Wednesday, 27 March 2002

AMID ROUGH TIMES, OPPORTUNITIES FOR CHANGE IN GEORGIA

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By Mamuka Tsereteli (3/27/2002 issue of the CACI Analyst)

BACKGROUND: In early 1994, Georgia emerged from two years of civil conflict with a collapsed economy, widespread crime and a weak government. It took a tremendous effort by the people and government of Georgia to implement a policy of stabilization. President Shevardnadze led that process.

BACKGROUND: In early 1994, Georgia emerged from two years of civil conflict with a collapsed economy, widespread crime and a weak government. It took a tremendous effort by the people and government of Georgia to implement a policy of stabilization. President Shevardnadze led that process. In 1995-1996, Georgia received a series of important loans from international financial institutions that enabled the Georgian Government to stabilize its financial system and start structural reforms of the economy. In 1996-97 Georgia had one of the highest GDP growth rates in the world. In addition, large oil discoveries in the Caspian Sea helped Georgia to establish itself as a major transit route for vast oil and gas resources, thus gaining strategic significance for the West. Despite all of these achievements, political and economic stability in Georgia continued to be very fragile. Following the Parliamentary elections of 1999, the political elites were focused on an intense power struggle, which yielded no clear winners. Shevardnadze allowed this process to run its course, but as a result of that power struggle, Georgia again became very weak and disorganized by the fall of 2001. In addition to government unrest and deteriorated security, the business atmosphere was growing increasingly unhealthy. Smuggling and corruption created an environment where the incentives for businesses to move to the informal sector were very substantial. On the backdrop of this picture, President Shevardnadze visited Washington in early October to meet President Bush, and received a strong message of support from the United States Government for the reforms in Georgia. In the wake of September 11, Georgia also received a commitment for assistance to fight terrorism and strengthen internal security.

IMPLICATIONS: The extraordinary level of support for Georgia in Washington irritated both internal and external opponents of stability in Georgia, and developments in October-November were tense and unstable. Yet President Shevardnadze again managed to discharge the situation. He started putting a new generation of reform-minded people in key government positions, and empowered them with a very high level of rights and responsibilities. The new leadership of the ministry of State Security is particularly promising. There were several positive signs in the economic life of the country as well: The collection of taxes has improved, the electricity supply to Tbilisi during the winter was much better than in any of the previous ten years, and the collection of electricity bills by the AES Corporation has improved as well. It remains to be seen how determined Shevardnadze is to bring reforms to a successful end, but it is becoming increasingly clear that if properly used, U.S. military assistance could greatly support the implementation of immediate policy adjustments in the area of the economic development. The largest obstacle for the development of Georgia remains the centralized control by the government over the economy, based on corrupt interests rather than on the rule of law. The practice of free private entrepreneurship is not a priority. One of the biggest challenges for competitive businesses is the fact that the government is unwilling or unable to protect the borders of the country. Smuggling, facilitated by corrupt customs officials, is putting legal businesses in a very uncompetitive position, giving smuggled goods a large price advantage over locally produced goods. Businesses that are processing legally imported raw materials are also in a disadvantageous position, since they can't compete with producers who use smuggled raw materials. The second major obstacle is the collection of taxes, and the current tax system itself. Poor administration is one reason for this situation, but the tax code itself is also very ambiguous and leads to corrupt interpretation by tax authorities. Payroll taxes are prohibitively high, which is yet another incentive for businesses to operate illegally. The presence of a strong security force in the country and attempts by the government to enforce the rule of law should send a very definite signal to those who operate beyond the law, and to those in the government who benefit with the existing situation. At the same time, the creation of a liberal business environment should invite illegal businesses to begin to work within the legal framework in order to gain better protection and support. There are several factors which are critical if rapid economic recovery is going to be achieved. Internal stability and the presence of the ultimate guarantor of the implementation of reform-oriented government decisions, as well as freedom-oriented visionary leadership are the necessary elements of the process of rapid transformation and development. The experience of Germany and Japan after World War II, Singapore in the 1960s, and Chile in the 1980s are the best examples. The model of a market economy that is right for Georgia and how to achieve it must come from within Georgia. It will undoubtedly be based on sweeping economic change and the positive experiences of other countries.

CONCLUSIONS: One of the most important things that the Georgian government needs is to regain the trust of its people. The only way one can truly succeed in implementing reforms in a country like Georgia is if top down and bottom up actions are equally strong. In six to eight months, Georgia will hopefully have about two thousand well-trained security forces, which will serve as a major guarantor for the stability in the country. Moreover, this will coincide with the beginning of the construction phase for two large infrastructure projects: the Baku-Tbilisi-Ceyhan Oil pipeline and the Baku-Tbilisi-Erzurum Gas pipeline, thus creating the perfect timing for a new boost, and test, of governmental reforms. What Georgia needs is to have, by that time, a clear action plan for rapid economic recovery, which is supported by the international community, including international monetary institutions. The action plan should include three interrelated components: 1) the strengthening of a small government with clear functions; 2) maintaining a strong system of control over the economic borders of Georgia (an alternative could be the elimination of customs duties, which could put every importer and producer in an equal position); 3) the creation of the best possible business environment for local and foreign investors, built on a very high level of economic freedom for business entities and individuals, a clear vision of the future and a well-planned process that encourages individual initiative, entrepreneurial spirit and readiness to take risk. Positive signs are in place in Georgia, which indicate that the leadership may move in this direction, and this move should receive strong support and encouragement by all parties who are interested in seeing progress in Georgia. The changes are inevitable, and the sooner they are implemented, the better.

AUTHOR BIO: Mamuka Tsereteli is the executive director of the America-Georgia Business Council. His areas of interests include economic security, business environment and development strategies.

Copyright 2001 The Analyst. All rights reserved

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