By Mamuka Tsereteli

Georgia is in search of its political and economic identity. Strategically located between the landlocked resources of the Caspian region and ports on the Black Sea, between aggressive Russia to the North, and NATO member and strong Western ally Turkey to the South, Georgia is blessed with natural and human resources. Yet the country is struggling for survival due to hardships of establishing a strong independent state, and transition from the socialist economic system to a market economy.

Data: Government of Georgia

Data: Government of Georgia

In early 1994 Georgia emerged from two years of civil conflict with a collapsed economy, widespread crime and a weak government. It took a tremendous effort by the people and government of Georgia to implement a policy of stabilization. In 1995-1996, Georgia received a series of important loans and credits from international financial institutions and that enabled the Georgian Government to stabilize the financial system, sharply reduce inflation and start structural reforms of the economy. US technical and humanitarian assistance had a significant role in the stabilization process in Georgia.

In 1996-97 Georgia had one of the largest GDP growth rates in the world. In addition to the strong internal development, the large oil discoveries in the Caspian area helped Georgia to gradually establish itself as a major transit route for vast oil and gas resources, thus gaining strategic significance for the West.

Despite all the achievements, political and economic stability in Georgia continues to be very fragile. The early 1998 fiscal performance and general development has shown signs of serious disruption due to slow structural transformation, poor management and administration, and the weakness of the regulatory environment. Georgia's fiscal performance began deteriorating dramatically. Smuggling and low tax collection were the most important negative factors. For a time the IMF and World Bank suspended their projects in Georgia.

After some policy adjustments, IMF renewed its support for Georgia at the beginning of the 2001. The Real GDP growth was four percent in 2001 and inflation was three percent at the end of 2001. The exchange rate depreciated modestly, reflecting economic problems in Turkey, as well as internal and external political problems of Georgia at the end of 2001.

The macroeconomic performance during the first half of 2002 was again in line with the IMF’s Poverty Redaction and Growth Facility Program. GDP grew by an estimated 4 percent. On July 12 the IMF board approved a $30 million loan, and on August 1 the World Bank Board of Directors approved three development credits for Georgia of total amount of $55 million.

Georgia has been an official member of the World Trade Organization since 2000, and has enjoyed GSP (General System of Preferences) trade status from United States since June 29, 2001. The GSP program offers duty-free access to the U.S. market for a wide range of products from beneficiary developing countries.

The most attractive areas for development and investments in Georgia are agribusiness, transportation, telecommunications, energy and tourism. Some Georgian products are very well established in Russian and other former Soviet markets with certain brands of wines and mineral waters being among the most popular products in that part of the world. The production of wine, as well as other agricultural products, including tea, citruses, canned fruits and vegetables, is increasing. The energy and transportation infrastructure of Georgia, particularly ports and pipelines, are also attractive for investments.

International lending institutions supporting private business development, including the International Finance Corporation, European Bank for Reconstruction and Development and Overseas Private Investment Corporation, are very involved in Georgia and actively seek appropriate projects.

A major boost for the economy is expected next year, when the construction phase of the $2.9 billion Baku-Tbilisi-Jeyhan oil pipeline and $2.5 billion Baku-Tbilisi-Erzerum natural gas pipeline will start. Georgian contractors will be involved in the construction process, with completion expected as early as 2005.

While the business environment in Georgia is far from perfect, there is a huge hidden potential for the economy. The cost of doing business legally is higher than the cost of working around existing laws, which drives businesses to the extralegal (black, hidden) sector. Experts estimate the illegal sector of Georgia at 40 percent of current GDP. The undeveloped property rights, corruption, excessive regulation and taxation drive businesses out of the legal system. State institutions are still inadequate to handle those problems.

In another 6-8 months Georgia, with the help of United States, will have about two thousand well-trained security forces, which will serve as a major guarantor for stability. What is needed, however, is a clear action plan for rapid economic recovery, supported by the international community, including international monetary institutions and US government. The action plan should include three interrelated components: 1) Smaller government, but a well-functioning one, promoting rule of law 2) A much stronger system of border and customs control 3) Increased economic freedom for business and individuals leading to promotion of a strong economic environment.

Mamuka Tsereteli is the executive director of the America-Georgia Business Council and adjunct professor at the School of International Service at American University in Washington D.C.