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Georgias Economy - A Matter for Diplomats, CU Issue 37, June 22, 2009

This week the Georgian prime minister, Nika Gilauri, said in an interview with the Wall Street Journal that his country had finally gone officially into recession, with the economy forecasted to shrink by 1.5% this year (WSJ, June 18). He expressed confidence that the government is prepared and ready for the worst of the downturn, but predicting Georgia’s economy is not an easy task.

The country’s economic situation has been closely interlinked with its political fortunes. After the Rose Revolution in 2003, a wave of liberalisation and anti-corruption measures by the new Saakashvili administration sent Georgia’s credit rating soaring. When the Baku-Tbilisi-Ceyhan oil pipeline opened in 2005, cementing Georgia’s reputation as a transit corridor, President Saakashvili was able to claim further success (despite the fact that the BTC was planned during the tenure of his predecessor Eduard Shevardnadze).

Foreign direct investment (FDI) grew from $453 million in 2005 to $1.6 billion in 2007, and GDP growth accelerated to 12.4% in 2007: despite the turbulent relationship with Russia, on the one hand, and continued political turmoil on the other, foreign investors continued to pour money into this pro-Western, liberalising state.

The August 2008 war with Russia changed all that. For investors, the conflict was an instructive lesson in the need to account for political risk. Rather than a strategically-located investment opportunity, Georgia began to be seen as a diplomatically isolated, erratically-run country. Shortly afterwards later, the collapse of Lehman Brothers heralded the start of the global recession. And recent months have seen Georgia succumb to political paralysis as growing opposition to President Saakashvili has culminated in mass street protests.

The consequences of these three shocks were made clear by the Office of Statistics of Georgia this week: FDI plummeted to $124.7 million in the first quarter of 2009, down from $537.6 million in the same period of 2008 (Civil.ge, June 17). The construction industry, one of the mainstays of Georgia’s economic boom, slumped from $171.8 million to $6.2 million. GDP growth, already down to 2.4% due to the traumas of the year’s second half, is expected to be just 1%.

So why has it taken Georgia so long to slip into recession? The combination of a continued external threat, domestic turmoil, and a worldwide economic crash would bring many countries to their knees. Vladimer Papava, former Georgian Economy Minister and now a senior fellow at the Georgian Foundation for Strategic and International Studies, argues that the Georgian economy has actually been boosted by the aftermath of the war, specifically the $4.5 billion of aid pledged by donors in Brussels in October and $750 million promised by the IMF in September (BBC News, October 22). This ‘paradox of war’, Professor Papava told CRIA, “may enable the country to avoid the banking and currency crisis”. Georgia’s ability to withstand these shocks has been aided by its relative isolation from world financial markets, unlike many other former Soviet republics in Eastern Europe.

Delivery of the aid pledged at Brussels may be difficult, for although three-quarters of the money should be delivered by September, foreign governments may drag their feet when it comes to paying out in the middle of a recession. Transparency is another problem – allegations of corruption continue to dog the government and the influx of so much money provides ample opportunity for officials to take a cut.

If aid money is – or appears to be – stolen by members of the ruling elite, the opposition to President Saakashvili will only intensify. So far, however, what has been striking about the protests which have occupied downtown Tbilisi since April 9 is the absence of economic motives. The opposition’s demands have been almost exclusively focused upon President Saakashvili’s alleged authoritarianism and his decision to launch the attack on South Ossetia. Compare this with the protests in Iran, where similar complaints – state repression and an isolationist foreign policy – are accompanied and arguably even overshadowed by economic pessimism.

Professor Papava argues that economic problems have never been a motivation behind unrest in Georgia. Decades of economic stagnation under the USSR and the turmoil of the 1990s have led to a certain stoicism amongst the Georgian people. And it is probably true that for many, the last few years have seen an improvement in their material situation, a development for which the Saakashvili government has taken full credit. Therefore the oppositional strategy of occupying swathes of the capital stands a very good chance of backfiring. By allowing the demonstrations to continue for months, the authorities have quietly helped to portray the protestors as troublemakers who have shut down parts of the local economy and contributed to Georgia’s reputation as an investment black spot (Civil.ge, June 20). An insightful piece by Nana Sajaia for Transitions Online on June 16 reveals the frustration of many Tbilisi businesses towards the demonstrators (TOL, June 16).

The opposition seems to be aware of this, which explains the debate within the opposition over whether or not to block roads and railways, a move which the government warned constituted a ‘red line’ (MSNBC, May 27). Blockading key infrastructure would destroy the protests’ popular support and give the administration justification for a crackdown.

The government is nonetheless being disingenuous by claiming that “street politics” was the sole reason for the economic slump in the first half of the year. This conveniently absolves the government for any responsibility for the protests themselves. It also ignores the Russian artillery in range of Tbilisi: a far more worrying situation for foreign investors and the biggest obstacle to a normal business environment. The aid money pledged at Brussels may help to hide the damage caused by the conflict, but it is not a panacea. Regaining Georgia’s financial vitality will be a matter for diplomats, not economists.

"Georgias Economy - A Matter for Diplomats, CU Issue 37, June 22, 2009" | 1 comment | Search Discussion
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by Alexander Tvalchrelidze on Mon Jun 29, 2009 5:00 pm
The article is excellent!


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