member States.

Financial Freedom - 60%

Financial freedom is an indicator of banking efficiency as well as a measure of independence from government control and interference in the financial sector.

Georgia’s score of 60 is described as: “Moderate government interference. Banking and financial regulations are somewhat burdensome. The government exercises ownership and control of financial institutions with a significant share of overall sector assets. The ability of financial institutions to offer financial services is subject to some restrictions.”

Positive Results

Georgia received its highest scores in the following 4 components:

1. Business Freedom - 86.5% - Few regulations and infrastructural constrains on starting, operating, closing a business.
2. Monetary Freedom - 80.5% - Price stability, low inflation and limited price control by the state.
3. Trade Freedom - 88.6% - Low import tariffs and few nontariff barriers.
4. Investment Freedom - 80% - Few restrictions on investment flow.

Contextual Results

Georgia received scores much highest than most European countries in the remaining three components. However, in order to correctly understand this difference, these results need to be put in context.

The Index of Economic Freedom is run by The Heritage Foundation, which has a declared mission of promoting conservative public policy. This means that the index considers lower taxes, smaller government, and fewer labor regulations to be better for the economy, which is a view not shared by most European countries. As it happens, the situation in Georgia is closer to the political and economic stance of the authors of the index.

Fiscal freedom - 87.6%

Fiscal freedom implies lower taxes on all levels of government. Georgia ranks higher than Western and Northern European countries in this component.

Labor Freedom - 75.7%

This component measures how strict are labor market regulations in the country, specifically, regulations related to minimum wage, layoffs, severance requirements and working hours.

Georgia is ahead of most European countries in this component, because its labor regulations are less strict.

Government Spending - 75.3%

In order to compare the government spending of different countries the index calculated what percentage of GDP was spent by the government of each country. The Georgian government annually spends an amount equal to 28% of the country’s GDP, which is significantly lower than the European average of 43%.

The authors of the index believe that excessive government spending is a serious burden on the economy. Therefore, countries with lower government spending are ranked higher.

The Index methodology treats zero government spending as the benchmark. As a result, authors of the index admit that underdeveloped countries, particularly those with little government capacity, may have received artificially high scores.

Conclusion

The results of the Index of Economic Freedom need to be taken into account for a few reasons:

1. Many investors base their investment decisions on similar indices.
2. 22 years’ worth of data gathered by this index reveals a strong association between high economic freedom and richer, healthier and more educated population, and higher level of democracy.
3. The declared aim of the index is to identify economic weaknesses for various countries, in this way helping them direct state resources wherever it is most needed.

Despite an overall positive result, Georgia still faces challenges in terms of freedom of its financial sector and the rule of law, specifically unprotected property rights, corruption and lack of independence of the judiciary.

Therefore, the Georgian government should direct its reforms to these areas in order to not only strengthen democratic institutions, but also increase the country's economic potential and the prosperity of its citizens.