Georgian economy

The Process of European Integration and the Growth of the Georgian Economy

Zurab Chiaberashvili

"What kind of growth do you want? Bear in mind that:

"At an annual economic growth rate of 12% we will be a leading country in the world by 2040. No country so rich exists in the world today.

"With an annual 10% growth we will be among the world's top 20 most affluent countries by 2040.

"With an annual 7% economic growth, by 2040 we will be trailing behind developed countries.

"With 4% we will go bust.

"With 2% we will not be anything at all... we will be nothing...."

When Kakha Bendukidze raised the issue of economic growth in such an acute form in a very popular article of April 2010 (published in Tabula Georgian issue #6), he gave food for thought to many people. The significant decrease in Georgia's economic growth rate observed of late has made this dilemma even more dramatic.

Of course, we want economic growth because it has a direct positive impact on our pockets. The per capita annual income in 2003 stood at 2,961 USD (calculated based on purchasing power parity, PPP). By 2012, it had increased by 1.7 times, reaching 4,943 USD.

In a post entitled "Mistakes of the United National Movement" I wrote: "Despite the impressive economic growth achieved during the nine years, the United National Movement (UNM) failed to have the positive results of this growth reach each and every family. One cannot blame them for that. An annual per capita income of 3,200 USD (calculated without PPP) is still not enough to assume that Georgia has overcome poverty. As a result, this provided, and unfortunately will provide for quite a long time in future, a fertile ground for political populism."
That is exactly what happened. Political populism gained the upper hand.

Among the EU member states, the lowest indicators of economic growth were observed in Bulgaria. For example, by 1 January 2007, when Romania and Bulgaria joined the club, the GDP in Bulgaria comprised 40% of the average GDP of the 25 member-states that then comprised the EU.

However, in another post, entitled "Three Wishes for Cinderella" I wrote: "Today, increasingly more people understand that no matter how 'socially oriented' the Georgian Dream coalition makes the state budget, and no matter how much the coalition and the UNM argue over what the right balance between finances directed towards development-oriented projects and social costs is, there is no 'magic wand' which can turn a pumpkin into a carriage in one fell swoop. Consequently, the administration of the Georgian Dream will put an end to the utopian dream that 'we will all instantly become affluent and feel well'."

Although is clear that we will not "all instantly become affluent and feel well," it is not beneficial to merely stay idle either. If we do not work hard now to recover economic growth to the average of 6.4% (as was the case under the UNM's rule), we will come to face more problems than just empty pockets.

When we, politicians, are concerned about the almost one billion lari deficit in the state budget, the first question heard from society is "will pensions be paid?" The answer is simple: yes, pensions will be paid, at least for the time being. "Then what's the problem?" – is the question that often follows.

For the very aim of sparing pensioners and the socially vulnerable, the government's efforts will be focused on covering its social liabilities and spending less, or almost nothing, on economic growth, the development of state institutions, motivating bureaucracy, and maintaining low levels of corruption.

All of these things, however, are necessary to recover the favorable investment climate in the country and to continue economic growth at the desired rate. Let's go back to the question raised by Kakha Bendukidze: what is the desired growth rate? I will try to answer this question in the context of our European aspirations.

Among the European Union (EU) member states, the lowest indicators of economic growth (and I do not mean the binding Maastricht criteria for Eurozone countries) were observed in Bulgaria. For example, by 1 January 2007, when Romania and Bulgaria joined the club, the gross domestic product (GDP) per capita in Bulgaria comprised 40% of the average per capita GDP of the 25 member-states that then comprised the EU. Moreover, 58% of Bulgaria's external trade was accounted for by trade with EU countries.

Three years ago, employees of the National Bank of Georgia made the following extrapolation: taking into account various circumstances (the average indicators of growth for the EU economies and populations over the past 40 years, the inflation rate and Georgia's corresponding average indicators since 2003), they tried to estimate the average size of annual economic growth that Georgia would need to, at the very least, match the two above cited indicators of Bulgaria.

Before I recount the results of that calculation, let me once again explain the objective of that study: imagine that no non-economic factors that may impede Georgia's accession to the EU exist; what is the minimal economic criteria that we should meet (I reiterate that I do not mean the Maastricht criteria which must be met when a country's accession to the EU is decided in principle) to become a sufficiently interesting country for the EU that Brussels takes a positive decision about Georgia's admittance?

The study of the National Bank of Georgia showed that in order to reach the same level that Bulgaria had against the 25-member EU in 2007 (which has since grown to comprise 28 members) by 2022, Georgia needs an annual growth rate of 9%. At an annual growth rate of 5%, this level will be reached by 2029.

We should thus be worried about the growth rate of the Georgian economy, not only because it directly affects our pockets (of course, this is the main cause for concern), but also because at its current development level Georgia cannot be attractive for the EU, even in the absence of other political impediments.

This is not even mentioning the fact that economic growth and the accumulation of higher revenues for the budget are crucial for neutralizing the other political factors impeding our accession to NATO and the EU. The more we spend on diplomacy, the better we can contain Russia's aggression. But spending more on diplomacy requires the Georgian economy to be strong.

Finally, I have repeatedly heard that Kakha Bendukidze's libertarian attitude has been an obstacle for our accession to the EU. This may well be true: to join the EU we may have to restore such regulations (for example, food safety inspections) that were abolished over the period 2004 to 2006 when Bendukidze served as the Minister for Reform Coordination.
However, we must not forget that had we not abolished those regulations and the corrupt regulatory agencies, the Georgian economy would not have increased at an average annual 6.4% rate over the period 2004 to 2012. Let's restore the necessary minimal regulations when a formal need to do so emerges, but let's not do that just to spite Bendukidze – or the UNM in general – and to appease international experts.

Let me reiterate: if the Georgian economy fails to rapidly grow and the yoke of regulations is once again thoughtlessly put on our poor country, then the Georgian dream of joining the EU will be postponed from the 2020s to the 2030s.

No one wants to be nothing.



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