Hello and welcome to my blog my dear friends! I am Ragul D, and this is Ergonomically Correct! (casually threw in a reference from The Office). I am fresh off a study on Georgia’s economic climate and its current situation. And i really wanted to get you people through it. We will take a look at Georgia’s economy in the past, how it sailed through tough times and what the future holds for the nation. We will get an insight on where the nation lacks and where the economy should be looking to work on.

THE CHALLENGES FACED BY THE MODERN ECONOMY OF GEORGIA

Georgia, a small country located in the intersection of Asia and Europe, the Caucasus region. With a small population of just 37.2 lakhs (as per World Bank’s population statistics in 2017), Georgia is widely considered as a small, developing country. The Modern Georgian economy is facing an uphill battle of adapting to the fast global economic and technological advancements, and there is a reason for their setback in development.

Transition of Georgian economy post-independence (1991)

Georgia was the part of the mighty Soviet Union from1921-1991. After a national referendum in April 1991, Georgia declared its independence from the Soviet Union. This transition is one of the initial causes of the series of economic difficulties faced by Georgia in the modern economic climate.

Initial Economic Crisis in Georgia (1991-1994)

Transition from the Soviet Union economic system to a Free market economy was the first uphill task faced by the Government of Georgia. The collapse of the CMEA trade system led to widespread Civil Strife. And it had various repercussions on Georgia’s trade. The war in Abkhazia from 1992-93 obstructed Georgia from conducting trade through one of its predominant trade links to the outside world. The war also backfired and Georgia had to pay homage to around 270,000 refugees. Migrated population and civic tensions led to evolution of gangs, bandits which led to a steady rise of the crime rate in the country. The government policies including taxations were very inefficient. Goods of cheap quality were sold at high prices across the country and the nation relied on Foreign borrowing as their main source of income. Increasing inflation, decline in currency value and over dependence on the US dollar as storage value hinted at a major economic crisis in the rise for Georgia.

Why was the transition difficult for Georgia?

As a part of The Soviet Union, Georgia enjoyed a better economic condition. Trade accounted for nearly 43% of the country’s GDP. The Soviet Union provided an ensured marketplace for Georgian goods to be exported, and also acted as a provider of goods to be imported. Nearly 96% of all produced goods were exported to Soviet republics and around 72% of imported goods originated from the same. Disorientation from such an ensured trade tie-up was enough to stir a collapse of the economy. CMEA was dissolved and dollarization of economy is a main reason behind the staggering 500% increase in the prices of oil and fuel. This made the production sector non-competitive, and many factories ended up being shut down. War scenarios everywhere around the country cut-off the only rail link from Georgia to The Soviet Union, which resulted in decline of Tourism industry too. On an approximate scale, Georgia witnessed around 80% decline in the GDP within 1990-1994.

How Georgia Recovered from the initial downfall?

A proper working government was the only way to bring the nation of Georgia back on its feet, and that was exactly what happened. In April 1994, a properly structured authoritative government was formed with the main objective of restoring law and order in the nation. International Monetary Fund and the World Bank joined hands with the government of Georgia in this massive rebuild. Widespread steps were taken in all fields, like in the Fiscal budget, Taxation policies, Money and foreign exchange and the commercial banking system.

The Fiscal deficit was cut down from a massive 16.5 % to just 4.7 % between 1994-95 and 1995-96, a lot of major subsidies and transfers were cut down whereas the wages were kept unchanged. Bank overdrafts were converted to long term bank debts and all of these measures were the primary part of the Economic rebuild that Georgia was working toward.

CHALLENGES FACED BY MODERN ECONOMY OF GEORGIA. Introduction

Studying Georgia’s past has given us an idea of how this capable of making its way out of tough economic situation. From nearly crumbling down due to an economic crisis to getting back on its feet, today we see Georgia as a small country doing just fine to survive and as an economy that thrives on Tourism and Foreign Direct investments. But Georgia is still a developing country. It is a slow-growing economy that hasn’t witnessed over 5 % growth over the last five years. There is progress happening by the means of inflow of foreign investments, increased exports, enriching tourism for revenue and increased international debt. Still, Georgia is a country where the economy’s competitiveness is hindered by monopolies and oligopolies largely prevailing. A lot of new employment opportunities have not been created, poverty and insufficient income still prevails as the top problems the economy is facing. Economic development requires a concrete plan of action and should never be rushed into. It needs to take into consideration of the economy’s past actions and its consequences also keeping in mind of the future populations’ well-being.

1. Major Macroeconomic indicators of Georgia

Table 1: Major Macroeconomic Indicators of Georgia

Overview	Last	Reference	Previous	Range	Frequency
GDP Annual Growth Rate (%)	4.9	Mar/19	4.5	-8.7 : 13.9	Quarterly
Unemployment Rate (%)	12.7	Dec/18	13.9	10.3 : 18.3	Yearly
Inflation Rate (%)	4.3	Jun/19	4.7	-3.3 : 59.31	Monthly
Interest Rate (%)	6.5	Jun/19	6.5	3.75 : 12	Daily
Balance of Trade (USD Million)	-417	May/19	-436	-629 : -6.34	Monthly
Current Account (USD Million)	-233	Mar/19	-501	-926 : 2.81	Quarterly
Current Account to GDP (%)	-7.7	Dec/18	-8.8	-22.07 : -5.27	Yearly
Government Debt to GDP (%)	43	Dec/18	44.2	21.55 : 44.4	Yearly
Government Budget (% of GDP)	-2.3	Dec/18	-3.2	-6.7 : 4.5	Yearly
Corporate Tax Rate (%)	15	Dec/18	15	15 : 20	Yearly
Personal Income Tax Rate (%)	20	Dec/18	20	12 : 25	Yearly

As we can infer from the table above, GDP annual growth rate is concerning as growth is not crossing the 5% mark. We can take a look at other macroeconomic indicators which from which we can infer some factors that impact the growth rate of the GDP. Under these indicators, we shall take a look at

1.Foreign Direct Investment⁵

Table 2 of Foreign Direct Investment statistics in Georgia (2013-2017) million USD

Years	Total	Quarter I	Quarter II	Quarter III	Quarter IV
2013	949.9	252.2	208.8	254.8	234.0
2014	1 763.0	312.6	191.2	729.4	530.0
2015	1 576.0	294.6	465.6	486.0	329.8
2016	1 583.8	394.0	408.6	505.5	275.8
2017	1 346.5	404.5	347.5	594.5	–

As we can notice from this statistic, the third quarter (at that time of writing) FDI stood at around 595 million USD. Compared to previous quarter’s 347.5 million USD this was a huge increase. This pattern indicates that there has been an increasing trend in the Foreign Direct Investments, but what is affecting the economy from accelerating its growth? FDI is definitely a tool for accelerating growth, but where these investments are put into is another crucial aspect to look upon. According to studies in Tbilisi University, Georgia, majority of these investments are made into the Infrastructure sector. But as we already saw, one of the most struggling sectors is the Manufacturing sector of Georgia. Due to incredibly high prices of fuel and other energy resources, industries have been shut down in the past. This has led to situation of completion-less economy (origins of monopoly and oligopoly) and also caused unemployment. These are nothing but the main problems that the economy is facing, as we discussed earlier. Increasing FDI and distributing it into various other sectors could be the first of many steps to be taken by the government.

2.Unemployment

From table one, we observe that the unemployment rate of Georgia stands at 12.7%, in 2017 definitely and improvement over the 13.9% in 2016. 2018’s statistics suggest that the unemployment rate has further dropped down to 11.8%. One might wonder that these rates are not the worst an economy has to deal with, also they are declining. But the reason behind these rates being quite low is because statistically Self-employed population doesn’t fall under the unemployed population. However, people are not content with this idea as they believe that self-employed are in not far from worse situations, and are mostly like the unemployed.

One of the biggest concerns for such a high unemployment rate is the highly mismatched skillsets available and those required. The labour available in the nation that are unemployed or underemployed is mainly unskilled manual labour. Before the dawn of this decade, agriculture was the primary labour involvement. Economic climate has continued to evolve but there has been no reform or updates in any of the schools, universities or education system.

The main step that Georgia has to undertake is a widespread large scale surveys of the labour market. There has to be a professional training system implemented to all the unskilled labour population. There has to be a common pattern in the education system with relevance to the labour market. Job creation as we discussed earlier through FDI in all sectors (mainly Industrial).

3. FREE MARKET SYSTEM AND ECONOMIC DEVELOPMENT

Learning from its past experiences, Georgia must understand that the smoothest way to overall economic development is by Free Market principle. Lack of Competition has been Georgia’s main concern in the goods market. An economy built around free market principles will be able to open up trade for various suitors and healthy competition will be created. Economy should be set aside from politics, and a free market system would make consumers the determinants of market functioning.

Quoting the article ‘MAJOR CHALLENGES FOR SOCIO-ECONOMIC POLICIES IN GEORGIA’ by Giorgi Gaprindashvili, the main objective of Competition Agency of Georgia are as following:

 [10]. “The aim of the Agency is to promote market liberalization, free trade and competition”. To protect competition in Georgia, the Competition Agency will have to ensure following:

a) Inadmissibility of administrative, legal and discriminatory barriers to entry into the market from the side of the state and/or local self-government bodies of the state or autonomous republic;

b) Ensure proper conditions for free access of the economic agents on the market;

c) Inadmissibility of unlawful restriction of competition between economic agents;

d) The principle of equality in the activity of economic agents;

e) Not allowing dominant position to be misused;

f) Not granting exclusive rights to economic agents by the state, autonomous republic’s authority and/or local self-government body that causes unlawful limitations of competition;

g) Ensure maximum publicity, objectivity, non-discrimination and transparency in decision making by the authorized body.”

CONCLUSION

In 1994, Georgia stopped the potential mega crisis by getting the government back in the authority, liberalizing the economy, controlling accelerating inflation and building a well-structured macroeconomic framework. All this was done with the cooperation of the IMF and world bank. Now as a decently developing country with a few problems, Georgia can reform itself into accelerating growth in various ways we discussed. Liberalizing the economy furthermore with the aim of creating a healthy competition, increasing FDI in the industrial sector, and development of labour quality by educational, training reforms. Free market is the key to increase in competition. Investing on tourism to capitalize more on the revenue generating sector shouldn’t be forgotten. With all these steps taken due in time, Georgia will no doubt be on the path of accelerated growth.

References and Sources:

(Wellisz, Jan-Feb 1999)

(Tao Zangh, 2012)

(Gaprindashvili, 2018)

Table 1: macroeconomic indicators from https://tradingeconomics.com/georgia/indicators

             Table 2: FDI data table http://geostat.ge/index.php?action=page&p_id=134&lang=eng

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