The FINANCIAL — The FINANCIAL interviewed Sabine Donner, Bertelsmann, regarding the key factors conditioning Georgia’s outstanding performance.
The FINANCIAL — According to the February 2008 country report by Bertelsmann – an international media corporation, Georgia has made significant steps forward due to the successfully accomplished reforms conducted by the government over the past two years.
The FINANCIAL interviewed Sabine Donner, Bertelsmann, regarding the key factors conditioning Georgia’s outstanding performance.
Q. As is mentioned in the report, Georgia has made significant steps toward development due to the reforms the country has conducted over the past two years. Could you please name the top reforms you regard to be the most important in terms of Georgia’s economic development?
A. The fact that the government was determined to tackle the country’s immense problems with a wide range of structural reforms was key to Georgia’s impressive economic recovery in the few past years. Fiscal policy is probably the realm where Georgia achieved its most outstanding success. Anti-corruption measures, the adoption of a simplified tax code and significant progress in enhancing the efficiency of tax and customs administration contributed to Georgia’s favourable economic development. Together with recently enacted amendments to laws dealing with the registration of immovable property, the status of state-owned land and ownership enforcement proceedings this has also led to a significant improvement of the business climate.
Q. As for democracy and market economy, among the 125 countries discussed worldwide, Georgia has improved its positions with twenty steps and is 38th on the list. What concrete benefits do you see the country enjoying in the near future as a result of the successful reforms accomplished within the past few years?
A. Progressing on the way towards a democracy based on the rule of law and a socially responsible market economy as expressed in Georgia’s improved ranking in the BTI means not only a stabilization of the country’s political and economic situation but can be a sound basis for improving the quality of life for the people, both in political and economic terms. If the remaining shortcomings, especially in the rule of law and the political and social integration of larger parts of the population can be overcome, the concrete benefits will be successes in the fight against poverty and unemployment.
Another important result of the successful reforms was that Georgia has been able to regain international credibility and reliability. The country’s progress has already been rewarded with support from multi-lateral and bilateral donors. If Georgia is able to sustain its economic record without sacrificing its commitment to democracy, the country will continue to benefit from this increased attention. Entering the Intensified Dialogue and the Membership Action Plan with NATO and adopting the Action Plan outlining the cooperation between the European Union and Georgia for the next five years were crucial steps that could serve as an important stimulus for further internal reforms in Georgia in the near future.
Q. As the report says, Georgia’s successful development becomes more obvious if compared to other CIS countries, only Ukraine is ahead of us while Russia’s back at 59th place. Do you agree with the fact that revolutionary governments, such as is the case of Ukraine and Georgia, turn out to have more potential and commitment or do you see some other explanation for the subject?
A. The Transformation Index is advocating the twin goals of democracy under the rule of law and a market economy flanked by socio-political safeguards. Evaluated against this normative framework, the revolutionary governments did show the most potential and commitment of all CIS countries. Whereas Ukraine and Georgia despite all problems and setbacks were able to improve their political and economic development to varying degrees, there are growing indications that Russia is departing from the concept of liberal democracy. Although the Russian state and economy have been stabilized, this has been achieved at the price of democratic rights.
But the country report on Georgia also notes some worrisome trends with regard to democratic development of the country: the concentration of power in the executive, the lack of effective checks and balances, a weak party system and the political interference in the independence of justice seriously hamper the further consolidation of Georgia’s democracy. Moreover, the report states that civil society was not adequately involved in the reform process by the government. These issues need to be addressed if Georgia wants to maintain its top position amongst CIS countries.
Q. In 2003-2005 tax incomes in Georgia exceeded 200%, a significant step forward was made in terms of fighting corruption and the North economy. In parallel to these positive developments what are the side effects you happened to observe in the meantime?
A. Broad segments of Georgian society are still not benefiting from the recent economic achievements. The sharp rise of consumer prices especially for energy and water supplies and a high inflation rate accelerated problems for the poor. Despite all positive developments, the BTI country report observes that success was partly achieved at the expense of further consolidating democracy. Executive interference with the judiciary’s independence has become a common phenomenon. Due to the structural weakness of the opposition, the parliament has almost ceased to exercise its oversight function. From time to time independent media outlets still suffer from bureaucratic harassment. The consolidation of democracy is, moreover, still hampered by a deep-rooted culture of distrust and clientelism. There is no party system in place capable of articulating and aggregating social interests.
Q. Still, Georgia remains a country with a considerable percentage of unemployed and socially vulnerable people. What actual measures should be taken in the future to make the successful reforms affect the population?
A. Poverty distribution and unemployment is highly uneven throughout the country. People living in remote areas with weak or no access to public infrastructure and basic services are among the poorest and most vulnerable groups. The recent increase in public welfare spending is partly neutralized by a sharp rise of consumer prices especially for energy and water supplies. More investments into the decayed public infrastructure, decentralization and reform of the still poorly developed social safety net should be government priorities. In the fight against unemployment, more attention should be directed to rural districts and agriculture, which still employs more than 50% of the active workforce. State-sponsored credits for the development of food-processing enterprises in rural districts could be a promising measure.
Q. In respect to unemployment, do you think FDI flow to the country could be one of the most serious possible solutions to be considered?
A. Foreign direct investment encourages the transfer of management skills, intellectual property, and technology and thereby gives a boost to the export sector. But the role of foreign direct investment in fighting unemployment generally remains highly contested. Several studies indicate that domestic investment projects have more beneficial trickle-down effects on local economies. In order to promote growth and sustainable development as a basis to fight unemployment, Georgia should not rely solely on attracting FDI flows which remain highly volatile and dependable on external factors.
Q. How frequently is the Bertelsmann report published and how often have you happened to cover Georgia?
A. The BTI 2008 is the third edition of the Transformation Index, which is published every second year. Georgia has been covered in all three editions.
Q. Could you define several features about working on the report: how long does it take to accomplish a single report? Are your representatives sent to the covered countries or do you have representative offices in all these countries including Georgia? Who are the Bertelsmann owners? How much does a single report cost Bertelsmann and do you cooperate with other organizations in terms of sponsorship?
A. As a rule, each country is assessed by a domestic and an international expert. Using a standardized codebook, the country experts examine the extent to which a total of 17 criteria are fulfilled, providing scores as well as written assessments. The compilation of a single report from the first draft to the final editing takes about 8 months. The Bertelsmann Foundation does not have representative offices in the countries but relies on the expertise of a dense network of NGOs and local experts whose scholarly qualifications and knowledge of the country ensure that their reports are as objective as possible and of high analytical quality. More than 250 experts were involved in the compilation of the BTI 2008. An elaborate multi-stage review process with regional coordinators, an expert’s board and additional commentators from the respective countries ensures the validity of the data and facilitates regional and interregional comparisons.
The Bertelsmann Foundation was set up in 1977 by the German media entrepreneur Reinhard Mohn, the majority shareholder of Bertelsmann AG. It is a non-profit foundation dedicated to serving the common good. It works on issues of international understanding, education, economy, society, health and the peaceful coexistence of cultures. The mission of the foundation is more justice and increased civic participation in a globalized world. The Bertelsmann Foundation works independently of companies and German government institutions and has no party political affiliations.
The Transformation Index (BTI) is completely funded by the foundation’s own budget; there is no additional sponsorship from any other organization.
Q. Which international and local organizations did you cooperate with while covering Georgia?
A. The authors of our country reports are acknowledged experts on their respective countries. They are advised to include all available information from international and local sources into their assessments.
Q. Georgia has several times in a row been recognized a top reformer country in doing business. What do you think are the pros and cons foreign investors face in the country?
A. Business climate has significantly improved over the past years in Georgia and investors face one of the most open trade regimes in the world, improved standards of transparency and legal protection of property. However, a poor infrastructure and unreliable energy supplies continue to pose serious obstacles to foreign investment. The reform of the banking sector regarding restrictions on the inflow of foreign capital still lacks behind. Moreover, executive interference with the judiciary’s independence might jeopardize legal certainty for investors in the long run.
Q. Do you have business contacts with chambers of commerce in Georgia like: GCCI, AmCham Georgia, FBC?
A. No, we haven’t established business contacts with any of these institutions yet.
Q. Political stability is a guarantee for the successful development of all the fields in any country. Experts claim the November oppositional meetings and the following developments that have continued up until now have negatively affected FDI flow to Georgia. What are your arguments and expectations in this respect?
A. Georgia clearly stands at a crossroads. The November 2007 events have not only affected economic development and the FDI flow to Georgia, but have also demonstrated the fragility of Georgia’s young democracy. The lack of institutional channels for the articulation and representation of social interests remains a severe weakness of the political system and can easily rise to sudden policy changes in times of crisis. It will be crucial to the future of the Georgian reform project and the consolidation of its democratic achievements whether President Saakashvili can successfully build a consensus with his political opponents and thereby lay the foundations for an active participation of broad segments of the population in the reform process. Priorities should be strengthening the rule of law, democratic institutions and procedures as well as effective efforts at reducing poverty and unemployment.
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