Any suggestion that the first four years of Georgia’s Rose Revolution might have been “easy” does not go down well with Nika Gilauri, the new minister of finance.
“It is not easy to change the history of a country,” he says. “It is not easy changing from the most corrupt country in the world to one of the most incorrupt. It is not easy achieving 10 per cent annual growth of gross domestic product for three years. And it is not easy having gone from energy dependence to one of the most energy independent countries.
“I would say the first part is always the most difficult. That has been done. The next part is easier. We have already broken the bad bits. Now we have to keep moving forwards.”
Georgia’s economic performance since the revolution that ousted Eduard Shevardnadze in 2003, and saw Mikheil Saakashvili elected president in January 2004, has been little short of extraordinary. The latest International Monetary Fund report describes the transformation as “impressive”, and the government’s fiscal performance as “a spectacular improvement”, rare adjectives for such a dry institution.
“It is a fantastic story,” says Roy Southworth, country manager for the World Bank. “The transformation I have seen in three and a half years is something I have never seen in 28 years at the bank.”
The World Bank’s annual report Doing Business, measuring the ease with which companies can set up and operate around the world, saw Georgia improve its ranking from 112th place in 2005 to 37th last year, and 18th in 2007 (out of 178) – above Belgium, Germany and France, to name but three. Zurab Nogaideli, Georgia’s prime minister, won the first Doing Business award as a leading reformer, and other countries such as Azerbaijan, Guatemala and Mozambique are studying Georgia’s reform programme to help their own efforts.
When the government came to power, its top priority was to root out corruption. It did so by sacking all the police and thousands of civil servants, radically improving wages and training for the remainder, and scrapping much of the red tape in the system.
“Corruption had become almost endemic,” says Mr Nogaideli. “We simplified the rules of the game, to avoid interaction between bureaucrats and businessmen.
“The taxation system was very difficult and complicated, with 22 taxes. There were a lot of opportunities for officials to exploit their personal interests. We reduced the number of taxes to seven. By next year to will be down to five, with personal income tax and payroll tax merged at a [flat] rate of 25 per cent.”
The licensing system has been pruned, with the number of licences reduced from around 1,000 to only 150. The system has also been streamlined so that businesses face a “one-stop shop” to get all the necessary permissions from one government agency.
Sweeping privatisation of former state assets has been at the heart of the revolution. “Our policy is very simple,” says Mr Nogaideli. “We are going to withdraw government participation from business to the maximum extent possible. We will only stay in infrastructure, such as gas pipelines, if it concerns our security. Anything else will go private.”
Health reforms will leave only three out of 100 hospitals run by the state. “Right now we are considering drinking-water privatisation. We will definitely consider all municipal services to be privatised, and irrigation systems. The principle of the Georgian economy will be: whatever it is possible to be private will be private,” the prime minister adds.
The result has seen the country transformed from a place where teachers’ salaries and pensions were six months in arrears, public services were riddled with corruption, 70 per cent of all secondary roads were classified as “poor”, many rural areas went without electricity all winter, and the population had slumped from 5.5m to 4.3m in little more than a decade.
Tax collection improved from 14.5 per cent of GDP in 2003 to 22 per cent in 2006, and should reach 24 per cent this year. Combined with privatisation revenues, it has allowed the government to clear arrears, increase pensions, repair the roads and begin the process of reviving a wrecked infrastructure. The skylines in Tbilisi, the capital, and Batumi, on the Black Sea coast, are littered with cranes brought in for the ongoing construction boom.
Foreign investment has soared, even as the economy has grown: from 7 per cent of GDP in 2005 to 13.4 per cent last year, to a forecast 25 per cent in 2007. The problem is not one of failure, but of success.
“The most important challenge is the huge capital inflow, which is continuously growing,” says Aleksi Aleksishvili, former finance minister, nominated as governor of the National Bank of Georgia. “We need to respond, otherwise the fear of overheating is realistic.”
That is the immediate task. The longer-term challenge is to spread the benefits of economic growth to the majority of the population, and to become competitive in export sectors so that the early explosion of economic growth can continue.
“The transformation is remarkable,” says Robert Christiansen, representative of the IMF. “A legitimate question is not if it is real, but if it is sustainable. We do not know.”
Mr Gilauri admits that “one of the most challenging things for the next year or so will be fiscal discipline”. The government target is to keep inflation below 10 per cent, but in September the figure was edging up to that level. Allowing the lari to appreciate is not an easy option, for fear of harming exports when Georgia needs to find new markets, after Russia’s trade embargo.
Curbing state spending is a challenge, with parliamentary and presidential elections due next autumn. Spreading the benefits of growth to the poorest parts of Georgian society – the old and the rural population – is one priority. On top of that, defence spending now consumes around 25 per cent of the budget, as the government tries to set up a military establishment from scratch.
Poverty alleviation has been one of the less successful parts of the strategy. Growth has been concentrated in construction, communications and the financial sector. But 48 per cent of the population is still in agriculture, a sector that has been hit by floods, drought and the Russian trade embargo in recent years.
“It’s a rather confused picture,” says Mr Southworth of the World Bank. “The working poor are better off, but 30 per cent of the population is not looking for work – including the elderly and pensioners. This is the lost generation of the Soviet collapse.”
Longer-term growth prospects will depend on Georgia’s strategic position as an energy transit corridor; its capacity to increase hydro-power exports; the ongoing revival of tourism; development of food processing to allow agricultural exports; and the attraction of manufacturing to serve the regional market.
In 2006, Georgia proved that it could survive the dramatic shock of the loss of its biggest export market – Russia. It lost 1 per cent off the growth rate, according to most calculations, and reduced exports by $400m. Worst hit was agriculture – especially wine. But exports have been boosted to other parts of the former Soviet Union.
“Sanctions proved a mildly painful kick,” says Mr Christiansen. “It did not matter to the economy as a whole, but wine-makers were left sitting on a lot of semi-sweet reds [developed for Russian tastes], and nothing to do with it. It may have been a blessing in disguise.
“There is not that much growth potential in the Russian market, so Georgia needs to reorient itself towards the west.”