GEORGIA: ECONOMY 2003 TO 2008 - A CASE STUDY OF

C O N F I D E N T I A L SECTION 01 OF 02 TBILISI 000750

SIPDIS

E.O. 12958: DECL: 04/14/2019
TAGS: ECON ENRG PGOV PREL RU GG
SUBJECT: GEORGIA: ECONOMY 2003 TO 2008 - A CASE STUDY OF
PROGRESS

Classified By: Ambassador John F. Tefft for reasons 1.4 (b) and (d).


1. (C) Summary and comment. Although often overshadowed by
political crisis and conflict over the separatist
territories, the Georgian economy has been reformed and
developed since the 2003 Rose Revolution. While the August
2008 war with Russia and the ongoing financial crisis
continue to present challenges, the Georgian economy remains
more robust, more diversified, and less corrupt than the
economy inherited by President Saakashvili and his team in

2004. In five years, the Georgian government has nearly
eliminated the corruption faced by Georgian citizens on a
daily basis, ensured stable supplies of electricity and
natural gas for businesses and consumers, nearly doubled per
capita GDP, increased tax revenues by USD 2283 million
annually, and increased FDI from USD 331 million in 2003 to
USD 2.015 billion in 2007. The reforms undertaken by the
government brought Georgia from 112 in 2005 to 15 in 2008 on
the World Bank,s Ease of Doing Business report. Of course,
areas for additional reform remain, including further
development of commercial law and the judiciary, developing
export-focused industries and job creation. However what the
Saakashvili government has accomplished in the last five
years has laid a foundation for a free-market based economy
that can survive well after this administration leaves
government. End summary and comment.

THE REFORM PLAN ) ADDRESS CORRUPTION, ENERGY ISSUES, FDI


2. (C) In its first two years in office, the Saakashvili
administration tackled corruption, public sector reform and
rule of law. In 2005, the government implemented a new, more
business-friendly tax code, undertook a deep liberalization
of the economy, and began infrastructure improvements,
including much-needed measures in the energy sector. In
order to develop and meet this aggressive strategy to reform
the economy, attract investment, secure energy availability,
and fight corruption, Saakashvili called on western-educated
Georgian technocrats for help, many of whom lived abroad. In
bringing these experts into the government, Saakashvili
created the knowledge base needed to develop and implement
the necessary reforms to revitalize the Georgian economy.
Many of these experts remain today within the government. In
2006, business reforms began to bear fruit, as foreign direct
investment (FDI) flowed into the country and GDP growth took
off. This happened despite an embargo by Georgia,s biggest
trading partner at the time, Russia. Strong economic
performance continued in 2007 with significant portfolio
inflows. However, many economic reforms were put on the back
burner following the November 2007 protests, and subsequent
presidential and parliamentary elections in 2008. The new
parliament had begun to address additional reforms, when the
August 2008 conflict with Russia occurred, with the
international economic crisis on its heels.

WHAT A DIFFERENCE A FEW YEARS MAKE


3. (C) In 2003, the Georgian economy was rife with
corruption that affected all aspects of life, especially
business. Transparency International ranked Georgia at 124
with only five countries world-wide rated worse on their
corruption perception index. In 2008, Georgia was solidly
ranked at 67, due in large part to government efforts to
decrease corruption among the tax and patrol police, among
others. While Saakashvili,s wholesale layoff of the patrol
police remains unpopular in some circles even today, hiring a
smaller number of police at higher salaries has gone far in
Qsmaller number of police at higher salaries has gone far in
combating the every day level of corruption faced by the
population. (Note: Many former patrol police are eager
participants in protests against the Saakashvili government.
End note.) While corruption remains an on-going challenge
for the government, the steps to address the issue to date
have been nothing short of remarkable. IRI polling numbers
(most recently March 2009) have consistantly shown that 97
percent of those polled say they do not confront corruption
on a daily basis.

EVERYTHING WAS DARK, NOW ENERGY ON DEMAND


4. (C) In 2003, electricity and natural gas were a luxury.
In many places, including Tbilisi, people did not know how
many hours of electricity, if any, they would get during
winter months. Natural gas supplies were equally
questionable due to lack of payment by the government and
overall infrastructure failure. Now, electricity and gas
supplies are stable throughout the entire country. Despite
challenges to Georgia,s energy security following the August
conflict, the government was able to meet both electricity
and gas demands throughout the winter. In fact, not only was
the Ministry of Energy able to meet winter demands for gas,
the Minister signed a five year MOU with the Azerbaijani Oil
and Gas Company (SOCAR) to meet Georgian social needs at a

TBILISI 00000750 002 OF 002


pre-negotiated, favorable price. Despite de facto Abkhaz
Government control of Georgia,s largest hydropower facility,
electricity continued unabated.

GDP NEARLY DOUBLES, TAX COLLECTION INCREASES, FDI SOARS


5. (C) As a result of reforms, the economy continued to
grow, even after Russia's 2006 embargo on Georgian products.
In 2003, annual GDP per capita stood at USD 2,966. As of
February 2009, annual GDP per capita for 2008 was estimated
at USD 4,851 -- enough to move Georgia up to a lower middle
income country on the Millennium Challenge scale. While it
is possible GDP might shrink slightly given the international
financial crisis, early estimates for 2008 by international
financial institutions put GDP growth at two percent. The
Georgians estimate a more conservative one percent.


6. (C) The success of Georgian reforms in the banking
sector, tax structures, and overall business practices
together with a concerted effort to liberalize and privatize
many parts of the economy led to a sharp increase in foreign
direct investment (FDI). In 2003, FDI was USD 331 million.
In comparison, 2007 FDI stood at 2.015 billion dollars. The
economy also began to diversify, as FDI flowed in to nearly
all sectors. Fighting corruption in tax collections, while
at the same time decreasing the tax burden led to a steep
increase in tax revenue collected. In 2004, taxes were a
mere 15.8 percent of GDP at 2,267 million GEL (USD 1183
million at 2004 exchange rate). Tax revenues for 2007 (the
last full year reported) were 5,791 million GEL (USD 3466
million at 2007 exchange rate) or 25 percent of GDP. 2008
estimates put tax revenue at 28 percent of GDP.


7. (C) An independent indictor of Georgia,s economic reform
success is the World Bank Ease of Doing Business ranking. In
2004, Georgia was not ranked and in 2005 the country was 115.
In 2008 Georgia was ranked 15 in the world in ease of doing
business, with special praise for the ease and speed with
which a company could start operations.

BUSINESS'S CHALLENGES


8. (C) Across the board, business people say that the
business climate had improved dramatically from 2003 to 2009.
Crime, mafia involvement, and wholesale corruption were
nearly daily issues for most businesses in 2003. One
businessman told of a series of events from the late 1990s
through 2003 that included the kidnapping of a staff member
for 77 days by a competitor with government involvement,
murder of a security guard in an armed robbery, as well as
RPG and arson attacks on several of his offices. He said
that the current government's efforts to combat organized
crime and corruption, as well as reform the economy had an
immediate and direct positive impact on his business. No
longer does he need personal body guards. Other long-term
investors in Georgia have praised the government's success in
fighting crime as well, noting that this coupled with less
government interference have made it significantly easier to
do business.

YET TO BE DONE ) JUDICIAL REFORM, MANUFACTURING, JOB CREATION


9. (C) While the Saakashvili government's reform policies
have brought significant improvements in the Georgian
economy, work still remains, especially in these uncertain
economic times. The Georgian judicial system needs to
increase its understanding and improve its processing of
commercial disputes, and the court system as a whole needs
additional transparency for those involved in court cases.
In addition, the country's focus for the last five years on
attracting investment has been more focused on hard currency
Qattracting investment has been more focused on hard currency
earning ventures and less on overall job creation. In order
to increase the number of jobs in the country, as well as
hard currency inflows now that foreign capital is scarcer,
the Georgia government has begun to focus on export potential
as well as import substitution.
TEFFT