The FINANCIAL — Georgia, leading reformer in the world ranked by the World Bank, is at the bottom of Purchasing Power Parity and Gross Domestic Product Ranking in the world, according to the same organization. The same is according to the Central Intelligence Agency and IMF. It means that Georgians spend less compared to other nations.
Living costs in Georgia are quite high. Tbilisi might even be considered one of the most expensive cities to live in, taking into account the wages people receive in correspondence to living costs.
“Georgia’s per capita GDP is low, even compared to other countries of the former Soviet Union, which is somewhat surprising given that Georgia used to be one of the wealthiest union republics in the Soviet Union,” declared Michael Fuenfzig, Professor at International School of Economics at Tbilisi State University (ISET).
In the list of countries by GDP (PPP) per capita, according to the World Bank Georgia is ranked as number 94 in the world, as for the International Monetary Fund Georgia is in place 114 while according to the CIA World Factbook it is in position 122. (Year 2009)
In the list of countries by GDP (nominal), according to the World Bank Georgia is ranked as number 113 in the world, as for IMF Georgia is in place 117 while according to the CIA World Factbook it is in position 120. (Year 2009)
Within the list of countries by GDP growth, obtained from the IMF World Economic Outlook database, Georgia is listed as 38 by nominal GDP growth rate. GDP 2007 (Billions in USD) – 10.227, GDP 2008 (Billions in USD) – 12.870, 25.84% GDP growth.
“In economic literature, a country’s development is often summarized by its income per capita, which is statistical measurement of the total value added per person that a country generates. For international comparisons, a country’s income per capita should be converted into USD using either market exchange rates (IMF), a trade-weighted average of the past three year market exchange rates (WB Atlas methodology), or the exchange rate that measures the purchasing power of one US dollar in the local economy, which in particular, adjust for the price differentials of non-tradable goods (i.e. PPP methodology),” said Pedro L. Rodríguez, Lead Economist at the Poverty Reduction and Economic Management Unit of the World Bank.
“The reason for Georgia’s low per capita GDP is low productivity in most sectors, in particular in the agricultural sector. Low capital investment and deterioration of the existing capital stock in the 1990s and early 2000s and a persistently high unemployment rate explain only a small part of the low productivity puzzle. In contrast, low educational attainment explains a large part of the low productivity puzzle. Indicative of the low educational attainment is the low achievement of Georgian 8th graders in science and mathematics in the TIMMS study. Georgia ranked in the bottom third of all countries. In comparison, Armenia ranked in the top third,” said Fuenfzig.
“Other explanations for the low productivity are related to the inefficient use of existing input factors and the lack of productivity growth. Reasons include limited access to affordable loans for entrepreneurs and farmers, a lack of competition in many sectors, a concentration of FDI in relative unproductive sectors with little know how transfer. Georgia also suffers from a lack of business clusters, that is, most Georgian firms are relatively isolated and not deeply interconnected with other firms and suppliers in Georgia and the region,” Fuenfzig added.
“Over the past decade Georgia has experienced a tremendous improvement on its per capita income, which increased four-fold from about 650 USD to about 2,530 USD between 2000 and 2009 (using the WB Atlas methodology). Thus, Georgia has left the group of Lower-Income Countries and has become a Middle-Income Country over the past decade. Currently Georgia’s per capita income is similar to that of Syria, Ukraine and Guatemala—to name just a few countries in this category,” said Rodríguez.
“Looking forward, Georgia’s challenge is to maintain the income level it has achieved and to stride to become part of the group of Upper-Middle Income Countries, such as Poland in Europe (12,260 USD), Chile and Uruguay in Latin America (9,500 USD), and Malaysia in East Asia (7,230 USD),” declared Rodríguez
“As for what governs Georgia’s income per capita, standard and recent growth theory suggests that further gains in income per capita will be determined by: the pace at which human and physical capital is accumulated and utilized, both by the public and the private sectors; the amount of technological innovation by the country’s enterprises in industry, agriculture and services; and the pace at which the country’s export basket becomes increasingly sophisticated and reaches developed markets,” declared Rodríguez.
“Further gains in Georgian income per capita will be determined by: the pace at which human and physical capital is accumulated and utilized, both by the public and the private sectors; the amount of technological innovation by the country’s enterprises in industry, agriculture and services; and the pace at which the country’s export basket becomes increasingly sophisticated and reaches developed markets,” declared Rodríguez.
As Edward Gardner, IMF Resident Representative said, the differences between sources are due to discrepancies on all indicators across all countries, and to differences in the composition of the world (some sources have missing countries, and additional countries compared to others). In addition, some countries have estimates in one database, and actual numbers in the other database.
Economic Outlook for 2011
Still, the experts interviewed by The FINANCIAL have a highly positive economic outlook of Georgia. As President Mikheil Saakashvili declared, there is 6% economic growth expected in the country in 2011. However, still there are some challenges the country faces.
“Currently Georgia faces two fundamental challenges. First, the current growth of government debt is unsustainable even over a relatively short time horizon. Second, the Georgian economy is very vulnerable to external shocks as it relies on FDI and capital inflows and is not well diversified. In particular this is true for exports, as Georgia exports only a limited number of commodities and as the value of exports is relatively small,” Fuenfzig declared.
Rodríguez believes that the outlook of the Georgian economy should be considered highly positive. “However, the country faces a number of challenges including the need to successfully manage the process of fiscal consolidation over the medium term, and the challenge of promoting local and foreign investments and exports. The current economic and social policies are all sound. In addition, the country (both the government and the private sector) has shown that it has a very good capacity and resilience to navigate difficult circumstances. This latter consideration is very important given the uncertainties we face today with respect to the global economy,” declared Rodríguez.
“However, problems persist in investor protection, contract enforcement, and tax policy. Current policies are mainly targeting the tourism and energy sector, which are slowly developing into self-sustaining business clusters. Unfortunately little is done to develop and improve productivity in the agricultural sector and to develop business clusters in the manufacturing sector. This should have the same priority as the development of the tourism and energy sector,” declared Fuenfzig.
Gardner believes the outlook is for continued growth in 2011, which is projected at 4.5%. “The challenge is for the private sector to take the lead in sustaining demand as the fiscal stimulus is withdrawn, and particularly for private investment to return to being the engine of growth. Georgia’s strong investment climate and good macroeconomic policy management provide a sound basis for this,” Gardner added.
Current Economic Conditions
Living costs in Georgia are quite high. Tbilisi might even be considered one of the most expensive cities to live in, taking into account the wages people receive in correspondence to living costs.
Fuenfzig states that living standards in Georgia are somewhat higher than the low per capita GDP suggests, which is due to the size of the Georgian shadow economy. “In his research one of our students estimated the size of the Georgian shadow economy at almost 50% of GDP. This implies a significantly higher per capita GDP. Georgian living standards are also lifted by large FDI and capital inflows and remittances. It also helps that compared to countries with a similar per capita GDP Georgia has a relatively well developed infrastructure and housing stock, as a leftover from the Soviet Union,” added Fuenfzig.
“Economic conditions in Georgia are improving steadily. After a contraction of almost 4%, real GDP is expected to grow by around 6% in 2010. On the positive side, banks have started lending again, bank deposits are growing, and private financial inflows are coming to Georgia from abroad,” said Gardner.
Rodríguez declared that economic, security, and social policies that Georgia implemented in the past have resulted in significantly improved economic conditions in the country. However, economic conditions are not static.
“First, they are influenced by factors such as global developments, ongoing domestic policies and, of course, by the improvements in the ability of entrepreneurs and investors to deal with changing conditions and local and global risks. Second, at a given point in time, the economic conditions of a country are best measured by the perceptions that the country’s entrepreneurs have of them,” Rodríguez said.
“The economic conditions in Georgia have improved relative to 2009, but are still some way before they reach their 2007 level. One way to measure what entrepreneurs think of the economic conditions in the country is to track their investments. In this sense, investment by local and foreign entrepreneurs reached about 2 billion GEL in 2007, but fell to less than half that amount (in constant prices) in 2009, and are estimated to have reached only about 1.2 billion GEL last year. By this measurement, there is still a lot that needs to be done to further improve economic conditions to the levels they were in 2007—as appraised by entrepreneurs,” added Rodríguez.
“Georgia’s recession in 2009 was not as severe as the recessions in Armenia, Ukraine, and Russia, and Georgia’s recovery in 2010 has been faster than in these countries. This performance reflects the resilience of the economy, backed by a banking sector which remains sound,” said Gardner
“Georgian economic conditions compare favourably relative to those in the South Caucasus countries and in many European countries. However, Georgia needs to continue to work on the improvements of its economic conditions, so as to increase investments, job generation, and income even further. Georgian economic conditions are far from those prevalent in countries like Poland, Slovakia or Chile and, consequently, its income per capita is significantly behind these countries’ income. In this regard, it is perhaps more relevant to compare the economic conditions of Georgia with those that are prevalent in Upper Middle Income and emerging Countries,” Rodríguez declared.
Discussion about this post