ISET

ISET Economist Blog

A blog about economics in the South Caucasus.

Lessons Learned From a Decade of Georgian Reforms. View From The Sky


Georgian reforms have become an internationally traded commodity. Underappreciated and no longer wanted at home, some of Georgia’s former reformers are doing well-paid consulting gigs in Mongolia, Central Asia, Ukraine, Moldova and further away emerging markets. Sensing a business opportunity, a group of former government officials groomed by Kakha Bendukidze, the mastermind of Georgian reforms, has recently established a consulting agency, “Reformatics”. “The chosen”, such as Georgia’s former Minister of Health Sandro Kvitashvili and former Deputy Minister of Interior Affairs Eka Zghuladze, are enjoying a second political life… in Ukraine. The list is topped by Mikheil Saakashvili (who is, in fact, wanted in Georgia), current non-staff advisor to President Poroshenko’s and chair of Ukraine’s Advisory International Council of Reforms.

ISET also got a piece of the action by virtue of hosting Ukrainian delegations brought to Georgia by the Caucasian House, a small Tbilisi-based NGO with a track record in conflict resolution activities. On Wednesday this week, I spent some 8 hours “up in the air” between Kyiv and Tbilisi in order to speak at the forum “Economic Reforms and Lessons Learnt from Georgia”. On the way back to Tbilisi, while my plane was cruising at full throttle above Ukraine and the Greater Caucasus range, I could not help but think about what Ukraine could really learn from Georgia’s experience.

Ukraine’s fascination with Georgia and Georgia’s reforms is based on two convictions. First, Georgia is held as a living proof that change is possible, that new countries can overcome the post-Soviet crime-and-corruption predicament and establish a modern, lean and efficient state. Second, Georgians are appreciated for staunchly defending their national sovereignty and territorial integrity against Russia’s aggression.

If Georgia can, the argument goes, there is hope for Ukraine.


THE STORY OF GEORGIA’S ECONOMIC REFORMS IN TWO CHARTS

Since this blog is about economics, I will mainly focus on the reforms dimension of Ukraine’s “Georgiomania”.

When viewed from 10,000 meters high, the story of Georgia reforms can be summarized by these two charts. The first one, produced by the WB, shows the dramatic improvement in Georgia’s ranking on all indicators of good governance from 2003 to 2013.


Apr-17-2015_1

Source: Worldwide Governance Indicators (WGI) by the World Bank.

The numbers on the chart indicate the percentage of countries worldwide that rank lower than Georgia. Higher values indicate better governance scores. As shown, in 10 years, Georgia more than doubled its ranking on all dimensions of governance. Note that Georgia performed as well on most other global indices, including, most famously, the World Bank’s Doing Business Index, and the World Economic Forum’s Global Competitiveness Indicators.

The second chart shows Georgia’s GDP growth performance since 1988 till present time.


Apr-17-2015_2

Source: World Bank

The point here is that, having reached its nadir in 1994, independent Georgia’s economy has grown (from an extremely low base) at roughly the same annual rate in 1995-2003 (with crime and corruption) and in 2004-2013 (with very good institutions).

 How come “good institutions” do not make any difference, at least as far as economic growth is concerned?


THE DOORS ARE OPEN, BUT IS ANYBODY WILLING TO COME IN?

Before anything else, let us clarify that Georgia’s reforms are not a myth, they are the everyday reality for anybody living and working here. Georgia is amazingly safe. There is almost no street crime to speak of. Certainly gone is police harassment and petty corruption. Doing business is indeed very simple as far as all the formalities are involved. Georgia’s borders are probably the “thinnest” in the region. Coming in and going out is very easy for exporters, importers and travelers. Customs procedures have been significantly rationalized. Border police is very professional and welcoming (with bottles of wines, until recently). The traditional hospitality of the Georgian people is an established brand, more established, perhaps than that of Georgian reforms. The government bureaucracy is fairly lean and professional. Most government officials even speak English, helping impress donors, foreign diplomats, investors and … international rating agencies, such as Fitch and Moody’s.

What Georgia’s reformers managed to achieve in an amazingly short time is remove any barriers to economic activity and open the country up for foreign investment and foreigners – from freelancers who contribute to the county’s feel-good atmosphere, to investors and corporate lawyers, agronomists and expert farmers, teachers of English and economics – people who could help move Georgia’s economy forward. Until 2012, the open door policy may be said to have been Georgia’s state religion.

What may have been lost on Georgia’s reformers, however, is that open doors are neither a necessary nor sufficient condition for significant, long-term investment to come in.

“Open doors” are not a necessary condition because investors would bribe their way through any doors if the business opportunity is there, as is the case in the oil- and gas-rich Azerbaijan.

“Open doors” are far, very far from being a sufficient condition. In the presence of serious risks investors may come in to enjoy a country’s hospitality but would not park their money there beyond a few years.

A key problem still haunting Georgia today is that the risks of investing in Georgia outweigh many of the locational and ease-of-doing-business advantages it offers. And, perhaps paradoxically, instead of abating, the risks of investment in the Georgian economy may have increased after the Rose Revolution of 2003.

Now, investment risks are a rather large basket.

First, Georgia’s small market size (internal and external) and tiny labor force pose significant COMMERCIAL RISKS to any project that seeks to produce and/or sell in Georgia. None of the open door policies could change this fundamental fact. The loss of the Russian market in 2006 and preferential trade agreements with Europe may be said to have offset each other, but the Georgian economy will need time (and considerable investment in skills and technology) to re-orient itself from east to west.

Luckily for Ukraine, it does not face the “small market size” problem. Similarly to Georgia, however, it will have to gird for a painful east-to-west adjustment in terms of education and professional skills, production technologies and export structure, branding and marketing.

Second, there are the GEOPOLITICAL RISKS to consider. Georgia’s new leadership’s fiery rhetoric and active efforts at restoring its territorial integrity quickly transformed Georgia into a bargaining chip in the geopolitical confrontation between Russia and the West. While helping attract Western public funds and “technical assistance”, geopolitical tensions are a red flag for long-term private sector investment, unless in the presence of outstanding business opportunities of which Georgia has very few on offer. The only sectors in which Georgia attracted significant long-term FDI in recent years are transport, hydroelectric energy and … hazelnuts. The rather large FDI Georgia received in 2007 and the first half of 2008 (causing a small uptick in GDP growth) did little to promote long-term productivity, exports or jobs. Rather, it merely fed a real estate bubble.

Clearly, Ukraine’s economic recovery will not be possible as along as investors expect further violence to erupt in Donbas and, God forbid, spread to other Russian-speaking parts of the country’s south east. With this in mind, Ukraine’s goal should be to freeze the ongoing conflict and assure investors that military “solutions” are permanently off the table.

Third, Georgia performed rather badly in SECURING INVESTORS’ PROPERTY RIGHTS. The Georgian Ministry of Justice and state prosecution accumulated enormous powers under Zurab Adeishvili, effectively placing them above the law, without any control by the judiciary, parliament or civil society. The institutional mechanisms and legal norms created in order to clamp down on crime and corruption, later (after 2007) came to be used against political opponents, businesses that would not kowtow, and as a means of taxing firms and individuals (for example, by using pre-trial detention and the plea bargaining mechanism to “legally” extort confessions and money). To this date, Georgia is struggling to restitute justice in thousands of cases involving expropriation of property, illegal arrests, and extortion.

With the “oligarchs” controlling the most prized assets in the Ukrainian economy (and regional politics), the country’s leadership will face tremendous pressures to restore justice, re-privatize and nationalize. The risk of Ukrainian judiciary failing to secure investors’ property rights under these trying circumstances is likely be another major challenge for the Ukrainian economy.

Last but not least, Georgia’s under-developed democratic institutions failed to perform the critical consensus-building function in the rush to implement (badly needed) reforms, resulting in grave POLITICAL RISKS FOR THE ECONOMY. The openly confrontational we-know-better and winner-take-all approach of the Saakashvili administration turned former allies into enemies, leading to mounting political tensions and protests. Luckily for the country, Georgia’s reformers did have the wisdom to concede political defeat in the 2012 parliamentary election and oversee the first peaceful and orderly democratic transition in Georgia’s modern history.

Ukraine’s current preoccupation with economic and political reforms is understandable. Yet, Ukrainian policymakers (and their Georgian advisors) should know when to slow down and start building consensus, seeking compromise rather than dominating. While having its merits, the “window of opportunity” approach – it’s now or never! – is also a source of political risks that can undermine the entire reform process in the medium term. 

Rate this blog entry:
8 Comments

Related Posts

Comments

 
Guest - Ia on Friday, 17 April 2015 23:26

Fantastic article and very balanced analysis.

In my point of view Saakashvili has without question succeeded in turning Georgia towards a market economy and pulling Georgia from economic disaster. Taking into account the overall development of the political economy of Georgia since 2003, it can be concluded that it was a success story of the country’s transformation.

Of course there were many mistakes made, maybe because it was learning by doing process. The challenge for Georgia is to learn from those mistakes.

Fantastic article and very balanced analysis. In my point of view Saakashvili has without question succeeded in turning Georgia towards a market economy and pulling Georgia from economic disaster. Taking into account the overall development of the political economy of Georgia since 2003, it can be concluded that it was a success story of the country’s transformation. Of course there were many mistakes made, maybe because it was learning by doing process. The challenge for Georgia is to learn from those mistakes.
Guest - Eric Livny on Friday, 17 April 2015 23:42

Thank you, Ia! We should be the first to learn from our successes and failures!

Thank you, Ia! We should be the first to learn from our successes and failures!
Guest - Iñigo A on Monday, 20 April 2015 20:53

The summary of Ukraine's future is in the sentence above "to learn from ... successes and failures!". As for the latter, the orange revolution should be used as a text book of what not to do.

Success might be helped by breaking down the problems faced by Ukraine into smaller, more manageable scenarios.

The summary of Ukraine's future is in the sentence above "to learn from ... successes and failures!". As for the latter, the orange revolution should be used as a text book of what not to do. Success might be helped by breaking down the problems faced by Ukraine into smaller, more manageable scenarios.
Guest - Gregory Levonian on Saturday, 18 April 2015 00:43

Hi, excellent article. Two comments:

One you do a pretty good job explaining why Western investors (vs. Western NGOs, politicians and diplomats) might be less bothered by corruption than one might think. Your comments about the situation with Russia and the war are very accurate. It really doesn't matter what one's personnel political beliefs are or how little red tape there is, if Russia is threatening a country it's probably not a great investment opportunity.

But two, I really do have to disagree with you about a inherit assumption that is in your piece: that Economics drives/should drive national policy. It's really hard for Westerners to internalize this but for most countries money and economic prosperity are not an end in itself but at best a means to achieve ends or at worst occasionally run counter to ends.

This is very difficult for westerners to accept, but it really is so. For a LOT of countries territories, national pride, ethnic issues all take precedence over material wealth.

Statements like "Clearly, Ukraine’s economic recovery will not be possible as along as investors expect further violence to erupt in Donbas and, God forbid, spread to other Russian-speaking parts of the country’s south east. With this in mind, Ukraine’s goal should be to freeze the ongoing conflict and assure investors that military “solutions” are permanently off the table." just don't correspond to reality.

The Ukraine would much rather live poorer but with the knowledge that their territorial integrity is secured.

Hi, excellent article. Two comments: One you do a pretty good job explaining why Western investors (vs. Western NGOs, politicians and diplomats) might be less bothered by corruption than one might think. Your comments about the situation with Russia and the war are very accurate. It really doesn't matter what one's personnel political beliefs are or how little red tape there is, if Russia is threatening a country it's probably not a great investment opportunity. But two, I really do have to disagree with you about a inherit assumption that is in your piece: that Economics drives/should drive national policy. It's really hard for Westerners to internalize this but for most countries money and economic prosperity are not an end in itself but at best a means to achieve ends or at worst occasionally run counter to ends. This is very difficult for westerners to accept, but it really is so. For a LOT of countries territories, national pride, ethnic issues all take precedence over material wealth. Statements like "Clearly, Ukraine’s economic recovery will not be possible as along as investors expect further violence to erupt in Donbas and, God forbid, spread to other Russian-speaking parts of the country’s south east. With this in mind, Ukraine’s goal should be to freeze the ongoing conflict and assure investors that military “solutions” are permanently off the table." just don't correspond to reality. The Ukraine would much rather live poorer but with the knowledge that their territorial integrity is secured.
Guest - Eric Livny on Saturday, 18 April 2015 02:11

Thanks, Greg... I actually do agree with you... We all, westerners and "easterners", do lots of things against our individual "material" interests. In minor ways, such as when we smoke and drink (not to mention other vices). And in major ways, such as when we sacrifice our life for our beloved "nation" or other group. What's true at the individual level is also true at the level of groups and nations. Collective suicides are not all that uncommon in history (the story of Masada http://en.wikipedia.org/wiki/Masada immediately springs to mind).

I think you are misreading the passage you have quoted at length. What I am saying there is quite consistent with what you are saying in the first paragraph. The statement that starts with "should" is qualified by "with this in mind". In other words, if the goal is to achieve economic recovery (emphasis on economic!), war most be stopped. Of course, if the goal is to restore territorial integrity and/or punish Crimeans and the "vatniks" of the East, war must continue.

Thanks, Greg... I actually do agree with you... We all, westerners and "easterners", do lots of things against our individual "material" interests. In minor ways, such as when we smoke and drink (not to mention other vices). And in major ways, such as when we sacrifice our life for our beloved "nation" or other group. What's true at the individual level is also true at the level of groups and nations. Collective suicides are not all that uncommon in history (the story of Masada http://en.wikipedia.org/wiki/Masada immediately springs to mind). I think you are misreading the passage you have quoted at length. What I am saying there is quite consistent with what you are saying in the first paragraph. The statement that starts with "should" is qualified by "with this in mind". In other words, if the goal is to achieve economic recovery (emphasis on economic!), war most be stopped. Of course, if the goal is to restore territorial integrity and/or punish Crimeans and the "vatniks" of the East, war must continue.
Guest - mfmsm on Saturday, 18 April 2015 01:35

Eric - this seems to me remarkably confused. There are about six articles here. Yet - you touch on all that is important - and know all that is worth knowing ! - about each part of the jigsaw! I think the intellectual export of these advisers (- the original topic, lost, way back!) is hardly a kosher niche product inasmuch as Misha has not yet come up with a strategy for regaining the Presidency here. So until he has sorted that one, he is hardly going to perform for the Ukraine. As much as one lauds his political, legal, rhetorical, human, linguistic and intellectual skills in all this, he needed a job! But if he were to calm down (which he is doing - the paradox being that getting the job in the Ukrainian elite calmed him down, and after a few incredibly jejeune errors re 'arming' Ukraine and so on - he is now - for Misha - reasonably in balance... and he has chances here. His charisma may yet change everything.The man-in-the-taxi-cab view remains that Misha is 'giji'. But 2016 has yet to come! It seems to me that the destruction of the country's image by Georgian Dream gives him an open goal. His opponents have chased away investors, tourists, and presided over a 22% devaluation of the Lari! (Ask Florian...It's like losing your knight in a King, Queen Knight fork on about Move 18...) So a virtual campaign, via screens and without setting foot in the territory - as I have speculated - would be - from Saakashvili's perspective, a marvellous follow-up to the Rose Revolution. This would be the first ever victory of a President in absentia. I am sure he will try something like this! That will mean that Ukraine only gets half the medicine, largely because the original malaise has not been yet sufficiently diagnosed... And Gregory (above) delights me in adumbrating a 'non-traditional narrative! (Let's all be structuralists for a minute and have a drink! Any sign of Tara Isabella Burton?) It seems to me that Georgia has unique 'soft' niche skills. Imagine "parenting mentoring"! How to be a father! Georgians are world experts at this...while the west, on the same theme, is in crisis! Eco-tourism, with traditional farming skills and horse riding in the Marneuli area! Tourism at every level. Real estate (our local commune is now selling off neighbouring flats! What an investment opportunity!). So briefly - the failure recently is not set in stone. The penny - or the tetri - that the real problem is the inherited mindset - will eventually drop. A wiser and more listening Misha is now a prospect. The outrage of the Georgian Dream when he does his next spectacular thing will be poetry indeed! And yet the collecttive result will be peaceful, innovatory, and a credit to all concerned - none of whom I am mocking, incidentally, though I may joke at margins. Ukraine will go onto the back burner, and Georgia - for whom all publicity is good and no trope (structuralists... pssst!) is too arcane - will, as ever, benefit. And in literary mode, we may 'divide and conquer!'...along with all those charts! I wish I knew how to do them.

Eric - this seems to me remarkably confused. There are about six articles here. Yet - you touch on all that is important - and know all that is worth knowing ! - about each part of the jigsaw! I think the intellectual export of these advisers (- the original topic, lost, way back!) is hardly a kosher niche product inasmuch as Misha has not yet come up with a strategy for regaining the Presidency here. So until he has sorted that one, he is hardly going to perform for the Ukraine. As much as one lauds his political, legal, rhetorical, human, linguistic and intellectual skills in all this, he needed a job! But if he were to calm down (which he is doing - the paradox being that getting the job in the Ukrainian elite calmed him down, and after a few incredibly jejeune errors re 'arming' Ukraine and so on - he is now - for Misha - reasonably in balance... and he has chances here. His charisma may yet change everything.The man-in-the-taxi-cab view remains that Misha is 'giji'. But 2016 has yet to come! It seems to me that the destruction of the country's image by Georgian Dream gives him an open goal. His opponents have chased away investors, tourists, and presided over a 22% devaluation of the Lari! (Ask Florian...It's like losing your knight in a King, Queen Knight fork on about Move 18...) So a virtual campaign, via screens and without setting foot in the territory - as I have speculated - would be - from Saakashvili's perspective, a marvellous follow-up to the Rose Revolution. This would be the first ever victory of a President in absentia. I am sure he will try something like this! That will mean that Ukraine only gets half the medicine, largely because the original malaise has not been yet sufficiently diagnosed... And Gregory (above) delights me in adumbrating a 'non-traditional narrative! (Let's all be structuralists for a minute and have a drink! Any sign of Tara Isabella Burton?) It seems to me that Georgia has unique 'soft' niche skills. Imagine "parenting mentoring"! How to be a father! Georgians are world experts at this...while the west, on the same theme, is in crisis! Eco-tourism, with traditional farming skills and horse riding in the Marneuli area! Tourism at every level. Real estate (our local commune is now selling off neighbouring flats! What an investment opportunity!). So briefly - the failure recently is not set in stone. The penny - or the tetri - that the real problem is the inherited mindset - will eventually drop. A wiser and more listening Misha is now a prospect. The outrage of the Georgian Dream when he does his next spectacular thing will be poetry indeed! And yet the collecttive result will be peaceful, innovatory, and a credit to all concerned - none of whom I am mocking, incidentally, though I may joke at margins. Ukraine will go onto the back burner, and Georgia - for whom all publicity is good and no trope (structuralists... pssst!) is too arcane - will, as ever, benefit. And in literary mode, we may 'divide and conquer!'...along with all those charts! I wish I knew how to do them.
Guest - Gregory Levonian on Saturday, 18 April 2015 04:24

Yeah, I was probably no nuanced enough in my comments. I was pretty sure that you Eric L. would not disagree with me, I was just disagreeing with the statements as written (or rather as I chose to interpret them). That money doesn't drive things as much as you think thing, is a bit of a hobby horse of mine.

Yeah, I was probably no nuanced enough in my comments. I was pretty sure that you Eric L. would not disagree with me, I was just disagreeing with the statements as written (or rather as I chose to interpret them). That money doesn't drive things as much as you think thing, is a bit of a hobby horse of mine.
Guest - tbilisipr on Monday, 20 April 2015 01:01

Excellent analysis, it's clear that at the present time there is a lack of direction in the economy and that seems to be some kind of transitional issues. It looks like some of the air has come out of many sectors and people are looking around and wondering what next. Whilst there is significant investment in luxury accommodation and real-estate there is still a fundamental failure to attract or develop value-adding businesses that take advantage of Georgia's natural produce and competitive wage-rates. I expect this to change as the 1000+ pages of the EU association agreement become known to businesspeople that want to serve the EU market with Georgian product. It would be wise to sell processed products as this would generate better income and more jobs.

Excellent analysis, it's clear that at the present time there is a lack of direction in the economy and that seems to be some kind of transitional issues. It looks like some of the air has come out of many sectors and people are looking around and wondering what next. Whilst there is significant investment in luxury accommodation and real-estate there is still a fundamental failure to attract or develop value-adding businesses that take advantage of Georgia's natural produce and competitive wage-rates. I expect this to change as the 1000+ pages of the EU association agreement become known to businesspeople that want to serve the EU market with Georgian product. It would be wise to sell processed products as this would generate better income and more jobs.
Already Registered? Login Here
Register
Guest
Sunday, 12 July 2020

Captcha Image

Our Partners