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Journal number 1 ∘ Teimuraz Beridze Elguja Mekvabishvili
The “Thorny Road” of Economic Reforms in Post-Communist Georgia: Retrospective and Perspective

Expanded Summary 

For several decades the economy of Soviet Georgia was a composite part of the so-called integral economic complex. 26% of our products were sent to other allied republics, and 28% of the products produced there came into Georgia. In the economic development of Georgia, from the mid-1950s to the early 1990s, two periods are singled out. The first period (1950-1970) was marked by the backwardness of the main socio-economic indicators of Georgia relative to the median indexes of the Soviet Union. In the second period this retardation was largely overcome. In the Georgian economy in the 1970s and 1980s, certain reforms were focused on increasing effectiveness of management, but they had limited character and did not bring the desired results.

After the restoration of state independence (April 9, 1991), two important tasks were posed before Georgia: Creation of independent state institutions and establishment of market economy. It was very difficult to fulfill these tasks due to the various adverse factors (conflicts in South Ossetia and Abkhazia, disruption of economic ties with former allied republics, etc.). In addition, the reforms started mainly in agriculture, which meant passing the land plots to the private ownership of peasants. The National Authority gave preference to the gradualistic model of economic reformation that reflected the theoretical justification of the transition of state capitalism from the administrative-commanding Soviet system to the market economy. The military coup prevented the implementation of a wide range of reforms. The new government chose the "shock method" of reforming economy and the reforms implemented from 1992 to 2003 can be divided into two stages. The first includes 1992-1995 years, the second - 1996-2002 years. At the first stage, exemption from the state control of prices was carried out that was accompanied by the liberalization of trade. The historic outcome of the first stage was to dismantle the socialist economic system and exclude any possibility of restoration. In addition, it was the most difficult period in the economic history of independent Georgia: the budget deficit was more than 34% of the country's GDP and was covered by the emission credits of the National Bank of Georgia. Subsidization of production was carried out on a large scale. In particular, in 1993 the dosages were 57% of budget expenditures, and in 1994 it was 60%. Subsidization of production was carried out on large scale. In particular, in 1993 the subsidies were 57% of budget expenditures, and in 1994 it was 60%. The national currency surrogate coupon was introduced, which rapidly suffered catastrophic devaluation. Social situation deteriorated sharply and increased inequality in population’s incomes and property situation.

Since 1994, the country actively launched anti-crisis measures involving authoritative international financial institutions – the International Monetary Fund and the World Bank. Monetary reform was implemented successfully and was introduced the national currency – Lari, which maintained its hardness for a long period of time. The successful result of the reform can be regarded the fact that in 1996-1997 the GDP growth rate was 10-11%.

In 1998, new problems emerged in the Georgian economy and among them the most acute one was budget crisis. It should also be noted the sharp depreciation of lari as a result of the currency crisis in 1998-1999. Economic problems and the increase of social tensions caused the so-called “Rose Revolution” that led to the emergence of young and energetic politicians in power. They started a difficult process of modernization of the country and achieved some success in this matter: established financial discipline, increased the revenue part of the budget through the strengthening of administration, covered the several months’ debt of workers and pensioners of state-financed organizations, and almost completely rooted out “existing corruption” and so on. At the same time, Saakashvili's authorities often violated human rights, including private property rights, there was so-called wide-spread “elite corruption,” etc. Nine-year experience of the “Rose Revolution” enables to draw the following conclusion: Using authoritarian methods can make positive shifts in the economy, but for long-term economic development, it is necessary effectively functioning democratic institutions, inviolability of personal liberty and high political culture of citizens.

As a result of democratic and fair parliamentary elections, in October 2012, the political party "Georgian Dream" came to power, which developed "Georgia's Socio-Economic Development Strategy – Georgia 2020.” According to this document, three main principles of economic policy to be implemented by the Government of Georgia are determined:

     · Accelerated economic growth oriented to the real sector of the economy;

     · Support for inclusive economic growth;

     · Rational use of natural resources in the economic development process, ensuring of ecological security.

The Government has implemented the following measures to support the real sector of the economy:

     · The Agricultural Development Fund was created;

     · The vouchers were distributed to peasants and farmers;

     ·  The Law on Cooperation was adopted;

    · The three-level preferential credit program was developed with the goal of increasing the access to financial resources.

     · Subsidization of some agricultural products, for example, grape production.

The government paid considerable attention to the development of small and medium-sized businesses. From this point of view, the innovations in tax policy are particularly remarkable: Establishment of so-called Estonian tax model and a tangible ease of tax burden for small businesses.

In terms of the perspective development of Georgia's economy, in our opinion, the following tasks are very important to be solved:

     · Development of import and export production in parallel regimes;

     · Reorientation of financial flows mainly from financial-speculative operations and trade to the real sector of economy;

     · Creation of an innovative economic system based on modern achievements of science and technology;

     · Strengthening of social direction of economy;

     · De-monopolization of economy and promotion of equal competitive environment for economic subjects;

     · Universal capitalization of the economy and in this way the creation of favorable conditions for the emergence of so-called “middle class.”

Georgia's economy, despite some difficulties, is developing in the right direction, which gives the basis for optimism.