briefing paper Post-Revolutionary Georgia on the Edge? S. Neil MacFarlane Russia and Eurasia Programme | March 2011 | REP BP 2011/01 Summary points From the Rose Revolution in 2003 to the war with Russia and financial crisis of 2008, Georgia achieved impressive macroeconomic results. Government reforms reduced petty corruption and criminal violence markedly. Rapid progress was made in the delivery of public goods. The investment climate improved. President Mikheil Saakashvili has weathered the fallout of the war with Russia. Weak opposition and substantial Western aid have enabled the government to stabilize the economy and consolidate its political position. However, positive headline macroeconomic results may not be sustainable and mask persistent concerns regarding poor performance in combating poverty, unemployment and increasing inequality. Human rights continue to be a problem. The government cuts corners on democracy and the rule of law. Media freedoms remain constrained. Civil and parliamentary oversight of governmental decisions is limited, and the judicial system is subject to political interference. The abuse of state power and enduring poverty and inequality risk alienating the population and increasing social tension. There is therefore reason to question the sustainability of Georgia’s economic model and the stability of the post-war political situation. www.chathamhouse.org.uk Post-Revolutionary Georgia on the Edge? 2 e g a p Introduction economy shrank in 2008–09, it began to recover the In August 2008, Georgia lost a short but a disastrous war following year, despite the global economic downturn. with Russia over South Ossetia and Abkhazia. The two The opposition, after several months of street territories under separatist control were occupied by the demonstrations, melted away amid internecine quar - Russian army, more or less definitively detached from relling. The government’s candidate was elected by a Georgia, and recognized by Russia as independent states. substantial margin in Tbilisi mayoral elections in May Much of the Georgian army was destroyed. The war also 2010, as part of a countrywide sweep of local elections damaged Georgia’s relations with its major patrons, the by the ruling United National Movement (UNM). United States and the European Union. Both took the view Georgia’s parliament has adopted a series of constitu - that the Georgian government bore a significant portion of tional reforms that lay the basis for the continued responsibility for the conflict, and for complicating their political survival and power of the ruling group. own relations with Russia. In their efforts to restart the Russian relationship, Georgia appeared to be a liability. The war faced Georgia with substantial economic There is substantial reason to losses, while generating additional demands on the q‘uestion the sustainability of public exchequer. War damage needed to be made good and the government faced the responsibility to feed and Georgia’s economic model and house large numbers of displaced persons. These the stability of the post-war economic effects appeared just as the impact of the political outcom e global economic crisis began to bite. The government’s ’ investment-led growth strategy was jeopardized both by general global economic uncertainty and by the impact of the war on investor confidence. However, the government’s apparent success in post- In political terms, the popular tendency to support war stabilization and its striking capacity to survive in the nation and to rally around the leader in a time of such difficult conditions mask a more complex reality. crisis allowed President Mikheil Saakashvili to survive There is substantial reason to question the sustain - Georgia’s decisive military defeat. However, in subse - ability of Georgia’s economic model and the stability of quent months opposition challenges grew. By early the post-war political outcome. 2009, many were writing the current government off. This briefing paper explores this theme in two parts: Georgia has done surprisingly well since then. Russia an analysis of economic trends; and a consideration of has not followed up to attempt to remove Georgia’s the country’s recent political development. Each part government. The other members of the Commonwealth examines first the state’s performance in the period of Independent States (CIS) and the Collective Security 2003–08 and then considers trends since the war. Treaty Organization (CSTO) did not endorse Russia’s 1 actions and none has joined it in recognizing the sover - The Georgian economy eignty of the territories that it detached from Georgia. Western countries and organizations donated huge sums Rebuilding the Georgian economy, 2003–08 to assist Georgia’s post-war recovery, especially to accel - At the time of the Rose Revolution in 2003, Georgia’s erate the government’s substantial programme of economy was crumbling. In the judgment of the infrastructural modernization. Although the Georgian World Bank, 1 Analysis of Georgian economic data can be difficult because many of the statistics are generated in the National Statistics Office, which is not fully inde - pendent, creating a risk of motivated bias in the data. The approach taken here is to rely on a balance of international agencies (e.g. the IMF, World Bank and UNDP), which may be sufficient to generate a reasonably accurate picture. www.chathamhouse.org.uk Post-Revolutionary Georgia on the Edge? 3 e g a p By 2003, reform momentum sputtered to a halt, and GDP in 2002 to 25.7% in 2008. The (public) external Georgia was a near failed state. Political power was debt-to-GNI (gross national income) ratio declined increasingly fragmented, corruption and crime were dramatically from 54% in 2003 to 22% in 2007. Net rampant, there were massive arrears in pension payments foreign direct investment (FDI) rose from $160.2 and teachers’ salaries, and infrastructure was in a state of million to $1.75 billion annually in 2007, reflecting both near collapse, with most of the country without power the increasing ease of doing business in Georgia and and the road network increasingly deteriorated. 2 also growing investor confidence, which pushed inflows up while reducing outflows. 5 Major international agencies were reducing their financial The World Bank summarizes: commitments to Georgia or, in the case of the Inter- national Monetary Fund (IMF), walking away entirely. Since 2003, Georgia has implemented an impressive array The post-revolutionary government embraced these of reforms. These reforms are reflected in the pronounced challenges. In the first years after the 2003 revolution, political, social and economic transformations following petty corruption was substantially reduced. The the ‘Rose Revolution’ at the end of 2003. The processes government adopted and then enforced a new simpli - since the start of reforms can be qualified as unique in fied tax code and tightened up on customs and excise, terms of the speed of reforms, degree of innovations, and while clawing considerable amounts of money back extent of institutional restructuring. The reforms are from those who had benefited from the previous era’s recognized to have noticeably improved the institutional corrupt practices. It also simplified procedures for the environment, provided a basis for sustained economic establishment of new businesses and for foreign direct growth and human capital accumulation, and increased investment. International approval of both the revolu - multifold foreign direct investments. 6 tion and the direction of travel brought significant additional resources into the economy. 3 This involved This conclusion is consistent with the rapid rise of not only the resumption of IMF and therefore World Georgia up the ranks of the World Bank’s Doing Bank funding, but also substantial growth in funding Business index to its current global position of 12th. 7 from the United States and EU/European Bank for The country is singled out for having made more Reconstruction and Development (EBRD). progress than any other reforming economy in the The macroeconomic results were extremely positive. period 2006–10. In the years prior to the war, gross domestic product Whereas the headline macroeconomic performance (GDP) increased from $4 billion in 2003 to $12.8 billion looked very good, it was not obviously better than that of in 2008. The per capita shift was from $772 in 2002 to Georgia’s Southern Caucasian neighbours during the $2,919 in 2008. 4 The GDP growth rate rose from 5.5% in same period (2004–08). Moreover, the headlines have 2002 to 12.3% in 2007. State revenue grew from 10.5% of obscured a number of persistent concerns. For example, 2 World Bank, Georgia: Implementation Completion and Results Report – Poverty Reduction Support Operations I-IV (Washington, DC: World Bank), 23 December 2009), p. 1. Available at http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2010/01/13/000334955_20100113015515/ Rendered/PDF/ICR10180Multip1C0disclosed011111101.pdf. Accessed 30 December 2010. 3 For a full analysis, see S. Neil MacFarlane, ‘Georgia and the Political Economy of State-Building’, forthcoming in Mats Berdal and Dominik Zaum, eds, The Political Economy of State-Building (provisional title). 4 In terms of purchasing power parity, this translates into US$2,960 in 2003 and US$4,860 in 2008. 5 These data are all in current US dollars and are taken from World Bank Data Indicators. The longitudinal data are available at http://data.worldbank.org/indicator/ BX.KLT.DINV.CD.WD/countries?page=1. Accessed 30 December 2010. 6 World Bank, Georgia: Poverty Assessment, April 2009 , Report 44400-GE (Washington, DC: World Bank, 2009). Available at http://www- wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2009/04/29/000350881_20090429111740/Rendered/PDF/444000ESW0P1071C 0Disclosed041281091.pdf. Accessed 2 December 2009. 7 World Bank, Doing Business 2011: Making a Difference for Entrepreneurs (Washington, DC: World Bank, 2010). Available at http://www.doingbusiness.org/ ~/media/FPDKM/Doing%20Business/Documents/Annual-Reports/English/DB11-FullReport.pdf. Accessed 9 March 2011.