Georgia's Choices

IMGXYZ3096IMGZYXNearly a decade after the Rose Revolution, with parliamentary and presidential elections approaching in 2012 and 2013, respectively, Georgia is entering a critical period of political transition. Its future is uncertain, and with the state of the economy less promising than before, much depends on the long-term development model Georgia will adopt in the coming years. Carnegie’s Thomas de Waal presented his report, Georgia’s Choices—Charting a Future in Uncertain Times, which discusses the economic challenges facing Georgia today. Former Ambassador to Georgia and Kazakhstan William Courtney discussed the report’s findings, and Carnegie’s Ambassador James F. Collins moderated.

History of State Building

Georgia has come a long way since the collapse of the Soviet Union, when it was a failed state torn apart by a group of hawkish warlords, who created a regime of lawlessness and corruption. In the first two years since Mikheil Saakashvili rose to power, Georgia has made a great leap forward due to radical socio-economic reforms. In those two years the new government eradicated petty corruption, expanded the budget eightfold, improved the quality of civil services, and simplified the tax system. The impressive scope of this overhaul contributed to the sharp spike in foreign investment, and earned Georgia high rankings in the World Bank’s Ease of Doing Business Index, as well as other indices and economic reports, said de Waal.

One-Party State

• Democratic Institutions: Despite the dramatic improvements in state-building under Saakashvili, the changes were executed in an improvised manner, often behind closed doors. Reforms were overseen by a small group of individuals from Saakashvili’s inner circle, and few efforts were directed at sustainable institution building, de Waal said.
   
• The Georgia-Russia War: The Georgia-Russia war in August 2008 caused a rapid decline in investment and the massive destruction of infrastructure, although its economic effect was mitigated by a generous $4 billion aid package from Georgia’s Western partners. With the post-war foreign assistance package dwindling and dim prospects for another major assistance in the future, however, Georgia must build democratic institutions and form a system of accountability and transparency, argued de Waal.
   
• Political Pluralism: Saakashvili’s United National Movement controls the executive and legislative branches; most of the regional governors also belong to the party. The governing elite also provides funding and other resources to most of the national media, de Waal added, giving them a covert form of control over key platforms for public debate.

The Georgian Economy

• GDP: Georgia’s GDP per capita has grown significantly in recent years, although it still falls behind many of its neighbors.
   
• Inflation: Inflation reached 13 percent in the first months of 2011, hitting the food sector especially hard, as almost 80 percent of food is imported.
   
• Unemployment: The official unemployment rate is 16 percent. Unemployment is particularly high in the capital, where, according to the government data, only 30 percent of the population is fully or partially unemployed. According to a poll commissioned by the National Democratic Institute, 25 percent of Georgians said their household did not have sufficient income for food, and 42 percent said they could afford food but not clothes. Inequalities have been steadily deepening between the capital and the rural areas, added de Waal.
   
• Debt and Trade: All speakers agreed that Georgia’s near-term economic outlook is clouded by its mounting external debt. Georgia’s current economic model relies strongly on external economic factors, such as foreign assistance and foreign direct investment. Trade balance is unhealthy, with imports outweighing exports by a ratio of 4 to 1. Most critically, the current economic strategy lacks a long-term plan, and most decision-making is done in an impromptu and opaque manner, said de Waal.
   
• Volatile Business Environment: While the Georgian government never misses an opportunity to praise its investor-friendly climate in speeches at home and abroad, Courtney argued that such rhetoric provides an extremely narrow, one-dimensional perspective on the true state of Georgia’s economy. Businesses suffer from a widespread disregard for property rights and high-level corruption. Many businesses complain of harassment from tax authorities, who reportedly engage in parallel tax collection practices—imposing disproportionate fines on firms for small offenses. Monopolies are common and many sectors of the economy are impenetrable to other competitors, added de Waal.

Modeling Georgia

Since coming to power, Saakashvili has invoked several economic models, each reflecting a different philosophical approach to Georgia’s future, noted de Waal.  

• Old Georgia: This “model” stands for Georgia’s traditional value system and closed family networks and businesses. The “Old Georgia” model is critical of globalization, thus settling Georgia’s political and economic system for underachievement and isolation, argued de Waal.
   
• “Singapore”: A “European Singapore” model envisions Georgia as a dynamic business hub, with a  perennial inflow of tourists and foreign direct investment. According to this worldview, the key to Georgia’s prosperity lies in massive deregulation and privatization. The current government channels all of its efforts to foster a business-friendly environment and market Georgia as a “number-one reformer,” de Waal said.
   
• European Model: The European model entails the implementation of strict regulations, rigorous standards, and greater democratic accountability. Currently, pro-European sentiments among Georgia’s population are strong, albeit fuzzy: for the majority of Georgians, Europe is understood in civilizational terms, rather than a concrete structure of governance and development. While EU membership is not on the horizon, Georgia should take advantage of the proposed Deep and Comprehensive Free Trade Area, which, if passed, would give Georgia privileged access to the European market, in return for greater regulations and more democratic institutions, argued de Waal.

 Future of the European Model

• Domestic Opposition: Some opposition to the Europe-oriented development strategy comes from a small, tight-knitted clique of tycoons and business magnates who fear that the European model would disclose and undermine closed family networks and shady business enterprises. A powerful group of libertarians, headed by the former minister of economic development, Kakha Bendukidze, also oppose the European model. This group favors free-market practices, minimal government, and maximum deregulation. Its followers argue that the European model is more of a burden than a benefit to Georgia, said de Waal.
   
• EU Marketing: Despite the impressive work it has done in Georgia, the EU has failed to effectively market the benefits of institutional reforms that would encourage Georgia to pursue its European economic model more persistently. In the absence of domestic checks and balances on the Georgian government, the EU must step up to the challenge and provide Georgia with the support it needs to create a long-term, sustainable, and Europe-oriented economic model, argued de Waal.
   
• Benefits of the European Model: Although other economic models may appear to be more appealing due to their minimal burden and cost of implementation in the short run, Georgia will be better off in the long-run if it pursues greater integration with the EU, even if membership perspectives not on the horizon, de Waal said. Although the path toward greater reform and stronger regulations will be painful, it would enable Georgia to build export capacity, strengthen its institutions, and gain more democratic accountability.
   
• International Role: Georgia’s Western partners should structure their relationship with Georgia based on the principle of conditionality—encouraging and assisting Georgia to adopt greater economic regulation and democracy-strengthening measures, while not shying away from criticism when it is due, concluded de Waal.