Molly Corso in Tbilisi -

Georgia's "Act of Economical Liberty" - President Mikheil Saakashvili's plan to limit the power of the government to raise taxes and increase spending - has finally become law. Initially written off by international experts like the International Monetary Fund (IMF) as too radical and inflexible for a developing economy, the essence of the legislation more commonly referred to as the Liberty Act has now spread to countries around the world as governments grapple with the sovereign debt crisis.

The Liberty Act, influential Georgian libertarian Kakha Bendukidze tells bne, is a vital part of Georgia's efforts to create innovative, pro-business reforms to attract investment and spur economic growth. With its caps on spending and constitutionally mandated referendum for new taxes, the Act was "unique" when Saakashvili first proposed the initiative in 2009, he says.

But by the time the Georgian parliament adopted the legislation into law on July 1, governments ranging from Spain to Germany were also considering similar policies. In August, France and Germany asked governments in the Eurozone to pass constitutional amendments to balance budgets and limit public sector borrowing. A week later, the Spanish government and opposition agreed on such a measure; it is expected to go up for vote in the parliament in November.

Inevitable policy

The fact that it has now become something of a "trend" in policymaking, Bendukidze notes, is not a surprise. Georgia was seeking a remedy to the same problems troubling Spain, Greece and other countries today: deregulation, fiscal discipline and budget constraints. "I think it was visionary due to very harsh conditions from which we were trying to pull Georgia out from the beginning of 2004. Due to those problems, we do something which are a bit more unusual," he says. "Now it is more clear that [this type of policy] is unavoidable."

Bendukidze, a former minister of reforms credited with nurturing the libertarian roots of Georgian economic policy, believes the Act is a vital part of the government's quest to attract investment and encourage growth, describing it as a sign of "stability" for investors, and a measure to offset investor concern over Georgia's ongoing tensions with Russia.

With provisions to limit state spending and an amendment to the constitution to obstruct tax hikes, the Liberty Act promises to puncture attempts to unlatch Georgia's libertarian bearings when it goes into force in 2013 - the year the next planned presidential election is scheduled. It sets parameters for spending, tying it to the GDP: spending cannot increase to over 30% of GDP, while the deficit is limited to 3%.

Even so, the bundle of laws and provisions that will rein in the state's ability to spend and regulate is actually less radical than originally intended.

After two years of negotiations with the IMF and the EU, the government was forced to scrap plans to prohibit new tariff regulation bodies and ban the creation of new licenses or permits. The version passed by parliament in July also tempered some restrictions on spending: if spending is higher than prescribed by the act, the government has two years to rein it back in.

Despite the changes, the Liberty Act retains its reach over the constitution with an amendment forcing future governments to put any tax increases up for referendum. Future governments can, however, temporarily increase taxes for up to three years, without calling a referendum. The changes, Bendukidze says, are unfortunate but not devastating. Even without the ban on new regulatory bodies or new licenses, the Act includes enough "good things" to stimulate growth and investment, he notes.

Tbilisi's challenge, he says, is to create "good things" that will balance out the "bad" that stops investors from coming to Georgia - namely the ongoing conflicts in the country's separatist regions of Abkhazia and South Ossetia, as well as those continuing tensions with Russia. "There is no type of one key, one magic bullet, one power which you can powder everything [and attract investment]," he says.

"It is like a balance. You have two plates and you put bad things on one side and then you want to counterbalance it with good things, the more good things the better," he says. The liberty act is "one, big significant piece of policy which we can put on the right path of balance."