DEVELOPMENT CHALLENGES
After declaring independence in 1991, Georgia started a transition period with a low level of income, slender fiscal resources, and weak institutional and administrative capacity. The country began a period of strong growth in 2001, with GDP growing at 6.4% annually on average until 2010. Growth mainly came from a small number of sectors, including construction, real estate, telecommunications, financial services, and manufacturing. Today, Georgia is a “lower-middle” income country with a per capita GNI of US$2,690 and a “high” Human Development Index (HDI) of 0.733, placing Georgia in 75th position of 187 countries. Nevertheless, Georgia was strongly affected by the August 2008 conflict and the subsequent global economic crisis, with an economic contraction of 3.9% in 2009 and a corresponding decrease in the current account deficit. The country continues to face serious development challenges.
Poverty and inequality
Despite slowly decreasing poverty rates, from 51.8% in 2000 to 22.1% in 2008, over 10% of the Georgian population is considered “extremely poor”, defined as living on less than US$1.25 per day. In addition, increasing wealth disparity has restrained the impact of growth on the population. More than half of the population lives in rural areas, yet the rural poverty level (29.7%) is much higher than the urban poverty level (18.3%). The proportion of poor dwellers is significantly higher in some regions than in others.
High unemployment, labour migration, and a large informal sector
Georgia has a high official unemployment rate, at 16.4% of the total workforce in 2009. Youth and women are disproportionally affected by unemployment in Georgia. As a coping mechanism for job and income loss, Georgia also has by far the largest informal sector, though declining, among the 25 transition economies, amounting to around 62% of GDP (Andreas Bühn & Friedrich Schneider, 2011). Many women are employed in the informal sector, with little or no job security and social protection. Another effect of the limited employment opportunities is the large labour emigration from Georgia; Georgia has one of the ten largest diasporas, representing 22.9% of the total population. Remittances from migrant workers are also a crucial source of income for many households.
Skills gap
Although Georgia has achieved universal primary school enrolment and adult literacy, preschool education remains underdeveloped, and vulnerable children (living in rural areas and/or poor households) have more limited access to education, lower attendance rates and higher dropout rates. The quality of education also needs improvement: despite extensive reforms and increasing public expenditures on education, amounting to 3.2% of GDP in 2009, there is still a shortage of qualified personnel, a lack of equipment, and an absence of national standards. Moreover, links between vocational education and job skills are weak due to limited cooperation between educational institutions and businesses. This results in a substantial mismatch between the competences of graduates and the qualifications and skills demanded by the labour market.
Regional tensions and large-scale conflicts
Economic and social development challenges in Georgia have been intensified by internal wars and civil conflicts. Migration, economic disruption and decline followed the wars in the autonomous republics of South Ossetia and Abkhazia in 1991-1993. Similarly, the short armed conflict with the Russian Federation in August 2008 halted the prosperous period and resulted in the destruction of many buildings and infrastructures and the conversion of hundreds of thousands of people into refugees and internally displaced persons (IDPs). Problems related to nation-building have therefore considerably diminished the human capital and social cohesiveness of the country and set back development progress.
KEY TRADE ISSUES
Weak competitiveness, low productive capacity and trade deficit
Despite a move towards higher value-added sectors, the Georgian economy is highly dependent on the exports of a small number of low value-added commodities, exposing the economy to price fluctuations. The main exports are agricultural products (including prepared foodstuffs, edible fruits and nuts, and wine), iron and steel, and precious stones. 20% of exports are metals, including ferrous metals, copper, gold and other minerals. The range of other internationally competitive products is small, and their value-added is low, due to the weak productive capacity of enterprises. Relying on imports of higher value-added products (vehicles, machines and electronic equipment), as well as fossil fuels, Georgia suffers from a wide trade deficit (the value of imports is more than triple the value of exports).
Market concentration
Georgia became a member of the WTO in 2000 and, in the last few years, its number of trading partners has increased to 132 countries; however, the top six export destinations (Turkey, Azerbaijan, Ukraine, Canada, Bulgaria and the United States) account for 66.3% of total exports. Overreliance on a selected number of trading partners has made the country very vulnerable to changes in the political and economic situation in its partner countries. This is best exemplified by the sharp slowdown of export growth caused by the 2006 embargo on Georgian exports by the Russian Federation, traditionally Georgia’s primary trading partner.
Underdeveloped quality management infrastructure
The country’s quality management infrastructure is underdeveloped. Despite the existence of two independent standardization and certification institutions (the National Agency for Standardization, Technical Regulations and Metrology, and a National Accreditation Centre), international standards are poorly applied in the productive sectors. These institutions lack qualified personnel, and training is expensive. In addition, standardization is mostly optional, and any company has the right to develop its own specific standards. Finally, trade support institutions (TSIs) have limited capacities to enable the private sector to comply with international standards, in order to compete on international markets.
Limited access to finance
Despite the rapid growth of banking services, difficulties in taking out bank loans are still a key barrier to trade development. The overwhelming majority of SMEs never apply for credit. High collateral requirements and interest rates in the range of 17-25%, as well as the lack of early-stage financing and innovative financing mechanisms, hinder access to finance. Increasing strongly between 2003 and 2008, with its share of GDP more than doubling, foreign direct investment (FDI) fell in 2008 after the conflict and again in 2009 due to sluggish growth. In addition, FDI was concentrated on only a few priority sectors: real estate, industry, construction, transport, and communications.
Continued need to improve customs procedures
Georgia is considered the top reforming country in the world, having undertaken very ambitious institutional and business reforms since the Rose Revolution in 2003. In 2007, the country moved from 112th to 18th position on the World Bank’s “ease of doing business” indicator; Georgia has continued this progress and, today, is ranked 16th out of 183 countries. At the same time, business reforms have had little effect on SMEs and trade-sensitive sectors like agriculture. In the same vein, while Georgia has introduced more simplified customs procedures, which have reduced the number of days needed for export by three-quarters, there is still considerable room for improvement. In fact, on the “trading across borders” indicator, Georgia only ranks 54th.
Statistics have been compiled by the World Bank, OECD and UNECE. Information has been adopted from: the United Nations Development Assistance Framework for Georgia 2011-2015; the 2010 National Development Programme “United Georgia without Poverty”; the 2010 United Nations report on “The MDGs in Europe and Central Asia: Achievements, Challenges and the Way Forward”; the 2011 UNDP Aid for Trade Needs Assessment for Georgia: Trade and Human Development; and the 2011 OECD book on Development in Europe and South Caucasus: Armenia, Azerbaijan, Georgia, Republic of Moldova and Ukraine.