The FINANCIAL — Economic growth in Georgia is mostly governed by exogenous booms or recessions. Recent reforms and economic programmes have not been straightforward and strong enough to accelerate the economic growth of Georgia with endogenous factors.
Economists have positive expectations about the future, meanwhile they confess that these will be insufficient to improve the living standards of society. The most basic recommendations to the Government of Georgia are: accept the experiences of successful countries; stimulate the business sector; make the economy more industrialized and policies more transparent; spend more on the education system and enforce production diversification.
The economic growth rate is one of the essential indicators making clear how successful a policymaker’s decisions are. In 2016, economic growth per capita in Georgia was 2.7%; that does not mean a fast-enough growing economy, but at least it was the highest rate among neighbouring countries. The National Bank of Georgia predicts 4.5% GDP growth rate in 2017 and IMF forecasted an increased economic growth rate in all the neighbour countries of Georgia too.
The issue is: how optimistic should Georgians feel about the future? How can a 4.5% growth rate be interpreted? Is it fast enough and what should be done in the future to achieve higher economic growth or at least maintain 4.5%?
Senior researcher at ISET-PI, Giorgi Mzhavanadze, considers 2017 to be a year of economic recovery for the whole region. Mzhavanadze states that exogenous influences on the Georgian economy in 2017 are much better than in previous years. Hence, taking into account how the Georgian economy is dependent on the economies of trading partners and other exogenous factors, 4.5% economic growth is not high, but is an optimal rate for 2017. “Higher economic growth in the years 2004-2007 was due to the world economic boom and radical reforms in Georgia, thus, I have not expected higher economic growth than 4.5% in 2017,” Mzhavanadze told The FINANCIAL.
However, Givi Adeishvili, economic analyst at Society and Banks, believes that 4.7% economic growth in 2017 is not bad. However, it is not sufficient in the short run to improve the living standards of the society of Georgia.
Irina Guruli, a Deputy Director of EPRC, emphasizes the importance of sustainable growth and states that the challenge for the economy of Georgia, is to maintain long-term and stable economic growth that will decrease the poverty rate and create a middle class of society. In order to maintain stable economic growth, Guruli recommends that the Government of Georgia focus on private sector development, smaller government size, higher predictability of business environment, more liberal tax policy, and export diversification. “The Government of Georgia mostly concentrates on populist promises and social programmes that are not economically effective. Taking into account exogenous factors, with domestic macroeconomic shocks (inflation, lari depreciation etc.), it is almost impossible to maintain sustained economic growth in the long run,” said Guruli.
“A declining tendency of economic growth, started in 2014, with falling prices of oil products, economic crisis in Russia and Azerbaijan, negatively affected the economic growth of Georgia and none of the countries in our region were able to maintain economic growth,” said Mzhavanadze. However, he emphasizes that Georgia was not able to maintain the same pace of economic reforms in 2009-2014 as there was before. That might be one of the endogenous factors of decreased economic growth in Georgia. “From this point of view, the DCFTA; Georgia-China Free Trade Agreement; profit tax reform; Larization programme; upcoming pension reform and implementation of new infrastructure projects will positively affect the economic growth of Georgia in the future. However, we should not have the illusion of getting about 10% economic growth,” stated Mzhavanadze.
In terms of accelerating economic growth, Adeishvili emphasizes the importance of productivity and high-skilled labour force. “The quality of the labour force cannot be increased in the short run. The Government of Georgia should be focused on long-term improvements and invest more in the education system, which will accelerate productivity and economic growth in the long run,” said Adeishvili. Apart from this, Adeishvili emphasizes that Georgia mainly exports low-valued products. It would further stimulate economic growth, if Georgia were to concentrate not only on the export of products but also on the export of services. An essential condition for stimulating the export of services is a good education system, which provides high-skilled professionals, Adeishvili said.
“Despite the recent Doing Business ranking results, due to the low-skilled labour market and weak legal system, foreign businessmen hesitate to set up business in Georgia,” said Mzhavanadze. “None of the reforms in the education system so far have been sufficiently successful and problems are so complex that, short-term oriented programmes are not enough to make a difference,” said Guruli.
Furthermore, one of the main contributors to economic growth in Georgia is government spending. “Increased government spending can accelerate economic growth in the short run, but it is not real economic growth and in addition, government spending cannot be increased infinitely. Thus, the optimal way out of this issue is to make government spending more reasonable regarding the social policy,” said Mzhavanadze.
Apart from this, Mzhavanadze emphasizes the larization programme and profit tax reform as factors that are expected to stimulate financial stability in the long run and accelerate economic growth. However, increased excise tax on oil products in the short run resulted in declined aggregate supply and increased prices. All these factors in the short run negatively affected economic growth. “In 2018, all those short-term negative factors will probably have expired and higher economic growth is expected,” Mzhavanadze told The FINANCIAL.
Different research papers claim that in developing countries a high economic growth rate can be achieved not only based on the fundamental factors, but structural transformation of economy contributes the most. Existing macroeconomic stability and low rate of corruption make it possible for the Government of Georgia to take into consideration the experiences of Singapore, South Korea and Malaysia, etc. and implement effective policies that will stimulate the diversification of production and structural transformation of the economy of Georgia.
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