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A nation must think before it acts.
Report by : Maia Otarashvili
As a result of liberal economic reforms pushed through by the new Georgian government after the 2003 Rose Revolution, the previously corruption-riddled economy began to experience a significant yet unsteady turnaround. Economic growth in Georgia averaged 10.5% per year between 2005 and 2007, which is well above the average GDP growth of the EU-10 area and of Georgia’s Black Sea neighbors Moldova and Ukraine for the period.
The three years of speedy growth proved unsustainable as the global economic crisis approached. In 2008 Georgia was hit with the “twin crisis” of the August armed conflict with Russia followed by the global economic downturn. As a result, the previously growing investor and consumer confidence deteriorated and the heavily FDI and foreign aid dependent economy (FDI net inflows in 2007 accounted for 17.2% of GDP) experienced a sharp decline in growth to 2.3% in 2008 and -3.8% in 2009. The government was faced with the dual challenges of mitigating the impact of the economic downturn and facilitating post-war recovery.
Georgia received significant financial assistance from the American government (US $1 billion), the IMF, World Bank and other international donors in Brussels (totaling more than $4.5 billion) for post-war reconstruction projects. Tourism inflows and high levels of public investment were some of the main contributors to the pace of the renewed economic growth in 2010. As a part of the government’s expansionary policy, a $1.2 billion stimulus package was launched to emphasize job creation and social welfare protection. Also, Georgians received electricity and grocery vouchers (totalling approximately $30 per household) in 2011 and 2012, and pensions were almost doubled. The government also increased funding for social welfare programs for those living below the poverty line. Overall government spending increased from 5.237 billion lari (approx. $3.4 billion) in 2007 to 6.972 billion lari (approx. $4.6 billion) in 2010 and 8.120 billion lari (approx.. $5.4 billion) in 2012. Budget deficits began to experience quick increases, from 0.3% in 2004 to 9.2% in 2009, growing 2.9% per year on average, but great progress has been made in lowering the budget deficit since 2009, bringing it down to 3.6% in 2011, and the 2013 budget forecast shows a low 2.9% budget deficit projection. This progress in balancing the government budget was achieved partially due to an improved tax code – income tax remittances were practically nonexistent in Georgia before 2004, but represent 75% of Georgia’s 2012 government budget.
Georgia’s government continued to invest heavily in construction, real estate and banking. The construction sector experienced a decline in growth when the twin-crisis hit, while the real-estate sector remained strong. The banking sector required hundreds of millions of dollars from the International Finance Corporation and the European Bank for Reconstruction and Development, along with other IFIs, in order to increase liquidity and encourage lending. As a result, domestic demand began to expand, mainly driven by recovery in credit provided by the banking sector. Despite this improvement interest rates remain high.
During the pre-crisis years, as a part of President Saakashvili’s economic growth plan, the Georgian government worked closely with the IMF and the World Bank on multiple development programs, including “Millennium Challenge” projects. The government continuously received praise from international financial institutions regarding successful implementation of these programs, especially once the post-crisis recovery began. Thus Georgia’s economic recovery is a success story for the IMF and the World Bank development programs combined with strong leadership and effectiveeconomic governance.
Also, experts believe that despite the great disruption caused by the war, post-war financial assistance from the international community helped Georgia better weather the approaching global economic crisis by becoming an early recipient of the financial aid it would have needed later anyway. While most EU member states had to deal with growing public dissatisfaction over severe austerity measures, the Georgian government was able to adopt an expansionary fiscal policy increasing public spending to promote economic growth, although its pre-crisis public spending (salaries and social welfare) was not even close to that of the EU member states, and the social welfare system was nearly nonexistent before 2004.
Fueled mostly by financial assistance from the international community, the Georgian economy managed to recover to 6.3% GDP growth in 2010 and grew strongly by 7% in 2011. Growth in 2012 was 7% of the GDP, the highest among its Black Sea/ Caucasus neighbors- Moldova, Ukraine, Armenia and Azerbaijan. The government’s policy reform agenda included a macroeconomic and fiscal framework with an effective fiscal stimulus to restore confidence and mitigate the downturn in 2008-2009, followed by a high-quality fiscal adjustment to safeguard sustainability. FDI and other private capital inflows dropped dramatically after 2008, but slowly began to resume growth in 2010.
Foreign aid and close compliance with the rules established by the IFIs has helped the Georgian government stage this impressive economic recovery, yet many fundamental challenges remain. Government debt has increased during the crisis and, at 40% of GDP currently it is almost twice the amount of most of the EU-10 countries (which average 20% if one excludes Hungary, which is the outlier at 80% of GDP).
Increased FDI is a priority for sustainable growth for Georgia’s economy, as loans, aid and remittances from Georgians working abroad (mostly illegally) have been the main cash flow channels and do not guarantee long-term sustainability. Besides, the government has failed to effectively direct FDI and credit towards creating jobs. The official unemployment rate was reported at 15% in 2011 (although the unofficial number is 34% and some experts belive it is closer to 50%). Unemployment and a weak social welfare system remain primary concerns of Georgian citizens as 24.7% of Georgians continue to live in poverty.
The August 2008 war left the government with 30,000 internally displaced persons (IDPs) to provide essential housing for; this task still remains a challenge. Overall improvement of social services, including better employment opportunities and important public services for all IDPs, also remains a challenge.
There is a great imbalance between imports and exports in Georgia. Despite the fact that one-third of Georgians rely on agriculture, no effective reforms have been implemented in this sector and Georgia is currently a major food importer. The Georgian government has not been able to effectively take advantage of its WTO membership benefits, nor has it established free trade agreements with strategic partners like the United States. Despite the fact that increasing Georgia’s investor-friendliness is a clear priority of the Georgian government and much progress has been made in attracting FDI, further tax and regulatory reforms are necessary, including maximum stability guarantees for foreign investors (national security, commitment to consistently low tax rates, etc.). There are also reports of government level corruption and great difficulty to maneuver the business sector for newcomers.
The international community has duly recognized Georgia’s success in adopting sound macroeconomic policies and reforms to improve the business climate. However, rapid growth has not, on balance, translated into a net positive impact on Georgia’s democratic performance. Despite the fact that the Rose Revolution brought an era of governmental institutionalization, reform and overall modernization in Georgia, its effects have not yet paid off in terms of democratic consolidation. Georgia remains in the category of “transitional governments” or “hybrid regimes” as measured by Freedom House.
President Saakashvili, whose government has implemented many successful economic reforms and even some government administrative reforms, is also responsible for concentrating power in his own hands. As a result, the executive retains dominance over the legislative and judicial branches. While Georgia’s institutional framework for effective presidential government has been strengthened under Saakashvili, his approach to the rest of the political process has lacked balance. Some experts have argued that, although rhetorically committed to democracy, Saakashvili has serious authoritarian tendencies.
The October 2012 parliamentary elections have given Georgia an opportunity for a smooth transfer of power for the first time in the country’s modern history. Some significant reforms (electoral and other) were adopted during the past few years, and proper implementation of those reforms could restart the democratic transformation process in Georgia. However, these reforms and the degree to which the positive changes are implemented are being put to test only now, with the peaceful transfer of power through the parliamentary elections, as the political system will gradually turn into a semi-presidential model (the constitutional changes made by Saakashvili government are scheduled to take full effect by the end of 2013 when his second presidential term ends).
Due to the fact that previously ruling UNM (United National Movement) did not win a parliamentary majority, it is likely that the UNM’s move to the opposition combined with this shift in the political system will help facilitate better balanced political processes in Georgia. The country’s new Prime Minister Ivanishvili does not have a track record in politics and his coalition is made up of highly diverse political parties; therefore the situation requires further observation. So far Ivanishvili has said that Western integration will be a priority for his team, and that despite the severe and fundamental disagreements with Saakashvili and his now opposition coalition UNM, his team intends to continue driving the country on its current path to democratization and development (with continuous extensive reforms in mind). So far the two teams have ran into a lot of trouble trying to cohabitate. However, the tensions are not as severe as they were in fall of 2012 and early winter of 2013.
Saakashvili’s second term as President ends in October 2013, and based on the short track-record of his co-governance with the new Prime Minister Ivanishvili and his coalition, it is clear that a rocky year of severe political infighting still lies ahead for Georgian politics.
 World Bank
 Georgia Ministry of Finance, 2012
 World Bank
 Nations in Transit, 2012