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World > Europe > Georgia > Economy (Notes)

Georgia - Economy (Notes)


ECONOMY
The Soviet Socialist Republic of Georgia was one of the most prosperous and envied locations in the former Soviet Union. The political turmoil after independence had a catastrophic effect on Georgia's economy. The cumulative decline in real GDP is estimated to have been more than 70% between 1990 and 1994, and by the end of 1996, Georgia's economy had shrunk to around one-third of its size in 1989. Today, the largest share of Georgia's GDP is produced by agriculture, followed by trade, manufacturing, and transport. Georgia's main exports are metals and ores, wine, nuts, and aircraft.

Although Georgia experienced some years of growth in the mid-1990s, it was hit hard by the Russian economic crisis of 1998-99. The later years of former President Shevardnadze's administration were marked by rampant cronyism, corruption, and mismanagement. Public disaffection with the situation resulted in the Rose Revolution of 2003. The new government, led by Mikheil Saakashvili, promised to reorient the government and the economy toward privatization, free markets, and reduced regulation, to combat corruption, to stabilize the economy, and to bring order to the budget.

The government reduced the number of taxes from 21 to 7 and introduced a flat income tax of 12%. It significantly reduced the number of licenses a business requires, and introduced a 'one-window' system that allows an entrepreneur to open a business relatively quickly. Strict deadlines for agency action on permits were introduced, and consent is assumed if the agency fails to act within the time limit. The government intends to completely eliminate import duties by 2008, which should reduce costs and stimulate business.

The World Bank recognized Georgia as the world's fastest-reforming economy in its 2007 'Doing Business' report, ranking it as the world's 37th easiest place to do business, in the same league as countries such as France, Slovakia, and Spain. The World Bank's 'Anti-Corruption in Transition 3' report places Georgia among the countries showing the most dramatic improvement in the struggle against corruption, due to implementation of key economic and institutional reforms, and reported reduction in the bribes paid by firms in the course of doing business.

Economic growth has remained strong, reaching 8% in 2006; inflation reached 10% in the same year but decreased to 7.3% in the first six months of 2007. . Efforts to improve the efficiency of government operations since the Rose Revolution have required the government to release workers, pushing official unemployment to 13.8% in 2005. A strongly negative balance of trade is offset by inflows of investment and assistance from international donors. The fiscal deficit was 2.9% of GDP in 2006according to the International Monetary Fund (IMF).

Improved collection and administration of taxes have greatly increased revenues for the government. In two years, from 2003 to 2005, tax collections went up from 13.8% of GDP to 20.8%. The government has been able to pay off wage and pension arrears and increase spending on desperately needed infrastructure such as roads and electric energy supply systems. The government privatized nine times the value of state-owned assets in 2005 as it did in all of 2000-2003. It expects to have privatized all of the largest state-owned industries by the end of 2008, increasing revenues and removing a major temptation toward corruption from the control of state bureaucrats.

Before 2004, electricity blackouts were common throughout the country, but since late 2005, distribution has been much more reliable, approaching consistent 24-hour-a-day service. Improvements have resulted from increased metering, better billing and collection practices, reduced theft, and management reforms. Investments in infrastructure have been made as well. Hydroelectricity output increased by almost 27%, and thermal by 28%, from 2005 to 2006. Natural gas has traditionally been supplied to Georgia by Russia. Through conservation, new hydroelectricity sources, and the availability of new sources of natural gas in Azerbaijan, Georgia's dependence on Russia for energy supplies should decrease in the near future.

The banking sector is becoming more open to competition from foreign-owned banks. The sector is relatively stable, and is supplying more credit to domestic businesses. Credit from Georgian banks to the economy was 15% of GDP in 2005, compared to 10% in 2004--still low, compared to the average in the Czech Republic, Hungary, and Poland for 2005, which was 36%.

Foreign direct investment (FDI) is the most important source of capital for Georgia and other post-Soviet states. Such investment not only supports new plants and equipment, but usually entails bringing in modern management methods as well. The Georgian Government is eager to welcome foreign investors. From 2002 to 2006, FDI averaged 9% of GDP, with much of it dedicated to the construction of the Baku-Tbilisi-Ceyhan oil pipeline and the South Caucasus gas pipeline. In 2006, which saw diminishing pipeline investment as a function of total FDI, more than half of FDI went to the banking, manufacturing, and tourism sectors.

Georgia faces many challenges in attracting foreign investment and growing its economy. In 2006, more than 50% of the population lived below the official poverty line. With only 4.7 million people, most of whom have little disposable income, it is a small market in itself. The major market to which Georgia has traditionally been linked is Russia. (For example, at one time nearly 100% of the Soviet Union's citrus fruits were grown in Georgia.) In 2006, trade relations were plagued by politically motivated interruptions when Russia imposed bans on all Georgian exports of wine, fruits and vegetables, and mineral water. In October 2006, Russia severed all direct transportation links, as well as postal service and visa issuance. In addition, Russia undertook a campaign of deportations of Georgian nationals residing in Russia and closed the only legal land border crossing between Georgia and Russia, diverting traffic into the separatist regions outside of Georgia's control. In light of these restrictions, Georgian businesses are actively seeking new markets for their products in the EU, Eastern Europe, North America, and elsewhere. Reports confirm that the sanctions have not had an adverse effect on the economy; in fact, exports have increased since the beginning of 2006 because Georgia was forced to find alternate markets for its goods.

The government faces a major challenge in controlling corruption, which is a persistent problem. Shortly after President Saakashvili took office, his administration dismissed nearly the entire police force and replaced it with better-paid and -trained officers. Several high officials have been prosecuted for corruption-related offenses. On the other hand, widespread lack of confidence in the Georgian courts and system of justice is a major obstacle to both foreign and domestic investment. The new government has promised to tackle this difficult task, which requires balancing the objective of judicial independence with honest, fair, and competent decision making.

The United States and other international donors have targeted foreign assistance to promote democratic reform, resolve regional conflicts, foster energy independence, assist economic development, and reduce poverty. The U.S. seeks to help Georgia consolidate democratic gains since the Rose Revolution. The USG lends significant diplomatic and funding support to Georgia's efforts to resolve the separatist conflicts of South Ossetia and Abkhazia. With USG assistance, Georgia is working to free itself from near total energy dependence on Russian sources of energy. Georgia is one of the first countries to receive a compact, in the amount of $295 million over five years, from the United States Millennium Challenge Corporation (MCC). MCC offers grant assistance to countries that meet certain requirements for good governance and commitment to reform. In 2004, Georgia's debt to the Paris Club was restructured. Since 2004, the International Monetary Fund (IMF) has monitored a Poverty Reduction and Growth Facility that will terminate in 2007. The World Bank, European Bank for Reconstruction and Development, EU, OSCE, and the UN are all active in Georgia. Their goals are complementary, and include assisting in conflict resolution in Abkhazia and South Ossetia, energy and transportation development, legal and administrative reform, health, and many other areas.


Facts at a Glance: Geography - People - Government - Economy - Communications - Transportation - Military - Climate - Current Time - Ranking Positions
Notes and Commentary: People - Economy - Government and Political Conditions - Foreign Relations - Relations with U.S.



Facts at a Glance
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Government
Economy
Communications
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Military
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Current Time
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Notes and Commentary
People
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Government and Political Conditions
Foreign Relations
Relations with U.S.





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