Confronting Georgia's Economic Challenges

Since Mikhail Saakashvili won Georgia's presidential election in early January, international attention has largely fixed on the country's deep political dilemmas. In particular, the outside world seems most interested in how Saakashvili will go about managing Georgia's often tense relationship with Russia, and what approach he will take with Georgia's rambunctious autonomous regions. However, such a focus overshadows what may be the biggest key for Georgia's stabilization: promoting economic growth.

Georgia today is in sorry economic shape, burdened with a decrepit infrastructure. Power outages, for example, are common throughout the country, including the capital Tbilisi. Far more important, excessive bureaucracy and rampant corruption are strangling entrepreneurial activity in the country.

Saakashvili, who will be inaugurated on January 25, has stated that promoting economic development is among his top priorities. Since his election, he has said all the right things: vowing to contain corruption; to streamline government; and to simplify Georgia's tax code. Georgians are perhaps more hopeful than in recent years, but many remain wary. Georgia's leaders have made many promises since the Soviet collapse in 1991, but the country has not experienced genuine reform.

There is every indication that Saakashvili's administration will open an anti-corruption offensive soon after taking office. The country's newly confirmed prosecutor-general, Irakli Okruashvili, told members of parliament that he intends to launch a broad investigation to trace corrupt dealings, and, in successful cases, seek to recover funds that belong to the state, as well as bring former officials held responsible for misdeeds to justice.

Even if such an initiative stalls, the mere fact that many corrupt representatives of the old guard will loose their jobs once Saakashvili takes office creates a unique opportunity to address the corruption question.

Corralling corruption is vital, but success in this sphere would not entirely remove obstacles to stable growth in Georgia. The government apparatus is in dire need of profesionalization, while the legal framework governing economic activity must be improved.

The government's inability to pay competitive salaries means state agencies often lack qualified personnel. At present, there is a clear lack of understanding about the potential role of business in promoting economic growth. Georgian officials, for instance, need to learn how to capitalize on the membership of the World Trade Organization (since 2000), and on the country's GSP trade status offered by the United States. The GSP, or the General System of Preferences, offers duty-free access to the US market for a wide range of products. Georgia has enjoyed GSP status since June 2001.

There is hope that the Saakashvili administration will improve government capacity. The president-elect's initial action to trim the bloated apparatus is a first step towards building a more nimble bureaucracy.

Ultimately, responsibility for Georgia's economic revival will rest with the Georgians themselves. But international financial institutions and foreign governments, including the United States, will have an important support role to play.

Washington has thus far demonstrated strong backing for Saakashvili. Meanwhile, international institutions -- which had grown wary of cooperating with former president Eduard Shevardnadze [for background see the Eurasia Insight archive] -- appear disposed towards working with the president-elect. It is necessary, however, for international players to rethink their Georgia assistance strategy. The most vital economic sectors of the Georgian economy -- construction, telecoms, agri-business, wine production, and hospitality – are areas that have received little or no support from international lending organizations.

Success in these areas underscores the fact that the entrepreneurial spirit is alive and well in Georgia. International assistance over the near term should help unleash the country's entrepreneurial potential. Such a focus could prove helpful to the Georgian government, easing the financial burden of promoting economic growth.

Accordingly, the Saakashvili administration should, in the coming months, take action to simplify the start-up process for small businessmen, while making tax legislation more conducive to promoting new ventures. At present, the level of corruption is so high that many entrepreneurs prefer to operate in the informal sector, or gray market. Such businesses do not pay taxes, depriving the government of revenue. It is often cheaper for businesses to function in the shadow economy than to operate in the open, largely because of the existing, punitive tax framework. A recent World Bank study indicated that Georgia has one of the largest informal economic sectors among former Soviet states.

In the immediate future, the new Georgian government should also strive to address the question of providing steady energy supplies. A good start would be the implementation of the recommendations made by the Energy Working Group, which comprises the Georgian Energy Ministry, USAID and other international donor and investor organizations.

Despite its unfavorable business climate, Georgia experienced over 8 percent GDP growth in 2003, based on estimates for the first three-quarters of the year. Some economic analysts predict 7 percent growth this year. Entrepreneurs have been responsible for creating much of this growth. If the Saakashvili administration can follow through on its early rhetoric, taking concrete action that removes existing constraints to economic activity, Georgia's entrepreneurs could end up playing a crucial role in turning Georgia's economy around. A stable economy would greatly increase the Saakashvili administration's stated desire of integrating Georgia into Western economic and security structures.