georgia aid for trade needs assessment

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Ad or Trade Needs Assessment Georga

T H DAprl

United Nations Development Programme


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All rights reserved. No part o this publication may be reproduced, stored in a retrieval system or trans-

mitted, in any orm or by any means, electronic, mechanical, photocopying, recording or otherwise,without prior permission.

This is an independent publication commissioned by UNDP. The views expressed in this publication

are those o the author(s) and do not necessarily represent those o the United Nations, including

UNDP, or their Member States.

ISBN 978-92-95092-25-9

Copyright UNDP 11

All rights reserved

UNDP Regional Bureau or Europe and the Commonwealth o Independent States

The Aid or Trade agenda is one o the most important development-related outcomes o the

WTO Ministerial Conerence in Hong Kong. It targets developing countries through strengthening

their productive capacities, trade-related inrastructures and ability to compete in regional and global

markets. Trade plays an important role in development, although the relationship b etween trade and

human development is not automatic. In order to be inclusive, trade has to be set in a human devel-

opment ramework. It needs to be conceived as a tool to expand the abilities and choices o people.

The Aid or Trade initiative covers the ollowing categories:

Trade policies and regulations;

trade development;

developing productive capacities;

trade related adjustment;

other trade-related needs.

UNDP's regional Aid or Trade projectWider Europe: Aid or Trade or Central Asia, South

Caucasus and Western CIS, nanced in the context o Finl and's Wider Europe Initiative, ocuses on

the identication o capacity gaps and technical assistance needs both at the national and sub-regionallevel in Central Asia, the South Caucasus and Western CIS and support o economic development in

the areas located along the selected transport corridors, helping small entrepreneurs to gain rom

new trade opportunities.

The Wider Europe Initiative is Finland's harmonised regional development ramework. The

initiative targets the ollowing themes: security, trade and development, inormation society develop-

ment, energy and the environment and social sustainability. The ramework includes three regional

cooperation programmes in Eastern Europe (Belarus, Moldova and Ukraine), the South Caucasus

(Armenia, Azerbaijan and Georgia) and Central Asia (Kazakhstan, Kyrgyzstan, Tajikistan, Turkmeni-

stan and Uzbekistan).

The Needs Assessments produced under the Aid or Trade project orm part o a long-term vision

o developing trade capacities, which will benet human development in the region. The recommen-

dations presented are expected to constitute the basis or a second phase (1113), ocusing on the

implementation o the recommendations developed in the national and regional Needs Assessments.


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I am pleased to present this public ation on the assessment o the needs o trade development in Georgia and

recommendations or policy makers on the wide range o the policy options or urther acilitating access oentrepreneurs to local and oreign markets or goods and services.

I would like to mention that this initiative is an integral part o the regional Aid or Trade project under 'Wider

Europe: Aid or Trade or Central Asia, South Caucasus and Western CIS' which covers Central Asia, the South

Caucasus and Western CIS.

I strongly believe, that UNDP supported coordinated action o the national stakeholders rom these countries

which, on the one hand ace similar development challenges and, on the one other hand, have rather di-

erent opportunities and development needs, will result in ormulation and implementing o eective trade

development policy.

I would like to express our gratitude and appreciation or the support provided by the Government o Fin-

land through the Wider Europe instrument, the team o Aid or Trade project rom UNDP Bratisl ava Regional

Oce or Europe and CIS who successully manage th is project and the team o the authors who applied their

knowledge and took into consideration the opinions o the national stakeholders and experts.

I hope that this publication will acilitate the dialogue and cooperation among the public and private sector,

as well as, independent researchers and experts or developing the policy which makes the trade to work

better or development.

Jamie McGoldrickUNDP Resident Representative in Georgia

T P

Authors

Mikheil Tokmazishvili

George Berulava

Advisory group

Jacek Cukrowski

Kim Boermans

George Nanobashvili

Ak

We extend specal thanks to the Government o Fnland, whose generous contrbutons n the context

o the W E: A T C A, S C W CIS ntatve made

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T C

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1.1. Overvew o the developments n the economy beore the rose revoluton

1.2. Analyss o the nsttutonal reorms ater the rose revoluton

1.3. Analyss o recent trends n the Georgan economy

1.4. Socal envronment and human development challenges

1.5. Recent developments n the educaton sector

1.6. The healthcare sector n Georga

2. T

.. Revew o oregn trade relatons

.. Trade polcy and human development relatons

.. Investment polcy

3. O

3.1. Insttutonal eorts and obstacles to promote trade

3.2. Inrastructure to promote trade

4. I

4.1. Agrculture and ood ndustry

4.2. Wne sector

C

Acton Matrx

Reerences

Appendx

8

11

12

12

14

18

23

29

31

33

33

35

47

46

46

48

53

53

58

64

68

70

74

A

BSEC Black Sea Economc Cooperaton

CAB Conormty Assessment Body

EA European co-operaton or Accredtaton

EaP Eastern Partnershp Intatve

ENP European Neghbourhood Polcy

EU European Unon

FAOSTAT Food and Agrculture Organzaton o the Unted Natons Statstcs

FTA Free Trade Agreement

FDI Foregn Drect Investment

FIZ Free Industral Zones

GAC Georgan Accredtaton Centre

GSP Generalzed System o PreerencesGNIA Georgan Natonal Investment Agency

ILAC Internatonal Laboratory Accredtaton Cooperaton

ILO Internatonal labour Organzaton

IMF Internatonal Monetary Fund

IT Inormatonal Technologes

MoA Mnstry o Agrculture

MoFA Mnstry o Foregn Aars

MoED Mnstry o Economc Development

MFN Most Favourable Naton

PCA Partnershp and Cooperaton Agreement

SDS State Department or Statstcs

SME Small and Medum Enterprses

TBT Techncal Barrers to Trade

TIFA Trade and Investment Framework Agreement

WB World Bank

WTO World Trade Organzaton


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E S

The Georgian Government undertook a very ambitious institu tional and business reorm programme

ater the rose revolution in 3. The elimination and simplicat ion o business regulations boosted

the country's competitiveness and acilitated international trade. Business reorms were accompanied

by signicant capital infows and GDP growth. Georgia became the top reormer country in the world,

which allowed it to maintain economic growth during the global nancial crisis and demonstrated

resilience ater the Russia-Georgian army confict in .

Though improving the business climate had a positive infuence on the increase in gross output,

the growth in Georgia has mainly been macroeconomic, and was associated with excess absorption

and credit expansion, and oreign investment mainly in non-tradable sectors.

Study revealed that at the quality o economic growth has remained low with respect to social

sustainability and innovations. In particular, economic growth was not related to innovations and

investment in high-technology industries which would increase employment and equity in income

distribution.

Economic reorms reduced bureaucratic obstacles, making it possible or businesses to expandtheir operations, create new jobs and increase employment and output. At the same time business

climate reorms have had little eect on small and medium-sized business and the sectors sensitive

to trade, like agriculture, which remains to be the largest employer. The share o small and medium

businesses has not undergone signicant changes in the recent period and the agriculture sector

demonstrates low levels o investment and poor trade perormance, due to political, institutional

and human capital obstacles.

During the course o 6, Russia, Georgia's main trading partner, imposed a series o trade and

transit barriers on products rom Georgia. This contributed to a sharp slowdown in export growth,

especially in the agro-ood sector. Georgia lost his main agro ood market and reorientation to EU

markets was not easy because o the low competitiveness o Georgian enterprises.

Moreover, the result o analysis o the oreign trade relations o Georgia show that trade liberali-

zation eorts stimulated export, but in act, exporters largely haven't been able to make use o the

international trade preerences. Business reorms have to be supported with adequate measurements

in the eld o human resources in order to promote and intensiy oreign trade and stimulate exporters'

prot growth rom the ease o doing business.

The study nds that the reduction o inequality, poverty and unemployment rates and promotion

o job creation in the private sector is still an urgent necessity or Georgia, without which attaining

social cohesion and, consequently, ensuring economic development will not be easible. An impor-

tant way to deal with this issue is attaining high productivity levels in sectors employing large shares

o workers through the elaboration and implementation o development strategies oriented towards

ecient restructuring and upgrading o human capital.

The circumstances under which Georgian enterprises were compelled to diversiy export routes

have revealed a need to improve the skills and knowledge o the labour orce, technology, inrastruc-ture and logistics o organizations.

It is emphasized that in parallel with preparing Georgia's government strategy and programme o

TBT (Technical Barriers or Trade) in the ramework o preliminary negotiations with FTA (Free Trade

Agreement), there is a need to improve trade service institutions on the legislative level.

The study's emphasis on one o main sector o economy o Georgia, shows that the increase o

employment in Georgia is related mainly to activities in the agricultural sector and business climate

reorms. Agriculture production needs support and readjustment in order to increase the export capaci-

ties o Georgian agriculture entrepreneurs and nd ways to improve its competitiveness.

Examination o the Georgian wine industry reveals a need or specialists and adequate scientic

knowledge, training o high-qualied wine and vine specialists; improving educational capacities;

supporting scientic and research activities; establishment o market inormation and intelligence

system, a dierentiation strategy ocused on creation o strong brand awareness. The introduction

o a special support programme in such areas as mechanization, use o ertilizers and irrigation,

agriculture management practices, organization, providing quality and saety controls will enhance

the eciency o arms and improve the trade capacity that was badly hit by the introduction o the

Russian embargo, as it was Georgia's main trade partner.

The results show that trade liberalization will be benecial or the agricultural markets due to

positive welare eects and that urther support o SME and entrepreneurship in key sectors should be

considered by policy makers. The enhancement o trade competition prociency should be promoted,

on the one hand, through building up institutional mechanisms by the government, and, on the

other hand, through partnership relationships and joint eorts o private companies. To ensure long

term economic development, and stable growth rates, the social impact o growth must be improved,

alongside the elimination o barriers or producers who want to produce or export.

The recommendations cover several groups o proposals: institutional changes, organizational

measurements, directions o partnership relations including with government and sel-government

bodies, possible schemes o reducing risks and nancial instruments development.

Key priority areas are presented in the Action Matrix, which covers such components as support to

the Government o Georgia in national trade policy-making development and increasing coordinationbetween state institutions; strengthening inormation, research and training in support o trade policy

making; strengthening the capacity o public and private trade development institutions, improving

the Georgian Accreditation centre (GAC) and sanitary and phytosanitary (SPS) capacity; improving

trade promotion services; improving access to credits and insurance; improving transportation and

logistics; promoting Georgian wine export and sector development (establishing and promoting Brand

Georgian Wine (BGW) at global markets); increasing resources or agricultural and agro-ood research;

establishing agricultural and agro-ood extension services and vocational education in agriculture

and manuacturing. All these issues are crucial or Georgia and are subjects o discussion within the

government o Georgia and with international donors.

trade and human developmentaid or tr ade nee ds a sse ssme nt g eor gia

8 9


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I

Georgia, a small, strategically located middle-income country o 4. million people in the South Cauca-

sus, had an estimated per capita income o USD ,414 in , over .6 times its level at the beginning o

the review period in 3, when sustained growth resumed ollowing many years o economic decline.

Ater independence in 11, Georgia started a transition period with low level o income, slender

scal resources, and weak institutional and administrative capacity as a legacy o the communist

period. With the breakdown o communism, social protection system, social inrastructure and labour

markets collapsed. Intensication o economic and social problems was conditioned by internal wars,

civil conficts and closure or blockage o trade routes. The wars in 1113 in the South Ossetian

and Abkhazian autonomous republics were ollowed by migration, economic disruption and decline.

In the mid-1s the Georgian authorities achieved macroeconomic stability through implement-

ing a stabilization programme.

The Georgian economy received new stimulus ollowing the rose revolution in November 3.

The Government undertook a very ambitious reorm programme which enhanced macroeconomic

stability and ensured stable rates o real GDP growth.At present on-going reorms are conducive to human development needs. Georgia has just started

reorming its trade policy, arrangements, regulations and inrastructure aiming at improving the mac-

roeconomic and business environment. At the same time Georgia is working on a ree trade agreement

with EU that could be a driving orce or the advancement o deep and better integration in the region.

It has access to EU markets included in GSP+, but related institutional, inrastructural, inorma-

tional, human capital and technological diculties still weigh down exports o Georgian products

and implantation in EU markets.

The overall goal o this report is to help the government to design coherent plans or improving

trade policy, regulations, inrastructure and human development measurements through determining

trade-related needs and priorities within the context o economic development and poverty reduc-

tion strategies, to actively involve all stakeholders, including business associations and civil society,

in the transormation o the macroeconomic and business environment and adjustment o human

development processes, to emphasise the spheres where donors technical assistance and sponsor-

ship are necessary.

This report seeks to help Georgia build supply-side capacity and trade-related inrastructure

so that it can benet rom trade agreements and enhance the contribution o trade to development.

The paper provides an economic and institutional analysis o the country and oers policy advice

rom the point o view o improving o spheres related to trade and the wellbeing o the population.

Recent developments in the Georgian economy are discussed in more detail. In particular, the rst

chapteranalyses macroeconomic and business environment eatures o Georgia beore and ater the

rose revolution. Much attention is given to discussion o the impact o the global nancial crisis and

the war with Russia on the economy o Georgia. The chapter contains a review o social environment

and human development challenges.The second chapter contains a review o oreign trade relations, development o regional trade

issues and current investment policies. It includes a brie description o tari and non-tari policies,

custom and trade procedures, the impact o international conventions and arrangements on trade

perormance and human development o the country, investment perormance and investments' impact

on promotion o trade and human development.

Chapter three presents opportunities to urther promotion o trade. It sets out technical regula-

tions aecting trade, characterizes standards, certication, testing, sanitary and phytosanitary meas-

ures; considers inrastructure services, institutions and barriers to trade. At the end o the chapter a

SWOT analysis o trade and the investment environment is given.

Chapter our Analysis o human development in sensitive sectors explores the prospects o

the agriculture and ood sectors in Georgia in terms o trade expansion and human development,

highlights trade capacity constraints and overcoming trade barriers in the sector o wine and spirits.

At the end, the paper outlines conclusions and recommendations and sets out matrix o action

or urther development o trade and human development.


10 11


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. M

.. O

In Georgia the process o transition rom the Soviet system to the market economy was accompa-

nied, as was the case in many other post-communist countries, by substantial diculties. Georgia

experienced signicant problems stemming rom political instability caused by armed conficts in

separatist regions and civil war, and problems related to the transition to a ree market economy.

The economic situation in Georgia became rather unstable. This was refected in a reduction in

personal incomes, hyperinfation o the national currency, and a serious drop in industrial and

agricultural production.

According to ocial data, the output in 14 declined 3 per cent compared to 1. Monthly

consumer price infation in coupon (national currency at the time) terms averaged 6 per cent

per month in 1314. From 1 to 14, ocial data indicated that employment declined by onethird. The administrative capacity o the Government and its ability to conduct relevant economic

policy also deteriorated.

In 14, the Georgian authorities began to cooperate closely with the IMF and the World Bank

to address Georgia's massive economic problems by implementing a programme o stabilization and

structural reorm. These anti-crisis, large-scale economic reorms encompassed the entire range o

the Georgian economy: restructuring the monetary policy and the banking system, acceleration o

privatization, price liberalization, transormation o the scal system, liberalization o oreign trade,

development o revenue system and an appropriate legal ramework, etc. The implementation o

these reorms allowed or dramatic improvement o the situation within a relatively short period o

time. Georgia's GDP grew rapidly, and in 1, GDP growth reached 11 per cent. Moreover, by that time

relative political stability was achieved and a new constitution was adopted.

The progress in curbing infation has b een particularly impressive. Average monthly infation ell

rom the hyperinfationary level o per cent in 1 (end-o-period basis) to per cent in 1. Unor-

tunately, the period o economic revival was very short. Double-digit real output growth and decline

in infation continued until 1. Due to the crisis in Russia and droughts in 1 and , as well

as severe energy supply problems and underlying structural problems, the GDP growth decreased to

3 per cent in 1, and the infation rate grew and remained at over per cent during much o 1.

Until 3 the economy o Georgia was expanding at a moderate 3 to 3. per cent growth rate. In

13, infation rate was about 4 to per cent, refecting a restrictive monetary policy, a more

stable exchange rate, and the absence o demand-side pressures. Both the government and market

institutions remained underdeveloped. It's worth noting that in 3 the Georgian economy was one

third the size it was in 1.1

The low rate o economic growth was accompanied by an enormous trade decit, which widenedespecially in 16 and 1, refecting higher rates o import growth than that o export. Despite the

reversed tendency in the next ew years until 3, the Georgian economy became an import-oriented

country. Capital account was weak, refecting lower loan disbursements osetting oreign direct invest-

ment. The infow o oreign direct investment (FDI) in 161 was related to the construction o

the BakuSupsa oil pipeline. Moreover, Georgia had incurred a huge external debt o almost o per

cent o GDP in 14. Georgia's ability to pay its obligations was very low. At the end o the total

stock o external debt reached 3 per cent o GDP. Debt sustainability remained a serious concern.

The weak export capacity o Georgia was aggravated by the repeated fuctuation o the national

currency (GEL) exchange rate. The Russian crisis in 1 and Georgia's weak scal position caused

large scale depreciation o the currency. The GEL depreciated moderately in early 1, ollowing the

crisis in Turkey. The Russian crisis and the loss o condence in nancial markets put a signicant

strain on the banking system, but a ull-scale crisis in the banking system and debt was averted.

1 Source: National Statistics Oce o Georgia. Available rom www.geostat.ge.

By adopting a strict monetary policy and allowing the GEL to depreciate, the Georgian authori-

ties handled the crisis. This crisis, however, revealed the act that despite all the achievements in

macroeconomic stabilization process, the Georgian economic system remained ragile and vulnerable

in the ace o external shocks and new stimulus or its enhancement were badly needed.

In 13 the revenues o the State budget accounted only or 111 per cent o GDP. Such

situation in the scal sphere did not allow the country to launch the relevant social programmes and

develop basic inrastructure. The high level o corruption only worsened the situation.

Social lie and human developmenttendencies adequately refected the weakness o the mac-

roeconomic development area. Ater the short-lived revival o the economy in 1 to 1, the social

indicators worsened and ater recovering rom the recession in 1 until 3 the low level o living

standards remained almost unchangeable.

The majority o the employed population was engaged in low-paying and insecure segments o

the labour market and subject to poor working conditions. Most jobs were created in the inormal

sector, a major provider o urban jobs, and in the low-productive agricultural sector; many o these

were part-time or temporary jobs, oering extremely low remuneration and insucient to improve the

household budget situation. Inormal activities, which were mostly a way o surviving, were largely

unrecognized, unrecorded and unregulated small-scale activities, many o which were irregular sel-employment. Moreover, there was a substantial shit o employment rom the industry sector to the

agriculture sector. As a result, the low-productive agriculture sector had become one o the main

sources o employment.

The ocial unemployment rate reached as high as 14 per cent and sel-employers accounted or

per cent in total labour orce. Almost per cent o the total number o those unemployed was

concentrated in cities. This strengthened the intensication o regional distribution o added value

and transers, increased the economic contrast between city and village, and n egatively aected both

donors employed in cities and recipients living in villages. Inequality deepened not only between

cities and villages but between small and big towns. This development was rooted in dierent employ-

ment structures.

In this period average salaries were still very low and the worst situation was in budgetary

organizations. Generally, average wages amounted to 6 per cent o the minimum cost o living.

The wages even decreased in real terms during this period. Many public sector employees were paid

only token salaries, cases o non-payment o salaries were widespread, arrears in the payment o

budgetary employees' salaries persisted and the growth in salaries was eroded by infation.

In 13 the national pension decreased rom 1 to USD. Expenditures on pensions dropped

to 3.1 per cent o GDP and internal debt (on pensions and salaries) grew to 6 million USD.

There was an extremely high poverty rate in rural areas. Poverty in rural areas was conditioned

by low labour productivity and low level o education. 3

To summarize, during the period o 163 along with moderate economic growth the total

number o employed persons was decreasing. The number o employed people ell by 1 per cent

while the GDP increased . old. Poverty became the most serious issue in Georgia. For this reason

Economic Development and Poverty Reduction Strategic Plan (Programme) was prepared by aGeorgian governmental commission. This was a strategic statement aiming to overcome the crisis and

ensure uture development. Though the programme was approved its implementation was destined to

ail. During that period th e political authority and government, were inc apable o combating poverty,

because the government had limited capacity to implement its own decisions and decrees.

Extreme poverty and economic stagnation were some o the causes o the rose revolution in

November 3. The new government initiated radical changes in the social, political, and institutional

elds. A corresponding change ollowed then in the country's economic and social lie.

This does not include the rural population, which represents hal o the total population. Under Georgian law, armers who

own up to . hectares o land are not counted as unemployed. The average annual income o these armers was EUR 1

and at least two out o three armers were unemployed; armers constituted the poorest section o the Georgian society.

3 Ater the rst agricultural census in Georgia (), it was revealed that only 11 per cent o persons on the Managerial

position in agrarian sector have high and middle proessional education. (Source: http://www.geostat.ge/cms/site_im-

ages/_les/georgian/agriculture/census/1percentzogadi.pd)


12 13


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.2. A

Starting in 4, the new Government implemented radical social, political and institutional changes.

The main goals o the new administration included establishing scal discipline, restoring the legal

basis o the economy, reducing the scale o th e shadow economy, and simpliying regulations through

the introduction o new laws on business. These changes have aected the economic and social lie

in the country.

The rst step taken by the Government was civil service reorm, ocused on eliminating redundant

agencies and a signicant reallocation o personnel. Governmental agencies were restructured with

the aim o reducing bureaucracy and increasing both the eciency o government ocials and their

remuneration. At the same time, the number o institutions regulating, controlling and inspecting

the private sector was decreased.

The Government started an eective ght against corruption, exemplied in the reorm o the

trac police and the expedited creation o a Western-style patrol police orce. As a consequence, the

practice o bribery across the country's roads and highways was eectively eliminated.

International surveys (BEEPS, Doing Business) conrm that concerns over bribery decreased con-

siderably. These surveys indicate a substantial decrease in unocial payments as well as time spentin dealing with public ocials over interpretation o laws and regulations. The number o controlling

and inspecting state institutions was reduced drastically. Substantial deregulation was achieved in

Georgia, according to these surveys.

Georgia's ranking in Transparency International's Corruption Perceptions Index (CPI) which

analyses the degree to which corruption is perceived to exist among public ocials and politicians

has steadily improved in recent years, albeit rom a very low level. In , t he country ranked 13

out o 1 countries in its level o corruption. In , Georgia ranked 66th out o 1 countries. 4 The

hard-edged ght against corruption aected the lives o people in Georgia and their attitudes toward

the Government. According to the 1 Global Corruption Barometer (GCB) Georgia received the highest

rates in the world in terms o the decrease o the level o corruption, with % o the surveyed claim-

ing the corruption level has decreased a lot or decreased in the past three years. In terms o public

perception o eectiveness o Government actions in the ght against corruption, Georgia ranks the

nd in the world with per cent o Tbilisi's residents stating that the Georgian Government has been

eective or extremely eective in ghting corruption. These are the highest rates among 6 surveyed

countries around the world.

Georgia is also placed in the least corrupt group o countries. Only 3% o surveyed said that they

have paid a bribe within th e last 1 months. This score is even lower than the s ame average score or

the EU and North America which is %.

The ght against corruption and the implementation o institutional reorms helped to establish

nancial order in the country, and to yield signicant increases in tax revenues and, as a consequence,to overcome the budgetary crisis.

Privatization. Ater the rose revolution a new strategy o privatization was declared with th e aim

to push orward the reorm process in Georgia. As a result, approximately 1, enterprises, including

small, medium, large as well as strategic entities were designated or privatization by the government.

The list o enterprises subjected to privatization included key metallurgy, aviation, communication,

transport acilities and utilities. The new reormers took into account the diculties t hat the Georgian

Government aced at the rst phase during medium and large scale enterprises (MLE) privatization,

and assumed implementation o preliminary restructuring and liquidation/bankruptcy procedures or

privatized enterprises. This strategy allows or increasing the attractiveness o privatized enterprises or

oreign investors. As it shows in gure 1, which illustrates the dynamics o privatization and incomes

rom property sales, ater the rose revolution privatization was pursued mainly or pragmatic goals:

4 Source: Transparency International. Available rom http://www.transparency.org/policy_research/surveys_indices/

cpi//cpi__table.

http://transparency.org/policy_research/surveys_indices/gcb/1

higher budget revenues, better investment plans and more ecient use o assets. For instance, income

rom privatization or the period 4 alone exceeds the income generated during all previous

years (Appendix, Figure 1).

Business environment reorms in Georgia. Since November 3 considerable eorts have been

made to improve the business environment in the country. These reorms received high assessments

rom international organizations. One meaningul indicator o the progress in the reorm o the busi-

ness environment can be cons idered the high rankings that Georgia received recently rom the World

Bank/IFC. In particular, according to World Bank's Doing Business report , Georgia moved rom

11 to 3th position in 1-country ranking, receiving the status o the most improved country o the

world.6 The next year, according to World Bank's Doing Business report , Georgia has advanced

to 1th position. During the last year Georgia advanced by one rank and has moved to 1th position

according to Doing Business 11 report (Table 1).

table . ease o doing business in georgia, 22

EasE of... Doing BusinEss2011 rankDoing BusinEss

2010 rank ChangE in rank

Dong Busness 12 13 +1Startng a Busness 5 5 2

Dealng wth Constructon Permts 7 9 0

Regsterng Property 2 2 0

Gettng Credt 15 30 +15

Protectng Investors 20 41 +21

Payng Taxes 61 61 0

Tradng Across Borders 35 31 4

Enorcng Contracts 41 41 0

Closng a Busness 105 96 9

Source: Dong o Busness : Makng a Derence or Entrepreneurs.

Avalable rom http://www.dongbusness.org/reports/dong-busness/dong-busness-.

Analysis o the data in Table 1, which refects the main changes that took place in the Georgian

business environment during the last two years, shows that the country improved its position in the

ollowing areas: getting credit, protecting investors. With regard to registering property, paying taxes,

dealing with construction permits, and enorcing contracts, the position o the country remained

unchanged. Georgia's position worsened in the ollowing areas: starting a business, trading across

borders, closing a business. It should be mentioned that closing business and paying taxes are Geor-

gia's weakest positions in this ranking.

A radical improvement o the legislation was the initial step or improving the business environ-

ment in Georgia. These changes were created ater the introduction o the new tax code in January

. The old system o taxation, which came into orce in 1, imposed an excessively high taxburden on entrepreneurs and was dicult to administer due to many loopholes and possibilities o

dual interpretation. All these actors, together with the poor administration o tax collection agen-

cies, encouraged entrepreneurs to bribe tax ocials and/or move to the shadow economy rather than

pay taxes. Large numbers o exemptions, allowances and deductions in the old tax code created an

unavourable environment or competition.

The new Tax Code (in ) has considerably simplied taxes. The code eliminated 1 out o 1

taxes, the time to register property decreased by per cent and the cost by per cent. The scal

burden on entrepreneurs was reduced.

At the same time, the tax collection practice was improved. These changes enabled the Government

to increase tax collection and, consequently, state budget revenues; the tax-to-GDP ratio grew rom

14. per cent in to . per cent in . In the per cent social tax payable by employers

6 Doing Business. Measuring Business Regulations. Available rom http://www.doingbusiness.org/ExploreEconomies/?eco

nomyid=4#StartingBusiness.

Doing Busi ness in 6.WB&IFC, p. 1.


14 15
http://www.doingbusiness.org/ExploreEconomies/?economyid=74#StartingBusiness#StartingBusinesshttp://www.doingbusiness.org/ExploreEconomies/?economyid=74#DealingLicenses#DealingLicenseshttp://www.doingbusiness.org/ExploreEconomies/?economyid=74#RegisteringProperty#RegisteringPropertyhttp://www.doingbusiness.org/ExploreEconomies/?economyid=74#GettingCredit#GettingCredithttp://www.doingbusiness.org/ExploreEconomies/?economyid=74#ProtectingInvestors#ProtectingInvestorshttp://www.doingbusiness.org/ExploreEconomies/?economyid=74#PayingTaxes#PayingTaxeshttp://www.doingbusiness.org/ExploreEconomies/?economyid=74#TradingAcrossBorders#TradingAcrossBordershttp://www.doingbusiness.org/ExploreEconomies/?economyid=74#EnforcingContracts#EnforcingContractshttp://www.doingbusiness.org/ExploreEconomies/?economyid=74#ClosingBusiness#ClosingBusinesshttp://www.doingbusiness.org/ExploreEconomies/?economyid=74#ClosingBusiness#ClosingBusinesshttp://www.doingbusiness.org/ExploreEconomies/?economyid=74#EnforcingContracts#EnforcingContractshttp://www.doingbusiness.org/ExploreEconomies/?economyid=74#TradingAcrossBorders#TradingAcrossBordershttp://www.doingbusiness.org/ExploreEconomies/?economyid=74#PayingTaxes#PayingTaxeshttp://www.doingbusiness.org/ExploreEconomies/?economyid=74#ProtectingInvestors#ProtectingInvestorshttp://www.doingbusiness.org/ExploreEconomies/?economyid=74#GettingCredit#GettingCredithttp://www.doingbusiness.org/ExploreEconomies/?economyid=74#RegisteringProperty#RegisteringPropertyhttp://www.doingbusiness.org/ExploreEconomies/?economyid=74#DealingLicenses#DealingLicenseshttp://www.doingbusiness.org/ExploreEconomies/?economyid=74#StartingBusiness#StartingBusiness


10/47

was abolished while income tax was increased rom 1 per cent to per cent with the adoption o a

schedule o its gradual decrease down to 1 per cent or 13

The main dimensions o tax reorms can be summarized as ollows:

Introduction o an upper limit o taxable turnover required or mandatory registration o a VAT

payer o 1, GEL;

Abolishment o the minimum level o taxable turnover required or voluntary registration;

In order to encourage air competition, the list o commodities and services exempt rom VAT

was reduced signicantly. A VAT reunds scheme was introduced. The Code envisaged zero

VAT rating or the export o commodities. The zero rating also extends to transportation and

other services immediately relating to the international transportation o cargo and passengers,

tourist services provided by tour operators or oreign tourists on the territory o Georgia and

the rehabilitation o xed assets in Georgian territory, conducted by oreign enterprises.

The Government introduced the New Tax Code on 1 January 11. The main priorities o the new

tax system are to create a better business environment, provide more protection or entrepreneurs and

eliminate existing gaps in interactions b etween the authorities and business. To attain these objectives

a new classication o b usinesses and a new position taxpayers' ombudsman were introduced inthe New Tax Code.

In particular, the new classication o businesses in Georgia denes: micro, small, medium and

large businesses. Micro-businesses comprise individual enterprises with no employees and with an

annual turnover below GEL 3,. These businesses are exempted rom tax payments. Small busi-

nesses, which are represented by entities with annual turnover o GEL , or less, pay only 3%

o turnover taxes.

The New Tax Code also includes several new regulations and principles with the aim to acilitate

doing business in Georgia. Specically:

According to the Good Faith principle, a taxpayer might be reed rom paying a sanction i

the action o the taxpayer is caused by mistake or ignorance rather than by deliberate tax

avoidance.

To motivate honest payers and to provide additional services and privileges, the Revenue

Service introduces the Honest payer principle.

Taxpayers are given the right to make in advance agreements with the Revenue Service on

terms o taxation.

A Private Tax Agent institution is introduced with aim to deend the taxpayers' rights in the

Revenue Service, and to provide them consultation and support in ullling tax liabilities.

To improve services or clients a number o electronic services (electronic declarations, cashboxes

with a GPRS system, web portal o The Revenue Service and etc.) were introduced.

The important novelty o the New Tax Code is the establishment o the institution o tax ombuds-

man. According to the law, the tax ombudsman provides annual reports on the situation regarding

the protection o taxpayers' rights to the nancial and budgetary committee. The main mission o thisinstitution is to present and deend the tax payers' rights, to restore abolished rights as well as to work

together with public and private sectors.

The customs reorms introduced in Georgia, which simplied procedures or importers and trade

partners, have proved successul. The new Customs Code, introduced in , replaced the previous

16 dierent types o duties with only three. The new duties are set at rates o zero, per cent and 1

per cent, whereas those they replaced ranged rom 1 per cent to per cent. Reducing the import-tax

base or agricultural goods and construction materials, as well as annulling import taxes or other

goods, has made Georgia much more competitive.

Other reorms have reduced the quantity o ocial licences and permits required or various busi-

ness activities, which had previously created barriers to market entry. In a new Law on Licensing

was adopted, as a result o which, o the previous total o licences and permits, only 1 remain.

http://www.nchannel.com/Main_News/Business/143_%E%%C6%_Economic_Growth_is_Expected_in_11_

in_Georgia%E%%D_-_Saakashvili/

Licensing procedures were rationalized and the time taken to issue licences reduced. Moreover, the

legal grounds or governmental intervention in businesses have been restricted.

Georgia sped up approvals or construction permits. The procedure or occupancy certicates was

simplied (abandoning the need or a special commission), and time limits shortened (rom 4 to 3

days. Water utility and electricity providers can now be approached as one administrative body, and

project documentation was made easier. As a result, the time needed to obtain construction licences

ell rom to days.

A new Labour Code was introduced in 6. It signicantly diminished rigidities in labour markets

and streamlined ring and hiring procedures, giving more reedom and fexibility to employers and

employees. The Labour Code also introduced regulations or new types o labour agreements that

allow the labour market players to benet more.

The amendments made to the Procedural Code or the courts, introduction o specialized com-

mercial sections o the courts and reorms o the appeals process lead to a decrease in the average

duration o simple commercial disputes resolution rom 3 to days.

Investor protections were strengthened, including through amendments to the securities law

that eliminated loopholes which had allowed corporate insiders to expropriate minority investors.

The amended securities law now provides a denition o interested parties in a transaction, andmakes such transactions contingent on supervisory board or shareholder approval. Companies must

disclose transaction inormation to the securities commission, as well as include it in the company's

annual report. The law also requires all conficts o interest to be disclosed to the supervisory board

and improves ways or judicial redress.

The new insolvency law, that was adopted last year, shortens timelines or reorganization o a

distressed company or disposition o a debtor's assets, thus ensuring a more productive use o debtors'

assets and an overall decrease in time.

Reorms implemented in the period rom 4 to made considerable strides in reversing

policies that had previously stifed private initiatives. Georgia's strategy was to establish a minimal

state, and was oriented around a policy o terminating any state regulatory activity that enabled cor-

ruption and increased bureaucracy. These reorms mainly concerned th e simplication o procedures

required or business registration, with an emphasis on reducing the costs o excessive economic and

administrative regulations.

All these institutional reorms have created a avourable environment or trade growth. FDI stimu-

lated a boom o entrepreneurial activity, which in turn supported real GDP growth. The number o

registered enterprises almost doubled during 4 period (Appendix, Figure ).

Despite the lowering o tax rates, the state budget indicators have radically improved. This allowed

the Government to initiate serious reorms in the social sphere, develop inrastructure and advance

human development dimensions, and to move towards sustainable and transparent reorientation o

budgetary expenditures in the areas o health, education and social protection. These actors c reated

a climate necessary or long term sustainable development.

At the same time, it is worth noting that despite the proound achievements in doing business,

the competitiveness o the national economy was still very low. According to the World EconomicForum rating, Georgia is in th place. These data suggest that in 1, among the 133 coun-

tries Georgia's ratings along main dimensions are as ollows: in terms o institutions and eciency o

inrastructure development rates nd position; the macroeconomic stability 11; health and primary

education ; in terms o higher education and vocational training 4; goods markets eciency

4; labour market eciency 1; nancial markets diculties ; technological readiness 1;

the market size 11; business development 113; innovations 11th position.

These gures refect the competence o optimal utilization o existing and potential resources,

including material and especially intellectu al capacity, increase productivity, and the country's other

relative advantages. It seems that institutional reorms were not enough to enhance the actual com-

petitiveness o businesses in Georgia.

The Global Competitiveness Report 1. World Economic Forum. Available rom http://www.weorum.org/

documents/GCR/index.html.


16 17


11/47

.3. A G

The ambitious reorm programme launched by the government ater the rose revolution resulted in

stable rates o real GDP growth, indicating that signicant advances were achieved in the process o

business environment reorm. This progress was tangible especially until the global nancial crisis

and armed confict with Russia in . Below we briefy discuss the recent developments according

to main sectors o the economy.

Real sector

In parallel with macroeconomic and institutional reorms, corruption and state involvement in the

economy were reduced drastically, the investment climate was improved, and the average annual rate

o GDP growth reached .3 per cent in 4 (Appendix, Table 1). In the second hal o the rate

o annual GDP growth declined sharply, to .3 per cent. This slowdown resulted rom the confict with

Russia in August , the continuing external threat, and the global nancial crisis.

However, beore the global nancial crisis Georgia experienced continuous growth in real GDP.

This economic expansion was supported mainly by continuous real growth o the industrial and

construction sectors, nancial services, transport and communication, hotels and restaurants, whileagriculture negatively contributed to GDP growth. (Table and Appendix, Table ). Ater the

crisis the slowdown was noted in practically all sectors.

table 2. indexes o real growth by main economic sectors, 232 (percentage)

inDiCator 2003 2004 2005 2006 2007 2008 2009*

Agrculture 100 92.1 103.2 91.1 94.1 89.9 83.8

Industry 100 103.42 114.5 132.2 152.0 151.7 148.0

Constructon 100 135.9 155.0 169.3 192.9 171.5 166.0

Trade 100 108.2 118.3 141.7 155.3 173.6 145.3

Transport andcommuncatons 100 107.1 118.2 137.7 152.2 149.4 167.9

Hotels andrestaurants 100 103.5 120.7 133.3 148.5 155.7 148.9

Source: Natonal Statstcs Oce o Georga,www.geostat.ge.

The economic growth resulted also rom a signicant increase in consumption (both private and

public) as well as investment. The composition o GDP shows that both consumption and investment

were increasing practically in the same proportion. However, the share o consumption in total GDP

exceeded the share o investments by almost three times in . In , the discrepancy between

consumption and investments shares aggravated urther as the investment levels ell below the 3level. According to data presented in Table 3 the reduction in investments was the main cause o the

all in GDP in . However, this all was to a small extent compensated by an increase in net exports.

table 3. gdp composition, 232 (million gel)

2003 2004 2005 2006 2007 2008 2009

P r va te co ns .* 6, 19 2. 6 71 94 .7 7 ,7 80 .2 10 ,8 55 .9 1 2, 01 4. 0 1 4, 65 9. 5 1 4, 67 5. 8

Governmentconsumpton 836.2 1379.1 2,014.0 2,116.0 3,717.9 4,936.3 4,399.5

Inv estmen t 2, 682. 3 3134.8 3,891.5 4, 255.3 5,447.5 4,951.6 2,342.9

Net exp ort 1,24 9.0 1,63 3.5 2,07 0.8 3,33 0.5 4,54 5.0 5,68 1.2 3,49 2.3

Statstcaldscrepancy 102.0 250.8 6.0 106.8 359.4 208.7 20.2

To tal GDP 8,564.1 9,824.3 11, 620.9 13,789.9 16, 993. 8 19,074.9 17, 948. 6

Source: Natonal Statstcs Oce o Georga,www.geostat.ge

*Includes consumpton o non-prot nsttutons servng households.

An important source o real GDP growth was continuous improvement o the eciency o theeconomy. In , labour productivity increased by almost . times and capital productivity by 1.

times, as compared to 3 (Figure 1).

igure . labour and capital productivity in georgia, 232

Source: Entrepreneurshp n Georga, . Natonal Statstcs Oce o Georga, www.geostat.ge

Sectors o economy

Agriculture has always been one o the key sectors o the Georgian economy. However, since 16 the

share o agriculture in GDP has been declining with each year. In , its share in GDP reached .4 per

cent as compared with .6 per cent in 3 (Appendix, Table ). In total, agricultural output, whichconsisted mainly o wheat, tobacco, vegetables, ruits and grapes, and tea, decreased substantially

(see more details in part 3).

Since the mid-s industry has grown substantially, with growth peaking, in real terms, at 14

per cent, in .1 However, aterwards the expansion o industry has slowed down. The share o GDP

attributed to the sector decreased rom 14. per cent in 3 to 1.1 per cent in . Mining, chemi-

cals, and ood-processing are the principal industrial sectors. The coal industry is well established as

well. Manganese and non-metallic minerals, mineral ertilizers, synthetic materials and bres, and

pharmaceutical products are the main export products.

Despite the strategic importance o the energy sector, its share in industrial output has decreased,

due to the rapid growth o other sectors. The Government works on acilitation o investment to improve

technical conditions o power stations and gas distribution networks.

1 National Statistics Oce o Georgia, www.geostat.ge


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12/47

In 3 positive growth rates were recorded in every sector o th e economy. The share oser-

vices (especially nancial) in GDP increased rapidly, representing almost one-hal o total GDP growth.

Trade is still one o the largest sectors, with more than 1.1 per cent share in GDP. The signicant

growth that the trade sector experienced in resulted mainly rom the increased retail trade in

uel, motorcars and spare parts.11 There was also an increase in the demand or manuactured ood

products, urniture and household appliances as well as in the wholesale motorcar trade. However, in

, the trade sector showed some decrease in the rate o growth as compared to the previous year.

The construction sector (o which pipeline construction only constitutes a small part) has also

been growing rapidly. However, in and the construction industry, one o the principal sec-

tors in which strong growth had been recorded, decreased its share in GDP to 6.4 and 6. per cent,

respectively.

The decline in the transport sector in was caused by a decrease in the volume o road and

rail cargo resulting rom the downturn in trade related to the impact o the economic crisis and

August war.

Banking sector and monetary policy

The growth in economic sectors has been largely supported by the rapid development o the bankingsector. Since 4, due to economic liberalization and an increase in FDI, commercial banks' assets,

deposits, and loans grew signicantly. Sound monetary policy and the revival o the banking sector

provided a strong platorm or high economic growth.

Restoration o macroeconomic stability and stable economic growth laid the oundation or sig-

nicant credit expansion (Appendix, Table 3). Since 3 the credit-to-GDP ratio increased almost

ourold, and reached 3.6 per cent by the end o . The rates o credit growth averaged 4. per

cent per year and peaked at 3. per cent in . In and credit rate grew respectively by

and 31 per cent. However, in due to the global nancial crisis, credit to GDP ratio shrunk by 14

per cent. Deposits remained the major source o credit boom during all this period. The deposits-to-

GDP ratio almost tripled during 3. Other channels o this credit boom have been borrowing

rom abroad (increasing oreign liabilities) and additional capital.

The credit expansion started with high lending rates and large dierences between loan and

deposit rates. By , the lending rate and the spread between loans and deposit interest rates slightly

decreased, but still remain at a relatively high level.

Between 3 and bank assets tripled, as had been the case in the 13 period. In

commercial bank assets amounted to 46. per cent o GDP.

According to data (Appendix, Table 4), construction and indust ry maintained their leading posi-

tion in the distribution o credit among the sectors o economy. However, during the 3 these

sectors experienced dierent trends. The share o construction in total credits increased by 1 percent-

age points, while the share o industry decreased by approximately 1 per cent. In the period ater the

crisis, the main tendencies in credit distribution were the increase in shares o industry, and transport

and communications sectors and the reduction o the share o construction sector o the total credit.

Agriculture still attracts a very small portion o investments, despite the act that this sector accountsor more than per cent o total employment.

Recent credit expansion and increased monetization levels can be considered a result o a catching-

up process rom low levels o nancial perormance. The increased supply o credit was matched by

increased demand, especially rom the private sector.

Ination represents a serious threat to economic growth. Infation began to increase in 4,

as the economic environment became more active and dynamic. In 3 the annual rate o GDP

growth averaged 4 per cent, and the average annual rate o infation was only 3. per cent. Public

expenditures also remained low. However, in 3 the average annual GDP growth comprised .6

per cent, which was more than twice as much as in 3, while the average annual rate o infa-

tion increased to 11.1 per cent, which was more than three times the level recorded in the 3

period. However, in , as a result o the slump in energy prices and recession, the ocial annual

infation rate was 3. per cent, the lowest level since the rose revolution.

11 Georgian Economic Trends. Quarterly Review, October , Georgian-European Policy and Legal Advice Centre.

Fiscal sector

One o the most impressive improvements in the 4 period was the growth o budgetary rev-

enues. Budgetary revenues increased sixold as compared to the 3 period. Total revenues

increased rom 1. per cent in 3 to 3. per cent in . This increase was driven mainly by

improved tax collection. Improvements o the administration in budget perormance also enabled the

country to cover the previously accumulated domestic debts and also to increase salaries and pensions.

Government debt during this period has been decreasing continuously rom 3. per cent to per cent

o GDP. The overall scal balance was positive during the period o 4 to (Appendix, Table ).

In the post crisis period, however, there was some worsening o the main scal indicators. Both total

revenues and tax revenues slightly decreased, while expenditures increased. As a result, there was a

scal decit, which in and comprised respectively and 6. per cent o GDP. The state debt

increased as compared to previous years.

External sector

In 3 the main developments in the external sector were: a continuing increase o the trade

balance decit and a deterioration o the current account balance; signicant infows o oreign

direct investments (including privatization receipts); growth o remittances and an increase in grossinternational reserves (Appendix, Table 6). The export o goods and services grew rom 3.3 per cent

o GDP in 3 to 44 per cent in , while imports almost doubled and comprised . per cent o

GDP in . Such developments led to a serious deterioration o trade and current account balance.

In the decit o the trade balance and the current account comprised respectively 4. per cent

and 34. per cent o GDP, as compared to 14. per cent and .6 per cent in 3.

Despite the increase in the current account decit, the exchange rate o the GEL had a strong ten-

dency to appreciate. The real eective exchange rate (REER) steadily increased during this entire period,

ater reaching its lowest point in 3. This increase was driven mainly by the strong appreciation o

bilateral real exchange rate (BRER) with the USD; at the same time it was weakened by depreciation o

BRER with the Russian rouble. The act is that substantial current account and trade decits have been

nanced through remittances rom abroad and FDI. The transers rom abroad increased almost ten

times in the 3 period. Starting rom Georgia has been experiencing a signicant infow

o oreign direct investments (FDI) due to: BakuTbilisiCeyhan project implementation; privatiza-

tion process that revived ater 3 and involved the sale o large and medium-sized rms. During

the 3 period the amount o FDI in the economy increased almost ve times. The act that the

current account decit is nanced primarily through FDI rather than by debt accumulation, impacts

on the sustainability o the external account, since FDI generally implies long-term commitments and

can be considered a sign o condence in the economy.

During the military confict with Russia, Georgia's economy proved resilient. However, both

this confict and the global nancial crisis have presented Georgia with new economic challenges.

These include in particular: overcoming economic damages caused by the war; avoiding a crisis in

the banking sector; preventing high infation; and preserving the stability o the exchange rate o

the national currency. In infows o FDI were practically halved as compared to the peak levelachieved in (. per cent o GDP). Other capital infows rom the global nancial markets as

well as remittances also diminished. Fall o capital infows rom abroad led to a downturn in domestic

demand.

Economic recession and, in particular, alling domestic demand resulted in negative import growth.

Taking in to account the act that a declin e in export revenues was less substantial than the reduction

in imports, the trade decits narrowed rom 4. per cent in to . per cent in , while the

current account decit reduced almost twice in the same period. The central bank continues a small

depreciation o the national currency as private capital infows all. Because o the economic downturn,

social development problems became crucial and essential.

Impact o global nancial crisis and armed conict with Russia on the Georgian economy

Until 4, Russia was Georgia's largest trading partner. However, the relations between the two

countries deteriorated in the mid-s, and as a trading partner Russia moved to third place, ater

Turkey and Azerbaijan. Intensication o political tensions, stemming rom the pace o Georgian


20 21


13/47

integration with NATO and the EU, was accompanied by the closure o the Russian market to certain

Georgian products, including wine and mineral waters. The ban presented a great challenge or the

Georgian economy, and resulted in substantial changes in the oreign trade structure o the country.

The August confict represented another potentially severe setback to t he economy. It threat-

ened economic stability. The total cost o damages rom the ve-day war have been estimated at around

1 billion USD, while the heightened awareness o the level o political risk served to inhibit invest-

ment and led to a decline in business activities. Ater the military confict with Russia in August

internal the displaced population have increased. The growth o the number o Internally Displaced

Persons (IDPs) weighed heavily on the government, orcing it to increase expenditures on social needs.

Moreover, the negative impact o this confict was urther aggravated by the global nancial crisis.

The macroeconomic consequences o the confict and global nancial crisis have already been

discussed above in this chapter. In general, a comparison o pre-confict and post-confict general

macroeconomic indicators shows that the consequences o the confict are quite noticeable (Table 4).

All these actors have signicant impact on the social lie o population.

table . pre- and post-conlict macroeconomic indicators comparison

inDiCator PrE-ConfliCt Post-ConfliCt2007 2008 2009

Growth (per cent) 12.30 2.30 3.90

Infaton (per cent) 11.00 5.50 3.00

Fscal balance (per cent o GDP) 0.31 2.01 6.50

FDI (US$ bllon) 1.60 1.40 0.70

Current account balance (per cent o GDP) 27.50 34.70 17.50

Debt (per cent o GDP) 23.06 27.02 34.69

Source: Calculatons based on data rom Natonal Statstcs Oce o Georga, www.geostat.ge

However, or 1 and beyond, economic orecasts are more positive. The IMF expects Georgia to

return to a positive GDP growth o 4 per cent, and 4 per cent in 11, and it expects infation to return

to normal levels o around per cent. 1

To summarize, despite severe external shocks, the Georgian economy has been resilient. Liber-

alization and international support provided the basis or economic stability and urther develop-

ment in Georgia. The signicant progress in introducing and implementing key economic reorms,

preserving sound macroeconomic and nancial sector policies, as well as support rom international

donor organizations and the international community, allowed the Georgian economy to maintain

its balance ater this shock.

The crucial actor that ensured post-confict economic recovery was support rom international

organizations and states. At a joint conerence hosted by the EU and World Bank in Brussels in October, 3 countries and 1 international organizations pledged 4. billion USD (o which billion USD

constituted grants, and . billion USD were loans) to assist in the post-confict economic recovery,

over a three year period. The donor unds will start exhausting in 11 and the Government will have

to make great eorts in nding new unds to cover the loan payments and ensure the social security

o the population.

1 Georgia: Sixth Review Under the Standby Arrangement and Requests or Modication o Perormance Criteria, Waiver o

Non-observance o Perormance Criterion, Waiver o Applicability o Perormance Criterion, and Rephrasing o Purchase

Sta Report; Sta Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director or

Georgia. Country Report No. 1/1. July 16, 1. http://www.im.org/external/pubs/t/scr/1/cr11.pd

.. S

Social sphere development and poverty

Poverty and Inequality. In 3, according to the data o the National Statistics Oce, 4. per cent

o population was below the ocial poverty level. Later, based on the new methodology o meas-

urement o the subsistence minimum, the proportion o the population below ocial poverty line

decreased twoold.

During the period ater the rose revolution, despite high rates o economic growth, there was

only a slight decrease with respect to three poverty indicators: poverty level, depth o poverty and

severity o poverty (Table ).

At the same time, ruralurban disparity in terms o poverty urther deepened, as well as dispari-

ties between small and large cities, which are the result o varying employment structures. Along with

the spread o unemployment, among the poor there appeared groups o poor and extremely poor.

Extremely poor constituted nearly a third o the total poor strata o the population. Poverty aected

educated people as well. A new group o so-called new poor emerged.

table 5. indicators o poverty, 22, per cent

inDiCator 2004 2005 2006 2007 2008 2009

PovErty lEvEl By mEDian ConsumPtion

60 per cent o meda n consumpton 24.6 24.1 23. 3 21.3 22.1 21.0

40 per cent o medan consumpton 10.9 10.1 9.4 9.2 9.5 8.8

DEPth of PovErty



sEvErity of PovErty




The problem o poverty was aggravated by a relatively high inequality level. Gini coecient ine-

quality increased during the 4 period. (Appendix, Table ). As cross-nation comparison shows,

Georgia has the poorest perormance among CEE and FSU countries in terms o income inequality.13

One important reason is that development reorms, including privatization, ailed to stimulate employ-

ment and to reduce unemployment. Among external actors there were: closure o t he Russian market

which was the most accessible or Georgian small entrepreneurs, as well as natural calamities which

caused serious damage.14

Social policy. The old inecient system o social protection, coupled with limited governmentnancing and growing unemployment resulted in the growth o poverty. The government was unable

to carry out radical measures or improving social protection and security until 4, which resulted in

the impoverishment o more than per cent o the population. Despite moderate growth in economy,

state institutions or social protection were not suciently developed to help various social groups to

move out o the poverty by creating guaranteed and stable living conditions or them.

Until the government provided unding or several social schemes: unemployment benets,

vocational training and re-training, temporary employment o the unemployed and social assistance

to the socially vulnerable population, as well as its monitoring and analysis.

Social assistance (at some point provided in the orm o amily allowance) was mostly ocused on

persons unable to work and single pensioners. Their assistance package (pension, amily allowance,

medical insurance, reimbursement o consumed electricity, cash donations o various international

13 International human development indicators. Income Gini coecient. http://hdrstats.undp.org/en/indicators/616.html.

14 Georgia: Human Development Report, The Reorms and Beyond, (). Tbilisi, p.363.


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14/47

organizations, primarily o International Committee o the Red Cross, etc.) was coming close to the

minimum consumption basket. The average minimum consumption basket in was GEL 1, while

subsistence minimum o a man with the ability to work GEL 11; other categories o amily assistance

were only symbolic and did not have any signicant infuence on amily budgets. The existing social

protection system did not cover all categories o beneciaries and allowances issued were insucient.

There were inequalities in allocations or IDP assistance which were unied and not dierenti-

ated according to nancial conditions o the amilies. IDP allowances were not targeted to the more

vulnerable amilies.

As a result o achievements in the real sector o economy, the social expenditures as per cent o

GDP were steadily increasing during the 36 period in Georgia (Table 6). In and ,

however, there was a serious decrease in these indicators, especially in social saety sphere. In

social expenditures as a per cent o GDP improved in all three areas.

table . social expenditures as per cent o gdp, 22

2003 2004 2005 2006 2007 2008 2009

Educaton 2.1 2.9 2.5 3.0 2.7 2.9 3.2

Healthcare 0.4 1.0 1.8 1.6 1.5 1.6 2.0

Socal saety 4.0 4.7 5.4 5.0 3.0 1.7 2.6

Total socal expendtures 6.5 8.6 9.7 9.6 7.2 6.2 7.8

Source: Georgan Economc Revew , GEPLAC, p. .

The increased state budget acilitated positive changes in the system o social protection and secu-

rity. However, as a result o ragmented social reorms, social disparities are still high (Appendix, Table

). Increasing wealth among some social g roups was not accompanied by overall reduction o poverty

levels. Social segregation in the population was widespread, which required that the state carry out

relevant policies and protect the poor through the revitalization o state aid dist ribution mechanisms.

During the last two years with the aim o social protection o the population living below poverty

line, a state programme ocused on the identication and evaluation o socio-economic conditions o

amilies below the extreme poverty line was launched, and a database was subsequently set up. Instead

o allowances, monthly monetary benets were introduced which amilies could manage themselves.

The new system o social protection is operating alongside the system o issuing benets to peo-

ple living below poverty line and to people according to various categories people living under

the extreme poverty line determined by the means testing methods, IDPs, the displaced population,

veterans o wars, and mothers o large amilies and so on.

Demographic trends. There have been negative trends emerging in the course o Georgia's demo-

graphic development. Namely, a sharp decline in birth rates and increasing mortality rate (especiallyamong newborns), the logical result o which is the reduced natural growth o population. In 1

the population o Georgia ell by 1. per cent, compared to 11 per cent growth in 11. 1

These developments coupled with the ageing o the Georgian population are posing serious threats

to the renewal o generations and increasing the burden on the employed population.

The demographic aging o the population causes increase o demographic and economic burden o

employed). In Georgia, the proportion o those unable to work living on the subsistence o 1, able

to work has been increasing. I we take into consideration that the unemployment rate is permanently

high, the problem o the demographic burden is even worse.

In terms o demographic burden indicators, the proportion o those not having reached the age

o entering into the labour market is decreasing, and accordingly, the number o those beyond retire-

ment age is increasing. The share o children under the age o 16 is decreasing, while the number o

people beyond the retirement age is increasing.

1 World Bank Database: http://devdata.worldbank.org/hnpstats/query/deault.html

The eects o aging are especially painul or the labour market and social protection systems. Social

costs are increasing, which are increasing the burden o the employed population. Currently, there are

employed or every 1 pensioners, while the optimal proportion is 34 employed per 1 pensioners.

Migration.The general trend o population aging, among other actors, results mainly rom the

act that, in recent years intensive migration, which started in the 1s, has been continuing, mainly

due to economic conditions. According to the Department o Statistics, per cent o the population

which has let the country is o an able-to-work age, while the proportion o the population o this

age does not exceed two ths o the total population.

In recent years gender disparities have also been growing. Among young people leaving Georgia,

there are more women than men, which, in the long run, might result in serious socio-demographic

problems.

Demographic conditions in Georgia, along with the other actors, are signicantly worsened

by the migration o the population (especially the young population). Due to poor registration, the

precise number o people who migrated rom Georgia is not known. However, in the estimation o

various experts, this number reaches approximately one million people, which or a small nation like

Georgia, is very high. From an economic point o view, the huge loss o labour resources is justied by

the act that remittances sent by the labour migrants to their amilies is the only source o their dailysubsistence, and plays a vital role in ghting poverty. The volume o remittances is increasing each

year. In this indicator was 1. times higher than it was in and comprised 1. million USD.

Especially noteworthy is the involvement o youth in emigration. The ndings o the study, con-

ducted in , clearly showed a high prevalence o emigration among students. 16 The reasons or

emigration according to the study were: receiving education (31. per cent), learning oreign languages

(1.4 per cent), as well as lack o employment opportunities in the home country (. per cent), while

41 per cent named the opportunity o improving nancial conditions.

IDP. A document prepared by the UN Resident Representatives' Humanitarian Aairs Team in 6

stresses that in the lives o 4 per cent o the total o , displaced in the 1s as a result o ethnic

conficts, no signicant changes have taken place leading to the improvement o their socio-economic

status. 3, people still remain in collective centres. These centres did not meet living standards

rom the very beginning, and presently their inrastructure is completely dilapidated.

By the end o , the Government provided 16, amilies with the newly constructed houses.

At the same time, the need o developing social inrastructure and employment generation schemes or

the displaced population was identied. It is noteworthy that along with the assistance programmes or

the recently displaced population (as a result o the war with Russia), it also became necessary

to carry out new assistance programmes or the IDPs displaced rom Abkhazia in the 1s.

Pensions. Demographic aging o the population and migration both intensively aect the pay

as you go state pension system development, requiring the permanent increase o state expenditures

on social insurance. Economic growth allowed the government to double pensions. In , average

pension increased rom 1 to 3.3 GEL, and in it reached .6 GEL. So during the period 3,

pensions increased 4. times in absolute terms (Appendix, Table ).

The increase in pensions did not take place at the expense o an increase o the number o employedpersons. There is . employed person per pensioner and this a heavy burden or the employed, one

that will present a serious threat to the state pension system in the uture. However, the situation is

being neutralized by a rapid growth o average wages both in the private and public sectors.

Recent trends in the labour market

Between 1 and 3, the situation with regard to employment deteriorated signicantly. It was

largely infuenced by the shit o the l abour orce to the agricultural sector resulting rom the changes

in sectoral structure o the economy; as well as the demographic situation, migration processes and

underdevelopment o small and medium businesses.

The economic upsurge that took place during the period o 3 has not resulted in a serious

enhancement o employment variables. The main trends in the employment sphere keep showing a

16 Chelidze N. (). Attitude o Students in the Higher Education Institutions towards Education and Labour Migration; In

the Migration. Tukhashvili M.,ed. Iv. Javakhishvili Tbilisi State University Publications, Tbilisi.


24 25


15/47

decrease in employment and labour participation levels and an increase in the unemployment rate

(Appendix, Table ).

From to the share o economically active population reduced as compared to the total

population o the country (by almost at 4 per cent), due to the decrease o the natural growth o

the population and the negative migration balance. The decrease was especially visible among the

population o working age. Along with this, the number o economically active people has reduced

signicantly, as well as the number o hired employees. According to ocial data the number o hired

employees reduced to 6, in rom 64,3 in 1. All this happens against the backdrop o

just . per cent reduction in the total population. This indicates a non-optimal structure and negative

tendencies o the economically active population.

With intensication o the privatization process, the share o sel-employed persons in the employ-

ment structure has been increasing substantially at the expense o the share o hired workers, refecting

in part the downsizing process in privatized enterprises

Unlike in advanced transition economies, the increase in the share o sel-employment in Georgia

is related mainly to activities in the agriculture sector. Taking into account the act that these activi-

ties are oriented largely on sel-sustenance and th at a signicant portion o persons sel-employed in

agriculture are unpaid amily workers, one can conclude that increased sel-employment in Georgiarefects, in part, disguised unemployment.

Signicant changes took place in the employment structure in the period 3 (Appendix,

Tables 1). The share o the employed decreased relatively in public administration and trade, and

increased in industry. Economic revival, especially in the eld o construction, has supported employ-

ment growth in this sector. In general, construction and nancial mediation are the branches where

the increase in the economically active population is most tangible.

In the share o persons employed in the public sector was halved as compared to 1 (Table

). However, the share o public sector according to the number o hired sta is still high. In inormal

sector, sel-employed and unpaid workers are the majority.

table . structure o employment in business sector by orm o ownership (per cent o total)

2001 2004 2005 2006 2007 2008 2009

Publc sector 50.1 44.7 37.3 29.6 26.5 23.8 24.5

Prvate sector 49.9 55.3 62.7 70.4 73.5 76.2 75.5


Ocial unemploymenthas increased and reached to 16. per cent in , beore the nancial

crisis. Its level despite the reduction o the economically active population is still very high and in

its level has increased 1.-old against 1. This is an indication that unemployment is, rst and

oremost, a social-economic problem, and not a demographic one.

One o the reasons or this situation in the labour market is the continuous and intensive migra-tion (mainly due to the negative economic environment) along with general aging o the population.

Among migrants, per cent are capable o working.

The second reason was the insucient development o small and medium sized businesses. Eco-

nomic reorms through eliminating obstacles make it possible or small and medium-sized business

to expand their operations, create new jobs, and increase employment and output. However, this was

not the case in Georgia. The share o small and medium-sized businesses did not change signicantly

in the recent period. The numb er o entrepreneurs registered in Georgia has increased . old during

the last ve years and the rate o their growth considerably exceeded GDP growth.

During the recent period the SME sector ound itsel in recession. In 3 about .6 per cent o

the total workorce was employed in these enterprises (the share o small enterprises amounted to

.3 per cent, and the share o m edium-sized enterprises 3.3 per cent), an d in the overall tu rnover

aggregate share o SMEs amounted to 4 per cent. During the 3 period, the share o SME in

turnover, output and employment has continuously shrunk. In the number o jobs in the SME

sector made up only 3 per cent and their aggregate share in the total turnover decreased to 14.4 per

cent (the share o small enterprises made up 6.6 per cent, and the share o medium-sized enterprises

. per cent) (Table ).1

The economic growth in 3 period was basically caused by the expansion o large enter-

prises, while SME show a low level o competitiveness and ecacy and tend to move urther down.

The level o SME development remains rail.

table . employed persons by enterprise size and smes share in total turnover and total

production value

2003 2004 2005 2006 2007 2008 2009

SMEs turnover(per cent o total turnover) 24.0 22.5 23.0 18.7 14.5 12.3 14.4

SMEs producton value (percent o total producton value) 20.3 21.5 18.9 16.1 14.3 16.0 20.3

(in PEr CEnt of total EmPloymEnt)

Employed n small enterprses 27.3 25.5 25.8 23.4 18.7 18.7 18.3

Employed n medum-szedenterprses 23.3 21.8 22.5 23.3 25.4 21.3 19.7

Employed n large enterprses 49.4 52.6 51.7 53.3 55.9 60.0 61.9


Wages. Along with change in employment st ructure, the social consequences o th e recent devel-

opment trends were refected in the change in wages and incomes o employees.

Signicant changes took place in the size o wages ater the rose revolution. The average nomi-

nal wage grew rom 4.6 GEL in 1 and 1. GEL in 3 to 6. GEL in (Appendix, Table 11).

Thus the nominal average wage grew almost sixold during this period. The nancial sector, public

administration, the mining and quarrying sector pay the highest wages, on average, among the sec-

tors o economy. The worst situation is in agriculture and h ealthcare. The act that agriculture, which

accounts or more than per cent o total employment, has the lowest salaries among industries

indicates a worsening o the social dimension in general.

In the public sector the nominal wages were on average lower during the entire period as compared

to the private sector (Appendix, Table 1). However the relative dierence in nominal wages between

these sectors reduced during the period. The considerable growth o labour payments o

those employed in the public sector has played a signicant role in the reduction o this dierence.

The average wages increased quickly. The rate o its growth signicantly exceeded not only the real,

but also the nominal growth rate o GDP (Figure ). During the 3 period, on average, salary

growth exceeded by almost three times the rate o growth o the real GDP and by approximately 1.

times that o nominal GDP. The reason or the rapid increase o salaries was that the economic upsurge

hasn't been accompanied by a corresponding in crease in employment. On the contrary, employmentgrowth during this period mainly h ad a negative trend. Such a situation led to the increase o wages

o the employed.

During the 4 period, real monthly wages and salaries were growing in all sectors o the

economy. On average the real wage grew by . times as compared to 4. Agriculture, trade and public

georgia aid for trade needs assessment

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