In June 2009 Georgia's Prime Minister Nika Gilauri announced that the state was about to receive $200 billion as loans from European Bank for Reconstruction ...
COLLEGE OF EUROPE NATOLIN (WARSAW) CAMPUS EUROPEAN INTERDISCIPLINARY STUDIES
ECONOMIC TRANSITIONS IN GEORGIA: ON THE PATH FROM SHOCK THERAPY TOWARDS DCFTA
Supervisor: Kerry Longhurst
Academic Year 2013 – 2014
Thesis presented by Tamar Burduli for the Degree of Master of Arts in European Interdisciplinary Studies
Statutory Declaration I hereby declare that this thesis has been written by myself without any external unauthorised help, that it has been neither submitted to any institution for evaluation nor previously published in its entirety or in parts. Any parts, words or ideas, of the thesis, however limited, and including tables, graphs, maps etc., which are quoted from or based on other sources, have been acknowledged as such without exception. Moreover, I have also taken note and accepted the College rules with regard to plagiarism (Section 4.2 of the College study regulations).
Déclaration sur l’honneur Je déclare sur l’honneur que ce mémoire a été écrit de ma main, sans aide extérieure non autorisée, qu’il n’a été déposé auparavant dans aucune autre institution pour évaluation, et qu’il n’a jamais été publié, dans sa totalité ou en partie. Toutes parties, mots ou idées, aussi limités soient-ils, y compris des tableaux, graphiques, cartes etc. qui sont empruntés ou qui font référence à d’autres sources bibliographiques sont présentés comme tels, sans exception aucune. Je déclare également avoir pris note et accepté les règles relatives au plagiat (section 4.2 du règlement d’études du Collège).
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Acknowledgments Kerry Longhurst Vladimer Papava Quincy Cloet Aleksandre Gvarjaladze
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Abstract The following thesis discusses the history of economic transitions in Georgia, starting from restoration of independence in 1991 following the fall of the USSR, and progressing towards efforts to establish a democratic state, to make a transition from command economy to the liberal market-one, and to integrate closely with the European Union. The thesis also overviews some political or societal factors, that influenced economic developments at the time. First Chapter discusses the two main approaches of post-communist economic transition: Shock Therapy and Gradualism, briefly describes a classical example of Shock Therapy application in Poland, i.e. Balcerowicz Plan. Second chapter examines the initial post-communist transition stages that took place in Georgia in the nineties mostly during Eduard Shevardnadze’s presidency. It overviews successful and unsuccessful reforms of Shock Therapy together with accumulated errors that set foundation for Rose Revolution of 2003. Third chapter overviews the political “package”, that Mikheil Saakashvili inherited from previous administration and focuses on successful and infamous reforms carried out by his administration. Fourth chapter explores the history of EU-Georgia relations, Georgia’s recent political developments and current stand on these relations, economic implications of signing DCFTA agreement and how DCFTA is different from FTA, how Georgia complies with the EU Economic Governance, and analyses the chances of Georgia’s preference of ECU over the EU. The main conclusions are that domestic armed conflicts, declaration of independence by Abkhazia and South Ossetia, post-war infrastructural and social problems, massive corruption, inexistence of proper state institutions, lack of government’s cohesion and expertise on future economic strategies contributed to failure of Shock Therapy, which contributed to the happening of peaceful Rose Revolution. Even though the new government embarked upon a fast track of reforms to liberalize the market, eradicate corruption and harmonize domestic legal system with that of the EU, spontaneity, strategy inconsistency, populist programs, elite corruption and massive violation of human rights resulted in change of government in 2012. Nevertheless, Georgia has been dedicated to Eurointegration, especially after the Rose Revolution. Despite the raised fears about Russia’s actual leverage in the ENP countries right before when Georgia is about to sign Association Agreement with DCFTA component, Georgian government is positive about successful outcome. However, EU’s enlargement fatigue has produced discussions on ENP being a substitute for membership. Therefore, it should be kept in mind that the membership should, by no means, be the ultimate goal of Georgia, but rather approximation with the EU should be regarded as a means of becoming a truly European state or a state of European values. 3
Keywords: Georgia, Economic Transition, Shock Therapy, Rose Revolution, DCFTA
Wordcount: 21 284
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Table of Contents Introduction ............................................................................................................................... 6 1. Post-Communist Transition Theories: Two Approaches of Development ............................... 9 1.1. Shock Therapy ............................................................................................................... 10 1.2. Gradualism .................................................................................................................... 15 2. Post-Communist Reforms in Georgia ................................................................................... 18 2.1. Stage of Naive Comprehension ...................................................................................... 18 2.2. Stage of No Movement or Stage of Stagnation ............................................................... 18 2.3. Populist Stage of Reform or Shock Therapy ................................................................... 18 2.4. Stage of Delay or Stage of Accumulation of Mistakes .................................................... 21 2.5. Reforms Resumed or Stage of Correction of Errors ........................................................ 24 2.6. Leszek Balcerowicz - Economic Advisor in Georgia ...................................................... 26 3. Post-Rose Revolutionary Reforms in Georgia....................................................................... 29 3.1. What Was Right and Wrong Before the Rose Revolution? Political Inheritance of Saakashvili ........................................................................................................................... 31 3.2. Successful Post-Revolutionary Reforms ......................................................................... 32 3.3. Questionable Post-Revolutionary Reforms ..................................................................... 36 4. Georgia and the EU .............................................................................................................. 42 4.1. Brief Chronology of EU-Georgian Relations .................................................................. 42 4.2. EU Assistance to Georgia .............................................................................................. 44 4.3. Georgia on the Path towards the EU and DCFTA........................................................... 45 4.4. Peaceful Transition of Political Power in Georgia .......................................................... 46 4.5. EU Economic Governance and Georgia ......................................................................... 49 4.6. What is FTA and when does it become Deep and Comprehensive? ................................ 51 4.7. Georgia and DCFTA: What Next? ................................................................................. 52 4.8. Georgia: Towards European or Eurasian Union? ............................................................ 56 Conclusions ............................................................................................................................. 60 Bibliography ............................................................................................................................ 63
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Introduction Georgia, located between the Black and Caspian seas on the geographical border of Eurasian continent, is a one of the most ancient countries, first historical records of which can be dated back to ancient Anatolian period. Georgia's history is full of struggles against invading empires and nations like “Xenophon's Greeks, the Arabs, the invading Turks, the Crusades, Chingiz Khan and Timur Lang, the Persian empire, the Russian empire, Soviet totalitarianism […] having one of the longest, most turbulent histories in the Christian or Near Eastern world” 1, and which, “though small, stands at a crossroads between Russia and the Muslim world, between Eastern Europe and Central Asia, and is a dramatic example of state-building and, also, of tragic political mistakes.”2 This small country of 69 700 square kilometers, 1.87 times bigger than Netherlands and 0.68 times smaller than Iceland3, inhabited by almost 4.5 million people and with a GDP of $15.75 million4, was under Russian rule since the 19th century and, after few years of independence in 1918-1921, became ruled by the Soviet Socialist regime. After the revolutions of 1989 and final dissolution of the USSR, Georgia declared its independence in 1991, held its first democratic presidential elections and embarked upon the creation of proper statehood. However, the civil unrest in the capital, war in two breakaway regions and the military coup d’état between 1988 and 1993 substantially stalled the post-communist transition. Losing central administration control over Abkhazia and South Ossetia caused irreversible damage to Georgian population, infrastructure, social costs and economy, and still continues to do so. “There is no doubt that the post-Soviet Caucasus republic of Georgia is one of those transformation societies facing especially complex challenges. Geographically and culturally, Georgia is located in a traditionally unstable geopolitical border zone between Europe and Asia. Add an ethnically heterogeneous population, two active as well as several latent secession conflicts, and the fact that Georgia has no opportunity to fall back on historic traditions of effective state coherence, and one sees that the country’s process of political and economic transformation is struggling under an enormous burden.”5 Georgia declared its western political direction already in the early nineties, while keeping “warm” relations with Russia, mainly in trade, since Russia represented a major export partner for Georgian products (mostly wine and mineral water). Furthermore, Post-Soviet Georgia 1
Donald Rayfield, Edge of Empires: A History of Georgia. Reaktion Books Ltd., London, 2012, bookjacket. Reaktion Books, Edge of Empires: A History of Georgia. Available at: http://www.reaktionbooks.co.uk/display.asp?K=9781780230306, (consulted on: 29.4.2014). 3 MapFight. Available at: http://mapfight.appspot.com, (consulted on: 23.4.2014). 4 World Bank Data: Georgia. Available at: http://data.worldbank.org/country/georgia, (consulted on: 23.4.2014). 5 Bertelsmann Transformation Index: Georgia Country Report, 2003, p. 1. Available at: http://www.btiproject.org/fileadmin/Inhalte/reports/2003/pdf/BTI%202003%20Georgia.pdf, (consulted on: 18.4.2014). 2
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immediately put its efforts to transition from command economy to liberal one, main example of which was post-communist Poland and its famous Balcerowicz Plan. However, the lack of state institutions, expertise of liberal market economy, criminal situations and other factors influenced the unsuccessful outcome of Shock Therapy in Georgia. “Political and economic transformation in Georgia clearly lacks a linear dynamic towards the consolidation of democracy and market economy. Under the heavy burden of two unresolved ethnic conflicts and sharp economic decline aggravated by pervasive corruption and extremely weak state structures, Georgia’s development has been marked by a series of interruptions and setbacks.” 6 The aggravated dissatisfaction of Georgian population with the growing imprudence of Shevardnadze's government brought the Rose Revolution and a new president to the country. Elected by 97% of the population (with 83% of a turnout), Mikheil Saakashvili initiated revolutionary and drastic reforms in all spheres, which brought about change quite rapidly after dozen years of struggle of previous governments. The newly appointed, mostly young and western-educated government actively engaged in massive market liberalization and facilitation of state administrative procedures. However, many of these changes had drawbacks or were flawed. Despite the elimination of petty corruption, stabilization of criminal situation and steady economic growth, elite corruption, over-expenditure and non-transparency of state resources, violation of human rights, Georgia-Russia war of 2008 and some additional factors contributed to decreased trust and dissatisfaction with Saakashvili's government. In spite of all the internal or external obstacles, Georgia has been keeping its European direction and has been widely open to Eurointegration since 1992. As a part of Partnership and Cooperation Agreement (PCA) and European Neighbourhood Policy (ENP) Action Plan, the country has been adapting its constitution and regulations to the EU requirements. As for today, Georgia has finalized negotiations on Association Agreement (AA), which involves Deep and Comprehensive Free Trade Area (DCFTA), fate of which will be decided in summer 2014. Based on the described political history of the country, the milestones of economic development in Georgia's recent history include periods of: 1) 1989-2003 - from independence to Rose Revolution; 2) 2003-2012 - Rose Revolution and policies of the United National Movement; and 3) Initialization of the DCFTA agreement and prospects of signature. The first two of these milestones are characterized by two almost full presidential terms and having president's affiliated party as majority in the parliament: Eduard Shevardnadze with 6
Bertelsmann Transformation Index: Georgia Country Report, 2006, p. 2. Available at: http://www.btiproject.org/fileadmin/Inhalte/reports/2006/pdf/BTI%202006%20Georgia.pdf, (consulted on: 18.4.2014).
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Union of Citizens of Georgia during 1995-2003, and Mikheil Saakashvili with United National Movement during 2004-2013. Georgia's first president Zviad Gamsakhurdia held the office during 1991-1993. He died in unclear circumstances (while formally still holding the presidential position) during the civil war of 1988-1993 and military coup d’état of December 1991 – January 1992. In both cases, having president and majority of parliament from the same party and by taking into account the fact that Rose Revolution was directed against Shevardnadze's politics, it is presumable that the two leaders had drastically opposing views on certain crucial policies including economic policies. Currently DCFTA is proposing new dimensions for economic development and at the same time is testing Georgia's readiness to become part of European Economic Governance. Therefore, the following thesis discusses the three stages of Georgian economic transitions and development according to the policies of the ruling parties, by identifying underlying theories or practices of transitions, lists successful and failed reforms and their consequences, and tries to analyze prospects and implications of signing DCFTA agreement. The main purpose of this thesis is to serve as a consolidated version or reference point for those interested in Georgia's economic transition history and its contextual political factors.
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1. Post-Communist Transition Theories: Two Approaches of Development As a result of desovietisation, the revolutions and collapse of communism in 1989 and the final dissolution of the Soviet Union in 1991 gave basis for formation and re-formation of 15 former communist and now independent countries7. One of the main characteristics of this reformation was transition from command economy to the liberal market economy. However, this changeover still had components of or was on some level overshadowed by Soviet communism economic system8. Additionally, transforming communist institutions into market institutions is no piece of cake and, therefore, the process did not go without substantial mistakes. Especially if we take into account, that some of these countries did not inherit public institutions necessary for the transformation. Some academics refer to the process as “refolution” to integrate both “revolution” and “reform” that are so characteristic to the post-communist transformation. 9 In this sense, economic reforms undertaken by the government of Georgia were no exception to this rule. According to Joseph E. Stiglitz, post-communist transformation is one of the most remarkable events of the end of the past century10 and according to Ivan T. Berend, it can even be discussed as global transition to the market economy. 11 In the view of John Kenneth Galbraith it can be looked at the same level as the two world wars, comprising together the three major events in the past century.12 Currently, by looking at the history of transitions and the empirical data, it is already feasible to perform scientific observations and draw up general theories on the process of postcommunist transformation. The academics, economists and reformists are divided into two main “teams” or courses of reforms: “Gradualists” and the advocates of “Shock” in the economic
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Paul Hare and Gerard Turley, “Introduction to the Handbook”, in: P. Hare and G. Turley (eds.), Handbook of the Economics and Political Economy of Transition, Routledge, Abingdon, 2013, p. 3. 8 Richard E. Ericson, The Post-Soviet Russian Economic System: An Industrial Feudalism?, 28 June 2000, pp. 5-17. Available at: http://www.suomenpankki.fi/bofit_en/tutkimus/tutkimusjulkaisut/policy_brief/Documents/bon0800.pdf, (consulted on 07.4.2014). 9 Timothy Garton Ash, Revolution in Hungary and Poland, 17 August 1989. Available at: http://www.nybooks.com/articles/archives/1989/aug/17/revolution-in-hungary-and-poland/, (consulted on: 2.5.2014); Constitutional "Refolution" in the Ex-Communist World: The Rule of Law, 1997, p. 45. Available at: http://digitalcommons.wcl.american.edu/cgi/viewcontent.cgi?article=1385&context=auilr, (consulted on: 2.5.2014). 10 Joseph E. Stiglitz, “Another Century of Economic Science”, in: The Economic Journal, No. 101, 1991, pp. 134141. Available at: http://academiccommons.columbia.edu/download/fedora_content/download/ac:159591/CONTENT/10664.pdf, (consulted on: 2.5.2014). 11 Tibor Ivan Berend, “End of Century Global Transition to a Market Economy: Laissez-Faire on the Peripheries?”, in: Transition to a Market Economy at the End of the 20th Century, Eleventh International Economic History Congress, Session A-3, September 12-17, 1994, Milan, Italy, p. 21. 12 Vladimer Papava, Necronomics: The Political Economy of Post-Communist Capitalism (Lessons from Georgia), iUniverse Inc., Lincoln, 2005, p. 13.
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system of the state. However, besides these two paths a third one by the name of “Third Path” can be identified, which finds its origins in the Balkans and is also referred to as “Gradual Gradualism” and entails slower transition to market economy than that of Gradualism, where privatization occurs only to small enterprises in the sectors of trade, services and tourism. 13 From the following discussions on the two main strategies of transition it can be easily observed that the main difference and subject of discussion among the supporters of the theories is the “transition period” or the speed at which the reforms are being carried out. 14
1.1. Shock Therapy In general, Shock Therapy entails implementation of a set of tight fiscal and monetary policies involving exclusion of subsidies by the means of price liberalization, minimization of budget deficit, strict regulation of money supply by limiting the credit issues, and short-term restriction of income growth.15 Application of Shock Therapy strategy was most popular in Central and East Europe: “The CEE transitional countries applied the rapid “shock therapy” to put the economy on “automatic-pilot” and let the markets decide supply, demand, and prices and economic transformation”. 16 Moreover, governmental sector does not have a crucial role in this strategy and private sector, because of the “shift of economic decision making to the private sector, and the exclusion of government intervention in the national economy” which is same as “private enterprise operating in a framework of market-determined prices but abolishing the need for public sector involvement at the macro-level in a national economy”. 17 To put it simply, small and medium-sized enterprises or SMEs are the key to post-communist transition.18 However, “regardless of the political and cultural context, in the early stages of economic transition process where institutional support and market conditions are not apparent, the state and public sectors play key roles in development of above mentioned SME sector and capital movement in this sector, also provision of free market and political and economic flexibility”.19 “The Shock Therapy or “Big Bang”, or “Bitter Pill” is a strategy that consists of maximization of radical transformations in the shortest possible period of time. The key 13
Ibid., p. 18. Ibid., pp. 18-19. 15 Ibid., p 125; Vladimer Papava, “The Georgian Economy: From “Shock Therapy” to “Social Promotion””, in: Communist Economies & Economic Transformation, Vol. 8, No. 2, 1996, p. 252; Vladimer Papava, Economic Reforms in Post-Communist Georgia: Twenty Years After, Nova Science Publishers Inc., New York, 2012, p. 3; Hare and Turley, op. cit., p. 3. 16 Quamrul Alam, Thanh Hai Nguyen and Namul Majumdar, “Shock Therapy versus Gradualism: The Central Eastern Europe (CEE) and East Asia Comapared – A Review of Literature”, in: International Business Research, Vol. 2, No. 2, 2009, p. 4. Available at: http://ccsenet.org/journal/index.php/ibr/article/download/1109/1106, (consulted on: 2.5.2014). 17 Ibid. 18 Ibid. 19 Ibid., p. 3. 14
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elements of Shock Therapy strategy include liquidation (or at least, minimization) of budget deficit and pursuit of tight monetary policy under the conditions of fixed money supply or fixed exchange rate. The Shock Therapy doctrine stems from the orthodox macroeconomic stabilization scenario, which stipulates that budget deficit should be liquidated (or at least minimized) and a tight monetary policy, coupled with a fixed money supply or fixed exchange rate, should be established within a limited period of time.” 20 Hereby it should be remarked, that the quoted framework is same as “Washington Consensus” and, therefore, sets foundation for the approach that International Monetary Fund (IMF) has adopted towards transformational reforms and developments21 (also should be emphasized the substantial role and involvement of IMF in the post-communist transformations, especially in Georgia). The program of Shock Therapy was first carried out in West Germany after the Second World War. Its “second birth” took place in Poland and later on this method was applied in several other post-communist and post-soviet countries but with different levels of success. 22 Poland's former chairman of National Bank and former Finance and Deputy Prime Minister, economist Leszek Balcerowicz has identified four historical “transitions” 23: 1. Classical process of transition involving expansion of democracy in dominant capitalist nations in 1860-1920; 2. Neoclassical transition characteristic to the democratic processes after the Second World War in some European countries (West Germany, Italy, Spain, Portugal), Latin America and Asia (Japan, South Korea and Taiwan); 3. Market-oriented reforms after the Second World War in non-Communist countries (West Germany, South Korea, Taiwan, Chile, Turkey, Mexico, Argentina); 4. Asian model of post-communist transition (China and Vietnam). 24 However Leszek Balcerowicz is particularly famous for the “Balcerowicz Plan” or the transition program of “Shock Therapy” that was carried out in Poland in the 1990s. This transition from command economy to market-one is referred to as one of the most successful post-communist transition stories (if not the most successful one). Success of Poland's current European integration is also attributed to Shock Therapy as “the right policy set at the right 20
Papava, 2005, op. cit., p. 19. Joseph Stiglitz, More Instruments and Broader Goals: Moving Toward the Post-Washington Consensus, 7 January 1998. Available at: http://www.globalpolicy.org/component/content/article/209/43245.html, (consulted on: 8.4.2014). 22 Naomi Klein, The Shock Doctrine: The Rise of Disaster Capitalism. Picador, New York, 2007, p. 101; Olivier Jean Blanchard, Rüdiger Dornbusch, Paul Krugman, Richard Layard and Lawrence Summers, “Reform in Eastern Europe”, in: Journal of Economics, Vol. 59, No. 1, 1994, pp. 118-126. 23 Leszek Balcerowicz, Socialism, Capitalism, Transformation. Central European University Press, Budapest, 1995, p. 145. 24 Ibid. 21
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time”. 25 In his book Necronomics, Georgian economist and former Minister of Economy of Georgia, professor of economics and author of numerous works on the topic of post-communist transition and economic reforms in Georgia, Vladimer Papava writes that “the practice has shown that the Shock Therapy produces the best results in such countries where the status of the economy before the reforms (or before the “shock”) was so bad that the people were ready to tolerate whatever was deemed necessary to overcome the existing situation. In that case, negative effects of the shock are disregarded. Whereas positive ones are so apparent that the initiators of the Shock Therapy can feel secure from any political threat” 26 and refers to this extreme action as “Minimal Shock with Maximum Therapy” or “Soft Big Bang”. 27 As already mentioned above, even though Shock Therapy was invented before 1990's, it is uniquely associated with Poland and Balcerowicz Plan and can even be referred to as “classical” form of Shock Therapy. 28 This “classical” strategy first of all assumes that the country in which it is being applied has a form of nation state and possesses all institutions of a nation state. This was the case for Poland, Hungary and Bulgaria, for example. However, some of the former soviet republics, former Yugoslavia and Czechoslovakia countries 29, whose administrations were extremely closely linked to the central one in Moscow and ended up in forming several states afterwards, did not inherit these state institutions and had to build them from the scratch. Same holds true for Georgia. The “classical” form of Shock Therapy or Balcerowicz Plan consisted of eleven policy measures30: 1. Equalization of domestic prices to that of the world market level with acceptance of the consequential inflation results; 2. Restriction of income growth during inflation; 3. Constraint of money supply and substantial interest rate growth; 4. Stimulation of personal savings by deposit interest rate increase (including cash deposits); 5. Diminution of budget expenditures by reducing government investment and cutting off 25
Taylor Marvin, Shock Therapy: What We Can Learn from Poland, 11 November 2010. Available at: http://prospectjournal.org/2010/11/11/shock-therapy-what-we-can-learn-from-poland/, (consulted on: 17.3.2014). 26 Papava, 2005, op. cit., p. 23. 27 Ibid. Papava, 2012, op. cit., p. 14. 28 Papava, 1996, op. cit., p. 252; Papava, 2005, op. cit., p. 125 ; Papava, 2012, op. cit., p. 3. 29 Vladimer Papava, Leszek Balcerowicz and Georgia, Georgian Foundation for Strategic and International Studies, Tbilisi, 2002, p. 4. Available at: http://gfsis.org/media/activities/thumb1_/pub/files/publications_economics/papava_Leszek_Balcerowicz_And_ Georgia.doc, (consulted on: 2.5.2014). 30 Ibid., pp. 4-5.
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subsidies from unprofitable business ventures; 6. Issue of government bonds in order to fund budget deficit of the government; 7. Regulation and integration of tax code; 8. Instituting a single rate of exchange for the national currency (in this case for zloty) and its convertibility on the domestic market; 9. Establishment of a common customs tariff for restricting imports and stimulating exports; 10. Establishment of a social assistance program to the population by taking into account budget limits; 11. Rupture of monopolistic activities, promotion of competitiveness among enterprises and elimination of state intervention in this competition.31 As it can be observed, the listed policies constitute to a “drastic neoliberal package of liberalizing economic reforms”.32 However, even though this type of policy package is generally regarded to as substantially aiding the economies in transition, it should be once again noted, that Poland is exceptional case since its pre-existing conditions, including the “public institutions, infrastructure, high human development levels and proximity to world markets that were necessary to succeed in the world economy”33 made the Polish Shock Therapy a success story. Jackson, Klich and Poznanska classify five central macroeconomic and social changes that took place in Poland during Shock Therapy34: 1. Strict monetary policy was incorporated, aiming at reduction of money supply and thus allowing for achieving interest rate that exceeds the inflation rate; 2. Government deficit was diminished mainly through the reduction of subsidies and tax exemptions; 3. Substantial price liberalization resulted in a situation where market was responsible for determining price for 90% of the prices and the prices for essential goods, like fuel and rent were increased; 4. Convertibility, exchange rate and foreign trade for zloty were established and were set to crawling peg in autumn 1991; 5. State control over the wage indexing was eliminated, allowing for private sector to regulate the wages. Furthermore, high tax was imposed on wage growth in state
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Ibid. Marvin, op. cit. 33 Ibid. 34 John E. Jackson, Jacek Klich and Krystyna Poznanska, The Political Economy of Poland's Transition: New Firms and Reform Governments. Cambridge University Press, New York, 2005, p. 25. 32
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institutions (Popiwek).35 As there is no such thing as free lunch in this world, the results of these neoliberal reforms certainly were not solely positive and the population of Poland had to pay short-term price for this drastic change, especially when social reforms were being implemented at the same time. Soon after passing Balcerowicz Plan in December 1989, Poland got swallowed up by a major recession: increasing unemployment and inflation levels together with falling income levels and national output. The unemployment reached 11% in 199136, as a result of numerous reasons: with the decreasing output levels, large number of employees was fired; artificial demand of communist regime was uncovered, unveiling the inefficiencies of the production firms, incompatibility of supply-demand and inability of competition on the market;37 energy costs were increasing due to the inexistence of Soviet subsidies. Nevertheless, it should be underlined, that the drastic fall of employment statistics was not only due to the freshly incorporated neoliberal policies of the Polish government. In Soviet Union regime informal workers or unemployed population were not reported in the official statistics, therefore it is impossible to speak about exact numbers. Moreover, Poland's GDP drastically fell in 1991, but got back on track in 1992. Same holds true for the output and investment levels of agricultural and industrial sectors: they plummet in the 199138 and regained positive growth ability only in 1992-1993. Moreover, inflation managed to attain 584% in the initial year of Shock Therapy39 and 247% in 199040. Nonetheless, these unfavorable results did not last long and all economic indicators were back to “normal” for the beginning of 1992 – after around two years from initialing the Balcerowicz Plan. Poles were quick to recover from the recession and to embark upon the track of the market economy by stabilizing currency and inflation, stimulating foreign direct investments, private industries and trade, which, in turn, contributed to declining unemployment and rising income levels. Additionally, after more than 50 years of communist regime, its proximity to European markets and encouraged FDIs allowed for close integration with the European Union and most importantly, its single market.41
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Ibid. Kazimierz Z. Poznanski, Poland's Protracted Transition: Institutional Change and Economic Growth. Cambridge University Press, Cabridge, 1996, p. 179. 37 Marvin, op. cit. 38 Stephen Engelberg, 21 Months of 'Shock Therapy' Resuscitates Polish Economy, 17 December 1992. Available at: http://www.nytimes.com/1992/12/17/world/21-months-of-shock-therapy-resuscitates-polish-economy.html, (consulted on: 09.4.2014). 39 Poznanski, op. cit., pp. 193-195. 40 Historic Inflation Poland - CPI Inflation. Available at: http://www.inflation.eu/inflation-rates/poland/historicinflation/cpi-inflation-poland.aspx, (consulted on 09.4.2014). 41 Marvin, op. cit. 36
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Poland: GDP Growth (%) 6.95 5.29
7.09 6.24
6.23 4.98
3.74
5.34
4.52 4.26
3.87
6.79 5.13
4.35 3.9
3.62
2.51 1.21 1.44
1.63
-7.02 Figure 1 Poland: GDP Growth Rate (%)42
1.2. Gradualism Gradualism, by contrast to Shock Therapy, involves more “slow, but sure”, or gradual application of reforms and has been mainly applied in Asian countries, like China (classical example of gradualist transition), Vietnam, Uzbekistan, Thailand and Malaysia. As opposed to “Big Bang” or Shock Therapy, Gradualism sees public sector as essential to the support of the private one43, which, according to some scholars, should be done through privatization, small and medium-sized enterprise (SME) development and restructuration of large-scale enterprises. 44 According to Vladimer Papava, there are two pivotal conditions that determine the successful implementation of gradualist reforms 45: first of all, these are the political guarantees that manage to get positive feedback from the population and allow the government to be in charge of the national economy at the same time. Sadly, this was not the case in most of the postcommunist reformist countries. 46 Secondly and quite naturally, these are the financial resources needed for the transition to happen. If the state does not possess enough finances, it is possible to ask for international aid. One of these types of institutions is International Monetary Fund – supporter of the Washington Consensus (i.e. Shock Therapy) and big contributor to post42
Poland – GDP Growth (Annual %). Available at: http://www.indexmundi.com/facts/poland/gdp-growth, (consulted on: 3.5.2014). 43 Alam, Nguyen and Majumdar, op. cit., p. 4. 44 Paul Cook, Colin Kirkpatrick and Frederick Nixson, Privatization, Enterprise Development and Economic Reform. Edward Edgar Publishing, Cheltenham, 1998, p. 4. 45 Papava, 2005, op. cit., p. 20. 46 World Bank, From Plan to Market: World Development Report 1996, Oxford University Press, New York, 1996, p. 9. Available at: https://openknowledge.worldbank.org/handle/10986/5979, (consulted on: 2.5.2014).
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communist reforms in Georgia. “This means that the gradualist approach, if applied, will require a government to have huge reserves of its own financial resources, all other things being equal.”47 Stemming from this theory and from empirical evidence, the success of classical example of gradualist transition - China - was possible because of the following reasons: Chinese government was substantially investing in the GDP of the country, consistently following the gradualist policy approach. Additionally, Chinese companies in the third countries were massively employing people with Chinese origins. Moreover, the share of population employed by large state-owned enterprises (SOEs) was only 18%. 48 Therefore, it can be stipulated that, as in case of Shock Therapy in Poland, Gradualist success in China was a result of specific domestic context.49 Generally, transition from the command economy to the market-one is composed of six (or seven, if we include demolition of the old system as a step50) essential steps51: 1. Macroeconomic stabilization; 2. Price liberalization; 3. Foreign trade liberalization and establishment of national currency convertibility; 4. Reform in the enterprise sector, most importantly by the means of privatization; 5. Introduction of the social security system; 6. Foundation of an institutional and legal infrastructure necessary for the market economy. 52 These steps represent general frameworks and during the strategy implementation each of them might be divided into several sub-policies (macroeconomic stabilization might be comprised of monetary and fiscal policies), whereas some of the steps might be combined together under one main framework53 (stabilization and price liberalization, like in the case of Poland's policy, might be closely intertwined with each other, as macroeconomic stabilization cannot be achieved without price liberalization54). However, the speed of implementation of these steps varies by their sense. The first three steps can be carried out rapidly and thus are more typical to Shock Therapy, whereas the latter three steps need more time and are regarded as 47
Papava, 2005, op. cit., p. 20. Ibid., p. 21. 49 Ibid., p. 22. 50 Hare and Turley, op. cit., p. 2. 51 David Lipton, Jeffrey Sachs, Stanley Fischer and Janos Kornai, “Creating a Market Economy in Eastern Europe: The Case of Poland”, in: Brookings Paper on Economic Activity, Vol. 1990, No. 1, 1990, pp. 75-147. Available at: http://earthinstitute.columbia.edu/sitefiles/file/about/director/pubs/brookings0490.pdf, (consulted on: 2.5.2014). 52 Ibid; Hare and Turley, op. cit. 53 Charles Wolf, Market or Governments: Choosing between Imperfect Alternatives (2nd edition). MIT Press, Cambridge, 1993, pp. 170-176. 54 Marvin, op. cit. 48
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relatively more longer-term policies55 (since establishing institutional and legal infrastructures cannot be done overnight). Following this position, some will argue that the state should start getting the Shock Therapy treatment only after having properly functioning reformed institutions56 and that most appropriate transition strategy is the combination of the two discussed paths. As already mentioned, SME development is one of the crucial points of transition and the two paths try to manage it in relatively different ways, varying by the level of importance of public sector in the process. In the CEE countries the SME development policies have involved: macroeconomic policy, institutional framework, administrative legal policy, sectoral, regional and problem-oriented policy, financial support, and support through the provision of information, consultancy and training 57 (in Poland the instruments were grouped in the following manner: legal and regulatory, financial, organizational, and knowledge dissemination instruments58). Because of the industrialized heritage from the communist and/or Soviet era and the proximity to the EU (allowing for more financial or expert support), the SMEs in CEE countries have been growing remarkably59. Asian experience involved the following key policies: access to modern technology and scientific achievements, human resource development, finances, global market and networking in the business world. 60 It can be concluded that “irrespective of the country concerned, transitional approaches or industrial background, SMEs still face familiar problems and need adequate aid from government policies, because private enterprises cannot operate in an imperfect market without support from institutions in general or government and the public sector in particular.” 61 Public sector is responsible for preparation and development of all state institutions and infrastructure necessary for free market environment.
55
World Bank, 1996, op. cit., pp. 9-11. Joseph E. Stiglitz, Whither Reform? Ten Years of the Transition, World Bank Annual Bank Conference on Development Economics, Washington D.C., 28-30 April 1999, p. 19. Available at: http://siteresources.worldbank.org/INTABCDEWASHINGTON1999/Resources/stiglitz.pdf, (consulted on: 2.5.2014). 57 Alam, Nguyen and Majumdar, op. cit., p. 5. 58 Aleksander Surdej, “Small- and Medium-Sized Enterprise Development in Poland after 1990”, in: Working Paper No. 216, The United Nations University, World Institute for Development Economics Research (WIDER), 1990, pp. 15-21. Available at: http://www.wider.unu.edu/publications/working-papers/previous/en_GB/wp216/_files/82530864970541738/default/wp216.pdf, (consulted on: 2.5.2014). 59 Alam, Nguyen and Majumdar, op. cit., p. 6. 60 Ibid. 61 Ibid. 56
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2. Post-Communist Reforms in Georgia Dr. Vladimer Papava, former Minister of Economics of Georgia in the years of 1994-2000 and a Member of Parliament in 2004-2008, is an author of more than two hundred publications, including the ones on post-communist transitions in Georgia, and Caucasus. In number of these works he identifies several periods of economic development or transitions in Georgia and divides them in stages, depending on the reforms undertaken during each of the stages or stalling of reforms. Georgia regained independence from the Soviet regime in 1991 after the final decomposition of the USSR, however, according to Dr. Papava and Ronald Grigor Suny, “the period from 1989, when the idea of national independence embraced the whole society, should be considered as a starting point for the post-communist reform reasoning in Georgia” 62. Starting from this moment in the first period of transition (immediate post-communist transition) until Rose Revolution, Dr. Papava identifies 5 main stages of reforms63:
2.1. Stage of Naive Comprehension The first stage started with the dissolution of the Soviet Union with the first discussions on new economic strategies of the country and a “turning point” “when the Georgian society embraced the idea of independence”.64
2.2. Stage of No Movement or Stage of Stagnation The starting point of this stage is considered to be the election of the Supreme Council in autumn of 1990, following which several new reformist economic laws were passed, however with unsuccessful implementation. 65
2.3. Populist Stage of Reform or Shock Therapy Following the coup d’état of 1991-1992 Georgian government started carrying out several redistributive policies which turned out to have unforeseen negative effects: the policy of the state of transferring land and accommodation to the population for free, harmed agricultural and residence building sectors. The absence of legal basis for privatization and of payments for dwellings deteriorated supply and employment of the agricultural equipment. It was exactly during this phase of populist policies that the Shock Therapy approach was put into practice in Georgia in February 1992 (nearly simultaneously with Russia's application of Shock Therapy
62
Papava, 2012, op. cit., p. 1. Papava, 1996, op. cit., pp. 251-262; Papava, 2005, op. cit., pp. 123-136; Papava, 2012, op. cit., pp. 1-14. 64 Papava, 1996, Ibid., p. 251. 65 Ibid., Papava, 2005, Ibid., pp. 123; Papava, 2012, Ibid., pp. 1. 63
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and with quite identical framework).66 In order to assess the success or failure of this method in Georgia, we can analyze the 11 steps of reforms of the Balcerowicz Plan listed in chapter 1.1. Shock Therapy: 1. With the aim of achieving market balance, domestic prices were equalized to that of the world market level through the introduction of liberal prices for certain types of goods starting from spring 1991 (first stage) through February 1992 (second and more extensive stage). For number of products and services the prices were liberalized, while for the other group controlled prices notably grew.67 “If the consumer price index stood at 1.8 in 1991, it rose to 25 in 1992. At the same time, it is noteworthy that the regulated consumer prices increased sixty-eight times in 1992 in comparison with those of 1991 (100 times for bread, the main food product in Georgia).”68 Therefore, the first step was successfully implemented. 2. In 1991 the minimum wage and social security benefits of Georgia were adjusted for the changes in the world economy. In 1992 the indexation was performed six times because the price liberalization was already in action. “In 1991 the minimum wage and the average wage of employees increased in comparison to the previous year by 1.85 times and 1.26 times, respectively; and in 1992 compared with 1991 by 13.14 times and 17.94 times, respectively.”69 In contrast with Poland, Georgia did not employ austere control measures for wage increases, however the level of wage and social security benefit growth was not in accordance with the overall price level growth, “thus, it can be considered that item two of the Balcerowicz Plan was also, to a certain extent, more or less fulfilled in Georgia”.70 3. “In 1992 in comparison with 1991, the interest rate on deposits increased from 2% 71 to 5% per annum, and the interest rate increased from 9% to 80% for ten-year deposits. Such an increase of interest rates was still far from reflective of the actual inflation rate.”72 Old rubles from USSR and newly issued Russian rubles operated on Georgian territory, the country did not possess its own monetary system, therefore constraining of money supply could not be achieved.73
66
Papava, 1996, Ibid., pp. 251-252; Papava, 2002, op. cit., p. 5; Papava, 2005, Ibid., pp. 123-124; Papava, 2012, Ibid., pp. 1-2. 67 Papava, 1996, Ibid., p. 253; Papava, 2002, Ibid; Papava, 2005, Ibid., p. 126; Papava, 2012, Ibid., p. 4. 68 Papava, 2012, Ibid. 69 Ibid; Papava, 2005, op. cit., pp. 126-127. 70 Papava, 2005, Ibid., p. 127; Papava, 2012, Ibid., pp. 4-5. 71 “Percent“and “per cent” were substituted by “%” in all quotes for the consistency of the thesis. 72 Papava, 2005, Ibid; Papava, 2012, Ibid., p. 5. 73 Ibid; Papava, 1996, op. cit., pp. 253-254; Papava, 2002, op. cit., p. 6.
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4. In July 1992 there was an attempt of stimulation of personal savings: the decision to increase all cash deposits by doubling the devalued ones and assigning them a deferred account property was made, meaning that the savings could grow on a tax-free basis until their withdrawal. The logical answer to this decision was increased cash deposition by the Georgian population which was followed by extension of deposition period by additional 10 days. Withdrawal of the cash deposits was allowed only in one year after being doubled. However, it came as a big downside that it was impossible to procure necessary amount of ruble banknotes from Moscow in a timely manner, therefore the salaries and pensions were paid from these banknotes on the deposits, meaning that the state could not impose tight policy on money supply. 74 Therefore, the stimulation of personal savings could not be achieved either. 5. The state did not diminish the budget expenditures by reducing government investment in 1992 and it stayed in the range of 20%-25%. Despite the fact that the subsidies in the same year had a fivefold growth compared to preceding year, percentage of subsidies in the state budget expenditures was reduced to 30.1% from 47% of 1991. However, this cutback was not enough, therefore this step was also unsuccessfully implemented. 75 6. Issue of government bonds was fulfilled already in 1992, however they were issued for sale in the second half of 1993 with the general purpose of converting Former Soviet Union bonds into brand new Georgian ones. Utilization of these bonds in order to fund budget deficit of the government did not happen for several years from their issue. 76 7. Even though it still needed reworking and re-regulation, reform and integration of new tax code of Georgia started already in 199177, so this step was also achieved. 8. Instituting a single rate of exchange for the national currency and its convertibility on the domestic market was simply impossible to achieve because of nonexistence of Georgian national currency at the time. 78 9. In the year of 1992, 2% on imports and 8% on exports customs tariffs were set in Georgia, which is completely contrary to the aim of establishment of a common customs tariff for restricting imports and stimulating exports. So this goal also failed to be achieved.79
74
Ibid. Papava, 1996, Ibid., p. 254; Papava, 2002, Ibid; Papava, 2005, Ibid., pp. 127-128; Papava, 2012, Ibid. 76 Papava, 1996, Ibid; Papava, 2002, Ibid; Papava, 2005, Ibid., p. 128; Papava, 2012, Ibid., p. 6. 77 Ibid. 78 Ibid. 79 Papava, 1996, Ibid; Papava, 2002, Ibid., pp. 6-7; Papava, 2005, Ibid; Papava, 2012, Ibid. 75
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10. As already noted in the second point of the 11-point plan, wage indexation was already in action in Georgia starting from 1991. “All incomes were adjusted by the same proportionate amount, so that the poorest paid got a smaller increase than the higher paid. Since price raises were particularly heavy on basic items, such as bread, the poor suffered more than those with higher incomes.”80 “As a result, the real minimum wage in 1992 amounted to only 86% of that of 1991. [...] Targeted assistance to the families most in need was inadequate.”81 11. There was a first attempt of rupture of monopolistic activities and promotion of competitiveness in 1992 by legal and governmental resolutions and decrees, however they were not successfully applied. Despite its rupture, quite a number of features of Soviet centralized procurement were still in place, one of them being state interference in the enterprise functioning.82 Therefore, this last step of Balcerowicz Plan also failed to be achieved. To sum up, only three steps (first, second and seventh points) of Balcerowicz Plan were realized in Georgia in the 90’s. Nonexistence of own national currency, of autonomous monetary system and basing Shock Therapy approach solely on price liberalization was simply “doomed to failure”83, which, in turn, caused extensive delays in the economic development of the country.84
2.4. Stage of Delay or Stage of Accumulation of Mistakes Criminal and Military Situation Lasting from 1993 until autumn 1994, the stage of delayed economic reforms in Georgia occurred on the one hand due to incorrect economic policies and on the other hand – due to erupted criminal and military situation. Georgian economy severely suffered from the Abkhazian war, the civil war and the military coup d’état, all in 1988-1993. Together with general amnesty in winter 1992, the country experienced major increase in the criminal operations at the time. The described situation made it extremely difficult to approve the national budget in a timely manner, while also harming the budget itself. The market operations were almost impossible to conduct, therefore many businesspeople fled to foreign countries, which, in turn, had a declining impact on the financial capital of the country. Racketeering reached unprecedented levels, while not generating wealth for the country since most of these criminals were addicted to drugs and 80
Papava, 1996, Ibid. Papava, 2012, op. cit. 82 Ibid; Papava, 2002, op. cit., p. 7. 83 Papava, 2012, Ibid., p. 7. 84 Ibid; Papava, 1996, op. cit., p. 255; Papava, 2005, op. cit., 129. 81
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the income generated from selling stolen goods was mostly going outside the country to acquire more illegal drugs. 85 “This criminal activity deepened and prolonged the agony of civil war and impeded the resumption of economic activity and reform.” 86 Currencies and Credits The single solution to fund the severe budget deficit was to issue more money. Because of past experience of inability to procure rubles from Moscow, Georgian government anticipated the same scenario and decided to substitute ruble by its own temporary currency “coupon”, issued by the National Bank of Georgia (NBG)87. “The coupon was a supplement to the rubles in circulation and was priced to exchange one-for-one with the ruble. It could be used for all purchases except for those goods originally purchased with rubles (e.g., petrol and other imports from Russia).”88 The decision seemed feasible and could be seen as a first step towards approving the Georgian national currency, however the coupon was simply the banknote substitute for ruble and in addition to nonexistence of small banknotes, and population had no other choice but to accept change in rubles. 89 The National Bank was unable to control the circulation, so the drastic devaluation could not be avoided (at one point one bread would cost five million coupons). In fact, they believed that they would be able to stay in the ruble zone forever and regarded coupon as a solely temporary measure. However, Russia withdrew all the banknotes at the end of summer 1993 following their currency reform. Only then the Georgian government and National Bank realized that they had no other choice but to issue own national currency. 90 “Uncontrolled credit emissions were the foundation of the inflationary process in Georgia. Attempts to solve agricultural problems (e.g., the procurement of agricultural products in autumn 1993 and carrying out essential agricultural work in spring 1994) from a budget that had been practically nonexistent since the autumn of 1993 had resulted in initially unreported budgetary emissions that finally ruined the financial system of the country. Georgia developed a hyperinflationary spiral, with the inflation rate proceeding at some 60-70% per month from 1993 until autumn 1994. In the long run, this money was not, unfortunately, used for agricultural purposes. In conditions of such high inflation, the coupon could not perform the normal function of sustaining commercial turnover because the real value of the coupon supply was constantly
85
Papava, 1996, Ibid; Papava, 2005, Ibid., p. 130; Papava, 2012, Ibid., pp. 7-8. Papava, 1996, Ibid. 87 The Incredible Shrinking Ruble, and the Introduction of the Lari. Available at: http://www.unc.edu/~pconway/teccours/lari.htm, (consulted on: 14.4.2014). 88 Ibid. 89 Ibid. 90 Papava, 2005, op. cit., p. 131; Papava, 2012, op. cit., p. 9. 86
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falling. Other things being equal, this promoted wider use of the ruble instead of coupon as a means of payment.”91 Inexperience of the NBG in handling currency and credits resulted in decline of cash and limitation on even the liquidity of bank deposits. 92 “A considerable discrepancy developed between the value of cash and non-cash money. At the same time the provision of easy overdraft facilities by the state banks promoted hidden credit emission. The subsidies for bread, gas, electricity and transport further extended the budget deficit and the requirement for credit.”93 Foreign Trade The single solution to procure gas from Turkmenistan was believed to be barter, price of which, as well as of some of the Georgian low-grade products, was artificially boosted, therefore, the economists of that time thought that the barter would be a good idea to encourage businesses. But the problem with gathering enough goods for this barter was the “non-payment network”94 which meant that due to the budget deficit the Georgian government was unable to purchase this low-quality production (which was supposed to be the case at the time for the production). The additional money issue by NBG in order to finance this acquisition contributed to the further currency inflation. Majority of these goods were obtained by the “state order system” whereby the government promises the businesses to pay them for the obtained production in future for the respective price. The business owners faced difficult financial circumstances, causing a series of non-payments.95 In addition to all the economic trouble, a couple of railroads got blocked because of the war in Abkhazia and the tense situation in Azerbaijan, making the above mentioned barter with Turkmenistan hopeless. Consequently, Georgia's slightly more than two-year debt to Turkmenistan equaled to approximately $0.5 billion, by which the total external debt reached $1 billion.96 Other Problems Using credits designed for energy sector development for other causes put the country in even worse situation: the constant breakdowns of the electricity power plants, overly frequent theft of the electric hardware (mostly for copper which was later being sold in Turkey 97), no 91
Papava, 2005, Ibid., pp. 130-131; Papava, 2012, Ibid., p. 8. Papava, 2005, Ibid., pp. 131; Papava, 2012, Ibid., pp. 8-9. 93 Papava, 1996, op. cit., p. 256. 94 Papava, 2005, op. cit., p. 131; Papava, 2012, op. cit., p. 9. 95 Ibid; Papava, 1996, op. cit., p. 256. 96 Papava, 1996, Ibid; Papava, 2005, Ibid., p. 132; Papava, 2012, Ibid. 97 Iza Natelauri, “Georgia's External Sector: Current State and Problems”, in: The Caucasus and Globalization, Vol. 1 (4), 2007, p. 58. Available at: http://cyberleninka.ru/article/n/georgia-s-external-sector-current-state-andproblems, (consulted on: 3.5.2014). 92
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repair or maintenance of the damaged equipment.98 The privatization process was disrupted in 1992 and 1993 because of disregard of worker's right and code, consequently the enterprises ended up transforming into joint-stock companies. Also, the mass illegal activities and black-booking made it practically impossible to control the enterprise actual capital movement and easier for these firms to hide taxes and contribute even more to the economic recession of the country. 99 Dr. Papava describes this stage as “characterized by extremely imperfect recordings of foreign economic activities, inefficient customs procedures, extensive commodity stock waste, decline in the economic role of normal wages, unrecorded expansion of the shadow economy, and the uses of humanitarian aid for purposes other than those intended. Overall, the picture of the Georgian economy was exceedingly bleak.” 100
2.5. Reforms Resumed or Stage of Correction of Errors Georgia could not stay in this “bleak” situation for a long time, so the state president at time, Eduard Shevardnadze, instigated the development of a program to fight the crisis in spring 1994, however it was impeded by non-economic factors. Even though the Abkhazian war was already left behind, its consequences still had to be dealt with, including social protection and housing for internally displaced persons (IDPs). Criminal situation was still a big issue in spite of the increased combat against the criminals. Economic production was kept low by many enterprises just because they were afraid to seem too attractive to the robbers.101 At the same time, the question of national currency finally was coming to a solution. Even though coupon had its supporters and opponents, several internal and external factors (including standard policy of IMF on aiding only the states with own national currencies, extensive support of Kutaisi city authorities in favor of coupon, strengthening of the coupon and increased devaluation of ruble) resulted in more focus on coupon by Georgia. In 1994 the National Bank imposed control on money emission and on banking system according to widely applied Western methods, and, under the IMF insistence, lifted up the constraints on the cash deposit withdrawal. 102 These measures “prevented state-owned commercial banks from continuing to work in overdraft conditions”103 and resulted in a situation where “cash and non-cash money values drew considerably closer to each other [and in] commercialization of government-owned
98
Papava, 1996, op. cit., 257; Papava, 2005, op.cit., p. 132; Papava, 2012, op. cit., p. 10. Ibid. 100 Papava, 2005, Ibid; Papava, 2012, Ibid. 101 Ibid; Papava, 1996, op. cit. 102 Papava, 1996, Ibid., p. 258; Papava, 2005, Ibid., p. 133; Papava, 2012, Ibid., pp. 10-11. 103 Papava, 1996, Ibid. 99
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banks.”104 Involvement of IMF in the reforms of this period were crucial, since Georgian experts and economists lacked experience and expertise needed for transition to the market economy. Therefore, it was again part of the IMF’s plan to liberalize prices of gas, electricity and bread (which increased by 285 in order to bring it to equivalent level as the market). Share of social assistance and pensions in the budget also grew, however it did not correspond to the changes in the above-mentioned prices.105 “This enabled a great reduction in the budgetary subsidies needed to cover the discrepancies between consumer and producer prices, or between producer prices and actual costs. A substantial strengthening of the Georgian coupon rate thus followed. Whereas one dollar was worth 5.3 million coupons before the price rise on bread, one dollar was already valued at 2.4 million coupons after the price rise [...] At the end of 1994 the price of bread increased again by 40% and as a result a stable coupon exchange rate was established (one dollar= 1.3 million coupons)”.106 But, unfortunately the coupon decline was subject to speculation by many organizations, including banks. Also, the prices of gas and electricity were increasing perpetually. However, in spring 1995 these prices were reduced by 35% and 25%, respectively and a state-owned energy enterprise Sakenergo was designated with gas procurement. In 1995 the quota system was annulled, and the licensing got limited to certain goods.107 In the first half of 1995 Georgian national budget was approved after two years of “break”. One of the main successes was that extra money was not issued to finance the budget deficit. 108 “In 1995, only 47% of the expenditures of the national budget were covered by taxes, and the remaining 53% had to be covered through the monetization of wheat and flour received as humanitarian aid (mobilizing proceeds of sales in the national budget).”109 This would have been unattainable without the external financial aid and loans from IMF, World Bank and donor countries. However, the scheduled achievements did not took place, so the loans (one billion USD external debt110) had to be restructured: $44 million from as a second tranche and $113 million as a stand-by credit from IMF, all for more stabilization and emission of new Georgian currency “lari” with more caution than the coupon. 111 In the mid-summer of 1995 bread price grew by 7%, compared to state budget employees 104
Papava, 2012, op. cit., p. 11. Ibid; Papava, 1996, op. cit; Papava, 2005, op. cit. 106 Papava, 2012, Ibid., p. 12. 107 Ibid; Papava, 1996, op. cit., pp. 258-259; Papava, 2005, op. cit., pp. 134-135. 108 Papava, 1996, Ibid., p. 259; Papava, 2005, Ibid., p. 135; Papava, 2012, Ibid., p. 13. 109 Papava, 2005, Ibid; Papava, 2012, Ibid. 110 Ibid; Papava, 1996, op. cit., p. 259. 111 Ibid. 105
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wage increase of 50% (minimum wage equaled to $2.69 and the maximum wage – to $12.69, compared to almost ten cents and a bit more than one dollar, respectively, in autumn 1994). Following the end of state monopoly in bread prices, final price liberalization was supposed to happen soon.112 Regarding the reforms in other spheres, health insurance program was initiated. Also, privatization was encouraged, involving distribution of social property vouchers for free 113, with the objective of giving equal chance of asset acquisition to everyone. 114 Dr. Vladimer Papava refers to the Georgian Shock Therapy program of 1994-1995 as “Minimal Shock with Maximum Therapy” or “the Soft Big Bang” and regards is as necessary in a case where a country's future seems very blurred and questionable. 115
2.6. Leszek Balcerowicz - Economic Advisor in Georgia The first time Leszek Balcerowicz visited Georgia was in autumn 1995 in the beginning of introduction of a new currency lari which represented final step of the Shock Therapy application in Georgia. The first visit involved consultations with the government agencies and ministries about the issues and progress of the transition process and reforms. According to Vladimer Papava, who held a position of Minister of Economy of Georgia at the time, Balcerowicz was positively surprised by the fact that the older people who were holding higher positions in the ministry and who have worked for State Planning Committee in the soviet times were so open-minded and flexible towards market economy, while in Poland the Planning Committee was never transformed into Ministry of economy, but rather was exterminated. One of the exceptional steps that Georgian Ministry of Economy, or more precisely by the Minister of Economy Mikheil Jibuti, made in 1992-1993 was the initiation of indicative planning, at the time unprecedented in the post-communist area.116 It involves conducting market analysis by observing the economic production and input, in order to distribute the analysis and forecasts to the private sector, which acts independently. 117 “It was assumed that under the conditions of market economy, indicative plan would play a role of economic development program and that every interested person would find in such a plan some “food” for the economic sector of his
112
Papava, 1996, Ibid; Papava, 2005, Ibid; Papava, 2012, Ibid. Avtandil Silagadze and Teimuraz Beridze, “Note on Privatization in Georgia”, in: B. Kaminski (ed.), Economic Transition in Russia and the New States of Eurasia, Vol. 8, M. E. Sharpe, New York, 1996, p. 356. 114 Papava, 1996, op. cit., p. 260; Papava, 2005, op. cit., p. 136; Papava, 2012, op. cit., p. 14. 115 Papava, 2005, Ibid; Papava, 2012, Ibid. 116 Papava, 2002, op. cit., pp. 9-10. 117 Charles F. Schwarz, Edward C. Thor and Gary H. Elsner, “Wildland Planning Glossary”, in: General Technical Report PSW-13, Berkeley, California, U.S. Department of Agriculture, Forest Service, Pacific Southwest Forest and Range Experiment Station, pp. 98-99. Available at: http://www.fs.fed.us/psw/publications/documents/psw_gtr013/psw_gtr013.pdf, (consulted on: 3.5.2014). 113
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interest”.118 According to Mr. Papava, at the time of Balcerowicz's first visit, Georgian “Ministry of Economics was, […] the best model of good government, as it played the least possible role in economic life and provided maximum liberty to competitive market forces for the benefit of economic development.”119 Following the presidential elections held in 2000, Georgian government decided to invite Leszek Balcerowicz as an economic advisor for the state president. Funding for this was provided by the government of the USA120. Balcerowicz took the position of a president of a central bank of Poland right after his approval as an economic advisor for Georgia, therefore his visits were not frequent. Though, his presence was not so necessary since his advisory team of highly qualified professionals was always in Georgia and therefore he had the access to all the necessary information. It is crucial to remark, that most of the recommendations that Balcerowicz made to Shevardnadze were kept under secret and only few were revealed to the public121:
Identify as soon as possible the desirable economic direction and system of the country. Georgian government made this decision in 1995 by adopting the constitution and then in 2000 by voting in the elections, but because of Georgians' lack of knowledge of the electoral program, nobody in the Balcerowicz team was informed about it and there were still inconsistencies within the government on desirable strategies;
Achieve more coordination inside the Georgian government. This could not be achieved because of the very opposing views on the policies within the government, several examples of which are provided in the following recommendation points;
Substitute progressive income tax (12%, 15%, 17% and 20% tax rates) by proportional system (fixed 15%). This would extremely benefit two major points: simplification of tax operations and population's willingness not to hide taxes anymore (or hide fewer taxes, at least). Vladimer Papava also supported this idea of “Tax Therapy” 122, however the utilitarian views of other government officials, and mostly of the Minister of Finance, this did not happen and in fact, the upper limit of the income taxed was increased;
Annul the decree of 2000 according to which state companies were transferred from the Ministry of State Property Management to corresponding ministries. This kind of transfer obviously was causing conflict of interests and represented a “clearly Communist-style
118
Ibid; Papava, 2002, op. cit., p. 10. Ibid. 120 Macroeconomic Policy Advice to Georgia. Available at: http://www.case-research.eu/en/node/52046, (consulted on: 3.5.2014). 121 Papava, 2002, op. cit., pp. 11-13; Papava, 2012, op. cit., pp. 36-37. 122 Papava, 1996, op. cit., p. 261. 119
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decree”. Ministers of Economy, Health and Social Protection at the time were against this decree and were openly denouncing it even before its approval, but in vain.
Create a private pension scheme. By taking into account the limitations of Georgian state budget, this idea seemed more feasible. However, the government was more in favor of doing two things at the same time: formation of the private pension scheme and restructuring of current state one. Again, because of the budget deficit and debts making the two happen was impossible. Therefore, the decision to maintain the already-inprogress restructuring of the state pension scheme was made. 123 It is highly possible that even more recommendations of the Balcerowicz team were not
taken into account by the Georgian government, especially if we recall that they were strictly confidential and it’s highly possible that the reason why they were kept so was not to incite more public criticism towards the Georgian government.124 These recommendations were not taken into account first of all because of the lack of above-mentioned coordination among the government officials on the desired direction of the economic policies, and secondly, because of possible lack of economic knowledge or expertise of the market economy (despite Mr. Balcerowicz's astonishment with Georgian economists' open-mindedness).
123 124
Papava, 2002, op. cit; Papava, 2012, op. cit. Papava, 2002, Ibid., p. 13; Papava, 2012, Ibid., p. 37.
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3. Post-Rose Revolutionary Reforms in Georgia “The Rose Revolution in Georgia was quickly hailed in the West as a democratic success story, inspiring a series of other “people-powered revolutions,” such as the ones in Ukraine, Lebanon, and Kyrgyzstan.”125 Rose Revolution in Georgia took place on 22-23 November of 2003 and was “a hybrid of spontaneity and careful preparation” 126. Georgia's history is full of bloodshed and wars, Tbilisi has been burnt down more than three dozen times and Rose Revolution was the first revolution without this kind of experience. 127 Country's newly elected (2004) western-educated, active, charismatic leader, who speaks several foreign languages fluently, appeared as a sign of rescue and hope. Georgian nation always had hope and trust in the one and only leader who should have been a shepherd of the nation towards better life and comfort, visualization of which we can see by examining the Caucasus Barometer time-series dataset for the following question: ”Please tell me which of the following statements you agree with: 1. People are like children, the government should take care of them like a parent; 2. Government is like an employee, the people should be the bosses who control the government.”128 Nearly half of the Georgian population still believes that government should be like a parent, rather than an employee. Unfortunately, the dataset for the pre-revolutionary period or for the following several years does not exist, but the trend of the attitude of the population is not hard to guess. (Also, the decline in the demand for government's “parenting” in 2008 can be attributed to the five-day Georgia-Russia war in the August of the same year, especially taking into account its immediate post-war effect, since the survey is being conducted in OctoberNovember every year).
125
Devi Khechinashvili, Georgia After the Rose Revolution: An Opportunity Lost?, Center for International Private Enterprise, Washington D. C., 2005, 5. p. Available at: http://www.cipe.org/sites/default/files/publicationdocs/103105.pdf, (consulted on: 3.5.2014). 126 Neal Ascherson, “After the Revolution”, in: London Review of Books, Vol. 26, No. 5, 2004, p. 4. Available at: http://www.lrb.co.uk/v26/n05/neal-ascherson/after-the-revolution, (consulted on: 3.5.2014). 127 Ibid. 128 Caucasus Barometer Time-Series Dataset Georgia: Government as Parent vs Government as Employee (%). Available at: http://caucasusbarometer.org/en/cb-ge/GOVTROL/, (consulted on: 23.4.2014).
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GOVTROL: Government as parent vs government as employee (%) Parent
Employee
DK/RA
54
52
48
47 42
41
37
40
48 43
35
16 12
10
2008
2009
2010
11
2011
12
2012
9
2013
Figure 2. Caucasus Barometer: Government as Parent vs Government as Employee (%)129
“Mikheil Saakashvili is 36 years old, dark and already a bit joufflu, wildly talkative and often indiscreet. His own rhetoric is ebullient. He will break down Georgia’s monstrous corruption, bring order to the chaos of state finances, set the nation on a course towards the European Union, get rid of the Russian military bases, deal (we don’t yet know how) with the ten-year-old secession of Abkhazia. At the presidential election on 4 January (clean, barring irregularities described by foreign observers as “frequent but not systematic”), he got 97% of the votes on an 83% turnout. Everybody wants to share his optimism, and to believe in their own vaulting expectations. But Georgians have seen a lot of false dawns. Their deepest expectation, currently repressed, is that their expectations will be disappointed. They talk lovingly about “our baby president” and his pretty Dutch wife, Sandra, who has learned Georgian. But they want to see results as well as words.”130 After presidential elections of 2004, doubts have been raised regarding the new government's and president's capabilities. However, Georgia's former Prime Minister Zurab Zhvania “sought to dispel these doubts regarding the ability of Georgia’s new government to make good on its promises to improve political and economic life in Georgia.” 131
129
Ibid. Ascherson, op. cit. 131 Zurab Zhvania, “After the Rose Revolution: Building Georgia’s Future”, CSIS Statesmen’s Forum, Center for Strategic and International Studies, Washington D. C., 26 April 2004, p. 1. 130
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3.1. What Was Right and Wrong Before the Rose Revolution? Political Inheritance of Saakashvili The revolutions happen for a reason. Therefore it would not be a surprise if we said that there was little good news in Georgian economy in the pre-revolutionary era. Monetary system (exchange rate for lari) and economic growth were the only stable economic indicators. However, compared to the first half of the 90's (where inflation reached even 70% per month in 1994 and GDP declined by three), consistent improvement of indicators can be observed (Figure 3). The downfall of GDP growth in 1998 and inflation increase in 1998-1999 were the result of Russia’s default spillover, therefore internal decisions cannot be blamed for these. The launch of Tbilisi-Baku-Ceyhan oil pipeline resulted in the GDP growth up to 11.1% for 2003.132
GDP End-of-period Consumer Prices
1995
1996
1997
1998
1999
2000
2001
2002
2003
2.6
11.2
10.5
3.1
2.9
1.8
4.8
5.5
11.1
57.4
13.7
7.2
10.7
10.9
4.6
3.4
5.4
7.0
Figure 3. Annual Growth of GDP133 and Inflation Rate in Georgia, 1995-2003 (%)134
On the other hand, the black market was still playing a substantial part in practically all economic spheres: for the same year the annual GDP missed out on 67.5% of taxes on average just because of shadow economy in the country.135 This untaxed income was not to the large extent comprised of legitimate activities without official incorporation. Additionally, the forecasted inflation for 2003 equaled to maximum 7%, whereas in the first half of the year the actual observed rate was 1.9%. Increase in the inflation in November happened due to the pre-revolutionary heat, political ambiguity and 136 “provocative statements made by the government officials about the diminished supply in the Georgian market and the inevitable growth in prices of consumer goods because of the approaching revolution”.137 Even so, the actual inflation did not exceed forecasted 7%, mainly because of the Georgian National Bank's stable monetary policy. 138 Consequently, it can be concluded that the economic indicators did not contribute that
132
Papava, 2012, op. cit., p. 38-39. GDP Growth (Annual %). Available at: http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG, (consulted on: 3.4.2014). 134 Wojciech Maliszewski, Modeling Inflation in Georgia, IMF Working Paper, WP/03/212, November 2013, p. 4. Available at: http://www.imf.org/external/pubs/ft/wp/2003/wp03212.pdf, (consulted on: 3.5.2014). 135 Papava, 2012, op. cit., p. 39. 136 Ibid. 137 Ibid. 138 Ibid. 133
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much to the Rose Revolution, especially because of the fact that supply and demand were in good terms with each other. But there were other problems, budgetary ones. The effect of Russian default in 1998 was devaluation of lari, which, in turn, created considerable holes in the state budget. 1999 budget deficit amounted to $150 million (30% of forecasted tax revenues). This had a couple of additional reasons besides under-collection of forecasted taxes: undercollection of non-tax revenues, and inability to collect grants and loans from international donors (mainly because of misimplementation of IMF programs, causing suspension of the programs). Moreover, the tax code got so ambiguous and puzzling after numerous amendmends, that corruption became a popular way out. Furthermore, some territorial parts of Georgia were not under control of the central government, which also created holes in the tax revenues. 139 Consequently, the state government itself engaged in illegal activities in order to make ends meet: “the practices of compelling companies to pay taxes in advance, returning collected taxes to taxpayers by means of forged documents, filing fictitious offsets, and artificially raising prices of public procurements so that they could pocket the difference between official and actual prices, [...] fictitious increases in planned non-tax revenues of the national budget.”140 In the year of 2003, state budget deficit amounted to $90 million (15% of forecasted budget revenue) and at the end of the year it was unable to pay salaries and pensions (internal debt amounted to $120 million, 57% of which was the share of unpaid pensions despite the fact that monthly pension was $7 at the time). Consequently, the national poverty reached 52%.141 Naturally, the energy crisis responsible for many cold and unheated winters, the budgetary failures, followed by related corruption, irresponsibility of the government towards the population and their social security, increased poverty level and lost control over some parts of Georgian state territory, contributed to the happening of the Rose Revolution and represented the “package” that Saakashvili and his government assumed from Shevardnadze's presidency.
3.2. Successful Post-Revolutionary Reforms Reinstating control over Adjara The first successful change that Saakashvili brought to the country happened in May 2004
142
when he reinstated state control over the region or the Autonomous Republic of
Adjara143, which was headed by Aslan Abashidze, wealthy Georgian with close ties with 139
Ibid., pp. 40-42. Ibid., p. 42. 141 Ibid., p. 43. 142 Saakashvili's Ajara Success: Repeatable Elsewhere in Georgia? Europe Briefing No. 34, 18 August 2004. Available at: http://www.crisisgroup.org/en/regions/europe/south-caucasus/georgia/b034-saakashvilis-ajarasuccess-repeatable-elsewhere-in-georgia.aspx, (consulted on: 18. 4. 2014). 143 Other versions of English spelling for the Georgian region of “Adjara” (like “Achara” or “Ajara” have been 140
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Russia. 144 Even though Adjara had not declared independence unlike two other regions of Georgia, Abashidze had major control over it, quite independently from central government. “Saakashvili's administration intentionally framed their autonomy policy for Adjara as a test case for subsequent autonomy options for South Ossetia and Abkhazia. Therefore, the mechanism of bringing the region under Tbilisi's control and the actual division of power between center and Adjara might presage subsequent offers made to those regions.” 145 However, even before the “takeover”, Abashidze had changed its strategy towards newly established central power when in January 2004 sent customs dues worth of 2.4 million laris to Tbilisi and resigned after he fled to Moscow in May of the same year. 146 With this restitution of central power, “new opportunities for arranging normal budgeting processes between the central government and this region of Georgia had emerged.”147 “The Georgian government took over all the commercial banks in Adjara and liquidated the Georgian Maritime Bank, which housed the Adjarian budget, alleging corruption in lending. [...] In a nationwide poll conducted June 2004, 31% of the respondents named “solving the Adjara porblem” as “the most significant achievement of the new Georgian government.” It was the top response, followed by “fighting corruption” (10%) and “don't know” (21%).”148 Improvement of Criminal Situation and End of Petty Corruption Another very visible change brought by the post-revolutionary regime was considerable improvement in the criminal situation of the country by “zero tolerance policy” towards the “thieves in law”149 and corrupted and/or criminally active administration or bureaucracy workers from previous government 150. Rapid substitution of the Soviet-heritage traffic police by more western-style patrol police finally ended corruption on this level and set a precedent for combating corruption in all spheres, causing the end of the energy crisis, thanks to which “as of the winter of 2006-2007, the whole Georgia has been enjoying about a 100% supply of electricity.”151 Reforms in the educational system, mainly the abolition of bribery for getting diplomas and for university entrance exams by introduction of country-wide national exams
substituted in quotes for the consistency of the paper. Khechinashvili, op. cit., p. 2. 145 Julie A. George, The Politics of Ethnic Separatism in Russia and Georgia. Palgrave Macmillan, New York, 2009, fp. 174. 146 Ibid. 147 Papava, 2012, op. cit., p. 47. 148 George, op. cit., p. 175. 149 Alexander Kupatadze, Political-criminal-business nexus in Georgia and Kyrgyzstan: Comparative analysis. Available at: http://kms1.isn.ethz.ch/serviceengine/Files/ISN/32364/ipublicationdocument_singledocument/538b9f3c-fd80465c-9fa8-c9a698849daa/en/Report_Aleko_Kupatadze_eng_19June.pdf, (consulted on: 21.4.2014). 150 George, op. cit., p. 170. 151 Papava, 2012, op. cit., p. 48. 144
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were one of the few biggest successes of Saakashvili’s government. The national budget revenue increased four times thanks to a specific anti-corruption tool by the name “price of liberty”, that arrested officials or their relatives from Shevardnadze's government had to pay to the special extra-budgetary “law enforcement development accounts”.152 However, as we will see in chapter 3.3, the latter reform had some substantial drawbacks. Easing of Doing Business Today (2014) Georgia ranks as 8th among 189 economies of the world in “Ease of Doing Business”153 (in 2013 – 9th154, in 2006 - 100th155). Since 2003 “the World Bank has recognized Georgia as one of the world’s fastest reforming economies and as a leader in fighting corruption”156. Georgia was one of the top reformers in 2006-2007157, involving ease of starting a business, dealing with licenses, employment and registering property158, together with making investment safer, holding 18th position in the World Bank ranking in 2007-2008.159 Other Successful Reforms
Increased training and readiness of the Georgian military force; 160
Initiation of massive privatization program, including full privatization of agricultural land, enabling the farmers to become actual landowners instead of just renting them.161 This reform was “a very important step in the creation of a property-owning class, which is essential in a democratic society”. 162
Adoption of simplified licensing system for businesses, reducing the activities which need licensing from 909 to 159.163 “A one-stop shop was created for license applications, so that now businesses can submit all documents there, with no verification by other
152
Ibid. Economy Rankings. Available at: http://www.doingbusiness.org/rankings, (consulted on: 22.4.2014). 154 Ease of Doing Business in Georgia. Available at: http://www.doingbusiness.org/data/exploreeconomies/georgia (consulted on: 22.4.2014). 155 World Bank and International Financial Corporation, Doing Business in 2006, p. 92. http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/AnnualReports/English/DB06-FullReport.pdf, (consulted on: 22.4.2014). 156 Doing Business in Georgia: 2013 - Country Commercial Guide for U.S. Companies. Available at: http://photos.state.gov/libraries/georgia/749756/zavrashviliex/2013-CCG-Georgia.pdf, (consulted on: 22.4.2014). 157 Doing Business 2008. Available at: http://www.acci.gr/acci/Portals/0/Departments/keme/international/DOING%20BUSINESS%202008.pdf, (consulted on: 22.4.2014). 158 Business Reforms in Georgia. Available at: http://www.doingbusiness.org/reforms/overview/economy/georgia, (consulted on: 22.4.2014). 159 Doing Business 2008, op. cit. 160 Papava, 2012, op. cit., pp. 48-49. 161 Khechinashvili, op. cit., p. 3. 162 Ibid. 163 Doing Business in 2006, op. cit., p. 1. 153
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agencies required. And the time to register property fell by 75%, and the cost by 70%.” 164
Adoption of a more simplified and generally acceptable tax code of 2004, eventually cutting 12 of 21 taxes, one of them being turnover tax, which was imposed in addition to VAT. 165 The VAT itself was reduced to 18% from 20%, the payroll tax - to 20% from 32%, and the old progressive income tax was substituted by a flat income tax of 12%.166 “Reducing the import-tax base for agricultural products and construction materials, as well as annulling the import taxes for other goods, have made Georgia much more competitive.”167 New reforms of Saakashvili's government resulted in generating 300 times more cash
inflow into the budget in two years, then ever before. This inflow involved collected taxes, international aid and FDIs, The GDP per capita more than doubled in 2007 compared to 2003. Furthermore, the state capacity, measured by tax revenue as a percentage of GDP, considerably improved. Also, steering capability (the extent to which the reforms are managed effectively and to which the political priorities are maintained) and resource efficiency (the extent to which the government makes use of the available resources) have increased over the years. 168 2003 -
2004 -
2005 0.713
2006 0.719
2007 0.732
2008 0.730
GDP per capita (current USD)170
922
1187
1470
1765
2318
2920
GDP growth (annual %)171
11.1
5.9
9.6
9.4
12.3
2.3
169
Human Development Index
172
Tax revenue as a % of GDP
7.0
9.9
12.1
15.4
17.7
23.8
173
Steering capability
2
-
-
6.3
-
7.3
Resource efficiency174
2
-
-
5.7
-
7.0
Figure 4. Georgian State Capacity Indicators
The new government was finally able to pay off outstanding pensions and wages inherited from the previous one.
164
Ibid., p. 1-2. Ibid. 166 Papava, 2012, op. cit., p. 47. 167 Ibid. 168 George, op. cit., p. 170. 169 Georgia - Human Development Index – HDI. Available at: http://countryeconomy.com/hdi/georgia, (consulted on: 18.4.2014). 170 GDP per Capita, PPP (Current US$). Available at: http://data.worldbank.org/indicator/NY.GDP.PCAP.CD, (consulted on: 18.4.2014). 171 GDP Growth (Annual %), op. cit. 172 Tax Revenue (% of GDP). Available at: http://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZS, (consulted on: 18.4.2014). 173 Georgia, The Management Index. Available at: http://www.btiproject.org/atlas?share=1*2014*CV:CTC:SELGEO*CAT*GEO*REG:TAB, (consulted on: 18.4.2014). 174 Ibid. 165
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3.3. Questionable Post-Revolutionary Reforms Super-Presidential System One of the initial reforms of “Rosy”175 government, was designed to further combat decentralization of the state power “justifying it by a need to reinstate the country's territorial integrity”176, which, in February 2004, ended up in president having constitutional power to dismiss the government, parliament, to appoint extraordinary parliamentary elections in case of conflict between the two,177 and constitutional power to designate and dismiss all of the judges in the Georgian Constitutional Court178. Thanks to this new “Russian-style super-presidential system [...] the parliament was reduced to a rubber-stamping body, rather than an independent and equal branch of government”.179 Extra-Budgetary Accounts or Elite Corruption Despite the successful combat against corruption in many areas (see chapter 3.2), only petty corruption (or corruption at low and middle hierarchical levels) was eliminated. The aforementioned extra-budgetary accounts, set for arrested former government officials (and their relatives) to collect their “price of liberty”, was supposed to serve as an example of how would the corruption be treated or punished. However, only part of this “price” went to the “revenue” entry of the budget balance sheet, the rest was accumulated on extra-budgetary accounts. The exact amount of money and the expenses of these accounts were impossible to track even by the Georgian Parliament or the Chamber of Control because it was under the exclusive competence of the government and were not publicly accessible180. Naturally, after some time, the paid “price” substantially decreased with the limited number of charged former officials and the price of liberty was substituted by the “voluntary contributions” that wealthy businesses had to pay to the same account. After having worked for a while, the business owners felt great pressure and finally started complaining about it, after which IMF demanded closure of these accounts. Following some resistance from the government, the result was achieved in 2006. 181 Property Rights During the state property deprivatization process “certain objects that had been privatized before the revolution were forcibly taken back by the government and later offered for 175
Papava, op. cit., p. 73. Ibid., p. 45. 177 Ibid., p. 46. 178 George, op. cit., p. 169. 179 Khechinashvili, op. cit., p. 3. 180 Papava, 2012, op. cit., pp. 73-74. 181 Ibid. 176
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privatization. Throughout the process, the law-enforcement organs (the General Prosecutor's Office and the Ministry of the Interior) got involved, pressuring the owners to “voluntarily” give up their property for the government's benefit. [...] The actual goal of government was to redistribute property for the benefit of the newly formed elite”. 182 Destruction of private houses on the ground of improving the city looks further violated the property rights in Georgia. 183 And all this was happening whilst Georgia was quickly progressing to the top rankings of World Bank in “Doing Business”184. Large Russian, Kazakh, and Arab capital was poured into Georgian market due to the massive privatization process initiated in 2004, with violation of property rights along the way. Besides the official contracts not reflecting actual price paid for the properties, making it impossible to track where the difference was actually going 185, “firms with dubious founders and dubious capital were created for the purpose of privatizing certain objects, and it was precisely these firms that won the corresponding tenders”. 186 “In June, 2006 the Georgian government chose the Czech company’s privatization bid out of eight proposals submitted by other companies after Energo-Pro offered $312 million187 for the six hydropower plants and two electricity distribution companies. But under the final agreement, which has only now been finalized, the price tag on the auctioned items is $132 million.”188 Populist Programs The largest scale populist program of Saakashvili’s government was the National Employment Program of 2006 designed to combat unemployment by hiring 50 000 people and worth of $12.7 million from the national budget. Business establishments would hire jobseekers for three months, for which the employee would receive $85 per month. Since the wages were not going out of their own pockets, the entrepreneurs would sign a contract with almost any jobseeker (mostly they were employing on the grounds of nepotism, first-come first-served basis, or on some occasions on the promise to divide the salary between the employer and employee), the newly hired person would get their three-month salary and leave, so the program did not benefit employment in the long-term. In fact, it did cause inflation because this huge 182
Ibid., pp. 51-52. Ibid., p. 52. 184 Doing Business 2007: Georgia is Top Reformer in the Commonwealth of Independent States and Jumps up the Global Rankings. Available at: http://www.doingbusiness.org/press/~/media/FPDKM/Doing%20Business/Documents/Press-Releases0609/2007/DB07-PR-CIS.pdf, (consulted on: 21.4.2014); Business Environment Snapshots: Georgia. Available at: http://rru.worldbank.org/BESnapshots/Georgia/default.aspx, (consulted on: 27.4.2014). 185 Papava, 2012, op. cit., p. 75. 186 Ibid. 187 For the consistency of the paper, “$” sign is used almost everywhere to denote US dollars. 188 Czech Company Takes over Majority of Georgia’s Energy Market, 5 February 2007. Available at: http://www.civil.ge/eng/article.php?id=14566, (consulted on: 21.4.2014). 183
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influx of cash did not produce or offer any goods or services to the market.189 Another populist program was a five-year poverty eradication program elaborated to fulfill the pre-election (2008) campaign promises. However, eradicating poverty in 50 days seems highly unlikely and naturally, was not fulfilled.190 Furthermore, the classification points for assigning a person status of living below poverty line were easily manipulated for improving statistics. Emission of Eurobonds In 2008 the foreign debt of Georgian state increased by emission of Eurobonds (2008) worth $500 million which the government should have bought back in 2013 at an interest rate of 7.5%.191 Later in 2011 ten-year Eurobonds with the value of $527 million and maturing in 2021 were issued and 83.4% of the previous batch was bought back.192 The purpose or utilization of the money received from bonds in 2008 remains ambiguous, along with the question of only partial buy-back in 2011. 193 Other Notorious Reforms
Elimination of state monopoly service, therefore hindering the competitiveness and encouraging monopolies on the market;194
Incorporation of State Statistics Department into the Ministry of Economic Development, therefore making it dependent on the state and quite open to manipulation of statistical data (so characteristic to the Soviet regime);195
Media control, especially of the most popular and large-scale Georgian TV channels; and closure of several independent TV channels shortly after the change of government; 196
Confiscation of the banking monitoring functions from the National Bank of Georgia, met with disapproval by IMF and resulted in elimination of IMF programs by 2008;197 Also, the same year, the famous 50-Day Action Plan designed to make Georgia more
189
Papava, 2012, op. cit., pp. 49-50; 76. Ibid., 58. 191 Georgia Starts Eurobonds Road-Show, 02 April 2008. Available at: http://www.civil.ge/eng/article.php?id=17503, (consulted on: 22.4.2014); Georgia Issues Debut Bonds, 13 April 2008. Available at: http://www.civil.ge/eng/article.php?id=17570, (consulted on: 22.4.2014); Papava, 2012, op. cit., pp. 59-60; 79. 192 Ibid; Georgia Plans Eurobond to Refinance Previous One, 22 March 2011. Available at: http://www.civil.ge/eng/article.php?id=23263, (consulted on: 22.4.2014); Gov't Proposes Amendments to 2011 Budget, 29 March 2011. Available at: http://www.civil.ge/eng/article.php?id=23288, (consulted on: 22.4.2014). 193 Papava, 2012, op. cit., p. 60. 194 Ibid., pp.75-76. 195 Ibid., pp. 51; 63; 76. 196 Ibid., p. 49. 197 Ibid., p. 79. 190
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attractive for the investors and financial activities, involved institutional changes to subordinate NBG to the government, and to further increase its responsibility in the monetary policy (the president of NBG should have resigned if the inflation would have reached 12% annually).198
Adoption of a new Labor Code which clearly made the environment for business nourishment better, but significantly broadened the employers' rights at the expense of the employees. 199
Non-transparency of Cheap Credits (part of 50-Day Action Plan) issued to help small businesses development.200
Post-War Crisis and Anti-Crisis Reforms The five-day war between Russia and Georgia in August 2008 had a massive impact on Georgia's economy. “Bank of Georgia share price on the London exchange fell sharply immediately after the August war but prior to the onset of the current worldwide financial crisis.”201 Besides the enormous infrastructural damage, the question of 138 000 IDPs 202 and related social costs, the war caused a drastic inflation (reported by NBG)203 and massive withdrawal of bank deposits. In September 2008 only 30% of the withdrawn money ($0.5 billion) was redeposited, which added to the banking crisis. Moreover, the global crisis decreased the remittances, and the political instability of the country resulted in reduced FDIs and trade imbalance where imports exceeded exports by four times. 204 To combat the banking crisis, NBG limited reserves available for the commercial banks and reduced interest rate for deposits in order to keep the banks off from borrowing from NBG. While avoiding the banking crisis by these actions, the inflation grew further 205, since more money was circulating on the market.206
198
Controversy over Proposed Central Bank Reform, 8 February 2008. Available at: http://www.civil.ge/eng/article.php?id=17063, (consulted on: 22.4.2014). 199 Ibid., p. 47. 200 Ibid., p. 58. 201 The Georgian Economy under Saakashvili, 21 April 2009. Available at: http://www.messenger.com.ge/issues/1838_april_21_2009/1838_article.html, (consulted on: 22.4.2014). 202 Protection of Internally Displaced Persons in Georgia: A Gap Analysis, July 2009. Available at: http://www.unhcr.org/4ad827f59.pdf, (consulted on: 23.4.2014). 203 Georgia Inflation Rate. Available at: http://www.tradingeconomics.com/georgia/inflation-cpi, (consulted on: 23.4.2014). 204 Papava, 2012, op. cit., pp. 61-64. 205 Georgia Inflation Rate, op. cit. 206 Papava, 2012, op. cit.
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Figure 5. Georgia: Inflation Rate 2008-2009
In June 2009 Georgia's Prime Minister Nika Gilauri announced that the state was about to receive $200 billion as loans from European Bank for Reconstruction and Development (EBRD) and the Asian Development Bank (ADB) in addition to the international aid of $4.5 billion received right after the war207 for helping commercial banks and for post-conflict reconstruction and development. Among other actions of the New Financial Package of 2009, a plan to issue treasury bills worth of 260 million laris (around $155 million) and ease of administration in the banking sector, which would bring a relief around 700 million laris (around $415 million) to the banks, as “an important stimulus for the banking sector to activate issuing of loans”, was announced.208 However, according to some economists, this anti-crisis measure reduced the credit resources needed for state development, therefore its productivity is arguable 209. Again in 2011, the government proposed the issue of 100 million laris (around $60 million) worth of treasury bills domestically from the national budget.210 With some positive and the other relatively arguable consequences, the New Financial Package of 2009 was not designed to address increased social costs of Georgia. By looking at the macroeconomic indicators, it can be observed that the war and global financial crisis brought a major hit to the Georgian economy, however it managed to recover from it. But, we can see that the unemployment rate still remains higher than that of pre-war period. The steep increase in unemployment can be observed since 2004 (Figure 6) with massive 207
USD 4.55 bln Aid Package Priorities, 23 October 2008. Available at: http://www.civil.ge/eng/article.php?id=19811, (consulted on: 23.4.2014). 208 Government Offers New Plan to Boost Economy, 30 June 2009. Available at: http://www.civil.ge/eng/article.php?id=21180, (consulted on 23.4.2014). 209 Papava, 2012, op. cit., p. 66. 210 Gov't Proposes Amendments to 2011 Budget, op. cit; 2011 State Budget Amended, 8 April 2011. Available at: http://www.civil.ge/eng/article.php?id=23328, (consulted on: 23.4.2014).
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state bureaucratization and introduction of online state administration services. Together with number of cases of selective justice and violation of human rights it was overshadowing the successful changes brought by the Saakashvili's government (ex: Figure 7).
Figure 6. Georgia: Inflation Rate 2004-2012211
Figure 7. Georgia: Annual GDP Growth Rate 2006-2012212
211
Georgia Unemployment Rate. Available at: http://www.tradingeconomics.com/georgia/unemployment-rate, (consulted on: 4.5.2014). 212 Georgia GDP Annual Growth Rate. Available at: http://www.tradingeconomics.com/georgia/gdp-growth-annual, (consulted on: 4.5.2014).
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4. Georgia and the EU 4.1. Brief Chronology of EU-Georgian Relations Relations between Georgia and the European Union date back to the early nineties right after Georgia regained its independence following the collapse of the Soviet Union. 213 Georgia declared its western political direction, while keeping “warm” relations with Russia, mostly in trade sector, since Russia represented a major export partner for Georgian products and was still substantially dependent on Russia for energy resources. However, with years Georgia has been taking more western, or rather European-oriented political course and declared Eurointegration as one of the most crucial political strategies of the country. In 1993-1996 the main spheres of assistance were solely economic: financial, humanitarian (mainly food) and technical. Besides economic sector, Partnership and Cooperation Agreement (PCA), (signed in 1996 and in force since 1999, included political sphere and advanced the relationship to collaboration on customs matters).214 The EU delegation has been present in Georgia since 1995.215 In 1997, soon after the signature of PCA, Georgia started the long process of harmonization of national legislation to that of the EU. In 1999, Georgia became a member of Council of Europe and World Trade Organization (WTO). Two years later the EU Cooperation Council was founded with the responsibility of reviewing EU-Georgia relations and developing recommendations for further harmonization. 216 The relations intensified after Rose Revolution and arrival of more western-oriented Saakashvili in the state presidency. In 2004 Georgia founded a state ministerial post for European and Euro-Atlantic Integration together with the creation of Commission for Georgia's EU integration. In 2006, after three rounds of talks and seven EU-Georgian Cooperation Council meetings, the European Neighbourhood Policy (ENP) Action Plan 217 was adopted. Since then, the EU-Georgian relations have gotten even closer and include frequent official visits, talks, committee and council meetings and consultations on conclusion of agreements (for example, series of meetings in the early 2000's on bilateral agreement on mutual recognition and protection of agricultural products and other foodstuff). 218
213
European External Action Service: Georgia. Available at: http://eeas.europa.eu/georgia/index_en.htm, (consulted on: 25.4.2014). 214 Chronology of Basic Events in EU - Georgia Relations. Available at: http://www.mfa.gov.ge/index.php?lang_id=ENG&sec_id=462, (consulted on: 25.4.2014). 215 Delegation of the European Union to Georgia. Available at: http://eumm.eu/en/eu_in_georgia/delegation_of_the_eu_commission, (consulted on: 25.4.2014). 216 Chronology of Basic Events in EU - Georgia Relations, Ibid. 217 EU/Georgia ENP Action Plan. Available at: http://www.mfa.gov.ge/index.php?lang_id=ENG&sec_id=461, (consulted on: 26.4.2014). 218 Ibid.
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Eastern Partnership, as an ENP framework, took off in 2009 and includes six Easter European and South Caucasian countries, including Georgia and nowadays represents the main strategic framework for EU-Georgia relations. “The initiative aims at tightening the relationship between the EU and the Eastern partners by deepening their political co-operation and economic integration. The EaP neither promises nor precludes the prospect of EU membership to the partner states. It offers deeper integration with the EU structures by encouraging and supporting them in their political, institutional and economic reforms based on EU standards, as well as facilitating trade and increasing mobility between the EU and the partner states. [...] EaP goes beyond the original ENP package as it deepens bilateral co-operation, and introduces new mechanisms for regional co-operation. The bilateral track is mostly concerned with concluding bilateral association agreements, developing sectoral co-operation in a wide range of areas, facilitating visa regimes, and lifting them in the longer term. It also introduces Comprehensive Institution Building Programmes, which are intended to enhance the capabilities of the partner states' public institutions.”219 In addition, the EaP encourages strengthening and promotion of civil society and their role in all of the above mentioned processes. 220 With the launch of this framework, Georgia-EU Visa Facilitation Agreement was initialed. 221 Up to now, several stages of visa facilitation have resulted in non-requirement of visas for the EU citizens to travel to Georgia, and drop of visa fees for Georgian citizens applying for visas for educational or professional purposes. It is worth mentioning that the EU and its Member States support Georgia's Territorial integrity, do not recognize Abkhazia and South Ossetia as independent countries 222 (compared to Russia who recognized state independence of both breakaway regions on August 26, 2008, shortly after the war against Georgia 223). At Vilnius Summit on November 28, 2013, after several rounds of negotiations, Georgia and Moldova initiated Association Agreements with DCFTA component224. The fate of signing this agreement will be decided in summer 2014, according to the advancements in reforms made by respective countries. 219
What Is EaP? Available at: http://www.easternpartnership.org/content/eastern-partnership-glance, (consulted on: 26.4.2014). 220 European External Action Service: Georgia, Ibid. 221 Chronology of Basic Events in EU - Georgia Relations, Ibid. 222 Ibid. 223 Russia Recognizes Abkhazia, South Ossetia, 26 August 2008. Available at: http://www.rferl.org/content/Russia_Recognizes_Abkhazia_South_Ossetia/1193932.html, (consulted on: 26.4.2014). 224 Georgia and Moldova Initial Association Agreements with EU at Vilnius Summit, 29 November 2013. Available at: http://www.europeanforum.net/news/1810/georgia_and_moldova_initial_association_agreements_with_eu_at_v ilnius_summit, (consulted on: 26.4.2014).
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4.2. EU Assistance to Georgia “European Union assistance to Georgia mainly takes the form of Annual Action Programmes under the European Neighbourhood and Partnership Instrument (ENPI). Other funding sources are the thematic assistance programmes which focus on specific sectors such as human rights or civil society. Total budget for 2007-2010 amounted to €225117.4 million and total budget for 2011-2013 - to €180.7 million. In addition to this, extra funding of €22 million was made available for Georgia via the Eastern Partnership Integration and Cooperation (EaPIC) programme.”226 The financial assistance from EU to Georgia, for ENPI and additional programmes, can be summarized as following 227: Time
Amount
Sector
Period 1992-2007
€530.8 million
2008-2010
€500 million
2011-2013
€180 million
Various Post-war reconstruction:
IDPs
Infrastructure
Economic stabilization
Democratic development, Rule of law, Good governance
Trade and investment, Regulatory alignment and reform
Regional development, Sustainable economic and social development, Poverty reduction
Peaceful settlement of conflicts
225
“Euro” and “Euros” were substituted by “€” in all quotes for the consistency of the thesis. European External Action Service: Georgia, Ibid; EuropeAid: Georgia. Available at: http://ec.europa.eu/europeaid/where/neighbourhood/country-cooperation/georgia/georgia_en.htm, (consulted on: 26.4.2014). 227 Delegation of the European Union to Georgia, Ibid; Summary on EU-Georgia Relations. Available at: http://eeas.europa.eu/georgia/eu_georgia_summary/index_en.htm, (consulted on: 26.4.2014). 226
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4.3. Georgia on the Path towards the EU and DCFTA “Prior to the Rose Revolution, Georgia already had adopted a western-oriented stance and enjoyed strong relations with the United States and Europe.”228 “I am Georgian, and therefore I am European” - declared Georgia’s Prime Minister and Parliament Speaker Zurab Zhvania at the European Council in 1999.229 With the years we can observe the gradual increase of EU’s involvement and interest in the Caucasus region and in Georgia, as well as in Georgia's commitment towards the EU's norms and values. As noted before, this happens mostly through ENP and EaP frameworks. Naturally, closer integration with the EU depends on the extent to which Georgia (or any other partner country) fulfills its obligations under the agreements. So far EU's “more for more” principle has been relatively successful with Georgia. However, this Eurointegration path has not been bump-free. Following the Georgia-Russia war in 2008, the EU condemned Russia’s recognition of independence of Abkhazia and South Ossetia and declared own readiness to integrate Georgia more into the EU by visa facilitation and “possible establishment of a full and comprehensive free trade area as soon as the conditions are met”.230 In particular, the conditions involved ratification of anti-monopoly legislation (in accordance with EU norms), food safety legislation and a new Labor Code. Both of the first two legislations were eliminated after the Rose Revolution, and the existing Labor Code (also adopted by Saakashvili's government) was empowering employers at the expense of employees. 231 Therefore, naturally, the EU conditioned the regulation of these sectors. However, in a week after the Extraordinary European Council, Georgia signed a Letter of Intent with International Monetary Fund, stating with regard to structural reforms: “40. In order to maintain the competitiveness of the Georgian economy and to encourage further capital inflows, we will avoid introducing any laws or regulations that may reduce labor market flexibility, including the labor code. […] 45. In order to avoid an unnecessary regulatory burden on enterprises operating in Georgia, in the aftermath of the conflict with Russia we will avoid any amendments to or new legislation or regulation in the areas of anti-trust policy and consumer protection, as we 228
The Georgian Economy Under Saakashvili, op. cit. “I am Georgian, and therefore I am European” – Zurab Zhvania’s Historic Speech at the European Council, 10 September 2013. Available at: http://www.georgianews.ge/politics/25618-i-am-georgian-and-therefore-i-ameuropean--zurab-zhvanias-historic-speech-at-the-european-council.html, (consulted on: 4.5.2014). 230 Extraordinary European Council, Presidency Conclusions, 12594/2/08 REV 2, The Council of The European Union, Brussels, 2008, p. 3. Available at: http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/102545.pdf, (consulted on: 3.5.2014). 231 Papava, 2012, op. cit., p. 94. 229
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believe any such measures would be meaningless for a small open economy like Georgia.”232 Therefore, the Georgian government promised the IMF that it would not to carry out (in 20082009) the structural reforms that in fact represented the EU conditionalities. Regarding the food safety measures, they are still one of the main points to be reformed in Georgia: “In 2013, only 1.3% of registered Georgian food business operators were inspected by the food safety authorities.”233
The draft law “On Free Trade and Competition” was introduced to the
parliament only in 2011, which happened in order to satisfy the DCFTA requirements. Together with Comprehensive Strategy in Competition Policy (adopted in 2010), it proposed to create two competition agencies that will monitor the competition on the market and be in charge of state procurement.234 The Law on Free Trade and Competition was adopted in 2012 235 and the new Labor Code – in 2013236 by the current (post-Saakashvili) government. Together with the aforementioned legislative delays, Saakashvili was more captivated by the Singaporean model of economic development and has publicly referred to Georgia as future “Switzerland of this region with elements of Singapore”237. Despite the visible advancements, the speed of Georgia's Eurointegration was being negatively affected by the inconsistency of Georgia's economic transition strategy, or rather the attempt of combining the two of them.
4.4. Peaceful Transition of Political Power in Georgia October 2012 was the date of parliamentary elections in Georgia. As usual for past two parliamentary elections, United National Movement did not have much competition. However, the balance of power was questioned when in 2011 out of the blue Georgian multibillionaire businessman Bidzina Ivanishvili (currently with wealth of $5.2 billion estimated by Forbes238) announced that he would compete with Saakashvili (an therefore with his party) in the following elections. In no time, Ivanishvili's Georgian citizenship was annulled by Saakashvili, the reason 232
Georgia and IMF, Georgia: Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding, International Monetary Fund, 2008, pp. 10-11. Available at: https://www.imf.org/external/np/loi/2008/geo/090908.pdf, (consulted on: 3.5.2014). 233 Public-Private Dialogue on Food Safety Begins in Georgia, 5 February 2014. Available at: http://www.fao.org/investment/newsandmeetings/news/detail/en/c/213586/, (consulted on: 26.4.2014). 234 Georgian Government’s New Legislative Initiative– Universal Competition Agency Without Sector Regulator?, 28 September 2011. Available at: http://transparency.ge/en/node/1389, (consulted on: 26.4.2014). 235 Competition Policy in Georgia, 2012. Available at: http://transparency.ge/sites/default/files/post_attachments/Report%20%20Competition%20Policy%20in%20Georgia.pdf, (consulted on: 26.4.2014). 236 Highlights of the recently adopted amendments to the Georgian Labor Code, 25 September 2013. Available at: http://www.lexology.com/library/detail.aspx?g=7d5e5381-d045-4be0-b064-83a9990f99fd, (consulted on: 26.4.2014). 237 Saakashvili: “Georgia Switzerland with Elements of Singapore”, 9 March 2010. Available at: http://www.civil.ge/eng/article.php?id=22064, (consulted on: 26.4.2014). 238 #282 Bidzina Ivanishvili, 27 April 2014. Available at: http://www.forbes.com/profile/bidzina-ivanishvili/, (consulted on: 27.4.2014).
46
being the former’s additional French and Russian citizenships. 239 The Businessman annulled his Russian citizenship and applied for the revocation of the French one as well. Since Saakashvili's action was not met with international or local approval, the changes to constitution were made, permitting the EU citizen, who has lived in Georgia for past five years, to be elected. However, Ivanishvili stated that he would only take part in elections as a Georgian citizen. 240 Another constitutional change was the prohibition of contributions to the political parties by corporations or their employees, obviously directed against utilization of the huge financial resources of Ivanishvili for the election campaign. “Also in late 2011, a new electoral code provided for 77 members of the 150-seat legislature to be elected through proportional voting and the remaining 73 through constituency voting in single member districts, replacing the previous election of 50% of the members by each method. Another provision guaranteed that a party that gained a minimum of 5% of the vote would get at least six seats in the legislature.” 241 In February 2012, Ivanishvili announced the composition of his newly founded political party Georgian Dream – Democratic Georgia, chaired by himself, although he would have to regain his Georgian citizenship to be able to do this242, which he tried to fulfill by naturalization process, but was denied. However, later in October, “Ivanishvili’s citizenship was restored by the President based on a provision of law, which allows Georgian President to grant citizenship if such a move originates from “the state interests”.243 Again in February, Ivanishvili announced the launch of political coalition Georgian Dream (GD) which included several other opposition parties and individuals. 244 “In June-July 2012, the State Audit Chamber obtained court rulings levying substantial fines on GD and its campaign donors, and authorities seized tens of thousands of satellite dishes belonging to two Ivanishvili-related television stations, alleging that the provision of dishes to customers represented illicit vote-buying. Domestic and international criticism of these moves may have contributed to the reduction or deferral of some of the fines and the enactment of a “must carry” law that allowed programs from Ivanishvili-related stations to be carried by cable
239
Civil Registry: Ivanishvili not Citizen of Georgia, 11 October 2011. Available at: http://www.civil.ge/eng/article.php?id=24019, (consulted on: 27.4.2014). 240 Georgia’s October 2012 Legislative Election: Outcome and Implications, 15 October 2012. Available at: http://www.fas.org/sgp/crs/row/R42777.pdf, (consulted on: 27.4.2014). 241 Ibid. 242 Ivanishvili Unveils Core Team of His Planned Party, 15 February 2012. Available at: http://www.civil.ge/eng/article.php?id=24446, (consulted on: 27.4.2014). 243 Saakashvili Restores Citizenship for Ivanishvili, 16 October 2012. Available at: http://www.civil.ge/eng/article.php?id=25356, (consulted on: 27.4.2014). 244 Ivanishvili Launches Coalition, 21 February 2012. Available at: http://www.civil.ge/eng/article.php?id=24468, (consulted on: 27.4.2014).
47
providers until election day.” 245 The turning point during the campaign was the dissemination of prison surveillance videos by Georgian Dream several days before the elections, showing the maltreatment and sexual abuse of the prisoners by the guards. Trust towards the president drastically fell from 58% in 2011 to 27% in 2012.246 Additionally, unemployment has been becoming the biggest concern for slightly more than 50% of Georgia's population. 247 The UNM lost the parliamentary elections, receiving 40.34% of the votes, while Georgian Dream got 54.97%.248 “The October 1, 2012, legislative election is the first in the South Caucasus resulting in a competitive and peaceful transfer of power. As such, the election meets Saakashvili’s pledge in his state of the nation address in early 2012 that it would be the “freest, most transparent and most democratic [...] ever held in Georgia. Also for the first time during Saakashvili’s tenure as president, he will face a legislative majority from an opposing party.”249 Following this transition of political power it did not come as a big surprise that the 2013 presidential elections were won by a member of Georgian Dream coalition Giorgi Margvelashvili. In the beginning there was a major ambiguity about the new government's politics towards Russia and the West. Especially since the UNM members were intensively campaigning Georgian Dream's pro-Russian direction. However, both the new president and the government have taken active steps towards the EU integration and have succeeded in finalizing negotiations and initiating Association Agreement with DCFTA (kick-started by Saakashvili and UNM). State Minister of European and Euro-Atlantic Integration Aleksi Petriashvili has been very clear and has held a solid position on the question in numerous of his public appearances. “Mr Petriashvili describes EU as one of the two largest international organizations that we strive to become members of. Political and economic assistance that we receive from EU is of vital importance. European Union’s monitoring meeting is the only international institution presented in occupied territories of Georgia.” 250
245
Georgia’s October 2012 Legislative Election: Outcome and Implications, op. cit. Caucasus Barometer Time-Series Dataset Georgia: Trust towards President (%). Available at: http://caucasusbarometer.org/en/cb-ge/TRUPRES/, (consulted on: 27.4.2014). 247 Caucasus Barometer Time-Series Dataset Georgia: Most Important Issue Facing Georgia (%). Available at: http://caucasusbarometer.org/en/cb-ge/IMPISS1/, (consulted on: 27.4.2014); Poll Shows Georgians Increasingly Concerned over Economy, 6 April 2011. Available at: http://www.civil.ge/eng/article.php?id=23317, (consulted on: 27.4.2014). 248 Elections 2012. Available at: http://results2012.cec.gov.ge/, (consulted on: 27.4.2014). 249 Georgia’s October 2012 Legislative Election: Outcome and Implications, op. cit. 250 The Vilnius Summit and Georgia, 28 November 2013. Available at: http://www.messenger.com.ge/issues/3000_november_28_2013/3000_cgs-group.html, (consulted on: 27.4.2014). 246
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4.5. EU Economic Governance and Georgia Global crisis of 2008 hit the EU hard and revealed inconsistencies within the financial and economic legislation of the single market. Therefore, the EU laid out intensified legislation composed of four main components251: 1. Stronger commitment towards medium-term budgetary objectives (MTO) in order to better monitor the budgetary expenditures and level of objective attainment. The strategy involves imposition of a fine for non-compliant countries worth of 0.2% of GDP in a form of interest-bearing deposit.252 2. “Member States should ensure that their fiscal frameworks are in line with minimum quality standards and cover all administrative levels” 253 and that medium-term budgetary objectives should be taken into account while assuming multi-annual budgetary strategy. 254 3. The Excessive Deficit Procedure (EDP) requires the Member States having debt-to-GDP ratio of not more than 60% and budget deficit – not more than 3% of GDP. If the debt-toGDP ratio exceeds 60%, the governments should reduce it (according to the TFEU provisions). Fines will be imposed for non-compliant countries.255 4. Adopt preventive measures for macroeconomic risks and instabilities, as well as correcting the already existing ones by implementing proper policies. Member States will be sanctioned for repetitive non-compliance. 256 However, it should be noted that the mentioned sanctions and fines mostly operate in Euro-area. The EU Economic Governance mechanism is in force since December 2011. 257 Let's see the extent to which Georgia, a non-EU state, complies with these requirements: 1. In 2006 Georgian government formulated and implemented a Medium-Term Expenditure Framework (MTEF). “The MTEF aims to ensure targeted spending of scarce state resources in line with the government priorities, and to strengthen the link between policies and expenditure estimates over a period of four years (the budget year plus three subsequent years).”258
251
EU Economic Governance. Available at: http://ec.europa.eu/economy_finance/economic_governance/index_en.htm, (consulted on: 28.4.2014). 252 Ibid. 253 Ibid. 254 Ibid. 255 Ibid. 256 Ibid. 257 Ibid. 258 Dirk-Jan Kraan and Daniel Bergvall, “Budgeting in Georgia”, in: OECD Journal on Budgeting, Vol. 5, No. 4,
49
2. Despite some technical difficulties with the innovative framework, OECD concluded that “it brings the consideration of policy and expenditure together in a multi-annual perspective. On the one hand it necessitates the timely consideration of the multi-annual budgetary consequences of new legislation and policy initiatives, and on the other hand it necessitates the timely preparation of new legislation and policy initiatives to achieve medium-term budgetary objectives.”259 3. In the second half of 2009, Saakashvili introduced Economic Liberty Act which had several major points260:
Liberalization of the market;
Ban on creation of new regulatory agencies;
Ban on introduction of new licenses and permits;
Referendum on tax increase (except excise tax);
Ban on state having shares in any bank;
Expenditures-to-GDP ratio – maximum 30%;
Debt-to-GDP ratio – maximum 60%;
Budget deficit - maximum 3% of GDP. 261
The Act entered into force in 2014 with having a tax referendum and the long-term upper limits enshrined in the constitution, however the government retains the right to request alteration of the taxes temporarily. 262 Price and market liberalization was into force since the introduction of Shock Therapy in Georgia in 1995. Prohibition of additional regulatory agencies was putting the EU single market under question, since it is a regulated market with a number of agencies263. On the other hand, the mentioned ceilings for debt-to-GDP ratio and budget deficit are part of Stability and Growth Pact of the EU Member States according to the Article 126 of the Treaty on the Functioning of the European Union (TFEU) and annexed Protocol 12264, which 2006, p. 74. Available at: http://www.oecd.org/gov/budgeting/40139928.pdf, (consulted on: 3.5.2014). Ibid., p. 76. 260 Saakashvili Lays Out “Act on Economic Freedom”, 6 October 2009. Available at: http://www.civil.ge/eng/article.php?id=21541, (consulted on: 23.4.2014); Georgia Adopts Economic Liberty Act, 11 July 2011. Available at: http://government.gov.ge/files/34_32577_661550_GEORGIAADOPTSTHEECONOMICLIBERTYACT.pdf, (consulted on: 23.4.2014). 261 Ibid. 262 Georgia Adopts Economic Liberty Act, Ibid. 263 Agencies and other EU bodies. Available at: http://europa.eu/about-eu/agencies/index_en.htm, (consulted on: 26.4.2014). 264 Consolidated Version of the Treaty on the Functioning of the European Union, 9 May 2008, Official Journal of the European Union C 115/01. 259
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brought Georgian state constitution more in accordance with the EU treaties. 4. MTEF also involves a budgetary strategic paper with the following points: “a macroeconomic overview; a forecast of macroeconomic indicators (GDP, inflation, balance of payments deficit, exchange rate, monetary indicators); a sustainability analysis concerning macroeconomic shocks; detailed estimates of tax, non-tax and donor grant revenue. [...] Both revenue forecasts and expenditure forecasts are supposed to be based on policy priorities and on past budget trends and cross-country comparisons.”265 It should be noted, that these technical and institutional reforms were funded by the EU itself (in the framework of several assistance programs like Tacis, TEMPUS, Policy Advice, Food Security Programme and Macroeconomic Assistance, etc.) and the US government (through Agency for International Development, USAID). 266
4.6. What is FTA and when does it become Deep and Comprehensive? Generally, free trade agreements imply elimination of trade barriers among the countries and creation of free movement of goods, services, people and capital (four freedoms of EU Single Market267) and thus giving the partner countries preferential treatment. “A free trade agreement (FTA) is a legally binding agreement between two or more countries to liberalize trade and bring about closer economic integration.”268 WTO glossary refers to free trade area as a situation where “trade within the group is duty free but members set their own tariffs on imports from non-members (e.g. NAFTA).”269 Reuters financial glossary defines free trade zone as “a designated area within a country in which businesses can operate free of customs duties or currency restrictions. Profits are usually tax-free for a set period.”270 Moreover, Article XXIV of GATT reads as: “A free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce […] are eliminated on substantially all the trade between the constituent territories in products originating in such territories.”271 Therefore, elimination of import-export tariffs among the agreement countries is the key determinant of FTA. 265
Kraan and Bergvall, op. cit., p. 78. Ibid., p. 68. 267 The EU Single Market: General Policy Framework. Available at: http://ec.europa.eu/internal_market/top_layer/index_en.htm, (consulted on: 27.4.2014). 268 Free Trade Agreements (Trade in Goods): Guide for SMEs, June 2005. Available at: http://www.spring.gov.sg/Resources/Documents/Guidebook_FTA_Guide_Goods.pdf, (consulted on: 27.4.2014). 269 Glossary: A guide to “WTO Speak”. Available at: http://www.wto.org/english/thewto_e/glossary_e/glossary_e.htm, (consulted on: 27.4.2014). 270 Financial Glossary: Free Trade Zone. Available at: http://glossary.reuters.com/index.php?title=Free_Trade_Zone, (consulted on: 27.4.2014). 271 World Trade Organization, General Agreement on Tariffs and Trade: Part III, XXVI. Article XXIV, GATT, Geneva, 1986, p. 43. 266
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The European Union has concluded FTAs or is in the process of negotiations with a number of third countries. However, as nowadays worldwide import duties are quite low, since 2006 EU has been trying to go further than just elimination of custom tariffs and to address nontariff barriers or restrictive regulations and standards272 “such as procurement rules, intellectual property, sustainable development or competition, in which the EU seeks to find common ground with trade partners and foster bilateral trade. This is what is called “comprehensive” negotiations.”273 Furthermore, DCFTAs are offered to the countries who seek to be “associated”, in other words, to have closer economic relationship with the EU than FTAs allow for. 274 Since the agreement represents 80% of EU acquis communautaire (or EU legislation) 275 and seeks to abolish “behind the border” obstacles, it will be “deep”. In case of successful implementation of relevant reforms and signature of the AA, the concerned country (in this case Georgia) will operate in the EU Internal Market in trade areas mentioned in the agreement. “The removal of barriers faced by economic operators, as well as the introduction of high standards of consumer protection is the main foundation of the EU. It is widely acknowledged that the Internal Market has created enormous benefits to its members.”276 Now, as Georgia is on the verge of signing DCFTA agreement, it is essential to know, what benefits it would bring to the Georgian economy and trade.
4.7. Georgia and DCFTA: What Next? Trade Sustainability Impact Assessment (TSIA)277, financed by Directorate General for Trade (DG Trade) of the European Commission and conducted by independent research companies Ecorys and Center for Social and Economic Research (CASE), lays out the detailed prospective impacts of DCFTA for the ENP countries (in this case, for Georgia and Republic of Moldova). According to the report, the macroeconomic estimates for Georgia with reduction of tariffs and non-tariff barriers are as follows: in the long-run, Georgia's will experience national income 272
Free Trade Agreements. Available at: http://ec.europa.eu/enterprise/policies/international/facilitating-trade/freetrade/index_en.htm, (consulted on: 27.4.2014). 273 EU Georgia Trade Insight, Issue 1, 1 November 2012. Available at: http://www.enpiinfo.eu/files/publications/tradenewsletter_n1_2012_en.pdf, (consulted on: 27.4.2014). 274 Ibid. 275 Agreement on Deep and Comprehensive Free Trade Area. Available at: http://www.ei-lat.ge/vin-vinaris/saqarthvelos-da-evrokavshiris-savatcro-urthierthobebi/363-shethankhmeba-ghrma-da-yovlismomcvelithavisufali-vatcrobis-shesakheb.html?lang=ka-GE, (consulted on: 27.4.2014). 276 EU Georgia Trade Insight, op. cit; Georgia: Moving Towards DCFTA, 2012. Available at: http://eeas.europa.eu/delegations/georgia/documents/eu_georgia/dcfta2012_01_en.pdf, (consulted on: 27.4.2014). 277 Ecorys and CASE, Trade Sustainability Impact Assessment in Support of Negotiations of a DCFTA between the EU and Georgia and the Republic of Moldova: Final Report, Client: European Commission - DG Trade, Rotterdam, 27 October 2012. Available at: http://trade.ec.europa.eu/doclib/docs/2012/november/tradoc_150105.pdf, (consulted on: 3.5.2014).
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of €292 million, 4.3% growth in GDP, increase of imports and exports by 7.5% and 12%, respectively, increase in average wages by 3.6%, decrease of Consumer Price Index by 0.6%. These figures imply that Georgia's purchasing power is expected to augment, trade balance - to improve, while trade deficit is expected to continue to grow,278 “given that exports expand from a much lower baseline than import”279. As for the EU, the forecasted benefits are less impressive, equaling to almost 0% growth in GDP, and insignificant changes in average wages and purchasing power.280 Figure 8 illustrates macroeconomic results of Georgia-EU DCFTA agreement. It is essential to remark, that “the short- and long-run does not refer to a specific time period, but to the time it takes for economic effects to adjust.”281 The main difference between short-run and long-run effects is the moment when actual capital movement and capital reallocation between the EU and Georgian markets take place (which would be in the longrun.282 As for the sector-specific effects of DCFTA (Figure 9), the biggest change is expected in chemicals, rubber and plastic sector, whose share in economy is only 0.5%, therefore the gross effect of this increase would not be major. It is important to look at figures for agriculture, because agriculture employs 50% of the total labor force in Georgia. 283 “The table shows that while the agricultural sector will come under pressure due to increased competition from abroad, some subsectors are still expected to expand due to the DCFTA. This is the case for vegetable oils and fats, vegetables, fruits and nuts, and animal products.”284
278
Ibid., pp. A13-A14; A70; A101; Ibid., p. A14. 280 Ibid., pp. A13-A14. A101. 281 Ibid., p. A26. 282 Ibid. 283 Agriculture and Rural Development. Available at: http://eeas.europa.eu/delegations/georgia/projects/overview/agriculture_and_rural_development/index_en.htm, (consulted on: 29.4.2014). 284 Ibid., pp. A40; A101. 279
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-0.1
3.3
-1.8
-0.8
0.3
0.2
10.4
9.1
GDP, % change
0.0
1.7
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Consumer Prices, % change
0.0
-1.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Wages, less skilled % change
0.0
1.5
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Wages, more skilled % change Terms of Trade, % change
0.0
1.5
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
-0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Total Imports, % change
0.0
4.4
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Total Exports, % change
0.0
8.9
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
National Income, mln €
-47.0
291. 9
2.1
113. 2
110. 8
16.3
53.0
3.3
-17.8
-118.5
GDP, % change
0.0
4.3
0.0
0.0
0.0
0.0
0.3
0.0
0.0
0.0
Consumer Prices, % change
0.0
-0.6
0.0
0.0
0.0
0.1
0.4
-0.1
0.0
0.0
Wages, less skilled % change
0.0
3.6
0.0
0.0
0.0
0.0
0.5
0.1
0.0
0.0
Wages, more skilled % change Terms of Trade, % change
0.0
3.6
0.0
0.0
0.0
0.0
0.5
0.1
0.0
0.0
0.0
-0.6
0.0
0.0
0.0
0.0
-0.1
0.0
0.0
0.0
Total Imports, % change
0.0
7.5
0.0
0.0
0.0
0.0
0.5
0.0
0.0
0.0
Total Exports, % change
0.0
12.4
0.0
0.0
0.0
0.0
0.5
0.0
0.0
0.0
RoW
114. 4
China
Ukraine
Armenia
Turkey
79.1
Russia
Moldova
National Income, mln €
Variable/ Country
EU
Georgia
Azerbaijan
Figure 8. Macroeconomic Results of an EU-Georgia DCFTA285
Short run
Long Run
Source: CGE modeling calculations
285
Ibid., p. A37.
54
Figure 9. Georgian Sector-Specific Shares of Total Value Added (VA), and DCFTA Effects by Sector286 Share of Value Output, Total Total Total VA Added, % change, exports, imports, in baseline % change, long rum % change, % long run long run change, long run Veg, fruits, nuts, oilseeds
5.9
2.7
3.4
21.9
19.1
Other crops
0.4
-2.3
-2.0
3.0
15.1
10.0
2.5
3.1
5.7
19.8
Livestock and meat producst
1.0
-14.7
-14.8
169.9
17.8
Vegetable oils and fats
0.0
5.4
6.7
6.5
3.4
Sugar
0.2
-2.5
-2.4
-1.5
1.6
Other processed foods
1.1
-6.2
-8.8
14.5
13.0
Beverages and tobacco
1.9
-1.1
-4.0
2.5
22.5
Petrochemicals
0.0
-1.4
-1.0
16.5
1.8
Chemicals, rubber, plastics
0.5
46.5
62.2
64.5
-2.7
Primary metals
1.0
7.3
7.9
8.5
4.9
Fabricated metals
0.2
-3.5
-3.2
6.6
6.1
Motor vehicles
0.4
-3.8
-3.5
8.3
5.9
Electronics, computers
0.1
-8.1
-9.3
16.3
8.8
Other machinery and equipment
0.4
18.8
23.7
48.1
4.1
Other manufacturing
0.1
-20.2
-24.0
-13.8
14.3
Construction
5.6
4.1
4.5
7.7
6.6
14.8
2.9
3.1
8.2
14.0
Water transport
0.6
3.8
4.1
2.9
2.5
Air transport
0.7
-4.6
-4.4
21.1
7.9
Communications
2.2
2.1
3.6
4.8
5.4
Business and ICT
3.1
0.2
0.4
12.0
4.2
28.0
1.5
1.7
1.8
20.6
Animal products
Trade
Public and other services
Note:Total exports and imports refer to Georgia’s total exports to and imports from the world, not only the EU Source: Shares GTAP, IIDE CGE modeling calculation
286
Ibid., p. A39.
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As mentioned before, AA involves close approximation of EU and Georgian legislation. The TSIA report also lays out recommendations for achieving this and for further integration. Not only the legislation has to be adapted, but non-governmental sectors should become knowledgeable about these changes, and they have to be assisted in order to adapt to the changes. Moreover, the government has to make sure that the new legislation is enforced at all levels. Since, as we saw, some sectors would be disadvantaged from signing DCFTA, it is recommended to introduce the new regulations gradually, or phase them in. This would also allow for better monitoring and forecasting of current and future effects of approximation. The report underlines the necessity to increase competitiveness for the Small and Medium Enterprises (SMEs) since they will have to compete with increased number of importing companies on the Georgian market. “Enhancing or mitigating measures may include business education, export promotion and support for innovation. Finally, attention could be paid to the links between SMEs and larger exporting companies: while not all SMEs will be able or willing to export themselves they could supply their products to larger exporting companies – provided they meet the export quality criteria set by these companies.”287 The gradual approximation of the legislations and integration with the EU Single Market would bring in more transparency, competitiveness and protection of intellectual property, better monitoring of product quality standards, therefore making Georgia more attractive for investors, trustworthy for consumers.288 Furthermore, the enlargement experience shows, that “more for more” principle is more or less working in the EU, therefore further institutional and economic development is expected after signing the DCFTA.289
4.8. Georgia: Towards European or Eurasian Union? Since the break-up of the USSR, Russian leaders have been thinking about reuniting the former soviet countries once again under the Moscow dominance.290 One and most recent of these is Russian-led Eurasian Customs Union (ECU) with Belarus and Kazakhstan as current members, 291 common external tariff of which was launched in January 2010. 292 Nowadays ECU 287
Ibid., A16; 107-108. Georgia: Moving Towards DCFTA, op. cit. 289 Georgia Ranked 8th in World for Ease of Doing Business, in: Georgia Today, Issue #688, 2013, p.1. Available at: http://www.georgiatoday.ge/article_details.php?id=11638, (consulted on: 29.4.2014). 290 Rilka Dragneva and Kataryna Wolczuk, “Russia, the Eurasian Customs Union and the EU: Cooperation, Stagnation or Rivalry?”, in: Russia and Eurasia Programme Briefing Paper, REP BP 2012/01, 2012, 16 p. Available at: http://www.chathamhouse.org/sites/default/files/public/Research/Russia%20and%20Eurasia/0812bp_dragneva wolczuk.pdf, (consulted on: 3.5.2014). 291 A Brief Primer on Vladimir Putin's Eurasian Dream, 18 February 2014. Available at: http://www.theguardian.com/world/shortcuts/2014/feb/18/brief-primer-vladimir-putin-eurasian-union-trade, (consulted on: 28.4.2014). 292 Dragneva and Wolczuk, op. cit., p. 4. 288
56
market includes population of 165 million with estimated combined GDP of $2.3 trillion293, compared to the EU with population of 500 million and GDP of more than €13.075 trillion.294 “Putin's plan is for the ECU to grow into a "powerful, supra-national union" of sovereign states like the European Union, uniting economies, legal systems, customs services and military capabilities to form a bridge between Europe and Asia and rival the EU, the US and China by 2015.”295 The following map shows that Georgia, together with Ukraine, is a potential candidate for the Eurasian Union membership, with Armenia, Tajikistan and Kyrgyzstan as candidate countries. 296 Armenia announced its preference to join ECU on September 3, 2013, for the sake of national interests and due to their Collective Security Treaty Organization (also Russian-led military alliance) membership.297 While stating, that this decision would not affect its relations with the EU, it is quite obvious, that this is just a political statement.
Figure 10. European Union vs the Eurasian Customs Union Map298
Ukraine did the same thing right before the Vilnius Summit in 2013, where its chances for finalizing six-year negotiations on Association Agreement were quite high since Ukraine was regarded as the best student in the ENP. 293
A Brief Primer on Vladimir Putin's Eurasian Dream, op. cit; This Map Shows The Huge Scale Of Vladimir Putin's Eurasian Plan, 6 December 2013. Available at: http://www.businessinsider.com/eurasian-union-map2013-12, (consulted on: 28.4.2014). 294 Gross Domestic Product at Market Prices. Available at: http://epp.eurostat.ec.europa.eu/tgm/refreshTableAction.do;jsessionid=9ea7d07d30dbaf26632810ff44089c75fb 2ee4aeb5f0.e34MbxeSaxaSc40LbNiMbxeNb3iQe0?tab=table&plugin=1&pcode=tec00001&language=en, (consulted on: 28.4.2014). 295 A Brief Primer on Vladimir Putin's Eurasian Dream, op. cit. 296 Ibid; This Map Shows The Huge Scale Of Vladimir Putin's Eurasian Plan, op. cit. 297 Armenia to Join Russian-Led Customs Union, 3 September 2013. Available at: http://www.rferl.org/content/armenia-customs-union/25094560.html, (consulted on: 28.4.2014). 298 A Brief Primer on Vladimir Putin's Eurasian Dream, op. cit.
57
Currently Georgia is close to signing the AA, scheduled in summer 2014. With the Russian invasion in Ukraine and takeover on Crimea, there are suppositions that Russia might repeat what it did already several times and exert high pressure on Georgia right before the turning point. The experience gives us three general development scenarios: 1) Yanukovychian scenario - rumors about new Georgian government's pro-Russian direction might turn out to be true, or become true with certain financial incentives (or simply, bribes). 2) Armenian scenario - Russia might exert pressure on the government to change the direction; 3) Crimean scenario - Putin might use problem of minority groups once again (just like for Abkhazian and South Ossetian regions), in this case Armenian minority in Javakheti region of Georgia; First scenario is less likely to happen because even though multibillionaire Ivanishvili is no longer in the government, the current members of the state administration are still in good relations with him and have less experience with connections with Moscow than Yanukovych. To put it in easer words, the problem of finances is less likely to exist with having a multibillionaire as a friend. The Second scenario is even less likely, since Georgia is much less dependent on Russia in any sector, than Armenia, especially after Russian embargo of 2006, thanks to which “Azerbaijan, which accounted for 10% of Georgia's total exports in 2005, now accounts for more than 20%, while the U.S. now accounts for 10% of Georgia's total exports, up from 3% in 2005”299. And, regarding the main export goods, mineral water and wine: “in 2012, Ukraine, Kazakhstan, Lithuania, Belarus, and Azerbaijan accounted for the bulk of mineral water exports. Exports of mineral water to Ukraine increased from 15% of the total in 2005, to nearly 50% in 2012. [...] Exports to neighboring countries such as Ukraine, Kazakhstan, Belarus, and Azerbaijan have leapt by 270% in nominal terms and 180% in volume terms. Ukraine, for instance, now accounts for more than 40% of Georgia's wine exports, while China accounts for 10%.”300 Additionally, Socio-Economic Development Strategy Project “Georgia 2020” clearly states that “Georgia aspires to become a state based on European values and to commit to political and economic integration with Europe. Successive and effective implementation of measures
299
Georgia: Lifting of Russian Wine Embargo to Have Limited Economic Impact?, 14 August 2013. Available at: http://www.eurasianet.org/node/67391, (consulted on: 28.4.2014). 300 Ibid.
58
foreseen by Association and Deep and Comprehensive Free Trade Area agreements between the EU and Georgia is a prerequisite of further deepening of Eurointegration process” 301. Therefore, we would not expect radical change of situation from the Georgian side. Regarding the third scenario, Crimean population is more pro-Russian than Armenian minority in Georgia. The factor of language also plays a role here, whereas Crimeans speak Russian, 95 000 people from the population of Javakheti region are Armenian speakers. 302 However, the low level of integration causes dissatisfaction and migration to Armenia or Russia. 303 Even though Georgian public opinion states that Russia would not use Crimean scenario against Georgia once again, after having successfully exercised it in Abkhazia and South Ossetia, it might not be assumed that Moscow lacks creativity regarding scenarios. Therefore, from the three listed scenarios, the Crimean scenario has the highest probability of happening and causes doubts and fear of one more Russian invasion in summer 2014 in Georgia. By history we have learned that Russia definitely is not a rational player, therefore none of the international relation theories or analysis can claim with credible probability what Moscow's next step could be.
301
Ministry of Finance of Georgia, საქართველოს სოციალურ-ეკონომიკური განვითარების სტრატეგია საქართველო 2020, [Socio-Economic Development Strategy Project: Georgia 2020], Government of Georgia, Tbilisi, 2013, p. 3. Available in Georgian at: http://mof.ge/common/get_doc.aspx?doc_id=10742, (consulted on: 28.4.2014). [Translation by the author]. 302 Georgia: The Javakheti Region’s Integration Challenges, 23 May 2011. Available at: http://www.crisisgroup.org/en/regions/europe/south-caucasus/georgia/b063-georgia-the-javakheti-regionsintegration-challenges.aspx, (consulted on: 4.5.2014). 303 Ibid.
59
Conclusions Since the restoration of Georgian independence from the Soviet regime in the early nineties, the country has devoted its efforts to become a society of democratic values. However, the path of transition from command economy to the market-one has been bumpy for a number of reasons. In slightly more than two decades Georgia has experienced several domestic wars, has been affected by internal and external economic crises, has had 20% of its territory occupied by a third country, while part of the rest is still being taken day-by-day by the Russian border control.304 Furthermore, the stages of economic transition themselves were characterized by lack of consistency on the transition strategies and reforms, by implementation of spontaneous reforms over the years, by lack of vision of desired economic strategy of the country or by attempt to combine different approaches, and at times by inexperience of the people in charge of decision-making. But, most importantly, the root of inconsistencies and unsuccessful reforms was nonexistence of proper state institutions necessary for the initial post-communist transition. In comparison with Poland, which is the main reference point and example of successful Shock Therapy, Georgia did not inherit proper state institutions after the break of communist regime, which made it impossible to succeed and sometimes even to carry out vital reforms. Price liberalization, indexation of minimum wages and social security benefits, and tax reform were the only successful reforms of Georgian Shock Therapy. Others failed or mostly failed due to the lack of proper state institutions and lack of expertise, especially because of inexistence of own national currency, further increasing the negative effects of the economy. Formation of these institutions took valuable time, resources and experience full of mistakes, in order to understand what was really needed. But, even so, criminal situation and corruption still stood as major obstacles for proper economic development. Rose Revolution of 2003 brought on drastic changes to the criminal situation of Georgia, as well as in social and economic spheres. While Georgia was reaching higher ranks in Ease of Doing Business charts of World Bank, receiving more and more Foreign Direct Investments, while the tourism was nourishing, petty corruption was being totally eliminated, and state budget was recovering from elite corruption, violation of human rights, selective justice and infamous political, legal, social or economic reforms were accumulating. The story of spontaneous reforms, inconsistencies on the desired economic system was repeated during Saakashvili's 304
Georgian MFA Slams Expansion of “Border Zone” deeper into Abkhazia, 21 January 2014. Available at: http://www.civil.ge/eng/article.php?id=26872, (consulted on: 4.5.2014); Georgian President Concerned over Abkhaz “Border Zone” Expansion, 22 January 2014. Available at: http://www.civil.ge/eng/article.php?id=26879, (consulted on: 4.5.2014); NATO Reps Russia for Expanding Border into Georgia, 5 February 2014. Available at: http://news.yahoo.com/nato-raps-russia-expanding-bordergeorgia-170915120--spt.html, (consulted on: 4.5.2014).
60
regime. However, as the government was devoted to massive privatization, market liberalization, non-interference of the state in the market, and other reforms so characteristic to Shock Therapy, it was investing intensively in sectors that would have had largest effect on GDP growth indicator - characteristic of Gradualist approach. As noted before, combination of the two approaches is considered to be the best strategy, but it also has to be successive, gradualist approach must be taken only after forming proper institutions and only after the “shock” is gone. Saakashvili’s government had no strict direction regarding the strategy. The reform pattern was rather inconsistent, at times spontaneous and was combining the two approaches at the same time. The most significant success of this government in the economic sphere was the minimization of state administration bureaucracy, facilitation of doing business (SMEs being one of the crucial points of Shock Therapy strategy), and minimizing tax gaps by eliminating petty corruption. The peak of dissatisfaction with Saakashvili's government occurred when the prison surveillance videos were spread by UNM’s rival party several days before the parliamentary elections in 2012. It served as a turning point in people's political or rather, party preference. Coalition headed by Georgian multibillionaire businessman Bidizna Ivanishvili won the elections and took majority seats in parliament, as well as the government seats. This was referred to as the most democratic transfer of political power in Georgian history. Even though the new government was accused of being overly pro-Russian, especially because they restarted talks about lifting the Russian embargo after six years, the new government extensively engaged in finalizing the negotiations on Association Agreement and Deep and Comprehensive Free Trade Area with the EU and declared Eurointegration as its main political direction in the SocioEconomic Development Strategy “Georgia 2020”. Since the initiation of EU-Georgian relations in 1992, Georgia has been becoming closer and more integrated with the EU, mostly by the Neighbourhood Policy and Eastern Partnerhsip. Georgia initialed Association Agreement with DCFTA component at Vilnius Summit in November 2013, signing of which is scheduled in summer 2014, depending on the extent to which Georgia fulfills its obligations by that time. On the path towards DCFTA Georgia has carried out a large number of approximation measures, including constitutional changes to be more or less in accordance with EU Economic Governance and its corrective arm. According to the analysis financed by the European Commission and conducted by independent institutions, in the long-term DCFTA has to bring significant increase in Georgia's imports and exports, GDP, average wages and purchasing power of the population. However, in the short-term this will take a lot of resources because of the legislation approximation technicalities and static short-term 61
effects. Unfortunately, not all of the Georgian export products will benefit from entering DCFTA: some of the agricultural products will experience decrease in exports. The future of small farmers in Georgia where agriculture employs 50% of the labor force, 95% of which represent small farmers305, still remains ambiguous, since they would face numerous technical and financial obstacles related to new legislations. For these reasons, it is recommended that the approximation takes a gradual form, in order to avoid short-term losses and to better monitor and forecast future development. Georgia's State Minister of European and Euro-Atlantic Integration Aleksi Petriashvili is positive about the signature of AA in summer 2014, however current international political situation and Russia's leverage in the neighbourhood, as well as its hypothetical leverage in Georgia, make the future of the AA and even the future of the country ambiguous and indefinite. Armenia's and especially Ukraine's (former best ENP student) decisions to turn to Russian-led Eurasian Customs Union pose question of actual level of Moscow's pressure on the ENP countries. And, since Russia and Putin can be, by no means, regarded as rational players, so far nothing can be said for sure. Even though Georgian governments over the years have clearly and numerously expressed their interest and determination to join the EU, this seems very futuristic goal first of all because of low readiness of Georgian state and society itself, and secondly, because of the EU's enlargement fatigue after the Big Bang of 2004. It has been discussed, that European Neighbourhood Policy is a substitute for the enlargement because of the aforementioned fatigue.306 However, Georgia has to remind itself that, while keeping EU membership as a longterm goal, it should more focus on building a state based on European values. The main goal should not be the membership per se, but rather the development of the state and Georgian society to the point where it becomes a truly European state.
305 306
Agriculture and Rural Development, op. cit. David Cadier, Is the European Neighbourhood Policy a Substitute for Enlargement?, 6 December 2013. Available at: http://www.lse.ac.uk/IDEAS/publications/reports/pdf/SR018/Cadier_D.pdf, (consulted on: 27.4.2014); Deniz Devrim and Evelina Schulz, Enlargement Fatigue in the European Union: From Enlargement to Many Unions, Working Paper 13/2009, 2009, pp. 1; 16. Available at: http://www.realinstitutoelcano.org/wps/wcm/connect/99cc28804f018b15ae7bee3170baead1/WP132009_DevrimSchulz_Enlargement_European_Union.pdf?MOD=AJPERES&CACHEID=99cc28804f018b15ae7bee3170baea d1, (consulted on: 29.4.2014).
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