Economic Reform: What is the Economic Picture, 20 Years

After the Transition to a Market Economy?

By Vladimer Papava

First StepsIn the early 1990s Georgia has found itself in a

profound crisis which encompasses all spheres of its vital activity and is leading to an abrupt slump in production, a high level of inflation, and a decline in the standard of living.

Beginning in 1994-1995, thanks to actively carrying out an economic reform policy, trends toward stabilization and improvement of the economy was observed.

Currency reform – introduction of lari, Georgian national currency.

Before the “Rose Revolution” An energy crisis which meant whole winters without electricity and heating.

A budgetary crisis created by the inability and unwillingness of public servants to collect taxes.

These problems were conditioned first of all by a high degree of corruption.

Positive ReformsAn effective fight against corruption.The abolition of the old soviet traffic police and

the creation of a western-style patrol police.The combat of corruption in the energy sector

resulted in the overcoming of the energy crisis and as of the winter of 2006-2007.

A fourfold growth of the national budget revenues.

Reducing the number of licenses and permits.Cutting tax rates.

Institutional ErrorsLosing of “institutional memory.”In 2006 the Minister of Defense was

charged with the marketing of Georgian wines abroad.

The abolition of the State anti-monopoly service in late 2004 and its replacement at President Saakashvili’s initiative in the fall of 2007 with the Ministry of the Interior (which in Georgia combines the police and the national security forces).

Transformation of CorruptionThe extra-budgetary accounts, which

were used to accumulate income from individuals accused of corruption, were outside the budgetary area. There was no transparency in terms of spending these funds.

So-called “voluntary contributions” of businesses.

Controlling the business.De-privatization.Non-transparent privatization.

OffencesDefiance of property rights.Extrajudicial decisions to demolish privately owned residential houses built before 2003.

Comment: paradoxically, the Georgian government’s obvious disrespect for property rights never became the focus of the West’s criticism so far.

The Russian Trail in the CaucasusRussian concept of the ‘Liberal Empire.’Russia started fulfilling its master plan

in Armenia: In late 2002, on the eve of the

presidential election in Armenia, a Russian-Armenian treaty called a “debt-for-equity” swap was established;

In early 2006, Russia obtained new assets in exchange for not raising Armenia’s price for natural gas.

• Next was Georgia.

The Russian Trail in GeorgiaThe summer 2003 takeover of the shares of the US-

based company AES Silk Road by RAO EES (Unified Energy Systems) Russia.

The sale of Georgian gold and copper mining and processing companies to Stanton Equities, a subsidiary of the Russian holding group, Industrial Investors.

The owners of the United Georgian Bank (privatised in 1995) sold it to Russia’s Vneshtorgbank of which 99-percent is owned by the Russian Government.

Main Gas Pipeline and Gazprom.

The Russian Trail after the WarIn 2011 the Government sold two hydro power

plants to INTER RAO. These plants were under the management of INTER RAO based on the Agreement with RAO EES concluded in 2000. The Agreement was concluded for 25 years expiring as of 2024.

INTER RAO has also undertaken the responsibility by the Agreement with Georgian Government to build three new hydro power plants for which the investment of 193 million USD are to be made.

Economic Crisis and the “Paradox of War”

At the aid conference held in Brussels under the aegis of the World Bank in October 2008, USD 4.55 billion was committed for the reconstruction of post-war Georgia. USD 2 billion was grant money.

Although war by essence is a negative phenomenon, it had a positive implication for Georgia, to a certain degree, to the extent that the country received an enormous amount of international financial assistance. This creates, therefore, a so-called “Paradox of War.”

Myths About Georgia’s EconomyMyth 1: “Georgia—A Country of Neo-Liberal Reforms.”

Myth 2: “Georgia—A Country Free of Corruption.”

Myth 3: “Georgia—A Country with No Economic Relations with Russia.”

Myth 4: “Georgia—A Country of European Orientation.”

The Ways of DevelopmentRapprochement with EU.Singaporization of Georgia’s Economy.

Involvement into Russia’s ‘Liberal Empire.’

Combination of above Mentioned Three Ways

The Way to Nowhere

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