Political Economy Of Transition: The Case Of Georgia

Introduction

Dissolution of USSR in 1991 resulted in 15 new independent states that were expected to transform their central-planned economy system into free market economy and practice independent domestic and foreign policy. Not all of them took the same path and not all of them had the same resources and support from the very beginning. While Eastern European states were more prioritized for the West, Caucasus and Central Asia was left behind. Moreover, some of Eastern European States had more resources and thus more ability and higher chance for quick and successful transition. Georgia’s transition experience is different from those of Eastern Europeans. Soon after the independence, country was involved in civil war and at the same time, separatist movements in Abkhazia and South Ossetia took an advantage and broke away from central government control. This experience dramatically weakened reform process and had a great impact on political and economic landscape of the country. If described Georgia’s post-independence experience shortly and chronologically, it would be as follow: Gaining the Independence, Civil war, losing control on two regions, First wave of Internally displaced people, Revolution, War with Russia, Second wave of internally displaced people, First democratic change of the government. Not a very good context for changes and reforms especially in the region like Caucasus. However, reforms did happen, country did develop and significant results were reached. Paper deals with the transition experience of Georgia and focuses on relations between economic and political reforms in this specific case. Author will analyze if liberal economic reforms lead to democratization in Georgia. The scope of the study is Georgia from 1991, when it gained independence since 2012, when new regime replaced the old one with the first democratic change. Even though the process of transition in Georgia is not finished and it continues till today, author will only focus on the period of 1991-2012. Transition experience and thus reforms that took place in Georgia, will be divided in two phases: first phase during 1991-2003 and second phase during 2003-2012. What is important to consider is that leadership plays an important role in the success of the transition experience. That is why, basically, author divided transition periods in accordance to different regimes. The structure of paper is as follows: First section describes the situation in post-independence period of Georgia and outlines the major reforms and changes that took place during 1991-2003. Second section describes the new regime’s reforms in economic and political field. Third section deals with the outcomes of reforms in Georgia and analyzes the effectiveness of the second phase of transition. Last Section provides concluding remarks.

Transition Phase I: 1990-2003

All ex-soviet states experienced serious economic and social problems after the dissolution of USSR, however, Georgia’s experience was way too traumatic because of the civil war that started soon after the independence. In addition, there were serious problems related to territorial integrity. The main characteristics of post-1990 Georgia was strong centralization and vertical hierarchy, lack of rule of law and property rights, massive corruption, poverty and widespread practice of shadow economy. Plus, there was a great lack of basic food and electricity in the context of widespread unemployment. Money in banks were frozen, people were getting coupons for their salaries, but they did not have any value. Even though country became independent, government lacked the legitimacy and control over budget. The first President, Zviad Gamsakhurdia led country with strong nationalist sentiments-even the central media went on propagating ethnic nationalism. This nationalist rhetoric deteriorated situation in breakaway regions of Abkhazia and South Ossetia (called Samachablo or Tskhinvali Region by Georgians) bringing the tensions between Georgians and Abkhazians, who were only 17% of population in Abkhazia with Georgians as majority. In 1992, after the military coup, Gamsakhurdia escaped the country and soon after the civil war started that lasted almost till 1994. In parallel to civil war and struggle for power, Abkhazia and South Ossetia started to act on their own against Georgians. Conflict in Tskhinvali region broke out in 1991, while in Abkhazia it escalated in 1992. This resulted in ethnic Georgians leaving the region and brought the country 300 000 Internally Displaced Persons.

In addition, Russia appeared as the peacekeeper. Shevardnadze agreed to join CIS and as a result Russian military “saved” the situation. There were a lot of problems and challenges for transition, however, the major problem, as in the case of all ex-soviet states, was weak soviet institutions. Georgia was practicing Soviet style free health care until 1995. Soon after the independence, healthcare system collapsed due to the mass downsizing (it was believed by government to be the best option that time) and as a result, per capita public expenditure on health declined from 13 US dollars in 1990 to less than 1 US dollar in 1994. Georgia’s economy was dependent on other states that resulted in great stagnation after the dissolution of USSR. Situation got worse due to the criminality and instability. Plus, there were no real and specific plans for reforms. During Soviet times, due to the central planning economy, prices were fixed by government and after independence new government also decided to increase prices, however, this resulted in the inflation rate of 50-70% per month (Rinnert, 2012). For instance, the price of bread was increased from 0. 4 ruble to 4. 8 rubles per kilogram. In 1992 the government liberalized the prices (except for the bread) but due to the deficit in national budget (17-21% of GDP) the results were opposite: the production fell, inflation rate increased, and the country had to face an unprecedented devaluation of the national currency. The only way left for the government was loans from the National Banks of Georgia, which was giving these loans without any formal documents. In order to overcome the crisis, government introduced coupons, however, it devaluated very quickly and its exchange rate against US Dollar was 12,629 (reaching 42,000 coupons in two months) to the dollar. Eduard Shevardnadze (president during 1995-2003), former foreign minister of USSR, formally introduced new laws and Washington-consensus style economic liberalization, however, practically, nothing has been changed and major institutions from the Soviet legacy, remained (Rinnert, 2012). He also failed to overcome corruption which was the major obstacle for development and biggest problem for the Georgia. Even though, Georgia lost control over Abkhazia, Shevardnadze managed to stay in power with his weak and corrupted regime supported by Russia. His way of balancing Russia and the West in foreign policy, also balancing different groups internally, resulted to the relative stability of the country after the civil war, however, state formation was practically frozen and country was stagnating in every possible way. In 1995 new constitution of the Georgia was adopted thus abolishing soviet legal framework and introducing new laws. What is more important, new Currency-Georgian Lari was established in 1995. Other important reforms were privatization, development of bank and payment system, improvement of foreign trade and etc. International financial institutions IMF and WB played an important role in this process. But these reforms have not brought any real change or improvement. Because of the domestic instability, world financial crisis, Russian default and etc. from 1999 the most depressive and corrupted period has started in Georgia.

Another problem was related to budget as government had not full control over it. The main challenge for government was Autonomous Republic of Adjara, who refused to transfer quotas of tax revenue collected in the region. As a result, IMF requirements were not met and Georgia was denied to get more aid. Even though economic crisis was more dramatic and continued longer than other ex-soviet states, there were still important steps taken for future development: establishment of new currency, liberalization of the prices, privatization, creating constitution, formation of banking and tax system and etc. Paradoxically, Georgia had GDP growth in 2003 with 11,1 % but this was due to the construction of Baku-Tbilisi-Ceyhan oil pipeline. But budget deficit grew even more and reached $90 million in 2003 while monthly pension was only $7.

Transition Phase II: 2003-2012

Due to the widespread corruption, poverty, unemployment, inability of the government and extremely dramatic situation for people (lack of basic public goods like electricity, food, salaries/pension, healthcare and etc. ) dissatisfaction grew among people. Young elites, mostly educated in the West, opposed Shevardnadze’s regime and with a nationwide and popular civil movement, in 2003 peacefully overthrew the old government. Mikhail Saakashvili became the new president. This movement was called Rose Revolution (peaceful demonstrates were holding the roses and it became the symbol of revolution). Shevardnadze was forced resign, and in 2004, Saakashvili was elected as a president by 96 % of population. Domestic situation when Saakashvili came into office was following: weak and extremely corrupted state, unability to control the territory of the country (Abkhazia and South Ossetia broke away, Adjara was ruled by Aslan Abashidze and acted as he wanted, criminals controlled Samegrelo and Svaneti, Javakheti), problems with border controlling, including Pankisi Gorge (perfect place for rebels and terrorists basically from Chechnya), Russian troops in different regions of the country while Georgian police was similar to “mafia organization” and army was fragile and unorganized and without sufficient funds, debts, energy crises, inability and unwillingness of public servants to collect taxes and others. Three man goals of Saakashvili were: fighting corruption, restore police and military institution and develop economic climate for investments and FDI.

Political Reforms

He managed to restore Country’s control over Adjara in 2004 and over Pankisi in 2005. He even reached an agreement with Russia according to which Russian troops would leave the country by 2007 (except of Abkhazia and South Ossetia). In addition, new government expelled local fighter Emzar Kviciani from the country and restored jurisdiction over Kodori Gorge. Government also restored full control in South Georgia, inhibited by minorities of Armenia and Azerbaijan. Fighting corruption were occupying major place in Saakashvili’s reform package. State bureaucracy was corrupted, ineffective and over inflated during that time. This was, practically, the main obstacle for development. New government carried out large scale downsizing of public sector and replaced corrupt public officers with new, specially trained people, mainly from new generation and gave them better salaries. Moreover, number of ministries were reduced from 28 to 13 (Gugushvili, 2016:2). Anti-corruption measures, taken by Saakashvili government, transformed country from most corrupted state to a model for developing and transitioning states.

Economic Reforms

The main focus of reforms, during Saakashvili period, was on economic development. Large scale privatization, full deregulation, cutting or abolishing of 20 different taxes, massive downsizing of public sector-were those radical reforms which Saakashvili’s government launched in a short period and that make country one of the most liberal economics in the world. In 2012 Georgia ranked ninth in the World Bank's ease-of-doing business ranking compared to 112th place in 2005 (World Bank, 2016). Similarly, it moved from the 82nd place to 34th in the economic freedom index between 2003 and 2012. Soon Georgia became one of the most successful transition economics and number one in market reforms. Another important reform was tax reform. During 2004-2008 20 out of 26 taxed were repealed. Graduated income tax was replaced by a flat-rate 20 per cent income tax. Value added tax (VAT) was reduced from 20 per cent to 18 per cent and corporate profit tax was reduced from 20 per cent to 15 per cent. Similarly, dividend income tax was halved from 10 per cent to 5 per cent. Forbes Tax Misery Index in 2009 placed Georgia as the fourth lowest tax burden country (Forbes, 2010). The new government followed the same strategy and reduced number and rates of tariffs to promote trade. As a result, in 2006 16 tariffs were eliminated, majority of the goods fall under zero tariff rate and rest was taxed with 5 or 12%. The result of these reforms was that in 2010 Georgia had fifth lowest average tariff among WTO members and the lowest trade barriers among European and Central Asian States (The World Bank, 2012). Georgia experienced also broad privatization. Because all the restriction were removed after the introduction of reforms, everything got sold, including “strategic importance” assets, such as seaports, energy distribution lines, water utilities and public assets, such as hospitals, lakes and forests. To attract FDI, a lot of things was important to develop and a lot of things were important to introduce. Country needed good infrastructure, resolve electricity problems, regulate transport costs, construct new roads, hospitals, schools, airports, attract human capital, liberalize business climate and reach political stability inside the country. These all things have been done in a short period of 2004-2008 and reconstruction of the country was continuing with the speed unseen for the last 25 years (Kbiltsetskhlashvili, 2008). One more step to attract FDI and investors was steps taken by government in 2008, when they introduced free industrial zones, where investors were exempt from all forms of taxation. As a result of new reforms, foreigners practically had the same property rights as citizens of Georgia. They were even allowed to work in Georgia without any legal document, like visa or residence permit (Gugushvili, 2016). Due to the above described radical liberal and friendly business climate and tax code, Georgia’s economy grew to an extent previously unimaginable. GDP was growing around 10% from 2005 until 2008 war with Russia. FDI was also flowing in the country. The title of “top reformer of the year” was given to Georgia twice, in 2006 and in 2008 by the World Bank. Government also increased social protection spending from 4,2% to 5,8% of GDP between 2004 and 2012 and plus old-age pensions were raised from 14 GEL per month in 2004 to 125 GEL per month in 2012.

The Outcomes of the Reforms

The second and more important phase of reforms started in 2004 after Saakashvili took the office of the president of Georgia. Number of new reforms were introduced and number of elements important for state’s effective functioning were developed and improved. Anti-corruption reforms were most effective. In 2008, Transparency International ranked Georgia at 67th in its Corruption Perceptions Index while in 2004 country was at 133rd place. Saakashvili government developed and equipped police and military forces, gave them better salaries and effectively used them for fighting with crime and corruption. However, increase of military budget from 0,8% to 8% of GDP was not the best solution when country had a lot of unemployed people and still high level of poverty. As a result, law enforcement forced became effective instrument for government. Results of economic reforms were also fascinating- Georgia’s state budget increased to 3,5 billion Lari in 2008 compared to 500 million in 2003. Country attracted a lot of FDI. However, even though country’s several economic indicators were improving, some important sectors of economy just collapsed. For example, Industrial production declined by 30% compared to soviet times and agricultural share in GDP fall with 25%. Priority was given to other fields, like construction, transportation, communication and etc. Moreover, share of social transfers (pensions, allowances for Internally displaced people, socially vulnerable families and etc. ) dropped from 12% in 1991 to 7% in 2011.

This is the lower than countries in EU have as they usually spend 20% of GDP on these issues. Worth to mention that Georgia has the lowest pension in the whole Europe and even in Central Asia. Georgia made significant progress in different areas of politics and economics and country’s international image and ranking increased a lot, however, this did not cause a better life for population. Many were still living in poverty. Despite economic growth, the unemployment rate increased from 11. 5% in 2003 to 15% in 2012 (The World Bank, 2003-2012). Another dissatisfaction of population was over judiciary system which was practically under Saakashvili and became an effective tool in the hand of his party. In general, numbers played an important role during Saakashvili’s regime. International ranking, statistical data of some economic indicators, also metaphorical expressions like “Switzerland will meet Singapore in Tbilisi” were effective tools for president Saakashvili to control and influence the electorate. However, as Papava argues, these international ranking and especially, “Doing Business” indicator do not have any value for Georgians. This is partly true. The most economic reforms were made in order to attract FDI and make Georgia’s business climate easier for investors, however, this did not change anything for ordinary population. Pension reforms, for example, have not adequately addressed the core problem and meant just increasing the monthly amount without considering implications and fixing the real shortcoming of system. The same can be said government’s 2006 initiative which meant including 50,000 people in national employment program. Papava (2008) argues that this initiative was senseless because in caused inflation and even through 12,7 million was spent, only 10% of population were employed after the program. Papava is critical toward the Labor Code too, which practically was beneficial for employers and served their interests while leaving employees unprotected. Some scholars think that the outcome of Saakashvili’s “rapid modernization” program was establishment of authoritarian neoliberalism rather than free and competitive market economy. Others think that economic growth and successful transition of economy happened at the cost of democracy. The government used top-down approach during the reforms implementation after the Rose Revolution, and external threat (mainly Russia) was used to justify the authoritarianism. In addition, weak trade unions and civil society, power concentration and weak and unorganized opposition facilitated to the weakening of the democratization process. It is true that economic reforms were more prioritized than political ones during Saakashvili’s regime, however, even in political field, mainly in foreign policy, government succeed a lot. From the first days of his presidency, European and Euro-Atlantic integration became the major priority of foreign policy and Georgia radically turned to the West and abandoned Russia. Of course, NATO was more important for Saakashvili but EU was also one of the major pillar of its program. Association Agreement (2014) and Visa-free regime with EU (2016) was a result of the reforms, steps and actions started in 2004.

Georgia is member of ENP (since 2006) and EaP (since 2009) and has clear success. This is also the outcome of many years of work that started in 2004. Practically, before Rose Revolution, The West was not popular in Georgia and Shevardnadze favored Russia more. But with Saakashvili coming as a president, Country took a very clear pro-Western path of development. There were great hopes for NATO and MAP in 2008, but it did not happen (there a lot of scholars providing solid argumentation that MAP was not granted to Georgian back in 2008 because Germany and France were afraid of Russia). However, Georgia maintains as a main partner of NATO in Caucasus and is involved in every action that non-member state can take. NATO and EU were major driving forces for reforms and they were also major motivating factors for population. As US State secretary remembers when he attended Saakashvili’s inauguration in 2003, “Flagsss”. There is no doubt that despite great reforms, a lot of problems, exciting before, remained. However, those economic and political performances that was achieved during that short period of time, should not be forgotten. It is very important to consider the context in 2003, when the regime changed. State was practically, fragile, labelled as “failed-state” and the progress that it made, was fascinating. Despite Saakashvili’s serious mistakes, he leaved the legacy, without which Georgia could have looked absolutely different. The major achievement was state-branding in which Saakashvili was expert and these efforts caused a wide awareness of the small country in Caucasus that is not associated with terrorism or radicalism, but with great culture, tourism, democratization and economic development efforts. Moreover, Saakashvili left one important gift for Georgia’s democracy in 2012, as he allowed the first democratic and peaceful transfer of power to the Georgian Dream coalition and stepped down without violence. 2012 became the second important date in the modern Georgian history after 2003. And the third phase of development has started after that.

Conclusion

2003 Revolution was not the national movement against dictator or against human rights massive and brutally violation. People were tired of corruption, high criminality of political elites, poverty and that country was not moving forward. Rose revolution was the most radical and the same time most peaceful and non-violent change in the Eastern Europe. It brought the great changes and remarkable economic development but the same time, strengthened president’s authority and weakened democratic transition. As Baumann (2012) argued, stability and thus strong central authority of president was the compromised for the sake of state-building and economic development, especially in the context of war with Russia, creeping occupation and two waves of internally displaced people.

References

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