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You are here: Home > Current Topics > Mind your Business > 03 October 2005 |
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Image: The Georgian flag Georgia is one of the countries that used to be part of the USSR - many students following A' levels and at first year undergraduate level will not be able to remember the USSR and will have no first hand recollection of what the world was like prior to the break up of the Union. Georgia was a former satellite of the all-powerful Russian authorities that were at the heart of the USSR. The USSR enjoyed control, both economic and political, over such satellites and for many years the ethnic diversity in Russia's republics was kept firmly in check with regards to political and national aspirations. When the USSR broke up, countries like Georgia sought independence. Georgia broke away from the USSR in 1991. Since that time it has experienced a number of political and economic difficulties as it has come to terms with its independence. Like many of the former Soviet republics, Georgia's independence has not been without its problems. The economic system prior to 1991 was essentially a centrally planned command economy with Moscow doing the planning. All aspects of life would be determined by the planners - what is to be produced, how it is to be produced, who gets what is produced - all these key questions that are at the heart of any economic system were decided by the bureaucrats at the state planning authority, Gosplan. This was economic management by the state. Markets as it is understood in the West did not exist and prices did not fulfil the function that they do in Western market economies. 
Image: The map of Georgia shows its strategic position linking Russia with Turkey which is currently in negotiations to become a member of the EU. How long will it be before Georgia joins the growing band of countries that are seeking membership of the EU? It is difficult for those who have not lived under such a system to understand this important point. Prices were merely a means of indicating how much had to be given up to acquire what you needed, price did not have any relationship to value. Value in part, relates to notions of scarcity - the scarcer something is the more it is valued and the higher its price tends to be as a result. 
Image: The transition in Georgia, combined with political problems, has resulted in suffering for many of the country's more vulnerable people. Title: Refugees In Georgia. Copyright: Getty Images, available from Education Image Gallery In Soviet republics like Georgia this was simply not the case. Wages were determined by the planners on the basis of how much would be needed to be able to access the basics of life but since prices were determined also by the planners, wage rates meant nothing either. Imagine this scenario: To live the average family needs to pay rent on their flat, buy 5 loaves of bread, 12 eggs, 1kg of cheese and 1/2kg of butter and also travel to work using a metro system (10 journeys per working week). If that is what is needed then wages need to be set so that this could be afforded. Let's set wages at £5 per month. Not much you might say and compared to Western levels absolutely right. But if rent is set at 50p, bread at 5p, eggs per dozen at 75p, cheese per Kg at 50p, butter per kg 50p and a metro ride 1p per journey then £5 is more than enough to enable the family to get what they need. When independence came, there came with it the shift to a market based economic system. The transition from planned to market is not an easy one and this is why these states are referred to as transition economies. They invariably have potential to be wealthy countries in the future but the difficulties of changing a whole culture plus the economic institutions that are necessary to enable this to happen is not something that will happen in a short space of time and in the meantime the ordinary population suffer and perhaps have expectations that are beyond that which the government are capable of producing. |
The theory section will highlight some of the problems facing Georgia in making the transition to a market based system and offer a brief outline of the state of its economy.
One of the main problems facing transition economies is how to remove price controls and expose the population to market forces. The President after independence was Zviad Gamsakhurdia. Price controls are invariably associated with rationing. Gamsakhurdia attempted to maintain his political position by attempting to control the price of basic supplies and public transport - what this means is fixing prices below market levels.
Look at the diagram below to see what effect this has. Basic market economics tells us that if we try to restrict price below market equilibrium then demand will exceed supply and there will be a shortage. To cope with this shortage the state has to ration supplies. In 1991, Gamsakhurdia did just this by restricting the population to buy only from local shops!
The problem faced by all transition economies is that this merely stores up the shortage. When price liberalisation occurs as it did when the President was ousted in 1992 the shortage comes into the open and prices begin to rise sharply. Georgia faced this exact problem - not only from food prices but also the prices of basic raw materials needed to boost manufacture.
In these circumstances, the ordinary member of the public has to find a way around this or go without. Even now over half the population live below the poverty line. The new opportunities that arise in a market economy mean that those who take the opportunities can become very wealthy but that the business activities they are involved in are half legal and half not! What we mean by this is that the restrictions on business activity that existed in the planned economy era have not all been swept away at the same time and so business people find it hard to carry out normal business activity in such circumstances. Where rules still exist they have to be 'bent' and this tends to lead to an underground economy which fuels other problems, notably corruption.
Image: George Bush's visit to Georgia in 2005 highlighted the new strategic importance of the country and the distancing of the new government from Moscow. Copyright: Milkhaz Machavariani, Georgia Today
Inflation during the early years of independence rose by 79% in 1991, 887% in 1992, 3,125% in 1993 and 15,606% in 1994! Such alarming inflation rates are typical of transition economies after price controls are removed. When inflation is this bad confidence in the economy drains away and people look at other ways of getting what they need - possibly through bartering - and avoid using money. In such circumstances output is also affected as unemployment rises and GDP is affected. In 1991, GDP fell by 21% then a further 45% in 1992, -29% in 1993 and yet another 10% drop in 1994.
Georgia has limited natural resources. It is a fairly mountainous country but does produce some metals, machinery and chemicals and has manganese and copper mines. 20% of the economy is agriculture with 40% of the population employed in this sector. Products include grapes, citrus fruits, hazelnuts and tea. Its main energy source is hydroelectric power and it has to import most of its oil and gas supplies.
Given this situation the problems facing a transition economy are even greater. Some transition economies have large natural gas and oil supplies that can be used to help drive economic growth and wealth generation but Georgia does not have this luxury. In addition to these difficulties, civil strife caused much disruption as regions sought greater independence - particularly in Abkhazia and Ossetia. The wars in these areas tended to have the effect of stifling foreign direct investment (FDI) further hindering the pace of economic development.
The difficulties of transition alluded to above have meant that a significant proportion of the economy is now underground. It has been estimated that over a quarter of Georgia's output is accounted for by the black economy and two-thirds of its trade. This then creates another problem. The existence of a black economy means that production and exchange are not declared and thus taxes are not paid. This puts pressure on the government who need tax revenue to invest in infrastructure to help boost economic growth that will benefit everyone.
Examples of this are clear from the demonstrations that have occurred about the lack of electricity in the country. In early 2000, only six hours of electricity was available each day. Not only does this affect the standard of living but also limits the potential for growth as businesses find it difficult to operate.
One of the tasks of the government is to try to make key industries like the electricity supply industry efficient. The answer to this seems to be attempts to try and privatise them. This in itself is a problem - to privatise them implies that some organisation is going to take over the running of the industry from the state and attempt to run it to make a profit. The extent of the dilapidation of the industry and the amount of investment that would be needed to make it profitable and efficient is often prohibitive.
Image: An example of the dilapidated state of industrial plants in parts of Georgia. Copyright: Milkhaz Machavariani, Georgia Today
However, one of the major obstacles facing this country is that of corruption. It is partly due to the way in which the transition has been handled and also something to do with the geographical and historical position of Georgia. Its geographical position meant that during the Soviet years much illegal trade occurred across the difficult terrain of the borders both North and South. The government of Gamsakhurdia and his replacement, Eduard Shevardnadze, who at one stage was the Soviet Foreign Minister, was expected to be a moderating influence on the country but he was unable to get to grips with the corruption problem and was 'forced' to resign after popular protest at vote rigging in elections in November 2003.
The current president is Mikhail Saakashvili who was elected on a mandate of solving the corruption problem that has so blighted the country. He is making inroads into the problem but it is a long and difficult, not to mention dangerous process.
There are two potential areas where Georgia can look to its longer-term economic development. One is tourism. Part of Georgia is situated on the Black Sea coast and the country used to be popular with Soviet tourists. The potential for developing the tourist industry could generate large revenues but the investment needed into the infrastructure to support tourism is again likely to pose a problem.
The other main area is again linked to its geography. The Caspian Sea and a number of countries surrounding Georgia have good supplies of oil and natural gas and the development of these supplies may see Georgia benefiting from the economic activity that will result. Already a $2.9 billion 1,650km pipeline has been laid connecting the oil fields of Azerbaijan with ports on the Black Sea coast of Georgia and Turkey. Other pipeline projects are in construction and the jobs and economic activity that this will generate is also a cause for some optimism but again, there are concerns that such investment will be short lived if the corruption problems cannot be solved.
Image: The laying of the Baku-Tbilisi-Ceyhan oil pipeline in Georgia. Copyright: Milkhaz Machavariani, Georgia Today
The path of transition to market economy from planned economy is not easy for any of the countries involved. The remarkable thing is that there have been a number of similarities in the way in which all of the former Soviet republics have gone through the transition to market economies. This allows us to look at how such economies develop and also learn something about what we, in the West, may take for granted about the way a market economy works and what is needed to ensure it works smoothly - well as smoothly as possible anyway!
| 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | |
| GDP % change | 2.6 | 10.5 | 10.6 | 2.9 | 3.0 | 1.9 | 4.7 | 5.6 | 11.1 | 6.2 | 6.8 |
| Inflation (Consumer Price Index, CPI) | 57.4 | 13.7 | 7.2 | 10.7 | 10.9 | 4.6 | 3.4 | 5.4 | 7.0 | 7.5 | 9.0 |
| Unemployment* | 21% | 14.5% | 14.9% | 10.3% | 17% | 12.6% | 11.5% | ||||
| Balance of Payments (Current Account millions US$) | −404.8 | −415.4 | −364.1 | −370.3 | −217.5 | −175.6 | −179.2 | −202.5 | −286 | −394 | −475 (projected) |
* Unemployment rate are estimates - the official figures are likely to be less than the 'real' rate because of the existence of the black economy.
Biz/ed wishes to thank Alix Hughes of the Bristol-Tbilisi Association for his help with this feature. Bristol has been officially twinned with Tbilisi since 1988.
