Issue 2, 2014. April-May

   

THE ECONOMIC REPORT CARD: GRADING GEORGIA ON ITS 15-YEAR PERFORMANCE

2014 represents a milestone year for Georgia in many respects: it marks the 15-year anniversary for an organization that is representative of a free market economy—the American Chamber of Commerce in Georgia Fittingly, 2014 also marks the year Georgia is anticipated to sign its Association Agreement with the largest trading bloc in the world. Following such sweeping bravado, it's appropriate to take a step back and see where Georgia has come from and how it is using that past to map its future destinations.

Cordelia Ponczek


Recently, over dinner with my Georgian expat friend and his wife, the conversation turned to Georgian wine. My host was lamenting the gradual shift of Georgian winemakers away from the ancient clay-jar method to more modern, dare I label, "Western", means of oak or steel vat production.

"Sure," he commented, "it may be more convenient or mainstream, but it's not traditional; it's not Georgian."

Georgians are known for many things, and seamlessly moving away from tradition is not one of them. Despite this, Georgia has transitioned successfully from its Soviet narrative and integrated steadily into an ever-diversifying global market. In its shift, Georgia has confronted the inevitable modernization of its economic sector. Such confrontations have, for the most part, been intrinsically motivated and implemented by Georgia. However, as Georgia intensifies its geo-economic strategy with help from outside organizations, there is paradoxically more opportunity for cooperation to aid, and more room for the unknown to abet. A 15-year snapshot of Georgia's economy can give clues as to where Georgia has been, and where this may take it in the next 15 years.

In 1999 Georgia established the Georgian Stock Market. Still transitioning after its break from the Soviet Union nearly a decade prior, remnants of that system remained: the most visible effects manifested in semi-authoritarian leadership, corruption and institutional opaqueness. Reliable economic information was difficult to obtain, as every government organization had its own rendering of matters. Meanwhile, there was a dearth of independent NGOs to filter and impartially interpret state-provided data, which corresponded to a lack of trust. Understandably, business investment was sparse—total investment for 1999 was only 1.56 billion lari, according to IMF data. Investors feared consequences of paying high bribes and assuming higher risk for a product easily obtained in a more stable economy.

In June 2000, Georgia joined the World Trade Organization (WTO). This was perhaps the second major turning point for the Georgian economy (the first being the break from the Soviet Union). The WTO required specific tenents for membership, including a memorandum from the applicant country concerning all aspects of its trade and legal regime. Preparing an accountable balance sheet forced Georgian leadership to focus on the reality of Georgia's potential compared to the present status. Georgia's WTO membership was a positive step forward, and the Georgian market responded accordingly: GDP increased 4.7 percent between 2000 and 2001.


Following three years of growth, 2003 ushered in political change that caused the market to flail in uncertainty. The Rose Revolution was not an economic event, but the people's frustration over disputed parliamentary elections mirrored economic undertones of corruption and cronyism. The Rose Revolution represented not only an official political platform shift, but also an establishment of checks and balances via the rise of non-governmental organizations. In 2003, the Rose Revolution brought in a president who promised to end corruption and raise foreign direct investment. It also ushered in new watchdog NGOs that promised to monitor those promises by establishing a credible civil society.

Despite the populist movement that swept Saakashvili and his UNM party to power in 2003, GDP didn't leap with faith. It held steady, but waited to see what the new leader would bring. For five years he implemented anti-corruption measures, an increase in western relations, and a cooling-off of Russian relations. In 2006, Russia struck a blow to the Georgian economy by placing an embargo on Georgian wine and mineral water—key exports to a key partner for the Georgian economy. In 2008, the coolness escalated to a deep-freeze when of tensions over breakaway regions Abkhazia and South Ossetia resulted in a five-day war between the two countries. Russia tactically hit vital transport routes, bombing train lines and tunnels. The cease-fire saved Georgia from further physical damage, but the psychological damage was irrefutable. The GDP change between 2008 and 2009 marked the only negative one in this 15-year span: -3.776 per cent. Foreign direct investment that had been so well cultivated by Saakashvili's liberal policies tanked, and in 2009, total investment was a mere 13.14 percent of the GDP.

Georgia broke the malaise through Association Agreement negotiations with the EU. Like the WTO accession, negotiations included specific policy requirements implemented on a strict time line. These requirements were marked by a call for transparency in business and the rule of law. In 2012 and 2013, despite a power shift from UNM to Georgian Dream, the market remained relatively unchanged. This could be attributed to two features (1) the political agenda and pro-EU stance of Georgian Dream did not fundamentally diverge from the platform of UNM; (2) both the parliamentary and presidential elections were peaceful, thereby showing Georgia's success as a transitioning democracy. These factors contributed to Georgia's Association Agreement negotiations, was reflected in continued growth of the Georgian market and diversifying its future political ambitions. In 2013, Georgia went on to complete its DCFTA and initial its Association Agreement.

Georgia now stands at another decisive moment. The road ahead is replete with obstacles, both internal and external. The trend between political events and the market has weighty implications for the direction Georgian leadership wants to take the country over next 15 years. If Georgia's trade agreement with the EU is successful, the market will adjust favorably to available opportunities. Currently, Georgia is on the right track: following the slump after the Russo-Georgian war, the economy is now an attractive venue for investors and responsive to its citizenry. Georgia has found trading alternatives to Russia, rebuilt its bombed-out transportation routes, and forged new friendships. It has remained a stable democracy with healthy opposition.

Moments of weakness in Georgia's economy manifest its growing pains—moments when the economy took a step back to allow prevailing policy a few steps forward. And, while stakeholders show confidence in Georgian investment, Georgia has shown confidence in self-investment. Largely, those investments have paid off. WTO membership led to GDP and investment growth; the Rose Revolution brought about progressive change and liberal policies to garner an uptick in foreign direct investment; the economy even recovered after holding ground in the 2008 Russo-Georgian War. Like in wine-making, Georgia has found its strength in both staying the course and using its unique past as a lens for its future.

Now for the real test: So far, the overwhelming majority of economic changes have been Georgian policies created by Georgian politicians elected by Georgian people. Not part of any higher framework. Not mandated. There are neither carrots nor sticks. That is about to change. Part of Georgia's EU-aspirations, require implementation of market and political reforms that may not be as palatable as previous Georgian-born reforms. This will create changes driven by both Georgia and outside actors, sometimes in cooperation, and other times not. This presents an opportunity for Georgian leadership to show its compatibility with outside actors, but it also presents a challenge for Georgian leadership if the reforms (or practical ramifications) were to flop. Resentment could fall on both the EU—which up to now has been an aspirational goal—or on the pro-western politicians of Georgia. Georgian leaders have proven they are ready to lead: the soundest investment one can make is in the idea that they will stay the course.

Cordelia Ponczek is a researcher based in Warsaw. Previously, she taught in Georgia, where she was stationed outside of Zugdidi and later in Batumi. She earned her B.A. in Political Science at Miami University in Ohio, USA.

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