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cent on the price of goods; and a personal income tax, progressive in nature but not strictly enforced. Other important sources of government income are customs duties, a two percent import tax, an eight percent export tax rate, a 20 percent tax for bartered goods, and a fixed tax levied on the currency exchange kiosks. The government plans to increase VAT up to 20 percent, import tax up to 12 percent, and to eliminate export tax.

Tax collection is severely undermined because of inflation, decline of government authority and corruption. In the first quarter of 1994, VAT and excise taxes constituted only 2.3 percent of GDP. In 1994 the government ruled without an adopted budget, with a 46 percent of GDP deficit in the first half of the year, basically financed by borrowing from the National Bank. In response to the demands of the IMF and the World Bank, the Government of Georgia presented a zero deficit budget for the fourth quarter of 1994. However, about 50 percent of income is contributed by grants and from borrowing abroad.

Government investments are still high, contributing 67 percent of total investments, though reliable information on private investments is not available. New investment regulations remain in draft form. In March 1994 the Bilateral Investment Treaty was signed with the United States. The treaty is pending ratification by both countries.

Only 25.8 percent of the enterprises approved for privatization by the State Property Control Ministry were privatized by May 1994. A total of 1,152 enterprises, mostly in the trade or service sectors, sold for 11 billion coupons (roughly $40,000). In order to accelerate the privatization process, a new decree by the head of state on privatization allows employees to directly purchase 51 percent of company shares (except in strategically important industries). About 380 large enterprises were privatized by November 1994.

The government regulates the export of strategic commodities produced in Georgia by a system of quotas and licenses, which limit or prohibit export of certain types of goods.

4. Debt Management Policies

Official statistics on the national debt do not exist. Some officials have set the amount of debt at $870 million, including $380 million owed to Turkmenistan, $71 million owed to Russia, $141 million owed to the EU, $86 million owed to Austria, $40 million owed to Turkey, $24 million owed to Kazakhstan, $11 million owed to Armenia, $8 million owed to Azerbaijan, and $1 million owed to the Netherlands. 5. Significant Barriers to U.S. Exports

Georgia's policy of encouraging imports has meant few established barriers to U.S. products. Georgia maintains import licenses on a number of goods: medical equipment, medicines and raw materials for medicines, vegetation protection chemicals, industrial scrap materials, drugs, and weapons and ammunition.

According to an executive decree, all commodities imported to Georgia must have an insurance certificate from the Georgian insurance company Aldagi. This decree contradicts another government decree on the limitation of monopolistic activity and development of a competitive environment, and is expected to be opposed by the Prosecutor General's office.

Import Licenses must be obtained through the Committee on Foreign Economic Relations on the basis of a preliminary decision by the proper branch ministry. Once ratified, the U.S.-Georgia bilateral investment treaty will provide substantial assurances to U.S. investments.

The exporting company must also submit to the customs office at the border and to the customs district office at the cargo's destination the following: pro forma invoice or bill of lading for sea transport or bill of board for air transport, export packing list, and a contract for exporting goods. The documentation from cargo origin country, certificate of quality and sanitary certificates for food products may also be required at the customs office. In addition, according to the new decree, persons taking abroad more than $500 must submit a certificate from a bank.

Importers pay a two percent customs duty and a 0.2 percent processing fee, as well as applicable VAT and excise taxes on goods from outside the Commonwealth of Independent States (CIS).

The Georgian Customs Department has submitted to the parliament newly proposed customs tariffs and draft laws on customs duties and on transit taxes, and a customs code. The import tax is expected to be increased from 2 to 12 percent. The effect of barriers to U.S. trade and investment in Georgia is minimal. The current law on foreign investment does not specifically hinder U.S. investment. The only barrier to foreign investments is lack of appropriate legislation and absence of a law regarding owning land. Currently land cannot be purchased by a foreign in

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vestor. A new law on investments is planned for passage by the parliament by the end of 1994. A U.S.-Georgia trade agreement providing for reciprocal most-favorednation status was signed and entered into force in late 1993. Outmoded and inadequate infrastructure and the absence of first-class bank guarantees create barriers to trade and investment in Georgia.

6. Export Subsidies Policies

Georgia is not a member of the GATT Subsidies Code. The government does not provide any type of significant export subsidy. On the contrary, it discourages exports through licensing requirements and quotas on a number of products. The export of some types of goods is prohibited.

7. Protection of U.S. Intellectual Property

Laws protecting patents and trademarks are adequate, but copyright protection is nonexistent. In accordance with decrees issued in March 1992, a patent office under the Committee of Science and New Technologies administers and approves patents and trademarks, utilizing the classic system of patent inspection. Georgia is a member of the Patent Cooperation Treaty and the Madrid Agreement of 1929 on Trademarks. There is currently no copyright protection law in effect, and the Georgian government, while working on one, does not expect to issue it by the end of 1994. Georgia is not listed on any special 301 watch lists, nor is it identified as a priority foreign country.

In January 1994 Georgia became a party to the Paris Convention for the Protection of Industrial Property, a member of the World Intellectual Property Organization, and a party to the Patent Cooperation Treaty. The new adjusted laws have not been completed.

Patent and trademark protection do not appear to pose substantial problems in Georgia. Systematic cases of patent infringement do not exist, although brand counterfeiting is known to have taken place, though not on a large scale. Patent terms are for the standard twenty years, although after four years there is compulsory licensing to domestic firms of rights held by foreigners. No important sector is excluded from the availability of a patent. Registering a trademark costs $520 and this can be renewed every five years. There are no procedural barriers to obtaining a trademark, although Georgia operates on the first-come first-serve system, where the first to register the trademark obtains the right, unless the trademark is internationally known, or registered under the Madrid Agreement.

The absence of any legal protection on copyrights has allowed for some pirating of U.S. motion pictures, although not on a large scale. Because of the very low levels of U.S. trade and investment with Georgia, the impact of any of Georgia's intellectual property practices on U.S. trade and investment is minimal.

8. Worker Rights

Georgia relies on old Soviet legislation which guarantees most major labor rights, although efforts to refine these laws began in late 1993. Resources devoted to investigation of complaints and enforcement of rights, centered in the Labor Ministry, are slim. In 1993 there was little interest in labor activity, and in 1994 there were few worker strikes demanding salary increases.

a. The Right of Association. The labor code allows workers to form unions and associations freely. These associations must be registered with the Ministry of Justice. In late 1993, the Georgian government had planned to implement specific legislation that would allow for strikes and prohibít management retribution against striking workers. A single confederation of trade unions, made up of about 30 sector organizations, is active in Georgia, but steadily lost membership throughout 1993 and 1994.

b. The Right To Organize and Bargain Collectively.-The labor code also grants workers the right to organize and bargain collectively. This right is freely practiced in the Georgia. Anti-union discrimination is prohibited.

c. Prohibition of Forced or Compulsory Labor.-Forced or compulsory labor is prohibited under the labor code. Instances of this practice are rare.

d. Minimum Age for Employment of Children.-According to the labor code, the minimum age for employment of children is 14. Children between 14 and 16 years are allowed to work a maximum of 30 hours a week. The minimum age is widely respected, and Georgian officials know of no sectors where the rule is violated.

e. Acceptable Conditions of Work.-Acceptable conditions of work generally follow the old Soviet pattern. A nationally mandated minimum wage applies to the government sector. In November 1994, it was revised to one million coupons a month. The labor week is 40 hours, although the government adopted 35 hour weeks for the winter period from November 15 to February 15. The labor code permits higher wages for hazardous work and allows a worker to refuse to perform if the work

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could become a danger to his life, but otherwise, there are insufficient safeguards for worker well-being.

f. Rights in Sectors with U.S. Investment. Conditions in sectors where there is U.S. investment do not differ from those in other sectors of the economy.

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Income, Production and Employment:
Real GDP (1991 prices)

1,870.1 1,743.0 1,824.5 Real GDP Growth Rate

2.2 -1.1

2.5
GDP by Sector: (1991 prices)
Agriculture/Forestry/Fishing

25.6
21.7

N/A
Manufacturing Mining/Construction

717.9 656.6

N/A
Trade
Transportation

281.9 268.6

NA Services

614.9 634.0

N/A General Government Households

271.9 267.7

NA Net Exports of Goods & Services

- 16.5 -14,7 -7.3 Real GDP Per Capita (USD)

23,203 21,471 22,316 Civilian Labor Force (millions)

38.9
38.7

38.5 Unemployment Rate (annual average)?

7.7
8.8

9.8
Money and Prices (annual percentage growth):
Money Supply (M3) 84

9.6
7.5

7.9 Commercial Interest Rates

12.03 10.16

9.43 Personal Savings Rate 8 6 15,6

13.9
13.3

12.5 Retail Inflation 6

2.5
2.1

1.2 Wholesale Inflation 6

0.1 -1.1

1.5 Consumer Price Inflation 6

4.0
4.2

3.0
Exchange Rate (annual average) (deutsch
marks/USD)

1.5595 1.6544

1.62 Balance of Payments and Trade: Total Exports (FOB)

430.4 379.9 413.6 Total Exports to U.S.?

28.8
28.6

30.6 Total Imports (CIF)

408.8 343.1 364.2 Total Imports from U.S.?

21.2
18.9

18.5 Gold and Foreign Exch. Reserves 3

3.8
45.6

50.0 Trade Balance

21.6
36.9

49.4 Trade Balance with U.S. 7

7.6 9.6 12.1
NIA--Not available.
*All Germany.
1 Estimates based on latest available data.
2 Percent of civilian labor force.
• 1994: latest available data.
Change 4th qtr4th qtr.; for 1994, seasonally adjusted annual rate, through September 1994 over 4th qtr.
1993.
Bundesbank definition.

Western Germany only; all German GDP data are incomplete.
+Official U.S. figures. 1994 based on first three quarters.
1. General Policy Framework

The German economy is the world's third largest and attained a GDP equivalent to USD 1.9 trillion (in nominal terms) in 1993. That same year was marked by a recession in which the German economy contracted by 1.1 percent. In late 1994, the economy is back on a growth path, and the consensus forecast is for 2.5 percent real growth this year and next. The German “social market” economy is organized on free market principles and affords its citizenry a greater degree of unemployment, health and educational benefits than most other industrialized countries. One of the world's foremost trading nations, Germany since reunification in 1990 has experienced a substantial decline in its foreign trade surplus due to the demands of inte

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grating the economy of the erstwhile GDR. The German parliament has ratified the Uruguay Round agreement.

German fiscal policy also has been driven by the financial exigencies of reunification. The government extended the country's generous social welfare system to eastern Germany and committed itself to quickly raise eastern German production potential via public investment and generous subsidies to attract private investment. The budgetary cost of these policies was increased by the decision to rapidly raise eastern German wages to western German levels. This resulted in heavy job losses and greatly increased the government's unemployment compensation costs, as well as wage costs in government-owned firms being prepared for privatization. As a result, western Germany has had to transfer vast sums to eastern Germany on the magnitude of DM 150 billion annually, or 5.0 percent of all-German gdp. These transfers accounted for the dramatic ballooning of public sector deficits and borrowing. The recession of 1992/93 further contributed to a widening fiscal deficit as tax revenues weakened and anticyclical expenditures rose.

Despite the recession and the fiscal demands of reunification, the German government has sought to narrow the federal budget deficit through a variety of tax and fee increases, public spending restraint and cuts in certain social benefits. Nonetheless, the overall public sector borrowing requirement (broadly measured to include all levels of government as well as hitherto "off-budget” funds and agencies) will be some DM 180 billion in 1994 and is expected to be only slightly smaller in 1995. In recent years, relatively high rates of inflation (the CPI rose an average 4.1 percent in 1992 and 1993) and money growth, as well as concern over wage developments and fiscal deficits, have preoccupied the German central bank (Bundesbank). The Bundesbank places overriding importance on price stability and thus responded to the rising inflation in 1991/92 by hiking short term interest rates, which peaked in July 1992 at post-war highs. Since then, the central bank discount rate has declined by 4.25 percentage points, with the most recent cut occurring in May 1994. In 1993-94, wage settlements were moderate and inflation has declined to about three percent. However, the Bundesbank has continued to be concerned about rapid monetary growth.

The government's public sector deficits are financed primarily through sales of government bonds, the maximum maturity of which normally is ten years (for the first time in over a decade, the government issued a 30-year bond in January 1994). The Bundesbank's primary monetary policy tool is short-term liquidity provided to the banking system primarily via repurchase operations. It also provides financing to the banking system via discount and Lombard facilities, and it sets minimum reserve requirements for the banks. The discount rate as of October 31, 1994 was 4.5 percent.

2. Exchange Rate Policies

The Deutsche mark is a freely convertible currency, and the government does not maintain exchange controls. Germany participates in the exchange rate mechanism of the European Monetary System. The Bundesbank intervenes in the foreign exchange markets infrequently, usually in cooperation with other central banks in order to counter disorderly market conditions.

3. Structural Policies

Since the end of the second world war, German economic policy has been based on a "social-market" model which has been characterized by a higher level of direct government participation in the production and services sector than in the United States. In addition, an extensive regulatory framework, which covers most facets of retail trade, service licensing and employment conditions has worked to limit market entry by not only foreign firms but also by German entrepreneurs. Although the continuation of the "social market" model remains the goal of all mainstream political parties, changes resulting from the integration of the German economy with those of its EU partners, the shock of German unification and a perceived decline in competitiveness in its traditional manufacturing industries, has forced a rethink of the German post-war economic consensus in the so-called Standort Debate.

As a result of this debate, numerous structural impediments to the continued growth and diversification of the German economy have been identified. These can be broadly grouped as follows:

-An excessively rigid labor market

-A regulatory system which discourages new entrants especially in the services sector

-High taxes and social charges

-Lack of risk and venture capital for start-up firms

In recognition of these problems, the government has been pursuing a program of reforms since the mid-1980's focusing on tax reform, privatization and deregulation. Within the last year, the reorganization of the German Federal Railroad, and the operating entities of the German Federal Post into stock companies was completed. The federal government also reduced its majority holdings in Lufthansa to less than 36 percent with the objective of selling the entire stake by the end of 1995. U.S. firms are likely to benefit from these developments as purchasing decisions are driven more by commercial criteria than in the past. It is also expected that the introduction of competition in some of these formerly protected sectors will eventually result in lower costs for the users.

Despite the progress in recent years, lack of competition in several protected sectors continues to drive up business costs in Germany. The service sectors which continue to be subject to excessive regulation and market access restrictions include communications, energy, retail distribution and insurance. A government proposal to modify or eliminate the so-called "rebate and premium" laws which limit firms' pricing and marketing flexibility failed to pass the German parliament in the summer of 1994. The government has indicated it may reintroduce legislation to reform these laws in the next session. Opposition from small shop owners also derailed an attempt to revise Germany's highly restrictive regulations on store hours. Irrespective of short-term German government reform priorities, the EU is expected to continue to pressure its member states to reduce barriers to trade in services within the Community. U.S. firms, especially with operations in other EU states, will likely benefit from EU market integration efforts over the long term.

4. Debt Management Policies

Germany has recorded current account deficits since 1991 due to a dramatic drop in the country's traditionally strong trade surplus, related in part to strong eastern German demand, and exacerbation of Germany's services account deficit because of the substantial foreign borrowing undertaken to finance the costs of unification. Nonetheless, due to large current account surpluses from the 1970's through 1990, Germany remains the world's second largest creditor, with net foreign assets estimated at some USD 275 billion at the end of 1993. The current export-led recovery is widely projected to improve both the trade surplus and the current account bal

ance.

5. Significant Barriers to U.S. Exports

Germany is one of the most important trade partners worldwide for the U.S. The country's strong economy poses virtually no formal barriers to U.S. trade or investment interests. It is possible to identify some pitfalls, especially for the newcomer to the German market, but on the whole the Federal Republic is an excellent place for U.S. companies to do business.

Import Licenses: The FRG demands virtually no import licenses, having abolished almost all national import quotas. Germany is subject, however, to the import-license requirements imposed on some products by the European Union. (An example is the recent imposition of a quota for “dollar” bananas under the EU's banana import regime.)

Services Barriers: Conditions of access vary considerably but the Embassy has received very few complaints. Some progress has been made in participation of foreign companies in banking and other financial services. The insurance market is still a tough one to crack. Telecommunications services are being increasingly deregulated. Standards, Testing, Labeling, and Certification: Germany's regulations and bureaucratic procedures can prove a baffling maze, blunting the enthusiasm of U.S. exporters. While not "protectionist" in the classic sense, government regulation does offer a degree of protection to German suppliers. Safety standards, not normally discriminatory but sometimes zealously applied, and exemplified by, for example, the testing and licensing procedures of the Technischer Ueberwachungsverein e.V. (TUV, or technical inspection association), complicate access to the market for many U.S. products.

Government Procurement Practices: German government procurement is non-discriminatory and appears to comply with the General Agreement on Tariffs and Trade (GATT) as well as the terms of the U.S.-FRG Treaty of Friendship, Commerce and Navigation. That said, it is undeniably difficult to compete head to head with major German suppliers who have long-term ties to German government purchasing entities. Those areas which fall outside of GATT agreement coverage, such as military procurement or procurement of services, have been the most susceptible to these problems. With the implementation, January 1, 1995, of the Uruguay round agreement under the auspices of the WTO, GATT coverage will commence for some of these areas.

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