A Brief Economic History of Georgia: A Lesson Has to be Remembered

Georgia’s economic story after the collapse of the Soviet Union (SU) is important to be considered and analyzed in Georgia and in any developing and transition economy nations. There are several reasons why Georgia’s experience is interesting and valuable. First of all, it shows almost all the wrong sides of central planning and a centralized, bureaucratized and command economic system. But also, the Georgian experience is a good one to analyze the colonial type of economic relationship that existed in the soviet empire and the unified monetary and fiscal policies that it used.

Georgia and its people experienced suffering from the disintegration of the SU economy; according to the WB data, its GDP declined to 20-25% of the levels of GDP of the 1980s. There were several direct and indirect reasons for this failure. This could be the colonial type of economy – the existing factories were to serve only the demands of the internal markets of the SU (in fact, the ideas of the central authorities) or the undeveloped trade relations with suppliers or consumers of goods out of the SU.

Already from the beginning of its independence from the SU, Georgia experienced harshest ever aggressive pressure from the political authorities of the Russian Federation (RF). This included direct tools like energy supply cuts or indirect ones such as monetary policy manipulations.

Georgia’s economy stagnated and had no essential improvements before 2005 despite the legislative improvement and the international assistance it received in the second part of the 1990s. Georgia attempted a strong institutional reconstruction based on harmonizing and, sometimes, just copying European legislation. The country’s geopolitical and internal political turmoil made any investments in the country very risky. This trend was also very much supported by its energy supply instability and the rapidly degrading quality of its labor force.

Legislative mistakes made Georgia’s business trapped by means of many obligations; any firm could be accused of violations of taxation rules and regulation requirements. The number of registered enterprises stagnated, business was discredited and the economy remained very vulnerable to any regional and global shakes. The business environment and economic freedoms improved slightly after the collapse of the SU and stayed at a very bad quality which discouraged further foreign and local investments. Corruption was not an exception but the absolute rule of governance. The long-lasting inexperience from the collapse of the SU and the Georgian economy made Georgian workers weaker on the global competitive market which itself contributed to careful activities and hesitation of investors.

Government finances stagnated as well. After some years of chaos, the first public budget was approved only in 1995 and revenues began increasing quickly but only until 1998 (blaming the Eastern-Asian crisis) after which revenues fell and did not improve for the next several years. The government made efforts to get internal and external loans to stabilize the fiscal system and pay for the arrears of teachers salaries, pensions and previous loans, etc. The country was close to default.

It was already clearly visible that there was a demand for cardinal change and reforms in the country which was then converted into the mass demonstrations and the Revolution of Roses (RR). The RR promised people improvement of their lives and an end to mass corruption and the abuse of government offices.

The reforms after the RR made Georgia better off – the economic growth during the period of the next nine years was one of the best in its whole history. The country became a global champion of business environment reforms, improved economic freedoms increased the trust of investors in the country and despite the continuous pressure from the RF and even the war of 2008, the country avoided the consequences of the global crisis. The economic policy of free trade and liberalized regulations brought great success to the economy and also for the government. The reduction of corruption to average European levels, the improved quality of public services, the liberalized business environment, the decreased dependence on international financial assistance and the responsible economic and fiscal policy made Georgia one of the leaders among developing nations. This story of the decline and the revival of the country must become a good lesson for future generations, decision-maker politicians and voters in Georgia as well as for all nations struggling with economic problems.

This is an abstract of the publication by the same title published by Georgian Foundation For Strategic and International Studies. Courtesy of an author. The full text can be viewed here.