Georgia

Georgia: Present Economic Overview  by  Flavia Almeida

Economic Transition in Georgia by Berenise Lucero

Struggle from Command to Market Economy by Jacqueline McKeon

Georgia: Present Economic Overview

 
By:  Flavia Almeida

About five years ago living standards in Georgia were considered good. During the Soviet Regime Georgia enjoyed a large "shadow economy". Since private enterprises were not permitted during the orthodox centralized state-controlled economic regime Georgians were forced to perform these practices underground. The political system was liberalized, but at the same time a series of ethnic conflicts exploded in the region followed by an economic decline. Georgia is mainly an agricultural country.

Agriculture accounted for 42% of Gross Domestic Product in 1991 while industry constituted 34%, and the remaining percentages are constituted of transport, communication, construction and trade. Georgia is a large producer of citrus fruits and tea crops (almost the entirety of the former Soviet Union production), grapes and wine, steel pipes, electric motors, aircrafts, computers, synthetic fihers, iron alloys, chemicals, fertilizers, cement, shoes and canned goods.

Georgia is also rich in minerals. It has one of the biggest manganese mines in the world in the Chiatura district; known reserves amount to almost 200 million tons. Before the transition annual production was about 5.15 million tons but it has since declined 476,000 (1993). There is also strong production in: copper ore (836,000 tons in 1992), copper concentrate (7,300 tons), gold concentrate (1,222 kg), silver concentrate (3,200 kg in 1995), lead, zinc, marble, decorative stones, basalt, clay, granite and diorite.

Georgia experienced relative growth during the eighties but plunged into economic crisis after the collapse of the Soviet Union. National income decreased by 4.9%, industrial production by 16%, and agricultural production by 20.5%. During the Soviet regime Georgia's industry was specialized to complement the Soviet Union's economy. Georgia was dependent on raw materials, fuel and markets from Russia.

Imports began to rise: almost all fuel was now imported, 80% of timber, 50% of cement, and nearly 90% of raw materials for industrial production. The country still relies heavily on energy imports (from Russia and Turkmenistan), but energy demands are so high that Georgia is having difficulty in paying for the imports. This has caused a significant decrease in imports and the population has had to endure bitter winters practically without electricity. This crisis is not to be taken lightly. The economy was stagnant and the population was surviving because of foreign aid.

Recently Georgia has been able to obtain political stability and therefore reforms in the economy have been taking place. The temporary coupons have been replaced by the Georgian Lary (introduced in October 1995), it has been relatively stable and is convertible to the dollar at a rate of 1.25. Economic stabilization has prompted growth in domestic production and promises to improve all areas of the economy. The process of change 5 far from over but Georgia has managed to revive its economy from the stand still it was in and is moving towards the right path

Economic Transition in Georgia

by Berenise Lucero

"The "human condition" is always to push forward for the better and economics is the study of that process" Brian S. Wesbury

When an economic system collapses, either because of internal mismanagement or external exploitation, that economic system needs to be replaced by another economic system. When the Soviet Union as a political and economic entity collapsed, the former Soviet republics recognized the need to restructure their economic system. Transition from an administrative command economy to a market economy was typically classified in four major dimensions. First, the microeconomic of transition focused on creating market and market prices signals through privatization. Second, the macroeconomics of transition centered on creating a money-financial system and developing a new fiscal role for the state. Third, emphasis was placed upon international economic integration, specifically on new trading arrangements and policies. Lastly, transition has had to consider some form of safety net for the provision of medical services, unemployment benefits, pensions. 1

The three countries of the Caucasus, which include Georgia, have adopted reform policies that have yielded varying degrees of success. 1 However, the road to reform has been full of obstacles, especially in the case of Georgia. This is apparent in poor political leadership, the economic decline that began in the 1980s, civil war, and a well-established underground economy that is difficult to control. After the break-up of the Soviet Union, Georgia, not surprisingly, experienced periods of political instability coupled with civil unrest from ethnic tensions within the country. Added severe economic shocks stemming from the break-up of Soviet Union adversely affected Georgia's economy and in early 1994 output had dropped and Georgia's GDP reached only one-third of the 1991 level while at the same time Georgia was experiencing one of the worst hyperinflations in its history. Just a few months afterwards, in mid-1994, the Georgian government adopted reform efforts to guide Georgia back on a sustainable growth pact. One of the most important programs that came out of this reform was the liberalization of prices, trade and the exchange system. 3 Georgia's civil war seems to have served as a catalyst to speed up the process of reform. It gave the Georgian government the initiative to push forward reform efforts in an attempt to revive Georgia's economy.

Indeed, the implementation of the reform program was successful. By 1995 Georgia's real GDP increased, led by agriculture, trade, transport, and construction increases and a decline in inflation. 3 In March of that year, Georgia began a privatization program of industry, services, and agriculture. This microeconomic aspect of the transition had actually began in August 1992 when the State Council adopted the "State Program on the Privatization of State Enterprises." The law was mirrored on Russia's approach to privatization by providing for several methods, including "popular privatization," consisting of a combination of vouchers distributed to the public and auctions of state enterprises. 2 However, Georgia's political crises delayed any significant measures. By 1993, few Georgian industries had been privatized, although large numbers of small enterprises were scheduled for privatization in 1993 and 1994. 2 Although the official privatization program began in 1992, real privatization did not see any significant progress until 1996 when price liberalization was nearly complete. 3 By January of 1998 10,515 units were privatized from 10,656 units approved to be privatized in the country. By now privatization of small units in the fields of construction, trade, communal service, oil production, transport and social sphere is accomplished. 4 More recent information shows that privatization is still increasing. As of July 1st 2000, 13,207 small enterprises had been approved for privatization and 14,756 had actually been privatized. 5 Although privatization has proceeded rapidly as seen by the fast privatization of the small enterprises, privatization of large industrial enterprises is not progressing.

International economic integration, specifically on new trading arrangements and policies was significantly improved under the Shevardnadze government. In May 1992, licensing requirements for import or export activities were dropped except for the import of goods in the military and medical categories. This liberalization of trade represented a significant expansion of the rights of enterprises to engage in foreign economic activity. 2 The Commonwealth of Independent States remains the main destination for Georgia's exports. Export to the CIS has been increasing since 1997, while imports are reducing. As for the European Union countries, Georgia's export is increasing, though it still has not established itself enough on the EU market. 5

In terms of safety net for the provision of medical services, unemployment benefits and pensions, there is still a long way to go before actual results become visible. The current social safety net system is largely the heritage of the Soviet past and in the conditions of transition economy appears to be ineffective as poverty refuses to subside. 5 The fundamental restructuring of the state social protection system is therefore crucial. “A Concept of Social Development” was presented in January 2000 stipulating the measures to be implemented for social development, are declarations of a long-term commitment to social sector reforms.

Georgia, like many of the former Soviet republics suffered substantial decline beginning in 1991, and has been facing several obstacles in the process of transition. Only by 1996 did Georgia begin to experience positive economic growth (figure one 1). Transition may involve the 4 aspects listed above, but the success or failure of it is rooted on both the philosophy of the people and the government officials. That is, since the economy operates by the interaction of individuals, firms and governments, economic performance is vested in peoples' values, ideas and believes. Most people act with a set of principles, principles that determine actions, and actions that determine a way of life. The way people behave is crucial in understanding economics. Hence, changing an economic system through mere economic factors, such as prices and privatisation is not enough. People's philosophy must follow and sustain that change for success. Change must obviously have a clear destination and goal. Whether the intended goal of that change is to a capitalist economy, market economy, or "mixed economy", government officials must act towards that goal. In the case of Georgia, Mr. Shevardnadze, has been implementing a gradual transition to a market economy through pro-western oriented reforms. Through Mr. Shevardnadze, Georgia is not only politically liberalized, having Mr. Shevardnadze as the first president democratically appointed, but also this new democratic figure has the prerequisite for brining about economic liberalization to a market economy.

References

1. Russian & Soviet Economic Performance & Structure. Gregory, Paul & Stuart, Robert. Addison Wesley Longman, Inc. 2001

2. Armenia, Azerbaijan, and Georgia : Country studies. Federal Research Division, Library of Congress; edited by Glenn E. Curtis. Washington, D.C. : Federal Research Division, Library of Congress

3. International Monetary Fund. http://www.imf.org/external/pubs/ft/survey/pdf/092396b.pdf

4. economics. http://www.parliament.ge/Economics/

5. The Georgian – European Policy and Legal Advice Center (GEPLAC). http://geplac.org/

 

Georgia's Struggle from Command to Market Economy

by Jacqueline McKeon

Georgia, though once a prosperous Soviet Republic, found it difficult to recuperate from the economic landslide caused by the disintegration of the Soviet Union. Georgia, like the other fifteen former republics, was dependent on internal trade to subsidize energy and production costs. As a small, historically dependent nation, Georgia entered uncharted territory when she faced world trade competition following her separation from Mother Russia. Separatist and ethnic movements also ensued following her declaration of independence: "Georgia's economy has traditionally revolved around Black Sea tourism, cultivation of citrus fruits, grapes, [etc…, but] The country imports the bulk of its energy needs, including natural gas and coal…its only sizable domestic energy resource is hydropower. Since 1990, widespread conflicts, e.g., in Abkhazia, South Ossetia, and Mengrelia, severely aggravated the economic crisis resulting from the disintegration of the Soviet command economy in December 1991" (www.departments.bucknell.edu/russian/facts/georgia.html).

Georgia purchased most of its energy resources from Russia during the Soviet period, but is currently suffering from an energy crisis due to the shift from soviet prices to world market prices that followed economic liberation. "The abrupt break from Soviet rule created much economic disarray along the way in form of disrupted energy supplies, a shutdown of many industries, and consequent hardships and shortages of water, electricity, and gas for the general population" (www.uiowa.edu/~cyberlaw/georgia/mwbwgoom.html).The economy completely collapsed proceeding the Soviet break-up, and Georgia has made little progress since; her stagnation is largely due to a powerful underground economy and a perpetual civil war that has waged between North and South Ossetia. "Georgia started its independent development in conditions which seemed relatively favorable at the time. In the years immediately post-independence, the Georgian economy fully collapsed. Consequences of political changes: instability, chaos and power vacuum played a disastrous role in addition to the purely economic effects of the break up of the command economy" (www.undp.org/rbec/nhdr/georgia/summary.htm). 

The Georgian administration of the early 1990's did take steps to combat the fledging economy. Civil war hiked inflation rates up to 7380 percent in 1994, but "Georgia adopted a financial austerity program that caused its inflation rate to drop to an annual rate of 450 percent in 1995" (Paul Gregory and Robert Stuart). 1995 brought about great reforms in Georgian economic recovery. GDP market prices grew by 2.4% and 8% in 1996. "The Georgian parliament drafted an economic reform program that won IMF support in July of 1995. In March 1995, Georgia began a privatization program of industry, services, and agriculture…" (Gregory and Stuart). During the transitional economic period (from command to market economy), Georgia's currency, the coupon, was virtually worthless: the American dollar was exchanged more frequently. However, in 1996, a new currency, the Lari was introduced, "…and relatively balanced state budget had beneficial impact on the state of the Georgian economy in general" (www.undp.org/rbec/nhdr/georgia/summary.htm). 

  In 1991, Georgia seemed poised to make a successful transition from command to market economy because she was one of the wealthiest republics; there are many pertinent reasons, however, which explain why the transformation has not occurred naturally. Georgia, with the exception of the period between 1917 and 1921, had no prior experience with economic or political independence before 1991. Typical to many colonized and developing countries, Georgia faced the dichotic task of simultaneously structuring a potent government and a viable market economy; it proved a task too unfamiliar and complex for a new nation to undertake alone.

 "Western economic help is thus badly needed to get started on a new course that will prevent the Georgian's from becoming irretrievably disillusioned. Thankfully, international institutions such as the World Bank (IBRD), the European Union (EU), and others have begun to implement programs for economic rehabilitation and reconstruction" (www.uiowa.edu/~cyberlaw/georgia/mwbwgoom.html). 

The Georgian government is gradually realizing which needs of its people are most imminent and are focusing on humanitarian and energy relief programs. The settlement of ethnic conflicts and civil war in Ossetia are high on the list of priorities; the currency has been stabilized and privatization begun, so hopefully greater strides will be made in the near future to complete the transition from communism and command economy to democracy and market economy.

References

www.departments.bucknell.edu/russian/facts/georgia.html

www.undp.org/rbec/nhdr/georgia/summary.htm

www.uiowa.edu/~cyberlaw/georgia/mwbgoom.html

Russian and Soviet Economic Performance and Structure, by Paul Gregory and Robert Stuart

 

 

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